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Stanford
University Law School - Securities Class Action Clearinghouse
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| ARNOLD COHN, On Behalf of
Himself and All Others Similarly Situated,
Plaintiff,
CRITICAL PATH, INC., et al.,
Defendants.
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No. C-01-0551-WHO
CLASS ACTION REPLY MEMORANDUM OF
DATE:
May 17, 2001
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B. Bell, Thomson-CSF, Nehring and Westgreen Will Effectively Manage the Litigation
D. The Lead Plaintiff's Selection of Lead Counsel Should Be Approved
William James Bell, Trustee ("Bell"), Thomson-CSF Ventures ("Thomson-CSF"), Alexander Nehring ("Nehring") and Westgreen Holdings LLC ("Westgreen") who collectively suffered losses in excess of $16.6 million from their purchases of Critical Path common stock throughout the class period (12/8/99 - 2/1/01), respectfully submit this memorandum in support of their motion to be appointed lead plaintiff and to have their selection of lead counsel approved by the Court. Bell, Thomson-CSF, Nehring and Westgreen should be appointed lead plaintiff and the other competing motions should be denied.(1)
The other competing motions should be denied because Bell, Thomson-CSF, Nehring and Westgreen have the largest financial interest in the relief sought by the class and are therefore presumptively the most adequate plaintiff. Confronted with this indisputable fact, some competing movants erroneously claim Bell, Thomson-CSF, Nehring and Westgreen should not be appointed lead plaintiff because (1) they do not have a pre-litigation relationship, (2) the class period proposed by Bell, Thomson-CSF, Nehring and Westgreen is not the class period the competing movants would choose from among the eight different class periods proposed to date, and (3) Bell, Thomson-CSF, Nehring and Westgreen do not favor competitive bidding to select lead counsel.
Each of these assertions is meritless. First, no class member has (or can) cite any portion of the Private Securities Litigation Reform Act of 1995 ("PSLRA") or its legislative history in support of the assertion that the PSLRA requires groups to have a pre-litigation relationship as a condition to serve as lead plaintiff. Rather, the PSLRA manifests a desire to appoint as lead plaintiffs, class members who (i) have a significant financial interest in the relief sought and (ii) who are capable of effectively managing the litigation and the lawyers. Both requirements have been met here as evidenced by the declarations submitted by each of the four movants. Second, courts have consistently held that it is inappropriate for courts to favor one plaintiff's determination as to an appropriate class period over others at this stage of the proceedings. Such a holding is particularly appropriate here where eight different class periods have been asserted in the 30 complaints filed to date. Finally, there is absolutely no support in the PSLRA or its legislative history for the selection of counsel via bidding. In fact, the PSLRA and its legislative history direct exactly the opposite. 15 U.S.C. §78u-4(a)(3)(B)(v) ("the most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class"). Indeed, an overwhelming majority of courts addressing the issue have rejected requests for bidding and followed the PSLRA's statutory mandate that the lead plaintiff is to "select and retain counsel."
Not only do Bell, Thomson-CSF, Nehring
and Westgreen possess the largest financial interest in the relief sought
by the class, they are a properly formed group of four sophisticated investors,
including two institutional investors, who are committed to vigorously
and actively prosecuting this action They have suffered the largest losses
compared to the other competing movants and are therefore the presumptively
most adequate plaintiff. Accordingly, they respectfully request this Court
to approve their motion to be appointed lead plaintiff and to approve lead
plaintiff's choice of counsel.
II. ARGUMENT
A. Bell, Thomson-CSF, Nehring and Westgreen Have the Largest Financial Interest in the Relief Sought By the Class and Are Presumptively the Most Adequate Plaintiff
As set forth in their opposition to the other competing motions seeking appointment as lead plaintiff, Bell, Thomson-CSF, Nehring and Westgreen suffered collective losses in excess of $16.6 million as a result of their purchases of Critical Path common stock - more than any other competing movant. Because Thomson-CSF and Westgreen are institutions, appointing Bell, Thomson-CSF, Nehring and Westgreen would also fulfill one of the principal goals of Congress in enacting the PSLRA - to encourage institutional investors to serve as lead plaintiff. Aronson v. McKesson HBOC, Inc., 79 F. Supp. 2d 1146, 1152 (N.D. Cal. 1999). Moreover, Thomson-CSF incurred individual losses of at least $13.4 million, more than any other single shareholder seeking appointment as lead plaintiff. Thus, Bell, Thomson-CSF, Nehring and Westgreen are the presumptively most adequate plaintiff. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(aa)-(cc).
