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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 this Court pursuant to §21D(a)(3)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78u-4(a)(3)(B), for appointment as lead plaintiff in this action and to approve their selection of Milberg Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss") as lead counsel. This motion is made on the grounds that the Fraschilla Group is the most adequate lead plaintiff, having suffered losses of $57,735. In addition, the Fraschilla Group meets the requirements of Federal Rule of Civil Procedure 23 because its claims are typical of class members' claims, and it will fairly and adequately represent the class. Finally, the Fraschilla Group has selected and retained Milberg Weiss, a law firm with substantial experience in prosecuting securities fraud class actions, to serve as lead counsel. The motion is based on this notice of motion, the supporting memorandum of points and authorities, the Declaration of Luke O. Brooks ("Brooks Decl.") in support thereof, the pleadings and other files and records in each of these actions and such other written or oral argument as may be presented to the Court. I. INTRODUCTION The Fraschilla Group consists of Gerald and Darlene Fraschilla, a husband and wife who purchased InterMune, Inc. ("InterMune" or the "Company") securities between October 24, 2002 and June 11, 2003, inclusive (the "Class Period"). See Brooks Decl., Exs. A-B. As a result of defendants' violations of law, the Fraschilla Group suffered $57,735 in losses in connection with its purchases of InterMune. Brooks Decl., Ex. C. This matter is a class action which alleges violations of the federal securities laws. The Exchange Act establishes a three-step procedure for the selection of lead plaintiff to oversee class actions brought under the federal securities laws. In re Cavanaugh, 306 F.3d 726, 729-30 (9th Cir. 2002). First, §21D(a)(3)(A)(i) provides that within 20 days after the date on which a securities fraud class action is filed, the initial plaintiff shall publish a notice advising potential plaintiff class members of the pendency of the action, the claims, and the purported class period, and that any member of the class may file a motion with the court to serve as lead plaintiff no later than 60 days from the publication of the notice. 15 U.S.C. §78u-4(a)(3)(A)(i). See Cavanaugh, 306 F.3d at 729-30. Notice in this action was timely published on June 26, 2003. Brooks Decl., Ex. D. Second, §21D(a)(3)(B)(i) directs this Court to consider any motions brought by class members seeking to be appointed as lead plaintiff as soon as practicable after the Court decides any pending motion to consolidate, but no later than 90 days after publication of the notice. This provision of the Exchange Act provides that the Court "shall" appoint the "most adequate plaintiff" to serve as lead plaintiff and shall presume that plaintiff is the person, or group of persons, that (1) has either filed a complaint or moved for lead plaintiff in response to a notice; (2) "has the largest financial interest in the relief sought"; and (3) satisfies the typicality and adequacy requirements of Fed. R. Civ. P. 23. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I). See Cavanaugh, 306 F.3d at 729-31. Finally, as a third step, after the presumptive lead plaintiff has been identified, other class members have "an opportunity to rebut the presumptive lead plaintiff's showing that it satisfies Rule 23's typicality and adequacy requirements." Id. at 730. The Fraschilla Group meets the requirements of the Exchange Act for appointment as lead plaintiff. The Fraschilla Group suffered losses of $57,735 as a result of purchases of InterMune securities during the Class Period. The Fraschilla Group believes it has the largest financial interest in the relief sought by the class. See id. at 729-30, 732-33. Additionally, the Fraschilla Group satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure and as such should be appointed lead plaintiff. The Fraschilla Group also seeks Court approval of its selection of Milberg Weiss as lead counsel as provided by statute. II. PROCEDURAL BACKGROUND Four related securities class action lawsuits are presently pending in
this District:(1)
