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In re Verisign, Inc. Securities Litigation

United States District Court, N.D. California, San Jose Division
Jan 13, 2005
No. C 02-02270 JW (PVT) (N.D. Cal. Jan. 13, 2005)

Opinion

No. C 02-02270 JW (PVT).

January 13, 2005


ORDER DENYING DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT AND MOTION FOR SUMMARY JUDGMENT, OR IN THE ALTERNATIVE SUMMARY ADJUDICATION


I. INTRODUCTION

Plaintiffs initiated this securities class action lawsuit on behalf of themselves and of a proposed class of persons and entities that acquired VeriSign Corporation's ("VeriSign") common stock between January 25, 2001 and April 25, 2002, inclusive (the "Class Period"). There are four lead plaintiffs in this case: Sheet Metal Workers' Local Union No. 19 Pension Fund ("Sheet Metal"), Wilson Telephone Company, Inc. ("WTC"), Oregon Telephone Company ("OTC"), and Raymond Donnelly ("Donnelly") (collectively, the "Lead Plaintiffs"). All four Lead Plaintiffs allegedly "suffered significant losses in connection with . . . transactions in VeriSign stock during the Class Period[.]" (Plaintiffs' Consolidated Second Amended Class Action Complaint, hereinafter Second Amended Complaint, Docket Item No. 217, at 6:17-18.)

Originally, there were six lead plaintiffs. However, two of the original six lead plaintiffs have since withdrawn from this lawsuit. Plaintiff StoneRidge Investment Partners, LLC ("StoneRidge") withdrew on April 19, 2004. See (Plaintiffs' Notice of Withdrawal of Plaintiff StoneRidge Investment Partners, LLC, Docket Item No. 196). More recently, on December 22, 2004, Plaintiff Ralph Michael ("Michael") withdrew as lead plaintiff and proposed class representative. See (Plaintiffs' Notice of Withdrawal of Ralph Michael, Docket Item No. 414). Thus, for the purposes of resolving this motion, this Court disregards as moot any arguments regarding StoneRidge and/or Michael.

Plaintiffs bring this action against VeriSign and four of its executives (collectively, the "Defendants") for violations of §§ 11 and 15 of the Securities Act of 1933 ("Securities Act"), §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, which was promulgated under § 10(b) of the Exchange Act. Plaintiffs allege that, during the Class Period, Defendants knowingly disseminated false and misleading information about VeriSign's business operations, financial status, and future earnings prospects — and thereby artificially inflated VeriSign's stock price. Plaintiffs claim that they relied upon these misrepresentations, acquired VeriSign stock at inflated prices, and were damaged thereby. Presently before this Court is Plaintiffs' Motion for Partial Summary Judgment and Motion for Summary Judgment, or in the Alternative, Summary Adjudication (hereinafter Plaintiffs' Motion, Docket Item No. 286). This Court finds it appropriate, pursuant to Civil L.R. 7-1(b), to take Plaintiffs' Motion under submission, without oral argument, for decision based upon the papers filed by the parties. For the reasons set forth below, this Court grants Plaintiffs' Motion.

II. BACKGROUND

VeriSign is a leader in providing Internet "trust services" — services that verify and authenticate information transmitted over the Internet. Such services enable consumers to safely transmit personal financial information (such as credit card numbers) over the Internet to complete commercial transactions.

On March 7, 2000, VeriSign announced that it would issue $21 billion in new stock to acquire Network Solutions, Inc. ("Network Solutions") and turn it into a wholly-owned subsidiary. Network Solutions operated the official registry of Internet domain names, such that anyone who wanted to register a website under the .com,.net, or.org domains had to register through Network Solutions. Network Solutions charged each website listed on its registry at least $6/year.

Although some industry analysts supported this acquisition, others questioned whether VeriSign was paying too much. This skepticism allegedly placed pressure on VeriSign "to show that it was growing at a rate greater than could have been realized by either VeriSign or Network Solutions as a stand-alone company." (Second Amended Complaint at 2:3-5.)

Not long after VeriSign acquired Network Solutions, the Internet boom went bust. VeriSign's business was hit: the demand for Internet "trust services" and for new Internet domain names declined. VeriSign's stock price fell from $196/share (on the day it acquired Network Solutions) to $75/share (on January 24, 2001, the day before the Class Period).