One court in this district noted that large institutional investors such as Thomson-CSF were "exactly the type of lead plaintiff envisioned by Congress when it instituted the lead plaintiff requirements," and that the PSLRA was "intended to create a new model for securities fraud litigation, under which the district court would appoint a strong lead plaintiff who would actively manage the litigation on behalf of the class." Bowman v. Legato Sys., 195 F.R.D. 655, 658 (N.D. Cal. 2000). See In re Network Assoc. Sec. Litig., 76 F. Supp. 2d 1017, 1020 (N.D. Cal. 1999) ("Congress expected that the lead plaintiff would normally be an institutional investor with a large stake in the outcome.").(2) Thus, courts have uniformly appointed a single institutional investor or small group of institutional investors as lead plaintiff. See, e.g., Sakhrani v. Brightpoint, Inc., 78 F. Supp. 2d 845 (S.D. Ind. 1999); McKesson, 79 F. Supp. 2d 1146; Yousefi v. Lockheed Martin Corp., 70 F. Supp. 2d 1061, 1067-71 (C.D. Cal. 1999); In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803, 809-16 (N.D. Ohio 1999); Wenderhold v. Cylink Corp., 188 F.R.D. 577, 583-87 (N.D. Cal. 1999); Switzenbaum v. Orbital Sciences Corp., 187 F.R.D. 246, 248-51 (E.D. Va. 1999); In re Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D. 42, 49 (S.D.N.Y. 1998).
B. Bell, Thomson-CSF, Nehring and Westgreen Will Effectively Manage the Litigation
The Hall Group argues that Bell, Thomson-CSF, Nehring and Westgreen are not qualified to serve as lead plaintiff because they do not have a pre-litigation relationship. The Hall Family Memorandum of Points and Authorities in Opposition to All Other Motions for Appointment as Lead Plaintiff and Approval of Selection of Counsel ("Hall Opp.") at 6. But Bell, Thomson-CSF, Nehring and Westgreen are the paradigm lead plaintiff group. This group includes less than five class members and includes both institutional and individual investors with substantial stakes in the litigation. Its members are sophisticated and experienced in prosecuting complex litigation and are committed to actively prosecuting this litigation and supervising their counsel. See Declarations of Westgreen Holdings, LLC by Tom Mudd, Alexander Nehring, William James Bell, Trustee, and Jean DuFour, which are currently filed with this reply or previously with plaintiff's opposition.(3)
The Halls' argument that courts cannot appoint lead plaintiffs consisting of small groups of unrelated investors is simply wrong and has no support in the statutory language of the PSLRA or relevant legislative history. The vast majority of courts have appointed small, previously unrelated groups as lead plaintiff following the plain meaning of the statute mandating the appointment of the "person or group of persons" with the largest financial interest in the relief sought by the class. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(bb) (emphasis added); see also Local 144 Nursing Home Pension Fund v. Honeywell Int'l, Inc., Civ. No. 00-3605(DRD), 2000 U.S. Dist. LEXIS 16712, at *9 (D.N.J. Nov. 16, 2000) (appointment of a group comprised of a small number of substantial shareholders as lead plaintiff is consistent with the language and purpose of the PSLRA); In re Party City Sec. Litig., 189 F.R.D. 91, 114 (D.N.J. 1999) (same). Rather, the relevant issue is not whether a group has a pre-litigation relationship but whether the presumptively most adequate plaintiff has demonstrated an ability to control the litigation. Honeywell, 2000 U.S. Dist. LEXIS 16712, at *11 (concern of the PSLRA that it be the investors, rather than the attorneys, that control private securities litigation does not translate into a requirement that group of investors need to have some relationship preceding the litigation); see also In re MicroStrategy Inc. Sec. Litig., 110 F. Supp. 2d 427, 435 (E.D. Va. 2000) (pre-litigation relationship not required); In re Tyco Int'l, Ltd. Sec. Litig., MDL No. MD-1335-B, 2000 U.S. Dist. LEXIS 13390, at *17 (D.N.H. Aug. 17, 2000) (PSLRA does not require pre-litigation relationship); Borenstein v. Finova Group, No. CIV 00-619-PHX-SMM, 2000 U.S. Dist. LEXIS 14732, at *23 (D. Ariz. Aug. 28, 2000) (pre-litigation relationship not required); In re Baan Co. Sec. Litig., 186 F.R.D. 214, 216 (D.D.C. 1999) (text of PSLRA does not limit the composition of a "group of persons" to those only with a pre-litigation relationship, nor does legislative history provide a sound enough foundation to support such a gloss).
