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I. INTRODUCTION 1

II. DEFENDANTS LACK ANY LEGAL BASIS FOR THEIR UNPRECEDENTED REQUESTS TO REMOVE OR ENJOIN A PENDING STATE COURT ACTION AS A CONDITION OF LEAD PLAINTIFF APPOINTMENT 2

A. Defendants Lack Standing To Oppose, Let Alone Condition Lead Plaintiff Appointment 3

B. The PSLRA Did Not Preempt State Securities Law Actions And, Consequently, Their Prosecution Does Not Thwart The Will Of Congress As Defendants Suggest 5

III. DEFENDANTS CANNOT COMPEL PLAINTIFFS TO SUBMIT THEIR STATE CLAIMS TO THE SUPPLEMENTAL JURISDICTION OF THIS COURT IN ORDER TO BE APPOINTED TO A LEAD POSITION 6

IV. CALIFORNIA STATE COURT IS THE APPROPRIATE FORUM TO ADDRESS DEFENDANTS' DISCOVERY CONCERNS 9

V. CONCLUSION 10

I. INTRODUCTION

The Securities Exchange Act of 1934 ("Exchange Act"), as amended by the Private Securities Law Reform Act of 1995 ("PSLRA"), 15 U.S.C. §78u-4, sets out the very specific procedure for appointment of lead plaintiff. Plaintiffs⁽¹⁾ have met the PSLRA requirements and have moved, unopposed by any purported class member, for appointment. Without precedent or legal authority, defendants have interjected a "response" seeking to impose a condition on the lead plaintiff appointment. Plainly, defendants' "response" has nothing to do with the proposed appointments and is merely a pretext to restrain a parallel state court proceeding.

At issue before this Court is whether the presumption favoring appointment of the Moving Plaintiffs has been rebutted "upon proof by a member of the purported plaintiff class." 15 U.S.C. §78u-4(a)(3)(B)(iii)(II). No rebuttal evidence has been marshalled nor oppositions filed. The only response from anyone with standing to speak has been to endorse the Moving Plaintiffs' appointment.

Ignoring this fact and the clear purpose of the appointment mechanism, defendants have interposed a procedurally inappropriate and legally improper request to stay a parallel state action. Defendants' "modest" request would, if granted, constitute an unprecedented and unwarranted intrusion into a state court proceeding. Indeed, the provisions of the PSLRA, to which defendants vaguely allude, deny them standing to address plaintiffs' motion substantively. Moreover, similar efforts to block parallel state court actions under the guise of the PSLRA have been soundly rejected by other courts in this district. For example, in In re Diamond Multimedia Systems, Inc. Sec. Litig., No. C-96-2644 SBA, slip op. at 4-5 (N.D. Cal. Jan. 13, 1997), attached as Ex. 1 to the Declaration of James A. Caputo in Support of Moving Plaintiffs' Reply to Defendants' Response to Motions for Appointment of Lead Plaintiff and Lead Counsel ("Caputo Decl."), Judge Armstrong rejected the argument that the filing of a parallel state action disqualified a class member from appointment as lead plaintiff.

In effect, defendants, without citing any authority, ask this Court to do what Congress has refused to do. The PSLRA did not preempt state securities actions. A pretextual procedural challenge offers no basis to remove or enjoin a parallel state court proceeding. Defendants' meddling interference in the lead appointment procedure must be rejected. The appropriate forum for defendants' motion is the state court where they have already filed a motion to stay proceedings.

II. DEFENDANTS LACK ANY LEGAL BASIS FOR THEIR UNPRECEDENTED REQUESTS TO REMOVE OR ENJOIN A PENDING STATE COURT ACTION AS A CONDITION OF LEAD PLAINTIFF APPOINTMENT

The purpose of and procedure for lead plaintiff appointment are clearly set forth in the PSLRA. As amended, the Exchange Act now expressly provides that "the court shall consider any motion made by a purported class member in response to the [early notice to class members] including any motion by a class member who is not individually named as a plaintiff in the complaint or complaints."⁽²⁾ 15 U.S.C. §78u-4(a)(3)(B)(i). Clearly, the statute makes no provision for a defendant to weigh in concerning the appropriateness of lead plaintiff appointment. Similarly, evidence rebutting the presumption favoring the most adequate plaintiff can come only from "a member of the purported plaintiff class." 15 U.S.C. §78u-4(a)(3)(B)(iii)(II). Undaunted, defendants interpose their unprecedented "conditions" for lead plaintiff appointment as if there were some legal basis to do so. Plainly there is not. Defendants have no standing to interfere with or condition the appointment of a lead plaintiff. Nor does the PSLRA, as defendants suggest, preempt state court litigation of state securities law claims.