Thereafter, Plaintiffs allege, Defendants employed "an assortment of schemes, artifices, and devices to mislead investors about both the amount and source of revenues earned by [VeriSign]." (Second Amended Complaint at 2:19-20.) In particular, Plaintiffs allege that Defendants artificially inflated VeriSign's earnings — and stock price — via improper reporting and accounting practices. For example, Plaintiffs allege that Defendants inflated VeriSign's earnings by improperly reporting revenue generated from "round trip" transactions. "Round trip" transactions are transactions wherein VeriSign would invest cash in small, private, start-up businesses ("affiliates") that otherwise could not afford VeriSign's services. In exchange for VeriSign's investment, the affiliates would purchase VeriSign's products/services. VeriSign, in turn, would report these purchases as revenue.

Furthermore, Plaintiffs allege that Defendants artificially inflated VeriSign's earnings by improperly accounting for VeriSign's investments in affiliates. VeriSign used an accounting method known as the "cost method" to account for its investments in its affiliates. The "cost method" permitted VeriSign to report at least $12 million in revenues on its financial statements during the Class Period. However, Plaintiffs allege that the "equity method" — not the "cost method" — was the proper method of accounting for VeriSign's investments in affiliates. According to Plaintiffs, the "equity method" is proper when an investor exerts "significant influence" over its investments. Because Plaintiffs claim that VeriSign exerted "significant influence" over its affiliates, Plaintiffs claim that the "equity method" was proper. The "equity method" would not have permitted VeriSign to report any of the revenues received from its affiliates.

Plaintiffs allege even further that Defendants artificially inflated VeriSign's earnings by improperly encouraging VeriSign's sales force to engage in a process known as "scrubbing." "Scrubbing" is a method of double-counting: salespersons in one division would report their own sales and the sales of other salespersons in other departments, as if they were their own.

Plaintiffs claim that these practices and others led VeriSign to issue materially false and misleading statements about VeriSign's financial status. Defendants allegedly knew that its business was flagging, yet they artificially inflated VeriSign's revenues anyway. Plaintiffs claim that they relied upon these misrepresentations to their detriment.

III. STANDARDS

Summary judgment is proper when there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). A principal purpose of summary judgment is to isolate and dispose of factually unsupported claims. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).

A movant for summary judgment who does not have the ultimate burden of persuasion at trial has the initial burden of producing evidence negating an essential element of the non-movant's claims or showing that the non-movant does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial. Nissan Fire Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). If the movant does not satisfy its initial burden, the non-movant has no obligation to produce anything and summary judgment must be denied. If, on the other hand, the movant does satisfy its initial burden of production, then the non-movant may not rest upon mere allegations or denials of the adverse party's evidence, but instead must produce admissible evidence that shows there is a genuine issue of material fact for trial. Id. at 1102. A genuine issue of fact is one that could reasonably be resolved in favor of either party. A dispute is "material" only if it could affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). The court must draw all reasonable inferences in favor of the non-moving party, including questions of credibility and of the weight to be accorded particular evidence. Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 520 (1991) (citingAnderson, 477 U.S. at 255); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986); T.W. Elec. Serv. v. Pac. Elec. Contractors, 809 F.2d 626, 630 (9th Cir. 1987).

IV. DISCUSSION

Defendants' Motion rests upon issues of standing. Their argument is twofold. First, Defendants argue that the Lead Plaintiffs, generally, lack standing to base their claims upon any misrepresentation made after the date of their last stock purchase. Second, Defendants argue that Plaintiff Sheet Metal, specifically, lacks standing to bring actions under §§ 10(b) and 20(a) of the Exchange Act because it is neither a "purchaser" nor a "seller" as defined under that Act. This Court rejects both arguments.

