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UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
TO: ALL PARTIES AND THEIR ATTORNEYS OF RECORD PLEASE TAKE NOTICE that on October 3, 2003, at 9:00 a.m., or as soon
thereafter as the matter may be heard in the Courtroom of Judge Susan
Illston, Gerald Fraschilla and Darlene Fraschilla (the "Fraschilla Group")
will move the Court for an Order consolidating the following actions for
all purposes under Federal Rule of Civil Procedure 42:
This motion is brought on the grounds that the above actions are substantially identical because each alleges claims for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§78j(b) and 78t(a), and Securities and Exchange Commission ("SEC") Rule 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5, based upon similar factual allegations against similar defendants. The motion is also brought on the ground that consolidation of these cases will promote efficiency. This motion is based upon this notice of motion, the memorandum of points and authorities, the Declaration of Kimberly C. Epstein ("Epstein Decl."), filed herewith, the complete files and records in the related actions and such other written or oral argument as the Court may consider in deciding this motion. MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION The four related securities fraud class action lawsuits identified above are currently pending in this District. The Fraschilla Group seeks to consolidate these related securities class actions pursuant to Fed. R. Civ. P. 42(a). Plaintiffs in each action assert substantially the same violations of the federal securities laws and raise substantially the same questions of law and fact. Plaintiffs in each of these cases allege securities fraud claims on behalf of a class of all persons who purchased or otherwise acquired securities of InterMune, Inc. ("InterMune" or the "Company") during the Class Period.(1) It is the Fraschilla Group's belief that there is no opposition to consolidating these actions. The parties attempted to stipulate to the terms of consolidation and were unable to agree with regard to preservation of documents. A number of letters were exchanged in our attempt to ensure plaintiffs were protected in this regard. Epstein Decl., Exs. A-K. Thus, consolidation of these actions is appropriate.(2) The only anticipated dispute lies with the terms of document preservation imposed upon the parties. II. SUMMARY OF THE PENDING ACTIONS InterMune is a Delaware corporation headquartered in Brisbane, California. ¶7.(3) The Company describes itself as a "'commercially driven biopharmaceutical company focused on the marketing, development and applied research of life-saving therapies for pulmonary, infectious and hepatic diseases.'" ¶7 (citation omitted). Substantially all of the Company's revenue is derived from sales of Actimmune, a proprietary drug marketed for the treatment of various pulmonary disorders. ¶¶22, 25, 27. The pending class actions allege that defendants engaged in a fraudulent scheme to artificially inflate the price of InterMune stock by misrepresenting the demand and success of Actimmune, the reliability of patient and clinical data and the state of the Company's internal sales and marketing controls. ¶¶22-34. The pending actions also allege that defendants overstated the Company's revenues and understated the level of inventory being held by distributors. ¶29. On October 24, 2002, the first day of the Class Period, InterMune released its financial and operational results for the third quarter ended September 30, 2002. The press release touted the success and demand for Actimmune and stated, in pertinent part, as follows: "Actimmune continues to be the primary driver of our revenue growth, and we anticipate total 2002 sales for this product to reach $95 to $100 million," said Scott Harkonen, President and CEO of InterMune. "Infergen(R) and Amphotec(R) sales also continue to grow, keeping us on track to achieve $105 to $110 million in total revenues in 2002."¶22. During an analysts' conference call on the same day, InterMune disclosed it had an estimated 2,500 patients on Actimmune. ¶23 Thereafter, and throughout the Class Period, defendants repeatedly told investors that Actimmune was a success, demand was growing and the drug was driving the Company's financial and operational results and would continue to do so in the future. ¶¶24-28. To support their rosy statements, defendants touted successful Actimmune patient data and clinical trials and proclaimed that the Company's seasoned marketing and sales force would drive physician acceptance of the drug. Id. Defendants also cited growth in the estimated number of patients purportedly using Actimmune during the Class Period, from 2,500 to 3,300 in only eight months. ¶¶23, 26, 28. Behind the scenes, however, defendants knew