[Proposed] Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]
 
 

I. Introduction and Overview

II. The Legato Group Is a Proper Lead Plaintiff Group Under the Reform Act

III. Adam Rosenberg's Trading in Legato Stock Does Not Disqualify Him as a Lead Plaintiff or Subject Him to Disabling Unique Defenses as a Class Representative

IV. Detroit's Losses Are Smaller than the Legato Group's Losses and Cannot Be Boosted or Supplemented by the "Support" of Now Withdrawn Lead Plaintiff Candidates

V. Counsel Representing Legato Group Members Did Nothing Improper in Publishing Notices of the Filing of Their Legato Class Action

VI. Conclusion

Blackie v. Barrack,
    524 F.2d 891 (9th Cir. 1975)

Chill v. Green Tree Fin. Corp.,
    181 F.R.D. 398 (D. Minn. 1998)

In re Cirrus Logic Sec. Litig.,
    155 F.R.D. 654 (N.D. Cal. 1994)

In re Clinton Oil Co. Sec. Litig.,
    [1977-1978 Transfer Binder] Fed. Sec. L. Rep.
    (CCH) ¶96,016 (D. Kan. 1977)

In re Gulf Oil/Cities Serv. Tender Offer Litig.,
    112 F.R.D. 383 (S.D.N.Y. 1986)
 
In re McKesson HBOC, Inc. Sec. Litig.,
    No. C-99-20743-RMW
    (N.D. Cal. Dec. 22, 1999)

In re Oxford Health Plans, Inc. Sec. Litig.,
    182 F.R.D.42 (S.D.N.Y. 1998)
 
In re Vesta Insurance Group, Inc., Sec. Litig.,
    Civ. A. No. 98-AR-1407-S
    (N.D. Ala. Oct. 25, 1999)

Katz v. Comdisco,
    117 F.R.D. 403 (N.D. Ill. 1987)
 
McNichols v. Loeb Rhoades & Co.,
    97 F.R.D. 331 (N.D. Ill. 1982)
 
Randall v. Loftsgaarden,
    478 U.S. 647 (1986)
 
 

STATUTES, RULES AND REGULATIONS

15 U.S.C.
    §78u-4
    §78u-4(a)(3)
    §78u-4(a)(3)(A)(i)
    §78u-4(a)(3)(B)(iii)
    §78u-4(a)(3)(B)(iii)(I)
 

LEGISLATIVE HISTORY

141 Cong. Rec. H13694 (daily ed. Nov. 28, 1995)
141 Cong. Rec. S17956, col. 2 (daily ed. Dec. 5, 1995)
 
 

I. Introduction and Overview

Detroit and Bernstein Litowitz ("Bernstein") mischaracterize the Legato Systems Lead Plaintiff Group's ("Legato Group") lead plaintiff motion as being made on behalf of over a thousand investors in the hope that their citations to the few decisions rejecting large groups as lead plaintiffs will seem more appealing. However, it could not be more clear that the Legato Group's lead plaintiff motion was made by and on behalf of only six investors - individuals and institutions - who transacted in Legato common stock and options, suffering damages of $2.1-$2.6 million. The Legato Group is not the large or unwieldy group Detroit and Bernstein erects as a strawman and then attacks. The Legato Group is small and well organized, having already met three times to oversee and direct this litigation. Declaration of Darren J. Robbins in Support of the Legato Group's Ex Parte Motion, Ex. A.

Recognizing the merit of the Legato Group's motion, lead plaintiff candidates, Silverman Group (10 members), Bryan Group (5 members), Legato Plaintiffs Group (2 members) and Sovereign Bancorp ("Sovereign") have withdrawn and now "support" Detroit. In maneuvers orchestrated by Bernstein, they have attempted to transmogrify their infirm lead plaintiff applications into a new amalgamation to help Detroit obtain control of the case. The deadline for making lead plaintiff motions expired on 3/20/00. These post-lead plaintiff motion deadline gyrations cannot alter the controlling numbers. Therefore, Detroit's motion must rise or fall based on the losses presented in its own motion, which ranged between $1.09-$1.25 million. Based on the motions actually filed, the six-member Legato Group has the largest financial interest in the relief sought by the class and alone includes purchasers of all the publicly traded securities of Legato sued for!

In fact, these maneuverings expose a fundamental weakness in Detroit's position. Even if Detroit could now - after the lead plaintiff motion deadline had passed - form a new "group" of investors to seek lead plaintiff status, this would radically contradict its prior position that the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C. §78u-4, limits aggregation of losses to "very small groups." Adding the Bryan Group, the Legato Plaintiffs Group, the Silverman Group and Sovereign to Detroit creates a group of 19 members - anything but "very small."