The Securities and Exchange Commission ("SEC"), whose opinions are entitled to deference in the area of securities law,(4) has stated unequivocally that small groups without a pre-litigation relationship are qualified to serve as lead plaintiff
while joint applications by hundreds of investors are not entitled to the presumption of "most adequate plaintiff" status, that presumption does apply to a group that is small enough "to be capable of effectively managing the litigation and the lawyers. The [SEC] believes that ordinarily this should be no more than three to five persons, a number that will facilitate joint decisionmaking and also help to assure that each group member has a sufficiently large stake in the litigation."Honeywell, 2000 U.S. Dist. LEXIS, at *9 (quoting Baan, 186 F.R.D. at 216-17 (quoting SEC amicus brief)); see also Network Assocs., 76 F. Supp. 2d at 1052 n.28 (SEC amicus brief states that pre-litigation relationship might be relevant only when a group exceeds five members).
The requirement of a "pre-litigation" relationship claimed by the Hall Group arose out of situations where hundreds or thousands of unrelated plaintiffs jointly moved to be appointed lead plaintiff. See, e.g., Network Associates, 76 F. Supp. 2d at 1019; McKesson, 79 F. Supp. 2d at 1153 n.7, 1154. Many of those movants had minimal losses and little or no interest in or ability to oversee the litigation or their counsel. Id. Courts were concerned that the lead plaintiff provisions of the PSLRA, which were intended to ensure that clients - instead of lawyers - controlled the litigation, were being subverted by attorneys who were amassing multitudes of individual investors with little interest in the litigation, and thereby allowing the attorneys to control the litigation. In response, one or two courts facing situations where lawyers had assembled together hundreds of class members with small losses attempted to craft barriers to prevent attorneys from controlling the cases by requiring, for example, a pre-litigation relationship. Here, there is no question that Bell, Thomson-CSF, Nehring and Westgreen have suffered substantial losses and are sophisticated investors. They have already invested substantial time and effort to the prosecution and taken action to control the litigation.(5)
Thus, those cases requiring a "pre-litigation" relationship are simply
inapposite under the circumstances of this case.(6)
Here, there are not hundreds or thousands of unrelated investors applying
for lead plaintiff. Instead, there is a small, discrete group of sophisticated
individuals consisting of two institutional and two individual investors,
of which each have suffered substantial losses and have organized themselves
in a manner designed to ensure that they take an active role in directing
this litigation.(7)
C. Bell, Thomson-CSF, Nehring and Westgreen Will
Adequately Represent the Interests of All Class Members Including Class
Members that Purchased Stock Prior to October 10, 2000
Recognizing that Bell, Thomson-CSF, Nehring and Westgreen are presumptively the most adequate plaintiff because they have the largest financial interest in the relief sought some of the competing movants invite the Court to delve into the thicket of choosing the length of the class period. However, these attempts should be seen for what they are. It is well settled that the Court should not determine the proper class period under Rule 23 at this stage of the litigation. Lax v. First Merchants Acceptance Corp., No. 97 C 2715, 1997 U.S. Dist. LEXIS 11866, at *16, n.8 (N.D. Ill. Aug. 6, 1997) (improper for court to determine proper class period when appointing lead plaintiff); Sirota v. Solitron