MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN (128661)
JAMES A. CAPUTO (120485)
TRAVIS E. DOWNS, III (148274)
TOR GRONBORG (179109)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

Attorneys for Plaintiff and the Class

I. INTRODUCTION

II. DEFENDANTS LACK A LEGAL BASIS AND STANDING TO OPPOSE LEAD PLAINTIFF APPOINTMENT

III. THE PSLRA DOES NOT PREEMPT STATE SECURITIES LAW ACTIONS AND, CONSEQUENTLY, THEIR PROSECUTION DOES NOT THWART THE WILL OF CONGRESS AS DEFENDANTS SUGGEST

IV. 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

V. MOVING PLAINTIFFS' CLAIMS ARE NOT TIME-BARRED NOR IS THEIR MOTION PROCEDURALLY DEFICIENT

VI. CONCLUSION

I. INTRODUCTION

Without standing or supporting authority, defendants challenge the Moving Plaintiffs' lead plaintiff appointment because they have also filed a state securities action in state court.⁽¹⁾ This "challenge" is not new to this Court. Counsel for many of the same defendants here raised a virtually identical objection in Head, et al. v. NetManage, Inc., et al., Case No. C-97-20061-JW ("NetManage I"), which is also pending before this Court. See Declaration of James A. Caputo in Support of Moving Plaintiffs' Reply to Defendants' Opposition to Motion for Appointment of Lead Plaintiff and Lead Counsel ("Caputo Decl."), Ex. 1. On that motion, the Court appointed lead plaintiffs unconditionally, notwithstanding defendants' pressing "concerns" about two-track litigation. Caputo Decl., Ex. 2.

Defendants continue to repackage and recycle their objection among the state and federal NetManage cases with a frequency bordering on the frivolous.⁽²⁾

In defendants' view, securities violations after enactment of the Private Securities Litigation Reform Act of 1995 ("PSLRA") can only be litigated on one track and that track runs through the federal court. However, neither Congress, the Supreme Court, this Court or other federal courts in this Circuit have endorsed or adopted defendants' view.

The true issue on this motion is whether the presumption favoring the Moving Plaintiffs' appointment has been rebutted "upon proof by a member of the purported plaintiff class." 15 U.S.C. §78u-4(a)(3)(B)(iii)(II). The PSLRA sets out very specific procedures for challenging this presumption, and under those procedures, no rebuttal evidence has been marshalled nor proper oppositions filed.

Defendants ignore this fact to once again bring their procedurally improper and legally insupportable "opposition." Undaunted by their lack of standing, defendants vaguely allude to the PSLRA to reach the stunning conclusion that this Court should enjoin the Moving Plaintiffs' prosecution of their state claims to prohibit "access to the fruits of state court discovery," or require that the state action be removed to this Court. See Defendants' Memorandum of Points and Authorities re: (1) Plaintiff Molinari's Motion for Appointment as Lead Plaintiff and Lead Plaintiffs' Counsel; (2) Opposition to Motion of Putative Plaintiffs Malcomson, Bloom, Jabro and Lattanzi for Appointment as Lead Plaintiffs ("Defs.' Mem.") at 8. But the PSLRA neither preempts state securities laws nor restricts state securities litigation. After the PSLRA, just as before, defrauded investors may choose between the federal and state forums to prosecute their claims. Moreover, a growing number of federal courts have rejected the constraints on state court discovery defendants again seek here.

Defendants further challenge the timeliness and completeness of some of the Moving Plaintiffs' lead plaintiff applications. These makeweight challenges are meritless.

Defendants' "opposition" does not reflect an earnest concern regarding lead plaintiff appointment. It is instead a pretext to limit defendants' exposure to state court discovery. Plaintiffs previously asked this Court to reject these same defendants' meddling interference in lead plaintiff appointment in NetManage I. Plaintiffs again request that defendants' "objection" be rejected and that their lead plaintiff appointment and selection of counsel be approved.

II. DEFENDANTS LACK A LEGAL BASIS AND STANDING TO OPPOSE LEAD PLAINTIFF APPOINTMENT

Section 21D(d)(3)(B) of the amended Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78u-4(a)(3)(B), provides that only purported class members may participate in the lead plaintiff selection process. For example, 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)). Similarly, "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." 15 U.S.C. §78u-4(a)(3)(B)(i) (emphasis added). Such limitations on participation are consistent with the express language and legislative history of the 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." See Zuckerman v. Foxmeyer Health Corp., No. 3:96-CV-2258-T, slip op. at 4 (N.D. Tex. March 28, 1997) (same) Caputo Decl., Ex. 3; Fischler v. AmSouth Bancorp., No. 96-1567-CIV-T-17A, slip op. at 3-4 (M.D. Fla. February 6, 1997) (same). Caputo Decl., Ex. 4.

