MELVIN R. GOLDMAN (Bar No. 34097)
MICHAEL L. ZIGLER (Bar No. 122679)
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105-2482
Telephone: (415) 268-7000

Attorneys for Defendants
INSIGNIA SOLUTIONS PLC, INSIGNIA
SOLUTIONS, INC., ROBERT P. LEE, GEORGE
BUCHAN, JOHN R. JOHNSTON, PAULINE LO
ALDER, PAUL R. GRIFFITHS, NICHOLAS A.
SAMUEL, RICHARD M. NOLING, AND ROGER D.
FRIEDBERGER

A. Facts

B. Procedural History

1. The State Action

2. The Federal Action

C. The Proposed Settlement

II. THE PROPOSED SETTLEMENT IS FAIR, ADEQUATE, AND REASONABLE AS TO BOTH THE PLAINTIFF CLASS AND THE COMPANY.

A. Plaintiffs Would Not Prevail On Their Claims

B. The Proposed Settlement Is Fair, Adequate And Reasonable Not Only To The Settlement Class, But Also To Insignia

Defendants Insignia Solutions PLC, Insignia Solutions, Inc. (collectively "Insignia" or the "Company") and eight of the nine individual defendants¹ (collectively referred to with Insignia as the "Defendants") submit this memorandum in support of the proposed settlement of this class action ("the Action"). Defendants request that the Court enter the Final Judgment and Order of Dismissal of Action submitted by the parties (Exhibit B to the Stipulation of Settlement). The Final Judgment approves the settlement set forth in the Stipulation of Settlement (the "Stipulation"), including the amount of settlement, as well as each of the releases, and finds that these releases are fair, reasonable and adequate as to all of the settling parties.

As discussed in Plaintiffs' memorandum, the settlement satisfies the requirements of Rule 23(e). This memorandum emphasizes two points: (1) the strength of the defenses to the claims alleged by plaintiffs; and (2) the fairness of the settlement as to the Company.

I. BACKGROUND

A. Facts

The demand for this capability has led to substantial revenue growth for Insignia, whose revenues climbed from $18 million in 1993, to $39 million in 1994, and in excess of $55 million in 1995. Following this growth in revenues, Insignia went public on November 14, 1995, in the middle of its fourth quarter for 1995 (the Company reports on a calendar-year basis). In conjunction with the offering, a registration statement and prospectus were filed with the Securities and Exchange Commission. The prospectus included eleven pages of warnings about specific risk factors faced by Insignia in the future, including the possible volatility of share price. Prior to the public offering, unnamed Insignia executives accompanied unnamed representatives of underwriters making a "roadshow" presentation regarding the offering.

Following the IPO, in mid-December 1995, three analysts issued reports, each of which forecast revenues of $59 million for fiscal year 1995, with approximately $18.5 million in revenues and earnings per share of 17 cents for the fourth quarter. On December 18, one of the analysts reaffirmed his prior earnings estimates. After the IPO, Insignia's stock had risen above $23 per share. However, shortly after these analyst reports issued, Insignia's stock fell by $9 per share to approximately $12 to $13 per share.

In the fourth quarter, Insignia did not meet these expectations. On January 2, 1996, the Company disclosed that it would achieve fourth quarter revenues of $14 million and break even on an earnings-per-share ("eps") basis for the quarter. The stock fell on the next trading day, January 3, 1996 to approximately $6 per share.

In 1996, the three independent analysts who had covered Insignia before the January 2, 1996, earnings announcement continued to issue reports about the Company. The reports included forecasts of Insignia's financial performance for each of the four quarters and for the year. The Company also made financial disclosures during the same period. On a quarterly basis, Insignia issued earnings releases and filed 10-Qs with the SEC. The Company's results during the year were mixed, and included a loss of 44 cents per share in the third quarter.

On February 27, 1997, Insignia announced that it had restated its operating results for the first and second quarters of 1996. As a result of the restatement, Insignia's revenues for the first three quarters of 1996 were adjusted downward by a total of $2.4 million. In addition, the Company released its final financial results for the year. The price of the Company's stock fell following the announcement by approximately $1 per share.

B. Procedural History

1. The State Action

Defendants demurred to the Complaint on June 11, 1996, which was renoticed for hearing or continued several times during the following months. On March 24, 1997, the Court sustained in part and overruled in part the demurrers. Principally, the Court overruled the demurrer to the 1933 Act claims and sustained the demurrer with leave to amend as to all state claims. Plaintiffs did not amend their complaint.⁴ Defendants then answered and, in the alternative, moved for judgment on the pleadings with respect to the 1933 Act claims. This motion had not been opposed or decided when the parties reached a settlement.