As noted in our Opposition to Detroit's lead plaintiff motion, in other litigations Detroit and Bernstein have taken positions inconsistent with that which they advocate here. See The Legato Group's Opposition to Detroit's Motion ("Legato Opp.") at 8-10. They regularly argue that institutional investors are not entitled to preferential treatment under the Reform Act, and that an institutional investor with the largest loss is not entitled to appointment as lead plaintiff where a group of investors with larger aggregate losses seeks lead plaintiff status. They have, in fact, formed or participated in groups of as many as 13 investors seeking lead plaintiff status. Most recently, Bernstein signed a brief seeking the appointment of a five-member group as lead plaintiff in Ward v. WellCare Management Group, Inc., Civ. A. No. 96-CV-521 (N.D.N.Y.), where they specifically argued that the presumption provided by §21D(a)(3)(B)(iii)(I) is not limited to institutional investors:

Nothing in the Act limits the presumption involved to plaintiffs which are institutions. Rather, the presumption exists with respect to that "person or group of persons that .... has the largest financial interest in the relief sought by the class...." Section 21D(a)(3)(B)(iii)(I).

As a result of the withdrawal of all lead plaintiff candidates except Detroit and the Legato Group, the Court's task has been simplified. There are now just two key issues. First, can six individual and institutional investors who suffered $2.1-$2.6 million in losses due to their transactions in Legato stock and options be a "group of persons" for lead plaintiff purposes? Second, are Rosenberg's substantial losses properly included in the Legato Group's losses?

Unless the Court is to disregard the express language of the Reform Act's lead plaintiff provisions and the overwhelming body of case law permitting persons who make repeated stock purchases to serve as class representatives, then the answer to both of these questions must be "yes." The Reform Act contains the words "group of persons." These words have meaning. No principled basis exists to conclude that a six-person group of individual and institutional investors who suffered millions of dollars of damages is not contemplated by the statutory text or Congressional intent. Equally clear is a long line of cases in which both individual and institutional investors have been certified as class representatives even though they engaged in computer-driven, "in-and-out" trading activities. Legato Opp. at 20-25; infra at §III.

Detroit's self-serving attacks on Adam Rosenberg's trading activities are inaccurate. First, Rosenberg is not a market maker in Legato common stock. Declaration of Adam Rosenberg, dated April 14, 2000 ("Rosenberg Decl."), ¶3. While Rosenberg traded almost daily in the stock of Legato during the Class Period (between 10/21/99 and 1/19/00), he accumulated a long position of 77,240 Legato shares (all purchased during the Class Period at an average purchase price of $53.31 per share) by 1/19/00. Rosenberg Decl., ¶4. On 1/19/00, when Legato revealed that it had to restate its prior earnings and its stock collapsed by over $23 per share, Rosenberg instantly suffered a $1.5-$1.9 million loss. See Ex. A to this memo. To be conservative (even though he was not legally required to do so), Rosenberg netted his Class Period trading profit of $394,819 against his loss on the 77,240 shares, producing the $1.1-$1.5 million loss figure used in the Legato Group's lead plaintiff motion. Thus, Rosenberg is actually quite typical of those Legato class members who purchased Legato stock and held it at the end of the Class Period - only to be blindsided and damaged by the 1/19/00 revelations and collapse of Legato's stock.

Detroit's attack on Rosenberg's activity as a trader or market maker in an effort to disqualify him as a lead plaintiff candidate proves too much. The fact that Detroit makes those attacks only confirms its inability to occupy the fiduciary role it seeks. How can a putative fiduciary display open hostility toward a significant segment of class members, i.e., stock traders, including day traders, who suffered significant damages? How can Detroit credibly argue later that such traders who are in the class are entitled to recover damages when the defendants seize upon the arguments Detroit has made here to cut down the class's damages - at summary judgment or trial? Such a victory by the defense would reduce the overall damages claimed by the class and the value of the case. A lead plaintiff should look out for the interests of all the class members seeking to maximize damages of the entire class, not make arguments that could benefit the defendants.

And, by attacking Rosenberg, Detroit seems to expose itself to similar attack. All of Detroit's funds are externally managed and undoubtedly invested in index funds or investments. Epstein Decl., Ex. 2. Thus, Detroit makes no direct investment decisions. Its investments are purchased by outside managers, who "index," i.e., they "buy the market." If one wished to argue it, this sort of uninvolved investment strategy is certainly not reflective of the way most class members invest, i.e., looking at a company and making a decision to buy its stock based on favorable factors.⁽²⁾

But if the Legato stock that was purchased for Detroit via index purchases was artificially inflated by the alleged fraud, that same inflation existed for the shares purchased by Rosenberg. All investors in the stock, no matter what their investment strategy or methodology were damaged if the stock was artificially inflated as alleged. And, under the fraud-on-the-market theory, their claim can be defeated only by showing that the purchaser knew of the fraud and still purchased the stock. Even Detroit does not claim this as to Rosenberg.

The wisdom expressed by Judge Brieant in In re Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D.42, 47 (S.D.N.Y. 1998), is instructive here. In Oxford, Judge Brieant refused to appoint the Colorado Pension Fund as the sole lead plaintiff, insisting upon a group of lead plaintiffs which included an active purchaser of Oxford stock like Rosenberg. Judge Brieant's fear that a sole lead plaintiff could endanger the class' claims if the defendants identified a defect in that single representative applies here also. Since 100% of Detroit's investments are externally managed and in index funds, Detroit made no decision to invest in Legato stock. The defendants may well contend this shows a lack of reliance and mount a determined attack on Detroit first at the class certification and again at trial. This could result, in a worse case scenario, in denial of class certification for the lack of a typical class representative or loss at trial if defendants are able to persuade a jury that Detroit did not care about Legato's represented profits or other public statements because Detroit's Legato stock was purchased for it by others as part of an index investing program. Why should the class be exposed to that risk? The Legato Group recognizes these realities and has accounted for them. There is no reason to subject the class to such risks where the Legato Group, whose diversified composition includes institutional membership and provides the class with protection against such attacks and future uncertainties.

