Stanford University Law School - Securities Class Action Clearinghouse
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MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN (128661)
MARK SOLOMON (151949)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
KIMBERLY C. EPSTEIN (169012)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
WEISS & YOURMAN
JOSEPH H. WEISS
JACK I. ZWICK
551 Fifth Avenue
Suite 1600
New York, NY 10176
Telephone: 212/682-3025
- and -
KEVIN J. YOURMAN (147159)
10940 Wilshire Blvd.
24th Floor
Los Angeles, CA 90024
Telephone: 310/208-2800
BERNSTEIN LIEBHARD & LIFSHITZ
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
BROOKE GRAUBART, et al., On Behalf of
Themselves and All Others Similarly Situated,
Plaintiffs,
vs.
INSIGNIA SOLUTIONS PLC, et al.,
Defendants.
___________________________________
No. C-97-20265-JW(EAI)
CLASS ACTION
DATE: April 20, 1998
TIME: 9:00 a.m.
CTRM: The Honorable
James Ware
DECLARATION OF MARK SOLOMON IN SUPPORT OF PLAINTIFFS'
APPLICATION FOR APPROVAL OF SETTLEMENT AND FOR AN AWARD
OF ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES
I, MARK SOLOMON, declare as follows:
1. I am a member of the law firm of Milberg Weiss Bershad Hynes & Lerach LLP, court appointed lead counsel for plaintiffs in the above-captioned action pending in the United States District Court for the Northern District of California (the "Federal Action") and one of plaintiffs' counsel in the related action Sharma v. Insignia Solutions PLC, et al., Case No. CV 757058, pending in the Superior Court of the State of California, County of Santa Clara (the "State Action").
2. I submit this declaration in support of plaintiffs' joint application: (1) to approve the global settlement reached with the defendants in the Federal Action and the State Action (collectively referred to herein as the "Litigation") as fair, reasonable and adequate; (2) to approve the proposed plan of allocation proceeds; and (3) to approve an award of attorneys' fees and reimbursement of expenses.
3. The parties to the Litigation entered into a Stipulation of Settlement dated as of August 8, 1997 which provides for a Settlement Fund consisting of $8 million in cash plus accrued interest. I submit that this global settlement(1) is a fair, reasonable and adequate resolution of the claims asserted in the Litigation based upon plaintiffs' understanding of, among other things, the facts and circumstances surrounding the subject matter of the Litigation and the principles of law applicable to the contested issues in the Litigation.
4. A favorable and early resolution was achieved through the effective prosecution of the Litigation by plaintiffs' counsel. Set forth below is a summary of the major proceedings in the Litigation. This declaration also highlights the efforts required by plaintiffs' counsel to prosecute one of the first cases filed and settled under the recently enacted Private Securities Litigation Reform Act of 1995 ("PSLRA").
5. Although the following is not all-inclusive, it is intended to illustrate the nature of the case, the efforts expended in its prosecution and the reasons plaintiffs' counsel believe that it is in the best interests of the class to settle the Litigation rather than continue to spend additional litigant and judicial resources in continuing the Litigation. Plaintiffs' counsel believe that the proposed settlement is fair, reasonable and adequate especially when the risks of continued litigation are weighed against the benefits of settlement.
6. Insignia Solutions PLC ("Insignia") develops, markets and supports cross-platform compatibility software solutions. SoftWindows, Insignia's principal product line, enables Macintosh and UNIX platforms to run substantially all Microsoft Windows ("Windows") and MS-DOS ("DOS") applications by emulating the underlying hardware.
7. Plaintiffs alleged that Insignia's Registration Statement and Prospectus disseminated in November 1995 and additional statements directed at the investing public misleadingly represented that Insignia (1) competed favorably in the cross-platform compatibility software market; (2) had an effective direct sales force; (3) had successfully introduced new computer software products (SoftWindows 2.0) for both the UNIX and Apple/Macintosh operating systems; (4) had a very strong 1995 third quarter with revenues jumping to $16.3 million; (5) anticipated strong growth in the fourth quarter of 1995 with revenues increasing to $18 million; (6) projected revenues of $80-$81 million for 1996; and (7) projected 1996 earnings per share of $0.80. Plaintiffs alleged that defendants knew Insignia was unable to make the sales necessary to meet these forecasts.