2. The Federal Action

On July 14, 1997, Defendants moved to dismiss the federal complaint. Defendants first argued that the pleadings failed to satisfy the heightened pleading requirements under the PSLRA that now require plaintiffs to plead facts giving rise to a strong inference of scienter for purposes of federal securities claims. Second, defendants argued that plaintiffs' allegations of "misstatements" surrounding the initial public offering -- written representations in the prospectus and registration statement and oral representations during the roadshow -- fail because the alleged "misstatements" are either accurate statements of historical fact, vague statements of optimism, or are surrounded by cautionary language. Insignia argued that it did not, nor was it required to, project future financial results in the prospectus and that plaintiffs claims were in reality a request for such projections, which a company is not required to provide. In re VeriFone Sec. Litig., 11 F.3d 865, 869-70 (9th Cir. 1993). Third Defendants argued that the prospectus "bespoke caution" to potential investors who, as a matter of law, were not misled in the ways claimed by plaintiffs. In re Stac Electronics Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997). Fourth, Defendants argued they were not accountable for the statements about Insignia and projections of Insignia's performance by others. Fifth, Defendants argued that plaintiffs failed to plead any facts showing that any forward looking statements lacked a reasonable basis or that they were materially misleading when made. Sixth, Defendants argued that certain claims based on misstatements before January 3, 1996 were now time-barred because the federal complaint was filed more than one year after the discovery of the facts constituting the violation, Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 & n.9 (1991), and any tolling of the statute of limitations did not apply to them. Finally, certain of the individual defendants raised pleading deficiencies as to them.

The parties agreed to settle the action before Plaintiffs filed their opposition.

On January 22, 1998, the Court entered an order preliminarily approving the Stipulation of Settlement. On February 9, 1998, plaintiffs filed a first amended complaint to add all claims brought in state court and all defendants in the state action who had not been named in the original federal complaint.

C. The Proposed Settlement

Defendants have denied and continue to deny all of the claims and contentions alleged in the complaint. Defendants have consistently maintained that they acted in accordance with governing laws and standards at all times, and that Insignia's public disclosures presented a full and fair description of all material facts. In entering into the Stipulation, Defendants deny wrongdoing of any kind and deny liability. (Stip. at 6-7 and ¶ 9.4).

II. THE PROPOSED SETTLEMENT IS FAIR, ADEQUATE, AND REASONABLE AS TO BOTH THE PLAINTIFF CLASS AND THE COMPANY.

Each of these factors weighs in favor of approval of the proposed settlement, and is addressed in detail in Plaintiffs' memorandum. This memorandum emphasizes the strength of the defenses to the claims and the fairness of the settlement as to Defendants.

A. Plaintiffs Would Not Prevail On Their Claims

Moreover, to survive a motion to dismiss under the Reform Act, a complaint must specify contemporaneous facts, such as contemporaneous statements or reports, that permit the strong inference that defendants knowingly issued misleading statements. Zeid v. Kimberly, 930 F. Supp. 431, 436-438 (N.D. Cal. 1996). Plaintiffs failed to meet this standard. Alleging that Defendants knew of adverse information due to "internal data" is routinely held insufficient as a matter of law. See, Silicon Graphics, supra at *35, n.11; Leonard v. NetFRAME Systems, Inc. [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶98,982 at 93,780 (N.D. Cal. Aug. 8, 1995).

Plaintiffs' principal contention in the litigation was that defendants omitted to disclose information that would suggest that accurate historical financial information was not reliable in predicting Insignia's prospects in the future. But the alleged "misstatements" in the prospectus and registration statement are either accurate statements of historical fact, vague statements of optimism, or are surrounded by cautionary language. Insignia did not, nor was it required to, project future financial results in the prospectus. The "facts" plaintiffs claim were omitted are in essence a request for such projections, which a company is not required to provide. In re VeriFone Sec. Litig., 11 F.3d 865, 869-70 (9th Cir. 1993).

In addition, the prospectus contained eleven pages of specific risk disclosures and thus "bespoke caution" to potential investors who, as a matter of law, could not be misled in the ways claimed by plaintiffs. In re Stac Electronics Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997).

Plaintiffs also would also have difficulty pleading and proving that Insignia was responsible for the projections of analysts. As an initial matter, plaintiffs failed to allege entanglement between Defendants and the analysts with sufficient particularity, or that the analysts' statements were materially misleading. Plaintiffs did not allege that Defendants had control over the content of the analysts' reports or projections. See, Stack v. Lobo, 903 F. Supp. 1361, 1371 (N.D. Cal. 1995); In re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996). Nor did Plaintiffs plead any contemporaneous facts demonstrating that the alleged statements were false or lacked a reasonable basis when made. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1995).

Assuming that Plaintiffs' case survived the motion to dismiss, Plaintiffs would still have to overcome Defendants' motion for summary judgment. Plaintiffs would have to establish not only the falsity of the allegedly misleading statements, but also that Defendants acted with recklessness rising to the level of conscious disregard of known problems and knowledge. Given Defendants' forthright actions in revising Insignia's financial statements, the absence of any restatement relating to the IPO quarter, and Insignia's conservative revenue recognition procedures, plaintiffs could not establish intent to defraud.