Defendants turn to Howard Gunty Profit Sharing v. Quantum Corp. ("Quantum"), No. 96-20711 SW, slip op. at 6 (N.D. Cal. Feb. 6, 1997), and In re Read-Rite Corp. Sec. Litig., No. C-97-20059-RMW, slip op. at 3 (N.D. Cal. May 28, 1997), to support their asserted standing to bring their well-worn substantive challenge. Neither case provides defendants' such a platform.

In Quantum, Judge Vaughn Walker permitted defendants to address only the motion's "facial" compliance with 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(a)(3)(A)(i)). Beyond that, "[d]efendants no longer have standing to object to the appointment of lead counsel." Quantum, slip op. at 7. Similarly, the Read-Rite court markedly limited the defendants' objection to lead plaintiff appointment: "This challenge should properly be limited to a facial challenge to a plaintiffs' motion for appointment of lead plaintiff." Read-Rite, slip op. at 3 n.3 (emphasis added.) Defendants make no pretense that their objection goes to the very heart of the appointment process, but ignore their lack of standing to so object.

Beyond this Court, a growing number of other federal courts have rejected similar attempts to deny or condition lead plaintiff appointment when a parallel state securities action was also being prosecuted. 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) Caputo Decl., Ex. 7, 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, slip op. at 4-6; see also Goldman, et al. v. FileNet Corp., et al., Case No. SACV-97-261-GLT(EEx), slip op. at 2 (C.D. Cal. July 2, 1997) (granting unconditional lead plaintiff appointment notwithstanding plaintiffs' prosecution of a state securities action) Caputo Decl., Ex. 8; Woodard, et al. v. Bradley, et al., Case No. C96-1345-CAL (N.D. Cal. July 22, 1996) (same), Caputo Decl., Ex. 9; Head, et al. v. NetManage, Inc., et al., Case No. C-97-20061-JW (N.D. Cal. May 14, 1997) (same), Caputo Decl., Ex. 2.

Even if defendants had the standing they seek, it is clear a proposed lead plaintiff's filing of a state securities action does not disqualify them from appointment. Indeed, as the Diamond court recognized, class members may be best represented by concurrently pursuing distinct state law claims in state court.

III. THE PSLRA DOES NOT PREEMPT STATE SECURITIES LAW ACTIONS AND, CONSEQUENTLY, THEIR PROSECUTION DOES NOT THWART THE WILL OF CONGRESS AS DEFENDANTS SUGGEST

Through the PSLRA, Congress comprehensively amended the Exchange Act. Defendants try to suggest that these changes have preempted state securities laws. They are wrong. The amended Exchange Act has not preempted state securities laws.

Section 28(a) of the Exchange Act expressly provides: "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). When Congress enacted the PSLRA, it did not amend §28(a). Thus, Congress continues to afford investors state law remedies for fraud and misrepresentation and to leave state court procedures supporting these remedies unrestricted. See Edgar v. MITE Corp, 457 U.S. 624, 631-32 (1982) (Congress's failure to amend §28(a) when comprehensively amending the Exchange Act evidences Congressional intent to preserve state regulatory powers).

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).

Plaintiffs here have done nothing more than avail themselves of the two litigation tracks lawfully available to them. Defendants accuse plaintiff Molinari of "hid[ing]" the state action from this Court in order to somehow enhance his chances of lead plaintiff appointment. Defs.' Mem. at 7. But Mr. Molinari frankly disclosed his participation when first filing his Complaint. Caputo Decl., Ex. 10. Nothing in that participation precludes him from being a lead plaintiff here.

IV. 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 authority, defendants demand that plaintiffs be required "to put forward all of their claims against defendants in this action." Defs.' Mem. at 8. Defendants, however, overlook well established law permitting a plaintiff to litigate federal claims in federal court and related state claims in state court. See, e.g., Atlantic C.L.R. Co. v. Brotherhood of Local Eng'r., 398 U.S. 281, 295 (1970).

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). There, plaintiffs filed a state court securities action in California alleging violations of the Corporations Code and common law fraud. Plaintiffs subsequently filed a related federal court action alleging Exchange Act violations. Id. at 1370. Defendants removed the state action to federal court, and plaintiffs' motion for remand was denied. Id. at 1371. Reversing, the Ninth Circuit held that removal of 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). Significantly, the Ninth Circuit specifically rejected defendants' assertion here that the Sullivan plaintiff should be forced to seek the federal court's exercise of supplemental jurisdiction so that all claims might be litigated in one forum.

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."); Sullivan, 813 F.2d at 1376-77 n.8. Defendants' proposed conditions cannot be permitted to traverse this choice.