8. On January 2, 1996, barely six weeks after the offering, Insignia revealed that revenues had shrunk rather than grown in the quarter ended December 31, 1995, due to disappointing sales. This disclosure caused Insignia's American Depository Shares ("ADS") price to collapse to $5-3/4 per share from $13-1/4 per share -- a 56% one-day drop and a 74% drop from its December 1995 high of $22 per share.
9. The complaints alleged that, rather than correcting their misleading statements, defendants made additional false and misleading statements to the market, which were designed to help Insignia's ADS price recover and support it at inflated levels. To this end, plaintiffs alleged that, through securities analysts, Insignia told the market to expect 1996 revenues of $14.5 million, $16.6 million, $17.7 million and $19.3 million for the first, second, third and fourth quarters of 1996, respectively.
10. Plaintiffs also alleged that, to attempt to meet their false forecasts, Insignia improperly recognized revenue for contingent sales to its customers. According to plaintiffs, through this improper revenue recognition in violation of Generally Accepted Accounting Principles, Insignia reported materially inflated revenue and earnings, which resulted in the continued artificial inflation of the price of Insignia ADSs.
11. On February 27, 1997, the Insignia announced that the first and second quarter 1996 revenues and net income had to be restated due to accounting irregularities in the reporting of sales contracts and reseller inventories. As a result, Insignia's previously reported profit of $749,000 for the first quarter for 1996 was restated as a loss of $225,000. Insignia's previously reported profit of $1.5 million for the second quarter of 1996 was reduced to only $569,000. As a result of these revelations, the price of Insignia's ADSs dropped from $3-7/8 to $2-1/2 per share.
12. Plaintiffs alleged that Insignia insiders sold $20+ million of Insignia ADSs in the offering, including sales of $12 million, which were realized as proceeds by four of the named defendants -- Paul R. Griffiths, John R. Johnston, Nicholas A. Samuel and Roger D. Friedberger.
13. On March 24, 1997, Graubart, et al. v. Insignia Solutions PLC, et al., C-97 20265, was filed in the United States District Court for the Northern District of California (the "Court") as a class action alleging violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") on behalf of all persons who purchased Insignia ADSs between November 14, 1995 and February 26, 1997, inclusive. The Federal Action was filed pursuant to the requirements of the PSLRA which amended the Exchange Act.
14. A significant amount of investigation was conducted prior to filing the complaint. This investigation included locating and interviewing persons knowledgeable about Insignia's business, obtaining materials about Insignia and its customers and consulting forensic accounting and damages experts.
15. On May 23, 1997, plaintiffs filed their Motion to Appoint Lead Plaintiffs Pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 and for Appointment of Plaintiffs' Lead Counsel. On June 19, 1997 the Court entered its Order granting plaintiffs' motion for appointment of Brooke Graubart, Bruce Lieb and David R. Fried as lead plaintiffs and Milberg Weiss Bershad Hynes & Lerach LLP as lead counsel.
16. On or about July 14, 1997, defendants Insignia Solutions PLC, Insignia Solutions, Inc., Robert P. Lee, Roger D. Friedberger, Paul R. Griffiths, John R. Johnston and Nicholas A. Samuel filed their motion to dismiss. Defendants Richard M. Noling ("Noling") and David L. Gibbs separately filed joinders on or about July 14, 1997 and July 22, 1997, respectively. Noling also made a motion to strike portions of plaintiffs' complaint. These motions set out in detail the defendants' arguments in support of their contentions that plaintiffs did not plead facts sufficient to support their claims against the defendants. Defendants asserted that the complaint did not adequately plead scienter under the standards required by the PSLRA, that the Insignia misstatements alleged by plaintiffs were either accurate statements of historical fact, vague statements of optimism, or were surrounded by cautionary language, that the complaint failed to plead defendants adopted the analysts' statements, that certain putative class members were time-barred from asserting claims and that the complaint failed to allege controlling person liability against the outside directors. Briefing on these motions was not completed prior to reaching an agreement in principle to settle.
17. During the course of the Litigation, plaintiffs' counsel researched and analyzed the law applicable to the claims asserted against the defendants and the potential defenses thereto. Under the provisions of the PSLRA, counsel in the Federal Action were prevented from conducting any formal discovery pending a resolution of defendants' motion to dismiss. Notwithstanding the stay of formal discovery in the Federal Action, counsel aggressively pursued their investigation making numerous contacts with persons who had information about Insignia and its business.