Each of these actions alleges claims for violations of the Exchange Act and Securities and Exchange Commission ("SEC") Rule 10b-5 on behalf of investors who purchased InterMune securities during the Class Period.(2) The Exchange Act requires the publication of a notice advising class members of their right to move to be appointed lead plaintiff within 60 days of publication. On June 26, 2003, pursuant to §21D(a)(3)(A)(i) of the Exchange Act, a notice of pendency of the action was published in Business Wire setting forth the requisite notice required by the Exchange Act. Brooks Decl., Ex. D. The notice advised class members of the existence of the lawsuit and described the claims asserted therein. The Fraschilla Group's motion is timely filed within 60 days from the publication of that notice. III. SUMMARY OF FACTS InterMune is a Delaware corporation headquartered in Brisbane, California. ¶7.(3) The Company describes itself as a "'commerically 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 Acimmune 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. IV. ARGUMENT A. The Fraschilla Group's Motion Is Timely The Exchange Act establishes a three-step procedure for the selection of lead plaintiff to oversee class actions brought under the federal securities laws. See Cavanaugh, 306 F.3d at 729-30. The Exchange Act first requires the publication of a notice advising class members of their right to move within 60 days of publication to be appointed lead plaintiff. 15 U.S.C. §78u-4(a)(3)(A)(i). On June 26, 2003, a notice of pendency of the action was published in Business Wire setting forth the requisite notice required by the Exchange Act. Brooks Decl., Ex. D. Class members who filed a complaint or moved pursuant to §21D(a)(3)(B) of the Exchange Act are eligible to be appointed lead plaintiff. 15 U.S.C. §78u-4(a)(3)(B)(i). The Fraschilla Group's motion is timely filed within 60 days from the publication of that notice. B. The Fraschilla Group Should Be Appointed Lead Plaintiff 1. The Fraschilla Group Believes It Has the Largest Financial Stake in the Relief Sought by the Class The PSLRA also provides that this Court:15 U.S.C. §78u-4(a)(3)(B)(i). Moreover, the statute requires this Court to adopt a rebuttable presumption that the most adequate plaintiff in any private action arising under this title is the person or group of persons that "has the largest financial interest in the relief sought by the class." 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(bb). The PSLRA explicitly provides that a "member or members" of the class, 15 U.S.C. §78u-4(a)(3)(B)(i), or a "person or group of persons," may combine to constitute "the largest financial interest" entitled to presumptive appointment as lead plaintiff. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I). Thus, courts in this District have appointed groups of shareholders as lead plaintiff. See In re Versata, Inc., No. C 01-1439 SI (Master File), 2001 U.S. Dist. LEXIS 24270 (N.D. Cal. Aug. 20, 2001) (appointing group of three shareholders); Steiner v. Aurora Foods Inc., No. C 00-602 CW, 2000 U.S. Dist. LEXIS 20341 (N.D. Cal. June 5, 2000) (appointing four shareholders).(4) Appointment of the Fraschilla Group is appropriate, particularly here, where the group is comprised of a husband and wife who will represent similar interests and have each suffered substantial losses. During the Class Period, the Fraschilla Group purchased InterMune securities at prices inflated by defendants' false and misleading statements and suffered losses of $57,735. Brooks Decl., Exs. A-C. The Fraschilla Group believes it has the largest financial interest in the outcome of this litigation and, therefore, is presumptively entitled to appointment as lead plaintiff. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(bb). C. The Fraschilla Group Is Qualified Under Rule 23 Section 21D(a)(3)(B)(iii)(I)(cc) of the Exchange Act provides that, at the outset of the litigation, the lead plaintiff must also "otherwise satisf[y] the requirements of Rule 23 of the Federal Rules of Civil Procedure." 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(cc). With respect to the qualifications of the class representative, Rule 23(a) requires generally that the claims be typical of the claims of the class and that the representative fairly and adequately protect the interests of the class. As detailed below, the Fraschilla Group satisfies the typicality and adequacy requirements of Rule 23(a) and is qualified to be appointed lead plaintiff. The typicality requirement of Rule 23(a)(3) is satisfied when the named plaintiffs have (1) suffered the same injuries as the absent class members, (2) as a result of the same course of conduct by defendants, and (3) their claims are based on the same legal issues. Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992); Haley v. Medtronic, Inc., 169 F.R.D. 643, 649 (C.D. Cal. 1996); In re Cirrus Logic Sec., 155 F.R.D. 654, 657 (N.D. Cal. 1994). The questions of law and fact common to the members of the class that predominate over questions that may affect individual class members include the following: • Whether the federal securities laws were violated by defendants' acts as alleged herein; • Whether InterMune issued false and misleading statements during the Class Period; • Whether defendants caused InterMune to issue false and misleading statements during the Class Period; • Whether defendants acted knowingly or recklessly in issuing false and misleading financial statements; • Whether the market price of InterMune securities was artificially inflated during the Class Period because of the defendants' conduct; and • Whether the members of the class have sustained damages and, if so, what is the proper measure of damages. As a result, there is a well-defined community of interest in the questions of law and fact involved in this case, and the claims asserted by the Fraschilla Group are typical of the claims of the members of the proposed class. The Fraschilla Group and members of the class allege that defendants violated the federal securities laws by publicly disseminating materially false and misleading statements about InterMune's business and finances throughout the Class Period. The Fraschilla Group, as did all of the members of the proposed class, acquired InterMune securities at prices artificially inflated by defendants' fraudulent misrepresentations and omissions and was damaged thereby. Because the claims asserted by the Fraschilla Group are based on the same legal theories and arise "from the same event or course of conduct giving rise to the claims of other class members," typicality is satisfied. In re United Energy Corp. Solar Power Modules Tax Shelter Inv. Sec. Litig., 122 F.R.D. 251, 256 (C.D. Cal. 1988); accord Blackie v. Barrack, 524 F.2d 891, 902-03 n.19 (9th Cir. 1975). Proposed lead plaintiff's interests are clearly aligned with the members of the proposed class, and there is no evidence of any antagonism between proposed lead plaintiff's interests and the interests of the proposed class members. As detailed above, the Fraschilla Group shares substantially similar questions of law and fact with the members of the proposed class, and its claims are typical of the members of the class. The members of the Fraschilla Group have amply demonstrated their adequacy as class representatives by signing sworn certifications affirming their willingness to serve as, and assume the responsibilities of, class representatives. See Brooks Decl., Exs. A-B. In addition, the Fraschilla Group has selected the law firm of Milberg Weiss, a firm highly experienced in prosecuting securities class actions, to represent it. Brooks Decl., Ex. E. The Fraschilla Group therefore satisfies the requirements of Rule 23 and all of the PSLRA's prerequisites for appointment as lead plaintiff in this action and should be appointed lead plaintiff pursuant to 15 U.S.C. §78u-4(a)(3)(B). D. The Court Should Approve Proposed Lead Plaintiff's Choice of Counsel The PSLRA vests authority in the lead plaintiff to select and retain lead counsel, subject to this Court's approval. See 15 U.S.C. §78u-4(a)(3)(B)(v); see Cavanaugh, 306 F.3d at 734-35. This Court should not disturb the lead plaintiff's choice of counsel unless necessary to "protect the interests of the class." 15 U.S.C. §78u-4(a)(3)(B)(iii)(II)(aa). Here, the Fraschilla Group has selected the law firm of Milberg Weiss as lead counsel to represent the class. Milberg Weiss has extensive experience litigating securities class actions, a fact recently noted by the Ninth Circuit, and has successfully prosecuted numerous securities fraud class actions on behalf of injured investors. See Brooks Decl., Ex. E; Cavanaugh, 306 F.3d at 734-35. V. CONCLUSION For the foregoing reasons, the Fraschilla Group respectfully requests
that this Court appoint it as lead plaintiff pursuant to §21D(a)(3)(B);
and approve its selection of Milberg Weiss as lead counsel.
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 August 25, 2003, declarant served by facsimile the THE FRASCHILLA GROUP'S NOTICE OF MOTION AND MOTION FOR APPOINTMENT AS LEAD PLAINTIFF AND APPROVAL OF SELECTION OF LEAD COUNSEL; 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. There is also a derivative action pending in the San Mateo County Superior Court. 2. Concurrent with the filing of this motion, the Fraschilla Group is moving to consolidate the four related cases in this District. Since under the Private Securities Litigation Reform Act ("PSLRA"), the related cases must be consolidated prior to the appointment of lead plaintiff, see 15 U.S.C. §78u-4(a)(3)(B)(ii), the Fraschilla Group respectfully requests that the Court consolidate the related actions. Following entry of an order consolidating the related actions and the appointment of lead plaintiff, a consolidated complaint will be filed by the lead plaintiff that will resolve any differences in the various cases. 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"). 4. See also In re Advanced Tissue Sciences Sec. Litig., 184 F.R.D. 346, 350 (S.D. Cal. 1998); Reiger v. Altris Software, Inc., Case No. 98cv0528J (JFS), 1998 U.S. Dist. LEXIS 14705, at **13-14 (S.D. Cal. Sept. 14, 1998). |