Detroit's and Bernstein's claim that the lawyers for members of the Legato Group acted improperly in publishing notices of the filing of their cases and are engaging in "lawyer-driven litigation" does not wash. Again, Detroit and Bernstein are criticizing the same conduct they engage in. As required by §21D(a)(3)(A)(i) of the Reform Act, plaintiffs' counsel - including Bernstein - issue press releases announcing the filing of securities class actions. Epstein Decl., Exs. 3-15. Each of the other firms who have now thrown their "support" to Detroit and Bernstein issued releases upon the filing of their complaints in this action! Epstein Decl., Exs. 16-19. If there is something wrong with law firms issuing notices of filing of a securities class action, why does Bernstein issue such notices and accept the support of groups formed by other lawyers who issued such releases? It seems that so far as Bernstein is concerned it is all right for them and their allies to issue notices of the filing of their class actions, including the Legato class action, but it is an abusive practice when counsel for the Legato Group does the same thing.

A word about lawyer-driven litigation. How about the recent maneuver where Bernstein persuaded the lawyers for all the other lead plaintiff candidates to withdraw their motions and support Detroit and Bernstein? Who made those decisions for these other groups? Can one believe that all the clients in all those competing lead plaintiff motions agreed to cast their motions aside? What promises have been made to the lawyers representing those proposed lead plaintiffs to get them to withdraw their lead plaintiff motions? Why isn't it lawyer-driven litigation to arrange the withdrawal of those other proposed lead plaintiffs, while protecting the financial interests of the law firms involved by promising them a continuing role in the case? Striking deals with the lawyers for other proposed lead plaintiffs to get them to withdraw their lead plaintiff motions, while allowing the lawyers to continue to participate in the case seems to epitomize the very sort of lawyer manipulation that the Reform Act was supposed to eliminate.

II. The Legato Group Is a Proper Lead Plaintiff Group Under the Reform Act

Detroit implies the statutory presumption with respect to the most adequate plaintiff only applies when large institutional investors seek to be made lead plaintiff. This contravenes the plain language of the Reform Act. While one objective of Congress was to provide an opportunity for institutional investors to seek appointment as lead plaintiff (see 141 Cong. Rec. H13694, col. 2 (daily ed. Nov. 28, 1995)) (Epstein Decl., Ex. 20), nowhere does the statute, or its legislative history, limit the presumption of most adequate plaintiff to an institutional investor seeking lead plaintiff status. Rather, the most adequate plaintiff provision reflects a Congressional belief that the plaintiff or group of plaintiffs with the largest financial interest in the outcome of the litigation was likely to be the most adequate representative because such plaintiffs would have the strongest incentive to assure that the litigation would be prosecuted effectively and in the best interests of the class. See 141 Cong. Rec. S17956, col. 2 (daily ed. Dec. 5, 1995) (statement of Sen. Dodd) ("the conference report empowers investors so that they, not their attorneys, have the greater control over the class action cases by allowing the plaintiffs with the greatest claim to be named plaintiff and allowing that plaintiff to select their counsel") (Epstein Decl., Ex. 21). This applies regardless of whether the proposed lead plaintiff is an institutional investor or group of persons, including individuals and institutions.

The Reform Act specifically states that the presumption exists even with a lack of institutional plaintiffs. The Act states that the most adequate plaintiff for purposes of the presumption is a "person" or "group of persons." §21D(a)(3)(B)(iii)(I). Such language is inclusive of individual investors and not merely institutions. The presumption applies here (see §21D(a)(3)(B)(iii)), and in consequence, the Legato Group is presumptively the most adequate plaintiff. In addition, the Legato Group includes two institutional investors, so whatever benefit institutional investors are thought to bring to the lead plaintiff role is present here in the Legato Group.

In other litigations, Detroit and Bernstein have taken positions inconsistent with what they advocate here. See Legato Opp. at 8-10. In those litigations, Detroit and Bernstein argued that institutional investors are not entitled to preferential treatment and that an institutional investor with the largest individual loss is not entitled to appointment as lead plaintiff where a group of investors with larger aggregate losses seeks lead plaintiff status. They have also both formed or participated in groups of investors seeking lead plaintiff status numbering as large as 13. Bernstein just filed a brief seeking the appointment of a five-member group as lead plaintiff in the WellCare Management Group Litigation, where they correctly argued that the presumption provided by §21D(a)(3)(B)(iii)(I) is not limited to institutional investors! In that brief they stated:

Nothing in the Act limits thepresumption involved to plaintiffs which are institutions. Rather, the presumption exists with respect to that "person or group of persons that ... (bb) in the determination of the court, has the largest financial interest in the relief sought by the class...." Section 21D(a)(3)(B)(iii)(I).