18. In conjunction with the global settlement, plaintiffs agreed to file their First Amended Complaint on February 10, 1998, adding the state law claims. The First Amended Complaint alleged violations of: (1) §§11 and 15 of the Securities Act of 1933 ("1933 Act"); (2) §10(b) of the Exchange Act and 10b-5 promulgated thereunder; (3) §20(a) of the Exchange Act; (4) §§25400-25402 and 25500-25502 of the California Corporations Code; and (5) §§1709-1710 of the California Civil Code on behalf of all purchasers of Insignia ADSs between November 14, 1995 and February 26, 1997.
19. On April 3, 1996, Sharma v. Insignia Solutions PLC, et al., Case No. CV 757058, was filed in the Superior Court of the State of California, County of Santa Clara as a class action alleging violations of California Corporations Code §§25400-25402, 25500-25502; California Civil Code §§1709-1710; and §§11 and 15 of the 1933 Act on behalf of all persons who purchased or otherwise acquired Insignia ADSs between November 14, 1995 and January 2, 1996.
20. Shortly after commencement of the State Action, plaintiffs served discovery requests on defendants. Plaintiffs also served subpoenas on various non-parties. These non-parties included certain of Insignia's customers and underwriters:
Ingram Micro, Inc.
Sun Microsystems, Inc.
Merisel, Inc.
Apple Computers, Inc.
Silicon Graphics, Inc.
International Business Machines
Microsoft Corporation
Digital Equipment Corporation
Price Waterhouse
Robertson, Stephens & Company
21. In response to plaintiffs' discovery reques>
22. Documents were produced by three non-parties subpoenaed and totaled approximately 2,000 pages of documents.
23. On June 11, 1996, defendants filed their demurrer in the State Action. Defendants argued that the state court plaintiff did not identify any projections of revenues and earnings by defendants, that the prospectus contained detailed risk disclosures, and that plaintiff lacked standing to bring the §11 claim and the California Corporations Code claims.
24. On August 16, 1996, defendants filed a motion for a protective order seeking a stay of discovery based on their argument that the PSLRA, which mandates a stay of discovery until motions to dismiss have been decided, applied to plaintiff's §11 claim asserted in the State Action.
25. Plaintiffs conducted extensive research and drafted oppositions to defendants' demurrer and motion for a protective order, filing them on August 30, 1996, and September 6, 1996, respectively.
26. Defendants' demurrer and motion for protective order were heard on January 16, 1997. On March 24, 1997, the court in the State Action overruled defendants' demurrer to the complaint, sustained with leave to amend the Cal. Corp. Code §§25400-25402 and 25500-25502 allegations, sustained with leave to amend the Cal. Civ. Code §§1709-1710 allegations; and overruled defendants' demurrer to the §11 claims. On May 2, 1997, all defendants except George Buchan (whose demurrer was sustained) answered the complaint as limited by the court's March 24, 1997 Order. On May 2, 1997, defendants filed: (1) a Motion for Judgment on the Pleadings Regarding Plaintiff's Third and Fourth Causes of Action, For an Order of Dismissal, or in the Alternative, a Demurrer to the First and Second Causes of Action; and (2) a Motion For Stay of Proceedings. Settlement negotiations successfully concluded before these motions were heard.
27. Settlement negotiations took place at arm's-length at all times, with counsel for the parties steadfastly maintaining their respective positions on the merits of the Litigation. Defendants vehemently denied liability and made repeated attempts to convince plaintiffs to dismiss the case with prejudice for no consideration. Based on a thorough analysis of the information provided to plaintiffs by defendants, the documents produced in the State Action, plaintiffs' extensive investigation and informal discovery, and the arguments presented by defendants' counsel relating to the claims asserted by plaintiffs, plaintiffs' counsel believe that plaintiffs could have established liability against defendants. Nevertheless, plaintiffs' counsel recognize that there were significant legal hurdles affecting plaintiffs' case that militated in favor of settlement.
28. First, plaintiffs faced the difficult burden of establishing liability based upon defendants' alleged misrepresentations. Indeed, defendants would likely argue, as they did in their motions to dismiss, that the alleged misstatements were not actionable because plaintiffs merely recite accurate statements of historical fact and that no reasonable investor could have been misled given the risky nature of the industry and the risk disclosures contained in the Prospectus.