that the true status of Actimmune was not so rosy. Defendants were well aware that Actimmune was facing strong physician and patient resistance due to disappointing clinical trial data and treatment results. ¶¶29, 30, 32-33. Defendants also knew that InterMune's estimated number of Actimmune patients, disclosed throughout the Class Period as an accurate and valid means by which to register the level of strength of the demand for the drug, was "inherently" unreliable, inconsistent, and lacking in any accountable basis for presentation. ¶¶29, 30, 32-33. Further, defendants knew that the Company lacked sufficient internal controls and there had been disruptions and problems with InterMune's sales and marketing efforts, including extraordinary turnover and lack of proper training. ¶¶29, 32. Finally, defendants knew that since at least the fourth quarter of fiscal 2002, the Company was materially understating millions of dollars of excess inventory being held by its distributors, thereby overstating its revenues during that time. Id. On June 11, 2003, the Company admitted that it had overstated the estimated number of Actimmune patients by hundreds of patients and would miss its revenue projections by tens of millions of dollars. The Company also revised downward its projected revenues derived from Actimmune, by tens of millions of dollars. ¶¶30, 32-33. Investor reaction was swift and negative as InterMune stock fell from a close of $25.10 on June 11, 2003 to a close of $16.74 on June 12, 2003, a single-day decline of more than 33% on more than twenty-five times normal trading volume. ¶31. At the conference call on June 12, 2003, the Company essentially admitted, inter alia, that (i) its estimated number of patients on Actimmune, disclosed throughout the Class Period as an accurate and valid means by which to register the level of strength of the demand for Actimmune, was "inherently" unreliable, inconsistent, and lacking in any accountable basis for presentation, (ii) there had been disruptions and problems with InterMune's sales and marketing efforts, including extraordinary turnover and lack of proper training, and (iii) since at least the fourth quarter of fiscal 2002, InterMune had materially understated the level of inventory being held by its distributors and materially overstated its revenues. ¶¶32-33. Based on the foregoing, defendants' statements during the Class Period regarding the success of Actimmune and its clinical trials and patient data, the Company's internal controls, the status of the Company's sales and marketing force, and the Company's inventory levels and revenues were false and misleading at the time they were made. ¶29. Further, defendants had no reasonable basis for their financial projections made at the beginning of the Class Period and consistently reiterated throughout the Class Period. ¶29. III. ARGUMENT A. This Court Should Consolidate These Related Actions to Promote Efficiency Consolidation pursuant to Fed. R. Civ. P. 42(a) is proper when actions involve common questions of law and fact. Southwest Marine, Inc. v. Triple a Machine Shop, Inc., 720 F. Supp. 805, 806 (N.D. Cal. 1989). This Court has broad discretion under Fed. R. Civ. P. 42(a) to consolidate cases pending within this District. Investors Research Co. v. United States Dist. Court for Cent. Dist., 877 F.2d 777 (9th Cir. 1989); Steiner v. Aurora Foods Inc., No. C 00-602 CW, 2000 U.S. Dist. LEXIS 20341, at *7 (N.D. Cal. June 5, 2000). Courts have recognized that class action shareholder suits are particularly well suited to consolidation pursuant to Fed. R. Civ. P. 42(a) because unification expedites pretrial proceedings, reduces case duplication, avoids the need to contact parties and witnesses for multiple proceedings and minimizes the expenditure of time and money for all parties involved. See In re Equity Funding Corp. of Am. Sec. Litig., 416 F. Supp. 161, 176 (C.D. Cal. 1976). Consolidating multi-shareholder class action suits simplifies pretrial and discovery motions, class action issues and clerical and administrative management duties. Consolidation also reduces the confusion and delay that may result from prosecuting related class action cases separately. See id. The actions pending before this Court present virtually identical factual and legal issues, alleging substantially the same violations of the Exchange Act against similar defendants. Because these actions are based on the same facts and subject matter, relevant discovery will pertain to all lawsuits. Thus, consolidation is appropriate here. Following the Court's granting of this motion, a consolidated complaint will be filed by the lead plaintiff appointed by the Court. The Fraschilla Group further requests that this Court order consolidation of all related actions subsequently transferred to this District. B. The PSLRA Requires that the Question of Consolidation Be Decided Prior to the Determination of the Appointment of Lead Plaintiff The PSLRA provides, among other things, for consolidation of substantially similar actions prior to the appointment of lead plaintiff. The PSLRA states, in pertinent part: If more than one action on behalf of a class asserting substantially the same claim or claims arising under this title has been filed, and any party has sought to consolidate those actions for pretrial purposes or for trial, the court shall not make the determination [of appointment of lead plaintiff under §21D(a)(3)(B)] ... until after the decision on the motion to consolidate is rendered.... 