V. MOVING PLAINTIFFS' CLAIMS ARE NOT TIME-BARRED NOR IS THEIR MOTION PROCEDURALLY DEFICIENT

Defendants argue that Moving Plaintiffs Malcomson, Bloom, Jabro and Lattanzi cannot be appointed lead plaintiffs because their class claims are time-barred. Defs.' Mem. at 9. This is ludicrous.

Defendants ground their time-bar argument solely on Robbin v. Fluor Corp., 835 F.2d 213 (9th Cir. 1987). This case is plainly inapposite. In Robbin, the Ninth Circuit addressed the question of whether an original class action, which had been voluntarily dismissed, tolled the statute of limitations for the filing of a second class action. The court ruled it did not. Id. at 214. But this holding has no bearing here, where the Moving Plaintiffs are not attempting to file new complaints, but are seeking to be appointed to lead the litigation under the existing complaint.

This circumstance is more akin to that in Haas v. Pittsburgh National Bank, 526 F.2d 1083 (3d Cir. 1975). There, after the class action complaint was filed, it was determined the representative plaintiff did not hold a credit card from one of the defendant banks. A nominal plaintiff holding such a credit card was substituted. Against a statute of limitations challenge, the Third Circuit Court of Appeal held:

[T]he commencement of the original class action by Haas tolled the statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action. The amendment of the complaint by the addition of Equibank cardholder Mitchell, therefore, relates back to the initial filing of the complaint . . . .

Id. at 1098. The Moving Plaintiffs' motion here similarly does not implicate a statute of limitations bar.

Moreover, Congress sought to ensure class member participation through the lead plaintiff appointment process. See 15 U.S.C. §78u-4(a)(3)(H)(i) ("[A]ny member of the purported class may move the court to serve as lead plaintiff of the purported class."). Defendants' improper application of the statute of limitations would decidedly have the opposite effect. Under defendants' reasoning, a plaintiff would be able to time his class action filing to time barred would-be lead plaintiffs even before they received notice of the pending action. Congress plainly did not intend such a consequence, and it should not be permitted.

Defendants also argue that Moving Plaintiffs Malcomson, Bloom, Jabro and Lattanzi cannot be appointed lead plaintiffs because they did not "include the certifications required by the Reform Act" with their motion to be appointed lead plaintiff. Defs.' Mem. at 9. However, class members who have not filed a complaint are not required to file such certifications with their appointment motions. In Greebel, 939 F. Supp. 57, the leading case interpreting the PSLRA's "certification" requirements, the court appointed class members without certifications:

Congress mandated that certifications be filed with the complaint, but did not expressly require that a certification be filed with a motion to be appointed lead plaintiff . . . .

* * *

Further, even if the text of the statute were ambiguous, the legislative history resolves the question. The Senate Committee Report explains that it "does not intend for the members of the purported class who seek to serve as lead plaintiff to file with this motion the certification described above." 1995 U.S.C.C.A.N. at 690. The Conference Committee reiterated this sentiment. 1995 U.S.C.C.A.N. at 732-33 ("Members of the purported class who seek to serve as lead plaintiff do not have to file the certification as part of this motion.")

Id. at 61-62 (emphasis added).

In any event, defendants' squabbling about plaintiffs' certifications is moot because Moving Plaintiffs Malcomson, Bloom, Jabro and Lattanzi, although not required to do so, have submitted their sworn certifications in support of their motion. See Caputo Decl., Exs. 11-14. Each certification fully complies with the amended Exchange Act's requirements and further supports the propriety of Moving Plaintiffs' appointment.

VI. CONCLUSION

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

NETMANAG\BMG06357.brf

1. The "Moving Plaintiffs" include Joseph Molinari, Jr., Leo Malcomson, Jonathan P. Bloom, David D. Jabro and Michael T. Lattanzi.

2. In the state action related to NetManage I, defendants asserted their concurrent state-federal litigation "objection" in (1) a motion to block state class certification, (2) a motion to stay discovery, (3) NetManage's demurrer, (4) their objection to deposition discovery, and (5) their objection to entry of a confidentiality order. All of these matters were decided against defendants. In NetManage I, defendants brought their "objection" to the lead plaintiffs' appointment and on a pending motion to preclude plaintiffs from using state court discovery in federal court.

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. 5 and 6 to Caputo Decl.

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 Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101.

2. That on September 22, 1997, declarant served the MOVING PLAINTIFFS' REPLY TO DEFENDANTS' OPPOSITION TO MOTION FOR APPOINTMENT OF LEAD PLAINTIFF AND LEAD COUNSEL by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:

http://securities.milberg.com

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

4. Declarant also caused the above to be served via telecopier.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 22nd day of September, 1997, at San Diego, California.