While one objective of Congress was to provide an opportunity for institutional purchasers to seek appointment as class representatives (see generally H.R. Rep. No. 104-369, 104th Cong. 1st Sess. at 34-35), nowhere does the statute, or its legislative history, limit the presumption of most adequate plaintiff to the situation in which an institutional investor is seeking to be appointed. Section 21D(a)(3). Rather, the most adequate plaintiff provision reflects a congressional belief that, as a general matter, the plaintiff or group of plaintiffs with the largest financial interest in the outcome of the litigation was likely to be the most adequate representative because such plaintiffs would have the strongest incentive to assure that the litigation would be prosecuted effectively and in the best interests of the class. See, e.g., S. 17956 (Statements of S. Dodd) ("the conference report empowers investors so that they, not their attorneys, have the greater control over the class action cases by allowing the plaintiffs with the greatest claim to be named plaintiff and allowing that plaintiff to select their counsel."). This principle applies regardless of whether the proposed class representative is an institutional investor.

Thus, Bernstein properly conceded that the presumption provided by the Reform Act applies to groups of investors even when the group does not include an institutional investor! Here, of course, the Legato Group contains two large, sophisticated institutional investors. The Legato Group is exactly the "group" contemplated by the Reform Act for lead plaintiff purposes.

III. Adam Rosenberg's Trading in Legato Stock Does Not Disqualify Him as a Lead Plaintiff or Subject Him to Disabling Unique Defenses as a Class Representative

Detroit mounts a heavy-handed attack on Legato Group member Rosenberg, contending that because he is a trader or market maker in Legato stock, he cannot be an adequate class representative due to the unique defenses he faces because of his trading activities. But, Rosenberg is not a market maker in Legato common stock. Rosenberg Decl., ¶3. As we pointed out earlier, courts have repeatedly upheld class certification where representative plaintiffs have been day-traders or engaged in computer-driven trading strategies. Legato Opp. at 20-25. To deprive such individuals of the protections of the federal securities laws, clearly runs counter to the fundamental purpose of those laws to protect all investors from fraudulent activity. In re Gulf Oil/Cities Serv. Tender Offer Litig., 112 F.R.D. 383, 388 (S.D.N.Y. 1986) ("The securities laws afford protection to all investors, both sophisticated and unsophisticated."). It also is inconsistent with current realities where an increasing amount of stock trading is done by active traders utilizing sophisticated, proprietary and/or computer controlled trading models.⁽³⁾

Detroit's characterization of Rosenberg's trading activities are inaccurate. While Rosenberg traded almost daily in the stock of Legato during the Class Period, he accumulated a long position of 77,240 shares (all purchased during the Class Period for an average purchase price of $53.31 per share) by 1/19/00. On 1/19/00, when Legato revealed it had to restate its results, its stock collapsed by over $33 per share. Rosenberg instantly suffered a $1.5-$1.9 million loss. The Legato Group calculated Rosenberg's damages very conservatively in its lead plaintiff motion, netting his Class Period profits of $394,819 from the huge losses he suffered when the stock collapsed, thus generating the $1.1-$1.5 million loss figure used in the Legato Group lead plaintiff application. However, it is not at all clear that such netting is legally required and thus Rosenberg's legally recoverable damages are likely much larger than the $1.1-$1.5 million used for the Legato Group's lead plaintiff motion.⁽⁴⁾ In any event, Rosenberg actually suffered no "in-and-out" damages; but rather, millions in retention damages and is quite typical of those Legato class members who purchased Legato stock and held it at the end of the Class Period - to be blindsided and damaged by the revelations on 1/19/00 and collapse of Legato's stock.⁽⁵⁾

In fact, institutional investors often engage in complex and active trading activities, which do not prevent them from serving as lead plaintiffs or class representatives. In In re Vesta Insurance Group, Inc., Sec. Litig., Civ. A. No. 98-AR-1407-S, Memorandum Opinion (N.D. Ala. Oct. 25, 1999) ("Vesta"), the court appointed the Florida State Board of Administration ("FSBA") together with other individual and institutional investors as lead plaintiff, even though FSBA had engaged in computer-managed trading in Vesta stock. When the lead plaintiffs sought class certification, defendants opposed FSBA claiming its computer-based trading in Vesta stock made it "subject to unique defenses that will consume its attention and detract from its ability to adequately represent absent class members." Epstein Decl., Ex. 23 at 10. The court rejected that claim and certified FSBA as one of the class representatives, stating:

[I]f arguable unique defenses will not distract the named plaintiffs' attention, then the interests common to the class will not be comprised.... [¶] One alleged unique defense here is that FSBA did not rely on any alleged material misrepresentations when it purchased Vesta stock [and] cannot benefit from the presumption of transaction causation (reliance) available through the fraud-on-the-market theory.

* * *

[D]efendants argue that FSBA abdicated its decision-making responsibilities by leaving the decision to purchase Vesta stock to a computer program (The BARRA optimizer) .... In either case, defendants claim, FSBA did not participate in the purchase and thus could not have relied on the efficiency or integrity of the market.

* * *

[D]efendants argue, FSBA cannot show that any alleged misstatements by defendants "caused" FSBA to buy Vesta stock [and] this lack of transaction causation will be a unique defense that will consume FSBA's attention to the detriment of the absent class members.