Devices, Inc., 673 F.2d 566, 571-72 (2d Cir. 1982) (improper for district court to resolve substantial questions of fact going to the merits when deciding the scope or time limits of the class); In re United Telecomms., Sec. Litig., No. 90-2251-0, 1992 U.S. Dist. LEXIS 16580, at *17 (D. Kan. Sept. 15, 1992) (limitation of class period on class certification motion would be an impermissible assessment of the merits of the action); In re Worlds of Wonder Sec. Litig., No. C-87-5491-SC, 1990 U.S. Dist. LEXIS 8511, at *28-*29 (N.D. Cal. Mar. 26, 1990) (court will not resolve issue of class period length because it goes to the merits of plaintiffs' action); Weinberger v. Thornton, 114 F.R.D. 599, 605-06 (S.D. Cal. 1986) (improper to decide scope or time limits of class since it requires resolution of facts going to the merits); In re Victor Techs. Sec. Litig., 102 F.R.D. 53, 58 (N.D. Cal. 1984) (court refuses to shorten class period because it requires an impermissible inquiry into the merits), aff'd, 792 F.2d 862 (9th Cir. 1986); Weinberger v. Jackson, 102 F.R.D. 839, 847 (N.D. Cal. 1984). Further, courts regularly consolidate related actions and appoint lead plaintiffs where there are differing class periods recognizing that the differing class periods will be resolved in the consolidated complaint. Takeda v. Turbodyne Technologies, Inc., 67 F. Supp. 2d 1129, 1133, 1137 (C.D. Cal. 1999); Zaltzman v. Manugistics Group, Inc., Civ. No. S-98-1881, 1998 U.S. Dist. LEXIS 22867, at *5 (D. Md. Oct. 8, 1998); In re Olsten Corp. Sec. Litig., 3 F. Supp. 2d 286, 293 (E.D.N.Y. 1998); In re Cendant Corp. Litig., 182 F.R.D. 476, 478 (D.N.J. 1998). The Court should therefore reject the invitation to delve into the merits of this matter in deciding the preliminary procedural issue of appointment of lead plaintiff.
Moreover, even a cursory review of the facts supports the class period beginning 12/8/99. The 30 complaints filed to date allege the same common course of conduct (e.g., accounting improprieties) over eight different class periods.(8) The 30 complaints have been related. Indeed, no one objected to the notices of related cases filed for each complaint, including the Thomson-CSF complaint alleging a class period of 12/8/99 - 2/1/01. While Critical Path has admitted the falsity of its third quarter 2000 and fourth quarter 2000 financial results by restating third quarter 2000 and fourth quarter 2000 (the "restatement period"), that does not mean class members who purchased Critical Path, Inc. ("Critical Path" or the "Company") stock prior to the restatement period do not have claims.(9) Indeed, the majority of the 30 complaints cover class periods prior to the restatement period. In fact, a similar attempt to have a court limit the class period at this stage of the case to what one group of plaintiffs considered to be the "good claims" (i.e. the "restatement claims") was soundly rejected. IBEW Local 98, et al. v. AT&T Corp., et al., Case No. 00-CV-5364 (GEB), Transcript at 57-59 (D.N.J. Jan. 25, 2001). Seefer Decl., Ex. C.
Finally, the Company's recent disclosure that it recorded an impairment charge of $1.3 billion (reducing intangible assets from $1.5 billion as of 9/30/00 to only $77.3 million as of 12/31/00) related to acquisitions made in 1999 and 2000 supports the longer, more inclusive class period. Indeed, the Company has written off more than 90% of the intangible assets associated with its acquisitions - most of which occurred in 1999 and first quarter 2000.(10) The magnitude of the write down alone raises questions about the accounting for the acquisitions in 1999 and 2000. In short, the circumstances in this case support the class period beginning on 12/8/99.