Finally, with respect to the state claims, Plaintiffs in effect abandoned such claims when they did not file an amended complaint. Because the plaintiff there was not a purchaser of securities in the State of California, the California Corporations Code claims may have failed, and Defendants believe that a nationwide class on state claims is inappropriate. In addition, such claims would be subject to many of the same defenses as the federal claims. Plaintiffs likely would not have been able to proceed in light of the ongoing federal action.

Even if plaintiffs could surmount all of these hurdles, they would face serious issues with respect to their damage claims. During the pendency of the class period, the fortunes of Apple essentially collapsed. Insignia's products were initially designed for use with Apple computers, and purchasers of Apple computers represented a significant portion of Insignia's potential customer base. Insignia's downturn can largely be attributed to Apple's collapse, not fraud. In addition, new product introductions simply did not fare as well as anticipated. No fraud is alleged regarding such issues. The amounts of Insignia's restatements were in fact small, and had a negligible impact on its stock price.

B. The Proposed Settlement Is Fair, Adequate And Reasonable Not Only To The Settlement Class, But Also To Insignia

In evaluating a settlement under Rule 23, this Court has the authority to determine whether it is fair, adequate and reasonable as to all of the settling parties; that is, the Court may determine here that the settlement is fair to the Company, as well as to the settlement class. Two recent Northern District cases illustrate this procedure. In Esses v. VeriFone, Inc., 1994 U.S. Dist. LEXIS 14384, NO. C-93-3640-DLJ (N.D. Cal. September 28, 1994), the parties reached a settlement and moved for court approval under Rule 23. Seeking to bring the litigation and the risk of any potential collateral actions to a complete close, the parties negotiated a settlement containing broad releases, and requiring court approval as to all of the settling parties. The court granted the required approval, ordering that:

The Court approves the settlement of the Action set forth in the Stipulation, including each of the releases and other terms, as fair, reasonable, and adequate to the Settling Parties...

The relative costs and benefits of the proposed settlement demonstrate its fairness to Insignia. Although Insignia funded all of the costs of defending the action, the Company will make no contribution to the settlement fund; insurance proceeds paid on behalf of Defendants will satisfy the entire $8 million settlement fund.

The proposed settlement confers substantial benefits upon the Company, which Insignia's Board of Directors considered in approving the settlement. By resolving the matter at an early stage, the Company avoids the costs and disruption associated with ongoing litigation. If the litigation were to proceed, Insignia would continue to incur attorneys' fees and other defense costs on behalf of the Company and pursuant to its obligations to advance defense costs on behalf of the individual defendants.

In addition to the legal fees and costs, the Company would continue to expend vast amounts of its management resources in connection with the litigation. The Company would have to continue to divert personnel, including key financial and management personnel, to litigation-related responsibilities. In light of the competitive nature of the Company's industry, the diversion of resources to litigation can be particularly disruptive.

Finally, the settlement also puts to rest any possibility of an adverse outcome. It permits Insignia to eliminate the risk of collateral litigation, including derivative litigation, involving Insignia's officers, directors or other third parties.

Dated: April 13, 1998
 

Morrison & Foerster LLP By:______________________________      Michael L. Zigler      Attorneys for Defendants      INSIGNIA SOLUTIONS PLC, INSIGNIA      SOLUTIONS, INC., ROBERT P. LEE,      GEORGE BUCHAN, JOHN R. JOHNSTON,      PAULINE LO ALDER, PAUL R. GRIFFITHS,      NICHOLAS A. SAMUEL, RICHARD M.      NOLING AND ROGER D. FRIEDBERGER

¹ David Gibbs is separately represented in this action.

² The recitation of the facts is drawn from the First Amended Complaint and publicly available information. Through this memorandum, Defendants do not adopt or accept as true the facts as set forth in the Complaint.

³ The individuals who are also named in the state complaint are Robert Lee, Roger Friedberger, Paul Griffiths, John Johnston, Nicholas Samuel, Pauline Lo Alker, an outside director, and George Buchan. Buchan and Lo Alker were initially named in the state complaint only, but not named in the federal action as originally filed. The federal action also added Richard M. Noling and David Gibbs. Buchan and Lo Alker have been added to the federal action in the amended complaint for purposes of effectuating a binding and final settlement.

⁴ Plaintiffs took the position that not all state claims were dismissed.

I further declare that on the date hereof I served a copy of:

and by hand delivery on the same date that it was placed in Morrison & Foerster's mailroom on:

Kimberly C. Epstein
MILBERG WEISS BERSHAD HYNES & LERACH LLP
222 Kearny Street, 10th Floor
San Francisco, CA 94108

I further declare that on the date hereof I served a copy of the above-listed documents (without attachments) on the SECURITIES CLASS ACTION CLEARINGHOUSE by Electronic Mail through the following electronic mail address provided by the Securities Class Action Clearinghouse:

I declare under penalty of perjury under the laws of the State of California that the above is true and correct.

Executed at San Francisco, California, this 13th day of April, 1998.
 

Ruby M. Lim ________________________________ (typed)

________________________________ (signature)

 

Source: File to epost from Morrison & Foerster LLP