A. Defendants Lack Standing To Oppose, Let Alone Condition Lead Plaintiff Appointment

Section 21D(a)(3)(B), 15 U.S.C. §78u-4(a)(3)(B) of the PSLRA provides for participation in the lead plaintiff selection process only by members of the purported class. Only class members may offer rebuttal evidence (15 U.S.C. §78u-4(a)(3)(B)(iii)(II)) or conduct limited discovery concerning the adequacy of the presumptive lead plaintiff. 15 U.S.C. §78u-4(a)(3)(B)(iv). Such limitations on participation are consistent with the express language and legislative history of PSLRA.⁽³⁾ And the courts have so ruled.

Squarely rejecting a defendant's substantive challenge to a lead plaintiff motion, the court in Greebel v. FTP Software Inc., 939 F. Supp. 57, 60 (D. Mass. 1996) reviewed the above-mentioned PSLRA sections and concluded: "The text of [§78u-4(a)(3)(B)] clearly indicates that this issue is one over which only potential plaintiffs may be heard."

Defendants apparently attempt to ground their standing on one ruling by Judge Vaughn Walker in Howard Gunty Profit Sharing v. Quantum Corp., No. 96-20711 SW, slip op. at 6 (N.D. Cal. Feb. 6, 1997). In Quantum, Judge Walker allowed defendants to comment only about "facial" compliance with the threshold prerequisites to the most adequate plaintiff presumption. These prerequisites concern, for example, whether the proposed lead plaintiff has filed a complaint (15 U.S.C. §78u-4(a)(3)(B)(ii)(I)(aa)) or published the required notice. 15 U.S.C. §78u-4(3)(A)(i). Beyond that, "Defendants no longer have standing to object to the appointment of lead counsel." Id. at 7.

Two courts in this district have rejected similar attempts to deny or condition lead plaintiff appointment because of a parallel state court securities action by the same class members. For example, in In re NCD Sec. Litig., defendants filed a "response" to the lead plaintiff motion which sought to condition the appointment on an order to refile the state claims in federal court or to stay of discovery in the state action. See Ex. 4 to Caputo Decl. Judge Charles A. Legge rejected the request and appointed movants as lead plaintiffs. See Ex. 5 to Caputo Decl.

Similarly, in Diamond Multimedia, one class member (Frazier) contended that a group of class members (represented by Mayfield) should not be appointed lead plaintiffs because the Mayfield group had filed a parallel securities action in state court. Judge Armstrong expressly rejected Frazier's challenge, holding that the contemporaneous prosecution of state law claims did not disqualify the Mayfield group from appointment as lead plaintiff. Diamond Multimedia, Caputo Decl., Ex. 1 at 4-6.

In sum, even if defendants had standing to raise the issue, the fact that the proposed lead plaintiffs have concurrently filed a state securities action does not disqualify them from lead plaintiff appointment. Indeed, as the Diamond Multimedia court recognized, class members may be best represented by also pursuing distinct state law claims in state court.

B. The PSLRA Did Not Preempt State Securities Law Actions And, Consequently, Their Prosecution Does Not Thwart The Will Of Congress As Defendants Suggest

Although preemption is obviously what defendants are arguing, they have studiously avoided using the word preemption. The reason, of course, is that in enacting the PSLRA, Congress did not preempt state securities laws.