15 U.S.C. §78u-4(a)(3)(B)(ii). Thus, the PSLRA establishes a two-step process for resolving lead plaintiff and consolidation issues where more than one action on behalf of a class asserting substantially the same claims has been filed. The court "shall" first decide the consolidation issue. The court shall then decide the lead plaintiff issue "[a]s soon as practicable." Id. The Fraschilla Group respectfully requests that the Court consider the consolidation motion as soon as practicable and consolidate these related actions under the lowest case number. A prompt determination is reasonable and warranted under Fed. R. Civ. P. 42(a), given the common questions of fact and law presented by the actions now pending in this District. See, e.g., Steiner, 2000 U.S. Dist. LEXIS 20341. C. This Court Should Order the Preservation of Documents Through this motion, the Fraschilla Group also requests that the Court order the preservation of documents relating to this litigation in accordance with 15 U.S.C. §78u-4(b)(3)(C)(i), both prior to and after the filing of any motion to dismiss. In complex securities fraud cases involving companies with numerous employees, such an order is appropriate and will prevent the loss of key documents, whether through inadvertence or otherwise. In addition, the Fraschilla Group seeks certification that documents or other information have not knowingly been destroyed, altered or concealed akin to the provision in §802 of the Sarbanes-Oxley Act. While the language of §802 refers to federal investigation, Senator Patrick Leahy commented that this provision was meant to make "federal law enforcement officials and regulators and victims can conduct more effective inquiries ...." Legislative History of Title VIII of HR 2673; The Sarbanes-Oxley Act of 2002, 148 Cong. Rec. S.7418 (emphasis added). Accordingly, including this preservation language in a civil action is appropriate. Furthermore, such language should not be objectionable to defendants, as it is in their best interests to confirm that documents remain intact at the outset of litigation in order to satisfy their obligations under the PSLRA. IV. CONCLUSION For the reasons stated above, and in order to promote judicial economy,
the Fraschilla Group respectfully requests that the Court consolidate
the related actions identified herein filed in this District and any other
related actions that may be subsequently filed in or transferred to this
District, and permit the filing of a consolidated complaint within 60
days from entry of the Court's Order granting the motion for lead plaintiff.
DECLARATION OF SERVICE BY FACSIMILE
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 August 25, 2003, declarant served by facsimile the THE FRASCHILLA GROUP'S NOTICE OF MOTION AND MOTION FOR CONSOLIDATION OF RELATED CASES AND PRESERVATION OF DOCUMENTS; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF 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 25th day of August,
2003, at San Francisco, California. /s/ Cynthia Sheppard 1. Gerald and Darlene Fraschilla are a husband and wife who purchased InterMune securities between October 24, 2002 and June 11, 2003, inclusive (the "Class Period") and have each submitted the sworn certifications required by §21D(a)(2)(A)(i)-(vi). The four actions in this District name substantially the same defendants during substantially the same time period. Following entry of an Order granting this motion, a consolidated complaint will be filed by the lead plaintiff appointed by the Court that will resolve any differences. 2. Concurrent with the filing of this motion for consolidation, the Fraschilla Group has filed a motion to be appointed lead plaintiff pursuant to §21D(a)(3)(B) of the Exchange Act and to approve its choice of counsel. Under the Private Securities Litigation Reform Act ("PSLRA"), the consolidation motion is to be heard by this Court prior to hearing the lead plaintiff motion. 15 U.S.C. §78u-4(a)(3)(B)(ii). 3. Unless otherwise indicated, all paragraph references ("¶__") are to the Complaint for Violation of the Federal Securities Laws in Lombardi v. InterMune, Inc., et al., Case No. C-03-3068-SC, filed July 1, 2003 ("Complaint"). |