29. Second, as to the §10(b) claim, plaintiffs faced the added burden of establishing that defendants acted with scienter. Defendants have maintained that plaintiffs failed to plead any specific facts giving rise to a strong inference of scienter. Establishing scienter has always been a significant challenge for plaintiffs. With the enactment of the PSLRA, sufficiently pleading scienter has become more of a hurdle. The PSLRA has imposed a stricter pleading standard, i.e., a complaint under §10(b) must state with particularity facts giving rise to a strong inference of scienter. The law is not yet settled as to what is required in order to satisfy this standard.
30. Plaintiffs also considered the risks attendant to establishing damage at trial. At trial defendants would likely use a conservative methodology which would yield little or no damages for plaintiffs. Defendants would likely contend that class member losses were the result of industry events totally unrelated to Insignia's actions. The evidence at trial regarding damages would become a "battle of experts" and there is no way of predicting which methodology or testimony the jury would accept.
31. Plaintiffs' counsel also recognize and acknowledge the expense and length of continued proceedings necessary to prosecute the Litigation against defendants through trial and through appeals. This global settlement confers a very significant benefit on the Settlement Class at a relatively early stage in the Litigation.
32. Plaintiffs also considered the extent of recovery that the class could receive if the case were to go to trial, even if plaintiffs prevailed on each of their claims and the Court accepted plaintiffs' methodology of computing damages, when compared with the significant costs to be incurred during the discovery process and proceeding to trial. The value of the present settlement, which represents an immediate recovery of $8 million, is an outstanding result in view of the significant hurdles that plaintiffs faced and the considerable time it would take to prosecute the Litigation through trial and the appeals process.
33. Given the risks inherent in any jury trial, particularly the trial of a complex securities class action, I respectfully submit on behalf of all plaintiffs' counsel that the proposed global settlement presented to the Court for approval is fair, reasonable and adequate, and in the best interests of the Settlement Class.
34. Plaintiffs' counsel also seek the Court's approval on the proposed Plan of Allocation ("Plan") of the Net Settlement Proceeds to eligible members of the Settlement Class. The settlement proceeds will be distributed to class members who submit valid and timely proof of claim forms. Under the Plan of Allocation, a class member will be eligible to participate in the distribution of settlement proceeds if the claim evidences a net loss on all transactions in Insignia ADSs during the class period.
35. For purposes of determining the amounts that may be recovered by a class member under the Plan, plaintiffs' counsel consulted with their damage expert, weighed the merits of plaintiffs' claims and the likely damage recovery if plaintiffs were successful in establishing liability. The Plan of Allocation was provided to class members in the Notice of Pendency and Proposed Settlement of Class Actions ("Notice"). It is also set forth in the accompanying and Memorandum in Support of Motion for Approval of Plan of Allocation for the Court's convenience. As explained in the Memorandum, the Plan was designed to be equitable to all class members based upon plaintiffs' theory of the case.
36. On January 22, 1998, the Court entered an Order Preliminarily Approving Settlement and Approving the Form and Manner of Notice. In that Order, the Court directed that the Notice be mailed to all members of the Settlement Class who could be identified with reasonable effort. On February 13, 1998, plaintiffs' counsel caused the Notice approved by the Court to be mailed to such class members. Approximately 4,564 Notices were sent together with a proof of claim form for making claims against the Settlement Fund. In addition, in accordance with the Court's Order, a summary notice of the proposed settlement was published in Investor's Business Daily on February 20, 1998.
37. In conformity with the requirements of the PSLRA, the class Notice provided specific information about the average recovery per damaged share, the maximum average per share recovery that might have been obtained if plaintiffs had proceeded and prevailed on all of their claims at trial, and the average per share amount that plaintiffs' counsel's requested fees and expenses represent. Therefore, potential class members were fully informed as to the economic substance of the settlement.