Even if it was true, as Columbus claims, that there are differences in the positions of class members who purchased Critical Path stock before and after 10/19/00, all purchasers of Critical Path stock during the relevant period should still be included in a single class. Courts have consistently held that, where a common course of conduct is alleged over time, all persons affected thereby may be included within the definition of the class. Lax, 1997 U.S. Dist. LEXIS 11866, at *12 (complaints based on substantially the same claims are related despite the fact they allege different class periods); In re Texas Int'l Sec. Litig.,114 F.R.D. 33, 40 (W.D. Okla. 1987) (quoting Blackie v. Barrack, 524 F.2d 891, 902-03 (9th Cir. 1975)); accord In re Storage Tech. Corp. Sec. Litig., 113 F.R.D. 113 (D. Colo. 1986); Lerner v. Haimsohn, 126 F.R.D. 64, 66 (D. Colo. 1989); Nicholas v. Poughkeepsie Sav. Bank/FSB, [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95, 606, at 97, 841 (S.D.N.Y. 1990); Shamberg v. Ahlstrom, 111 F.R.D. 689, 696-97 (D.N.J. 1986). As previously noted, the 30 complaints assert substantially the same claims over eight different class periods and have been related by the Court.
Bell, Thomson-CSF, Nehring and Westgreen purchased Critical Path stock throughout the class period (12/8/99 - 2/1/01): Thomson-CSF acquired its shares on 1/19/00, Nehring purchased shares in 6/00, Bell purchased shares from 7/00 - 1/01 and Westgreen purchased shares in 1/01. In contrast, Columbus purchased Critical Path stock only in 1/01 and the Hall Group purchased all its shares in 9/00. Thus, both Columbus and the Hall Group have come under a withering attack for their purported inability to adequately represent class members who purchased at different times during the class period and who therefore may have conflicting interests. Regardless of the merits of these attacks, it is incontrovertible that only Bell, Thomson-CSF, Nehring and Westgreen purchased throughout the class period and have every incentive to maximize the recovery for all class members.
Because of its membership and its purchases of Critical Path stock throughout the class period, Bell, Thomson-CSF, Nehring and Westgreen provide the class with broader and more diverse representation than the competing movants. The presence of multiple yet manageable class representatives has long been viewed as important in obviating potential class conflicts:
[T]he class members here will be represented by numerous named representatives, with substantial personal stakes, who purchased throughout the class period, and who thus will probably represent whatever conflicting interests there are in the development of plaintiffs' trial strategies.Blackie, 524 F.2d at 911; accord Oxford Health, 182 F.R.D. at 50. Thus, not only is the larger class period supported by the facts in this case but Bell, Thomson-CSF, Nehring and Westgreen provide the entire class with broader and more diverse representation.(11)
D. The Lead Plaintiff's Selection of Lead Counsel Should Be Approved
As discussed in detail in their opposition to the competing motions, counsel selected by Bell, Thomson-CSF, Nehring and Westgreen should be approved by this Court. Averneni's request for competitive bidding should be denied because competitive bidding is: (1) contrary to the express language of the PSLRA, which provides that the lead plaintiff shall select and retain counsel to represent the class, 15 U.S.C. §78u-4(a)(3)(B)(v); (2) contrary to Congressional intent as reflected by the legislative history of the PSLRA; (3) contrary to the views of the SEC whose opinions are entitled to deference in the area of securities law; (4) contrary to the views of commentators; and (5) not favored under Rule 23 of the Federal Rules of Civil Procedure. Indeed, most courts have followed the statutory mandates of the PSLRA and rejected competitive bidding for selecting counsel.
For the foregoing reasons, Bell, Thomson-CSF, Nehring and Westgreen
should be appointed lead plaintiff and their selection of counsel approved.
| DATED: May 3, 2001 | Respectfully submitted,
MILBERG WEISS BERSHAD
_____________________
100 Pine Street, Suite 2600
MILBERG WEISS BERSHAD
WEISS & YOURMAN
WEISS & YOURMAN
[Proposed] Co-Lead Counsel for Plaintiffs |
DECLARATION OF SERVICE BY FACSIMILE
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 Francisco, over the age of 18 years, and not a party to or interest in the within action; that declarant's business address is 100 Pine Street, 26th Floor, San Francisco, California 94111.