Section 78u-4 begins: "The provisions of this subsection shall apply in each private action arising under this chapter that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure." 15 U.S.C. §78u-4(a)(1). Section 28(a) of the Exchange Act expressly rejects state law preemption: "The rights and remedies provided by this Chapter shall be in addition to any and all other rights and remedies which may exist at law or in equity. . . ." 15 U.S.C. §78bb(a). Congress's express directive is to permit state laws to continue to protect securities investors from fraud and misrepresentation. As the Supreme Court recently noted: "Congress plainly contemplated the possibility of dual litigation in state and federal courts relating to securities transactions." Matsushita Elec. Indus. Co. v. Epstein, ___ U.S. ___, 116 S. Ct. 873, 882 (1996) (federal court required to give full faith and credit to a state court judgment which released federal claims over which federal court has exclusive jurisdiction).

III. DEFENDANTS CANNOT COMPEL PLAINTIFFS TO SUBMIT THEIR STATE CLAIMS TO THE SUPPLEMENTAL JURISDICTION OF THIS COURT IN ORDER TO BE APPOINTED TO A LEAD POSITION

Without citing any legal basis or authority, defendants demand that plaintiffs be required "to put forward all of their claims against defendants in this action." Defs' Mem. at 3. Yet, it is well established that a plaintiff may choose to litigate federal claims in federal court and related state claims in the state court:

While the [plaintiff] could probably have based its federal case on the pendant state claims as well, it was free to refrain from doing so and leave the state law questions . . . to the state courts.

Atlantic C.L.R. Co. v. Brotherhood of Local Eng'r., 398 U.S. 281, 295 (1970)(citation omitted).

In effect, defendants are attempting to remove plaintiffs' state law claims to federal court. A similar attempt, made in markedly similar factual circumstances, was considered and rejected by the Ninth Circuit Court of Appeals in Sullivan v. First Affiliated Sec., Inc., 813 F.2d 1368 (9th Cir. 1987). In Sullivan, plaintiffs filed a state court securities action in California alleging violations of the Corporations Code and common law fraud. Plaintiffs subsequently filed a related action in federal court alleging Exchange Act violations. That action was consolidated with several other federal securities class actions. 813 F.2d at 1370. Defendants removed the state action to federal court, and plaintiffs' motion for remand was denied. Id. at 1371. Reversing the district court, the Ninth Circuit held that removal of what would be a supplemental state law claim is proper only where the state claim is "precluded by the res judicata effect of a federal judgment." Id. at 1376; accord California v. Chevron Corp., 872 F.2d 1410, 1416 (9th Cir. 1989). The Sullivan court concluded:

Because the investors' claims are framed under state law, are not barred by res judicata nor preempted by federal law, and would only have been within the district court's original jurisdiction had they been joined with federal claims, which they were not, we reversed the district court's denial of plaintiffs' motion to remand the state action to the state court.

813 F.2d at 1376.

Significantly, the Ninth Circuit specifically addressed defendants' assertion here that the Sullivan plaintiff should be forced to seek the federal court's exercise of supplemental jurisdiction so that their claims might be litigated in one forum.

Defendants' proposed removal⁽⁴⁾ of plaintiffs' state court claims runs counter to established Ninth Circuit authority, and should be summarily disregarded.

[Defendant] argues that the district court can remove the state claims because they arise out of the same operative facts as the federal claims and would be within the district court's original pendent jurisdiction if filed with the federal claims. It relies on United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966). Gibbs does not support this proposition. Gibbs held that the federal courts have the power to hear state claims which the plaintiff has chosen to file in the same complaint with federal claims. . . . Gibbs acknowledged that the state forum is often the better one to hear state claims. Id. at 726. [Defendant] cites no authority for its proposed extension of the doctrine of pendent jurisdiction to state claims that are not appended at all to federal claims, but rather filed in a separate lawsuit.

Id. at 1376-77, n.8 (emphasis in original).

A fundamental precept of our federal system is that plaintiffs are permitted to choose whether to litigate their state law claims in state court or as supplemental (or pendent) claims joined with related federal claims in federal court. See Atlantic C.L.R., 398 U.S. at 295 ("[N]either court was free to prevent either party from simultaneously pursuing claims in both courts."). Defendants' proposed conditions cannot be permitted to traverse their choice.