At first glance defendants appear to make a compelling argument demonstrating lack of causation. This court believes, however, that defendants' argument only tells part of the story.... The problem is that defendants fail to acknowledge that every purchase in an efficient market carries with it the presumption that the market price honestly reflects all material information.... [FSBA's] investment strategy is none of defendants' business; it is none of the court's business.... Whatever the strategy, FSBA should have been able to presume that the market price for Vesta was based on honest and accurate financial information, and when it purchased Vesta, even if [it] would have done so with the less favorable numbers, it was paying for that stock approximately what it was actually worth.

Detroit's attack on Rosenberg, a class member whose interests Detroit should be championing if it sincerely believed in the case as pleaded and wanted to advance the interests of all class members, exposes Detroit to similar attack. All of Detroit's funds are externally managed and undoubtedly invested in index funds. Detroit makes no investment decisions to purchase a given stock. Its investments are purchased for it by outside managers, relying on index funds to "buy the market." One could argue that this sort of uninvolved investment strategy is certainly not reflective of the way most investors invest, i.e., looking at a given company and its stock and making a decision to buy it based on favorable factors. Yet, it is not the Legato Group's contention that such passive index investors should be excluded from the class or that their damages should not count for lead plaintiff purposes. The stock some investment manager purchased for Detroit via index purchases was allegedly artificially inflated by fraud. The same was true of the shares purchased by Rosenberg. Thus, both Detroit and Rosenberg are properly included in the class because they purchased Legato stock at artificially inflated prices and both of their alleged damages should be considered for lead plaintiff purposes. As stated in Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975):

A purchaser on the stock exchanges may be either unaware of a specific false representation, or may not directly rely on it; he may purchase because of a favorable price trend, price earnings ratio, or some other factor. Nevertheless, he relies generally on the supposition that the market price is validly set and that no unsuspected manipulation has artificially inflated the price, and thus indirectly on the truth of the representations underlying the stock price - whether he is aware of it or not, the price he pays reflects material misrepresentations.

It is not enough to disqualify a potential class representative by merely claiming that there is some arguable defense available to defeat that plaintiff's claim. In order to be disabling, the unique defense must not only be real, it must be so substantial that it will so distract the class representative's ability to present the class' case that it will prejudice the class and the presentation of its claims. See In re Cirrus Logic Sec. Litig., 155 F.R.D. 654, 662 (N.D. Cal. 1994) (rejecting argument that a sophisticated investor who held the defendant's shares at the close of the class period was subject to unique defenses). That is clearly not true here with respect to Rosenberg. Rosenberg Decl., ¶¶6-7. First of all, the defense that Rosenberg is a "trader" or even a "market maker," creates no defense at all for the defendants. Since Rosenberg was purchasing stock on the open market and was unaware of the fraud he has a valid "fraud-on-the-market" claim. Rosenberg Decl., ¶5. If such a defense cannot be used by the defendants to defeat Rosenberg's claim, it surely should not be able to be used by Detroit to disqualify him as a lead plaintiff candidate. And, even were the Court to allow such a "trading" defense against Rosenberg's claim to be offered at trial - a highly dubious proposition - it would certainly not overwhelm or distract from the presentation of the claim on behalf of the class which will focus on Legato's fraud - especially its fraudulent manipulation of its financial reports that accounted for later restatements of its financial results - wrongdoing that somehow seems to get lost during this lead plaintiff battle.⁽⁶⁾ And, remember that unlike Detroit which seeks to be a sole lead plaintiff so that any deficiency in Detroit's claim could, in reality, become the focus of a trial and really harm the class' claims if successfully pursued by the defense, the Legato Group includes Rosenberg as one of six lead plaintiffs/class representatives, so that even if, in the unlikely event a court permitted a "trading" defense during trial, the class would still be protected by the presence of other class representatives whose claims would not be subject to these kinds of attacks.

Under the foregoing analysis, discovery into the details of Rosenberg's trading is not justified. It does not matter what the reasons for Rosenberg's purchases and sales were or what his investment methodology was. If he traded in a polluted market, then he suffered damage prima facie which he is entitled to claim as a plaintiff in this action. However, if Detroit wishes to make the particular investment methodology and rationale of Rosenberg critical to the lead plaintiff determination then, what is sauce for the goose must be sauce for the gander. As noted earlier, Detroit has 100% of its investment funds managed externally, makes no investment decisions for itself and therefore made no decision to purchase Legato stock. Detroit's investments were made by an undisclosed, unknown outside manager and undoubtedly in index funds. Thus, if any investor is arguably atypical and subject to unique defenses, it is Detroit, which made no investment decision and relied on nothing regarding Legato. In fact, it is doubtful that Detroit even knew it purchased Legato stock until long after the fact, perhaps not even until after the first of the Legato class actions were filed or it was contacted by counsel. Thus, if Rosenberg's trading is subject to discovery, Detroit's investment activities should be also, so that the Legato Group will be able to demonstrate that if any investor here is, in fact, atypical and subject to potentially lethal unique defenses, it is Detroit.