38. Pursuant to the Notice, objections to any aspect of the settlement were to be served and filed no later than April 3, 1998. To date, plaintiffs' counsel are aware of no objections to any aspect of the settlement or to counsel's request for attorneys' fees and expenses. Plaintiffs' counsel believe that this lack of objection in response to the 4,564 Notices mailed is significant as the class likely includes sophisticated institutions who have large stakes and by way of their legal counsel could have come forward to object if in their view it was appropriate to do so. Over and above the fact that no class members have objected to the settlement, Plan of Allocation, or counsel's fees and expenses, only one class member has elected to exclude himself from the settlement.
39. Plaintiffs' counsel seek an aggregate award of 30% of the settlement proceeds established for the benefit of the Settlement Class as legal fees for services rendered on a wholly contingent basis and reimbursement of their out-of-pocket expenses reasonably incurred in the prosecution of the Litigation, plus interest on the fees and expenses at the same rate as that earned on the cash portion of the Settlement Fund.
40. The Notice sent to Settlement Class Members informed them of plaintiffs' counsel's intention to file a fee petition for 30% of the Settlement Fund. As discussed in the accompanying Memorandum in Support of Plaintiffs' Application for Attorneys' Fees and Reimbursement of Expenses ("Fee Memo"), an award of 30% of the benefits achieved for the class is well within the range of fees commonly awarded as a percentage of the recovery in cases of this type; is a percentage which has been previously approved by this Court and numerous courts in this Circuit and others; it is warranted based on the quality of counsel's work and the substantial benefit obtained for the class; and such award would further support the policy of encouraging lawyers to resolve actions without protected litigation when such resolutions will benefit those on whose behalf the cases are brought.
41. Plaintiffs' counsel also set forth in their declarations the categories and amounts of all expenses incurred in this Litigation. Plaintiffs' counsel have incurred reimbursable expenses in the amount of $256,199.13 during the prosecution of the Litigation.
42. As lead counsel, I was involved in every aspect of the prosecution of the Litigation and am familiar with and have reviewed the expenses incurred. I believe that the expenses were reasonably incurred, are reasonable in amount and should be reimbursed in full.
43. One of the largest expenses in cases of this type are those of experts and consultants. In this matter, plaintiffs' counsel utilized the services of several consultants.
44. Plaintiffs retained Princeton Venture Research, Inc. ("PVR"), a firm comprised of professional securities and financial analysts, and its president, John B. Torkelsen, as a consultant and testimonial expert to develop plaintiffs' damage analysis. PVR has extensive experience in providing expert opinions and analyses on issues relating to violations of securities regulations and the damages resulting from such violations. Prior to filing the complaints, Lead Counsel consulted PVR and obtained a preliminary opinion about the soundness of counsel's theories on damages and materiality. Thereafter, PVR spent considerable time and effort in analyzing materiality, causation and the damages to the class under the new provisions of the PSLRA. The work performed by PVR is described in detail in the Declaration of John B. Torkelsen filed herewith.
45. Plaintiffs also used professional accounting services to analyze the accounting and financial reporting practices engaged in by Insignia. These services included review and analysis of Insignia's financial statements, Insignia's calculations of revenues, earnings, accounts receivable, and allowances for doubtful accounts. In addition, plaintiffs retained investigators to locate potential witnesses and other persons with relevant knowledge.
46. The global settlement was arrived at after substantial investigation, research, discovery and vigorous arm's-length bargaining. Based on an understanding of, among other things, the facts and circumstances concerning the subject matter of the Litigation, the principles of law applicable to them, and the relative risks of continuing litigation, plaintiffs' counsel believe that this settlement represents an extremely favorable result for the Settlement Class and that the proposed Plan of Allocation will fairly apportion the Net Settlement Proceeds among Settlement Class Members who file valid and timely proof of claim forms and both should be approved by the Court. Plaintiffs' counsel also respectfully request that the application by plaintiffs' counsel for attorneys' fees and reimbursement of expenses be granted.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 5th day of April, 1998, at San Diego, California.
_____________________________
MARK SOLOMON
INSIGN-2\BM000411.DEC
DECLARATION OF SERVICE BY MAIL
PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)
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 April 10, 1998, declarant served the DECLARATION OF MARK SOLOMON IN SUPPORT OF PLAINTIFFS' APPLICATION FOR APPROVAL OF SETTLEMENT AND FOR AN AWARD OF ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES 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.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 10th day of April, 1998, at San Diego, California.
______________________________
DAWN C. CASSELMAN
1. After the Judgment in this action becomes final, plaintiffs will dismiss the State Action.