In re Network Associates, Inc. Securities Litig., C 99-01729 WHA.
| Decision Date | 22 November 1999 |
| Docket Number | No. C 99-01729 WHA.,C 99-01729 WHA. |
| Citation | 76 F.Supp.2d 1017 |
| Court | U.S. District Court — Northern District of California |
| Parties | In re NETWORK ASSOCIATES, INC., SECURITIES LITIGATION. and Consolidated Cases. |
Boris Feldman, Nina F. Locker, Keith E. Eggleton, Wilson, Sonsini, Goodrich & Rosati, for Network Associates.
APPOINTING LEAD PLAINTIFF
(AMENDED)
For two-thirds of a century, the federal securities laws have protected the integrity of the capital markets in America, in part through the policing effect of private securities class actions. Due to perceived abuses in such litigation, however, Congress enacted the Private Securities Litigation Reform Act of 1995 ("PSLRA"). One of its central provisions calls for the district court to appoint a "lead plaintiff" in such cases. This provision, and its proper application, are at issue in three competing motions for such appointment in this case. One of the pivotal legal issues is whether a "group" of unrelated investors with no decisionmaking structure and no connection other than counsel can qualify as a candidate for lead plaintiff under the PSLRA. For the reasons set forth below, the Court holds that such artificial "groups" may not so qualify.
This set of consolidated actions arose out of a series of declines in the price of the common stock of Network Associates, Inc., earlier this year.1 The complaints allege accounting fraud and insider trading. The fraud supposedly began in January 1998 and continued until April 1999 when the truth, it is said, finally came out. During the alleged fraud, the common stock price rose as high as $67. At the end of the ride, the price dropped to the $13 to $16 range. Twenty-five suits promptly followed, nineteen of which were brought as class actions. Three motions to appoint lead counsel emerged.
On April 7, 1999, the law firms of Milberg Weiss Bershad Hynes & Lerach LLP and the Law Offices of Steven E. Cauley, P.A. (of Little Rock, Arkansas), filed Action No. C-99-1729 on behalf of Frank W. Knisley and Joel Harmon, individuals who invested about $3000. Through a process described below, the Milberg firm has joined forces with Kirby, McInerny & Squire, LLP, and Barrack, Rodos & Bacine, and they now claim to represent over 1725 investors who acquired Network securities from January 20, 1998, through April 19, 1999, and who collectively lost at least $33,929,308. Designating all 1725 (or more) as "movants," these law firms seek to appoint a smaller group of ten investors as lead plaintiff in these consolidated actions, calling these ten unrelated investors "The Network Associates Lead Plaintiff Group." The ten investors lost a combined total of at least $10,213,115, according to counsel. The ten consist of two equity funds, a city, six individuals and a family trust. In short, although the motion purports speak for over 1725 movants, it seeks the appointment of ten unrelated investors as lead plaintiff.
Also on April 17, 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody filed Action No. 99-1731 on behalf of Philip E. Wetzel, an individual, who also lost about $3000. Through the process described below, these law firms now claim to represent over 100 institutions and thousands of individuals that acquired Network securities and lost over $120 million during the same class period described above. One institution represented by these firms allegedly suffered the single largest loss of any investor, although the claimed amount has proved to be a moving target, roaming from as high as $24 million to, after scrutiny, considerably less. The law firms call their long list of purported clients the "Network Institutional Group." They move on behalf of that group to appoint it as lead plaintiff. For "administration and efficiency," however, the motion proposes nine different investors with losses allegedly ranging from $3348 to over $24 million to serve as "representative lead plaintiffs."
The law firms of Ruby & Schofield and Manis Faulkner & Morgan, both of San Jose, represent Robert A. Vatuone, an individual, and seek his appointment as lead plaintiff. Mr. Vatuone is the named plaintiff in Action No. C99-2686. He lost at least $23,500. He does not advance any "group" and seeks the post in a solo capacity.