Judge Brieant's wisdom in Oxford - refusing to appoint the Colorado Pension Fund as the sole lead plaintiff and instead insisting upon a group of lead plaintiffs which included a very active trader in Oxford stock - should guide the Court here. Judge Brieant's fear there, that a sole institutional lead plaintiff could endanger adequate representation of the class if the defendants uncovered a defect in that single representative, applies with equal force here. Because Detroit's investments are externally managed and undoubtedly in index funds, the defendants may well mount an attack on Detroit for lack of reliance and lack of typicality at the class certification stage or at trial. Worse case, this could result in denial of class certification for the lack of a typical class representative or a trial where the defendants persuade a jury that Detroit did not care about Legato's finances or public statements because Detroit's Legato stock was purchased for it by others as part of an index investing program, and thus undermine the plaintiffs' case. Why should the class be exposed to that kind of risk? There is no reason to expose the class to that kind of risk where an alternative such as the Legato Group is present whose diversified yet small numbers provide the class with protection against such attacks and future uncertainties.

IV. Detroit's Losses Are Smaller than the Legato Group's Losses and Cannot Be Boosted or Supplemented by the "Support" of Now Withdrawn Lead Plaintiff Candidates

In maneuvers orchestrated by Detroit, all the other lead plaintiff candidates except the Legato Group have attempted to transmogrify their separate infirm lead plaintiff applications into some sort of amalgamated group to seize control of the case. However, these gyrations cannot alter the simple facts. The six-member Legato Group has the largest financial interest in the relief sought by the class and it alone includes persons who transacted in each of the publicly traded securities of Legato that have been sued for.

Detroit and its new allies lose under any analysis. If the lead plaintiff motions are limited to those motions actually filed by the deadline, then the Legato Group has the largest loss. If somehow obtaining the "support" of the other lead plaintiff contenders without the filing of a timely lead plaintiff motion or even an attempt to amend any existing motion somehow creates a viable group it creates a large one, i.e., 19 members. The creation of such a group certainly undercuts any claim by Detroit or Bernstein that the Legato Group is improper under the Reform Act or too large to effectively manage the litigation.

Detroit cannot now salvage its position by attempting to cobble together an after-the-fact created alliance and claiming that the support of other vanquished lead plaintiff candidates increases Detroit's financial interest in the relief sought by the class. The Reform Act's lead plaintiff provisions do not provide for counting the losses of groups or investors who "support" a lead plaintiff candidate in determining which of the lead plaintiff candidates has the largest loss. SeeBowbrow v. MobileMedia, Inc., Civ. A. No. 96-4715, Letter-Opinion at 5 (D.N.J. Mar. 31, 1997) (Epstein Decl., Ex. 25). Detroit moved for lead plaintiff status based on its losses alone and for the appointment of a sole lead plaintiff - itself. A lead plaintiff candidate cannot boost its losses by post-lead plaintiff motion deadline maneuverings or by obtaining the "support" of other lead plaintiff candidates. Id. Detroit's eligibility for lead plaintiff status depends on Detroit's own losses as established in its lead plaintiff motion. Those losses are not as large as the losses of the Legato Group. Therefore, the Legato Group must be designated lead plaintiff.

V. Counsel Representing Legato Group Members Did Nothing Improper in Publishing Notices of the Filing of Their Legato Class Action

Detroit and Bernstein attack counsel for members of the Legato Group for issuing public notices of the filing of their cases. However, Bernstein is criticizing the very type of conduct that it has and is engaging in. Bernstein and members of the plaintiffs bar routinely issue press releases announcing the filing of securities class actions. Such a notice is mandated by the Reform Act. §21D(a)(3)(A)(i). Collected at Exs. 3-15 to the Epstein Decl. are just a sample of the countless notices issued by Bernstein in similar cases. And, of course, each of the other law firms who have now thrown their support to Detroit and Bernstein issued press releases upon the filing of their complaints in this action. Epstein Decl., Exs. 16-19. If there is something wrong with law firms filing notices of the filing of securities class actions under the Reform Act, why does Bernstein issue such press releases when it files securities class actions, and why would Detroit and Bernstein accept the "support" of law firms who did so in this case? It seems to be a rule so far as Detroit and Bernstein are concerned that it is all right for them or their allies to issue notices of the filing of their securities class action lawsuits, including the Legato class action, but somehow, it is an abusive practice when counsel for the Legato Group does the same.

"Lawyer-driven" litigation seems to have become the new "buzz word" for lead plaintiff motion practice. But how about the recent machinations where Bernstein persuaded the lawyers for the other lead plaintiff candidates to all withdraw their lead plaintiff motions and support Detroit. Who made those decisions? Apparently Detroit and its lawyers expect this Court to ignore common sense and conclude that all the clients involved in all those competing lead plaintiff motions agreed to cast their motions aside. What promises have been made to the law firms representing those potential lead plaintiffs to get the lawyers to withdraw those lead plaintiff motions? Why isn't it lawyer-driven litigation for Bernstein to arrange the withdrawal of those other lead plaintiff motions while protecting the law firms involved? These types of maneuvers - striking deals with the lawyers for the other lead plaintiff contenders to get them to withdraw their lead plaintiff motions while allowing the lawyers to continue to participate in the case seems to epitomize the very sort of lawyer manipulation of clients that Detroit and Bernstein argue that the Reform Act was supposed to eliminate.