2. That on May 3, 2001, declarant served by facsimile the REPLY MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF THE MOTION BY WILLIAM JAMES BELL, THOMSON-CSF VENTURES, ALEXANDER NEHRING AND WESTGREEN HOLDINGS LLC TO BE APPOINTED LEAD PLAINTIFF AND TO APPROVE LEAD PLAINTIFF'S CHOICE OF COUNSEL to the parties listed on the attached Service List and this document was forwarded to the following designated Internet site at:
http://securities.milberg.com
3. That there is a regular communication by facsimile between the place of origin and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 3rd day of May,
2001, at San Francisco, California.
_____________
Carolyn Burr
1. Seven competing motions seeking appointment as lead plaintiff and approval of counsel were initially filed. However, two movants - Hal G. Johns and the Carly Plaintiffs - did not file oppositions and are no longer seeking appointment as lead plaintiff.
2. Indeed, counsel for the Hall Group has recognized that institutions are preferred. See Declaration of Christopher P. Seefer in Support of Reply Memorandum in Support of the Motion by William James Bell, Thomson-CSF Ventures, Alexander Nehring and Westgreen Holdings LLC to Be Appointed Lead Plaintiff and to Approve Lead Plaintiff's Choice of Counsel. ("Seefer Decl.") Exs. A and B, filed herwith.
3. The benefit to the class of having a large institutional investor such as Thomson-CSF involved in this action has clearly resulted in a fee agreement with counsel which provides for a fee that is below that which is typically awarded by courts in cases of this type.
4. Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1082 (9th Cir. 1999); Oran v. Stafford, 226 F.3d 275, 287 (3d Cir. 2000).
5. This may not be the case for the Halls because each member of the Hall Group did not sign the "joint" declaration submitted to the Court in support of the Hall Group's opposition.
6. "[T]he lead plaintiff decision must be made on a case-by-case basis, taking account of the unique circumstances of each case." Oxford Health, 182 F.R.D. at 49.
7. The Hall Group's assertion that counsel may not adequately represent the class because one of its partners in the firm's New York office owned shares of Critical Path is meritless. Hall Opp. at 9, n.5. Mr. Weiss, like other class members, incurred substantial losses. Thus, his interests are aligned with, not adverse to, the class.
8. The eight different class periods all have an ending date of 2/1/01 but have varying beginning dates including 12/8/99, 4/20/00, 4/21/00, 6/15/00, 8/8/00, 11/2/00, 11/30/00 and 1/19/01.
9. Columbus Capital Partners, L.P. ("Columbus") has stated that it does not plan to represent any class members who purchased stock prior to 10/19/00 and claims the class period should be limited to the restatement period because any case prior to 10/20/00 will be more difficult to prove. Memorandum of Columbus in Opposition to the Applications of Other Proposed Lead Plaintiffs at 6. Columbus is an inadequate representative because the hostility expressed towards other class members' claims, "pose[s] a significant risk that the complete interests of all class members will not be fairly and adequately protected." Borenstein, 2000 U.S. Dist. LEXIS 14732, at *26-*27(declining to appoint as lead plaintiff movants who "openly questioned" other class members' claims).
10. In 1999 Critical Path acquired five companies and reported total intangible assets of $474 million as of 12/31/99. In the first quarter 2000, Critical Path acquired three more companies and intangible assets increased to $1.2 billion as of 3/31/00.
11. Columbus' bald assertion that Bell, Thomson-CSF, Nehring and Westgreen will not adequately represent class members who purchased during the restatement period (10/19/00-2/1/01) ignores the fact that both Bell and Westgreen purchased almost all of their Critical Path stock during the "restatement period." Declaration of Ex Kano S. Sams II in Support of Motion to Appoint William James Bell, Trustee; Thomson-CSF Ventures; Alexander Nehring and Westgreen Holdings LLC as Lead Plaintiff Pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 and to Approve Lead Plaintiff's Choice of Counsel, Ex. A.