IV. CALIFORNIA STATE COURT IS THE APPROPRIATE FORUM TO ADDRESS DEFENDANTS' DISCOVERY CONCERNS

Under California law, plaintiffs may initiate discovery following the filing and service of their complaint. California Code of Civil Procedure §2031(b); Gonzales v. Superior Court, 33 Cal. App. 4th 1539, 1546 (1995). This plaintiffs have done.

Ignoring the propriety of plaintiffs' state discovery, defendants urge the Court, as an alternative to involuntary removal, to stay all state discovery. Asking this federal court to enjoin discovery in a state court action where the state court action is neither barred by res judicata or preempted would be a radical departure from long-established principles of federalism and comity.

Obviously, defendants have an appropriate forum to press their stay request. In fact, defendants have already filed a motion in the state action. See Ex. 6 to the Caputo Decl.

Defendants' discovery stay request is now properly situated before the state court. Defendants' recourse is within the state court system or Congress.

V. CONCLUSION

For these reasons, defendants' "response" should be disregarded. Moving Plaintiffs' motion for appointment as lead plaintiffs should be granted and their selection of counsel approved.

DATED: March 31, 1997 Respectfully submitted,

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

ALAN SCHULMAN

JAMES A. CAPUTO

TOR GRONBORG

______________________________

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

KIMBERLY C. EPSTEIN

222 Kearny Street, 10th Floor

San Francisco, CA 94108

Telephone: 415/288-4545

LAW OFFICES OF ALFRED G.

YATES, JR.

ALFRED G. YATES, JR.

519 Allegheny Building

429 Forbes Avenue

Pittsburgh, PA 15219

Telephone: 412/391-5164

SCHIFFRIN & CRAIG, LTD.

RICHARD S. SCHIFFRIN

ANDREW L. BARROWAY

Three Bala Plaza East

Suite 400

Bala Cynwyd, PA 19004

Telephone: 610/667-7706

FARUQI & FARUQI, LLP

NADEEM FARUQI

415 Madison Avenue

21st Floor

New York, NY 10017

Telephone: 212/986-1074

Attorneys for Plaintiffs

NETMANAG\MAJ00480.BRF

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.

2. That on March 31, 1997, declarant served the MOVING PLAINTIFFS' REPLY TO DEFENDANTS' RESPONSE TO MOTIONS FOR APPOINTMENT OF LEAD PLAINTIFF AND LEAD COUNSEL by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List.

3. That there is a regular communication by mail between the place of mailing and the places so addressed.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 31st day of March, 1997, at San Francisco, California.

______________________________

PAMELA JACKSON

1. The "Moving Plaintiffs" include Walter W. Head, III, Gregory Selmanson, Dominic Castaldo, Leila Waldman and John Velonis, Jr.

2. Throughout this memorandum, emphasis has been added unless otherwise noted.

3. Early versions of the House and Senate bills supporting the PSLRA proposed a guardian ad litem overseer to be selected from candidates proposed by both plaintiffs and defendants. Defendants' participation in this process was eliminated by subsequent amendment of these bills. See H.R. 10, 104th Congress, 1st Sess. §202(a) (committee print, Feb. 14, 1995); S. 240, 104th Congress, 1st Sess. §102(b)(2) (reported by Senate Banking Committee, June 19, 1995); 101 Cong. Rec. H. 13694 (Daily Ad. Nov. 28, 1995), attached as Exs. 2 and 3 to the Caputo Decl.

4. Defendants disingeniously assert that greater "protections" are available in the federal forum. Defs' Mem. at 3-4. However, plaintiffs' state law claims are not coextensive with their federal claims. In numerous aspects beyond the state's more liberal discovery rules, state law may favor plaintiffs' desired redress. For example, Rule 10b-5 claims require scienter (Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976)), while a defendant's negligence may suffice for liability under Cal. Corp. Code §25400(d). Similarly, §25400, in contrast to Rule 10b-5, does not require that plaintiffs plead or prove reliance. Mirkin v. Wassermann, 5 Cal. 4th 1082, 1103 (1993); compare Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988) ("[R]eliance is an element of a Rule 10b-5 cause of action."). Given such differences and in the proper circumstances, it may well be that plaintiffs' securities fraud claims receive the greatest protection by litigation in both federal and state forums.