VI. Conclusion

There are two key issues. First, can the six-member Legato Group of individual and institutional investors with $2.1-$2.6 million in losses be a proper lead plaintiff group? Second, can Rosenberg's damages - a trader who purchased 77,240 Legato shares during the Class Period which he held on 1/19/00 when Legato revealed its first accounting restatement and its stock collapsed by over $23 per share be included in the Legato Group's damages? The answer is "yes" to both issues. Thus, the Legato Group has the largest financial interest in the relief sought by the class, is presumed to be the most adequate plaintiff and must be appointed lead plaintiff to prosecute this action.
 

DATED: April 17, 2000

Respectfully submitted,  MILBERG WEISS BERSHAD HYNES & LERACH LLP     __________________________ WILLIAM S. LERACH WILLIAM S. LERACH TRAVIS E. DOWNS, III 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 MILBERG WEISS BERSHAD HYNES & LERACH LLP PATRICK J. COUGHLIN KIMBERLY C. EPSTEIN 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 [Proposed] Lead Counsel for Plaintiffs ENTWISTLE & CAPPUCCI LLP VINCENT R. CAPPUCCI 400 Park Avenue, 16th Floor New York, NY 10022-4406 Telephone: 212/894-7200 KAPLAN, KILSHEIMER & FOX LLP FREDERIC S. FOX LAURENCE D. KING CHRISTINE M. COMAS ADRIENNE L. VALENCIA 805 Third Avenue, 22nd Floor New York, NY 10022 Telephone: 212/687-1980 BERNSTEIN LIEBHARD & LIFSHITZ, LLP SANDY A. LIEBHARD 10 East 40th Street New York, NY 10016 Telephone: 212/779-1414 SPECTOR, ROSEMAN & KODROFF, P.C. ELLEN GUSIKOFF STEWART 600 West Broadway, Suite 1600 San Diego, CA 92101 Telephone: 619/338-4514 SHEPHERD & GELLER, LLC PAUL J. GELLER 7200 W. Camino Real, Suite 203 Boca Raton, FL 33433 Telephone: 561/750-3000 LAW OFFICES OF ALFRED G. YATES, JR. ALFRED G. YATES, JR. 519 Allegheny Building 429 Forbes Avenue Pittsburgh, PA 15219 Telephone: 412/391-5164 BARRACK, RODOS & BACINE EDWARD M. GERGOSIAN 600 West Broadway, Suite 1700 San Diego, CA 92101 Telephone: 619/230-0800 RABIN & PECKEL LLP BRIAN MURRAY 275 Madison Avenue New York, NY 10016 Telephone: 212/682-1818 LAW OFFICES OF BRUCE G. MURPHY BRUCE G. MURPHY 265 Llwyds Lane Vero Beach, FL 32963 Telephone: 561/231-4202 LAW OFFICES OF JAMES V. BASHIAN, P.C. JAMES V. BASHIAN OREN GISKAN 500 Fifth Avenue, Suite 2700 New York, NY 10110 Telephone: 212/921-4110 KOHN, SWIFT & GRAF, P.C. MICHAEL J. BONI 1101 Market Street 2400 One Reading Center Philadelphia, PA 19107 Telephone: 215/238-1700 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. STEVEN J. TOLL MATTHEW J. IDE 999 Third Avenue, Suite 3600 Seattle, WA 98104 Telephone: 206/521-0080 WECHSLER HARWOOD HALEBIAN & FEFFER LLP JOHN HALEBIAN 488 Madison Avenue, 8th Floor New York, NY 10022 Telephone: 212/935-7400 SAVETT FRUTKIN PODELL & RYAN, P.C. STUART H. SAVETT BARBARA A. PODELL 325 Chestnut Street, Suite 700 Philadelphia, PA 19106 Telephone: 215/923-5400 BERGER & MONTAGUE, P.C. SHERRIE R. SAVETT ARTHUR STOCK 1622 Locust Street Philadelphia, PA 19103 Telephone: 215/875-3000 LEVY & LEVY, P.C. STEPHEN G. LEVY 245 Park Avenue, 39th Floor New York, NY 10167 Telephone: 212/792-4343 LEVIN, FISHBEIN, SEDRAN & BERMAN ARNOLD LEVIN 510 Walnut Street, Suite 500 Philadelphia, PA 19106 Telephone: 215/592-1500 WEINSTEIN, KITCHENOFF, SCARLATO & GOLDMAN, LTD. PAUL J. SCARLATO 1608 Walnut Street, Suite 1400 Philadelphia, PA 19103 Telephone: 215/545-7200 DONOVAN MILLER, LLC MICHAEL D. DONOVAN 1608 Walnut Street, Suite 1400 Philadelphia, PA 19103 Telephone: 215/732-6020 STULL, STULL & BRODY MICHAEL D. BRAUN MARC L. GODINO 10940 Wilshire Blvd., Suite 2300 Los Angeles, CA 90024 Telephone: 310/209-2468 WEISS & YOURMAN KEVIN J. YOURMAN 10940 Wilshire Blvd., 24th Floor Los Angeles, CA 90024 Telephone: 310/208-2800 DYER DONNELLY F. JAMES DONNELLY 801 East 17th Avenue Denver, CO 80218 Telephone: 303/861-3003 THE SOHMER LAW FIRM STEPHEN M. SOHMER P.O. Box 811 Caldwell, NJ 07007 Telephone: 973-364-1616 FINKELSTEIN & KRINSK JEFFREY R. KRINSK JAMES A. CAPUTO ARTHUR L. SHINGLER, III 501 West Broadway, Suite 1250 San Diego, CA 92101 Telephone: 619/238-1333 LAW OFFICES OF LEO W. DESMOND LEO W. DESMOND 2161 Palm Beach Lake Blvd., Suite 204 West Palm Beach, FL 33409 Telephone: 561/712-8000 BULL & LIFSHITZ, LLP PETER D. BULL JOSHUA M. LIFSHITZ 246 West 38th Street New York, NY 10018 Telephone: 212-869-9449 WOLF POPPER LLP LESTER LEVY MICHAEL A. SCHWARTZ 845 Third Avenue New York, NY 10022 Telephone: 212/759-4600 SCOTT & SCOTT, LLC DAVID R. SCOTT NEIL ROTHSTEIN 108 Norwich Avenue Colchester, CT 06415 Telephone: 860/537-3818 Attorneys for Plaintiffs