Since the filing of these actions, a vitriolic competition has been waged between the Weiss faction and the Milberg faction. Both published (and repeatedly republished) notices of the suit and sought to accumulate as many investor forms as possible so as to claim to represent the larger total of aggregate losses. Both have accused the other of unethical, avaricious, illegal and mean-spirited wrongdoing. Each say the other is unworthy to represent a class. To the extent relevant, this history is discussed below.
A principal issue presented by these motions is whether "groups" like those proposed here may serve as the lead plaintiff under the PSLRA (or have any standing to move to appoint a subgroup). The PSLRA was provoked by a widespread perception that securities class actions had become "lawyer-driven," i.e., that such litigation had been typically initiated and controlled by plaintiff's counsel, bark to core, start to finish. Congress found that the named plaintiffs, while ostensibly in charge of the litigation as fiduciaries for all similarly situated, were, in reality, token figureheads with no actual control over their cases. In the vast run of cases, it was the lawyers who initiated them, selected the plaintiffs, controlled the strategy, controlled the settlement, and collected fees from the settlement — or at least so Congress found. This, Congress feared, led to worthless as well as worthwhile cases and to lawyers reaping excessive fees that should have gone to wronged investors.
In place of that practice — a practice wherein the class lawyer selected the class plaintiff — Congress sought to substitute a new model, one that reversed the roles. Under the new model, the court would appoint the lead plaintiff who, in turn, would select and direct class counsel. Congress expected that the lead plaintiff would normally be an institutional investor with a large stake in the outcome. The lead plaintiff would then monitor, manage and control the litigation, making, as is the case in ordinary cases, litigation decisions on resource allocation and settlement, with, of course, the advice of, but not the prerogative of, class counsel.
Under the heading of "Method For Determining The Most Adequate Plaintiff," the Conference Committee stated the perceived problem and its solution in these terms:
The Conference Committee was also troubled by the plaintiffs' lawyers "race to the courthouse" to be the first to file a securities class action complaint. This race has caused plaintiffs' attorneys to become fleet of foot and sleight of hand. Most often speed has replaced diligence in drafting complaints. The Conference Committee believes two incentives have driven plaintiffs' lawyers to be the first to file. First, courts traditionally appoint counsel in class action lawsuits on a "first come, first serve" basis. Courts often afford insufficient consideration to the most thoroughly researched, but later filed, complaint. The second incentive involves the court's decision as to who will become lead plaintiff. Generally, the first lawsuit filed also determines the lead plaintiff.
* * * * * *
The current system often works to prevent institutional investors from selecting counsel or serving as lead plaintiff in class actions [footnote omitted]. The Conference Committee seeks to increase the likelihood that institutional investors will serve as lead plaintiffs by requiring courts to presume that the member of the purported class with the largest financial stake in the relief sought is the "most adequate plaintiff."
The Conference Committee believes that increasing the role of institutional investors in class actions will ultimately benefit shareholders and assist courts by improving the quality of representation in securities class actions. Institutional investors are America's largest shareholders, with about $9.5 trillion in assets, accounting for 51% of the equity market. According to one representative of institutional investors: "As the largest shareholders in most companies, we are the ones who have the most to gain from meritorious securities litigation."
* * * * * *
Finally, this lead plaintiff provision solves the dilemma of who will serve as class counsel. Subject to court approval, the most adequate plaintiff retains class counsel. As a result, the Conference Committee expects that the plaintiff will choose counsel rather than, as is true today, counsel choosing the plaintiff. The Conference Committee does not intend to disturb the court's discretion under existing law to approve or disapprove the lead plaintiff's choice of counsel when necessary to protect the interests of the plaintiff class.
House Conf. Rep. 104-369, 104 Cong., 1st Sess., 33-35 (1995), U.S.Code Cong. & Admin. News, 104 Cong. 1st Sess. 732-34 (1995).
To effect these ends, the PSLRA now requires the plaintiff in the first-filed action to publish a notice advising of the pendency of the action and advising that any member of the proposed class can come forward and move to serve as lead...
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