K:\CASES\Legato\KLX80086.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 Diego, over the age of 18 years, and not a party to or interest in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101.

2. That on April 17, 2000, declarant served the THE LEGATO SYSTEMS LEAD PLAINTIFF GROUP'S REPLY MEMORANDUM IN SUPPORT OF ITS MOTION TO BE APPOINTED LEAD PLAINTIFF PURSUANT TO §21D(a)(3)(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND FOR APPOINTMENT OF 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.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 17th day of April, 2000, at San Diego, California.
 

__________________________
DEBORAH D. HAYES

1. Here, as elsewhere, emphasis is added and citations are omitted unless otherwise noted.

2. It is not the Legato Group's contention that such passive index investors should be excluded from the class or that their damages should not count for lead plaintiff purposes. They should be included in the class and of course their damages should count for lead plaintiff purposes. But, the same is true of Rosenberg.

3. Per the General Accounting Office, active traders account for 10%-15% of total NASDAQ volume. Epstein Decl., Ex. 22.

4. See Randall v. Loftsgaarden, 478 U.S. 647, 663 (1986) ("[In enacting the 1934 Act] Congress intended to deter fraud ... in the securities markets .... This deterrent purpose is ill served by a too rigid insistence on limiting plaintiffs to recovery of their 'net economic loss.'"); In re Clinton Oil Co. Sec. Litig., [1977-1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,016, at 91,578 (D. Kan. 1977) ("[P]rofit/loss margins on sales of shares obtained in separate and independent purchase transactions should not be offset for the purpose of reaching a net figure.").

5. The argument of Detroit attacking Rosenberg's damages at the very outset of the case - here during the lead plaintiff battle - are improper. For purposes of determining the losses of lead plaintiff candidates, courts accept prima facie the damages asserted by the lead plaintiff candidates. If courts do not do this, then lead plaintiff motion practice will degenerate into a form of mini-trial on the issue of damages raising complex and time-consuming factual issues of causation, many of which cannot be fairly adjudicated without discovery. In re McKesson HBOC, Inc. Sec. Litig., No. C-99-20743-RMW, Order at 4 (N.D. Cal. Dec. 22, 1999) ("the Reform Act plainly requires speedy consideration of the lead plaintiff question so as not to delay further proceedings") (Epstein Decl., Ex. 24).

6. Detroit's reliance upon McNichols v. Loeb Rhoades & Co., 97 F.R.D. 331 (N.D. Ill. 1982), for the proposition that a market maker is an inappropriate class representative under Rule 23, is misplaced. Though Detroit cites McNichols, it ignores that "[t]he Court emphasizes that it does not hold that a market maker, as a matter of law and solely by virtue of its role as a market maker, can never adequately represent the [plaintiffs in] a class composed of investors." Id. at 346 n.38. So too, the argument advanced by Detroit was recently rejected in Chill v. Green Tree Fin. Corp., 181 F.R.D. 398 (D. Minn. 1998). In Green Tree, the court distinguished McNichols, finding that a market maker on the COBE met the requirements of Rule 23 and was sufficiently typical and adequate to serve as lead plaintiff. Id. at 412. "There is nothing in the Record, one way or the other, which reveals Holland's strategy in purchasing stocks. ... [I]n our view, one who buys Green Tree stock, even as a hedge against other investments, still presumably relies on the integrity of the market in selecting that hedge. Where, as here, there is no evidence to the contrary, we cannot conclude that Holland relied on something other than the market's integrity in purchasing Green Tree stock. Therefore, the Berglund Group has failed to establish that Holland is subject to a unique defense that would prevent him from adequately representing the interests of the putative class of stockholders." Id. Accord, Katz v. Comdisco, 117 F.R.D. 403, 409 (N.D. Ill. 1987) (certifying market maker as a class representative). Thus, Rosenberg is an adequate class representative.