A. The Lead Plaintiffs Have Standing

Article III of the United States Constitution requires that federal courts exercise jurisdiction only over justiciable "cases" or "controversies." U.S. CONST. art. III, § 2. Standing is one doctrine that is used to determine whether a justiciable "case" or "controversy" exists. Standing requires that litigants have personal stakes in the matter that they are litigating. This ensures that litigants present their cases sharply. Baker v. Carr, 369 U.S. 186, 204 (1962) (a plaintiff must have "such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for the illumination of difficult . . . questions"). In Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992), the United States Supreme Court noted that standing contains three elements:

First, the plaintiff must have suffered an `injury in fact' — an invasion of a legally protected interest which is (a) concrete and particularized, . . . and (b) `actual or imminent, not `conjectural' or `hypothetical[']'. . . . Second, there must be a causal connection between the injury and the conduct complained of — the injury has to be `fairly . . . trace[able] to the challenged action of the defendant, and not . . . the result [of] the independent action of some third party not before the court.' . . . Third, it must be `likely,' as opposed to merely `speculative,' that the injury will be `redressed by a favorable decision.'

(Citations omitted). Defendants argue that the Lead Plaintiffs fail to satisfy the second of these three elements — the causation requirement.

Specifically, Defendants argue that any misrepresentation made after the Lead Plaintiffs' last purchase of VeriSign stock could not possibly have caused them any injury. As Defendants put it, "It is axiomatic that none of the Lead Plaintiffs could have possibly been misled into purchasing VeriSign stock by misrepresentations made after they purchased their stock. Nor could the market price of the stock at the time of their purchase have been artificially inflated by an alleged misrepresentation that occurred after their purchase." (Defendants' Reply in Support of Motion for Partial Summary Judgment and Motion for Summary Judgment, or in the Alternative, Summary Adjudication, hereinafter Defendants' Reply, Docket Item No. 325, at 2:10-13.) Plaintiffs OTC, WTC, and Donnelly last purchased VeriSign stock on December 18, 2001, and Plaintiff Sheet Metal last purchased VeriSign stock on December 31, 2001. Defendants contend that misrepresentations made after said dates could not have caused injury to said Plaintiffs. Thus, Defendants conclude, "[b]ecause the Lead Plaintiffs do not satisfy [the standing doctrine's causation] requirement, they cannot represent absent class members for such a claim." (Defendants' Reply at 2:6-7.)

Defendants' argument is a non sequitur. Their starting point is sound, but their conclusion is not. As a matter of logic, it is true that misrepresentations made after a person's purchase of stock could not possibly have induced that person to purchase that stock. However, as a matter of law, it does not follow that such a person "cannot represent absent class members for such a claim." Simply because certain class members were injured by misrepresentations that came after the Lead Plaintiffs had already acquired VeriSign stock does not mean that the Lead Plaintiffs cannot represent the class. Defendants' argument conflates Article III's standing requirements with FED. R. CIV. P. 23's class action requirements.

The Lead Plaintiffs' individual standing is a threshold issue. (Defendants' Reply at 2:4-6); accord O'Shea v. Littleton, 414 U.S. 488, 494 (1974) ("[I]f none of the named plaintiffs purporting to represent a class establishes a requisite of a case or controversy with the defendant, none may seek relief on behalf of herself or himself or any other member of the class") and Lierboe v. State Farm Mut. Auto. Ins. Co., 350 F.3d 1018, 1022 (9th Cir. 2003). In the class action context, Article III standing simply requires that the class representatives satisfy standing individually. No more is required. "Once threshold individual standing by the class representative is met, a proper party to raise a particular issue is before the court, and there remains no further separate class standing requirement in the constitutional sense." ALBA CONTE HERBERT NEWBERG, NEWBERG ON CLASS ACTIONS § 2:5 (4th ed. 2002). See Cornett v. Donovan, 51 F.3d 894, 897 n. 2 (9th Cir. 1995) ("Thus, if the representative parties do not have standing, the class does not have standing"). Once the class representatives individually satisfy standing, that is it: standing exists. "The presence of individual standing is sufficient to confer the right to assert issues that are common to the class, speaking from the perspective of any standing requirements." ALBA CONTE HERBERT NEWBERG, NEWBERG ON CLASS ACTIONS § 2:5 (4th ed. 2002). Whether the class representatives may then represent the claims of the class is a separate inquiry. Id. That inquiry is governed by FED. R. CIV. P. 23.

The Lead Plaintiffs allege that Defendants' misrepresentations, which were made prior to their individual acquisitions of VeriSign stock, artificially inflated VeriSign's stock price. The Lead Plaintiffs allege that they relied upon Defendants' misrepresentations, acquired VeriSign stock at artificially inflated prices, and were damaged thereby. (Second Amended Complaint at 62:21-63:2.) In Lead Plaintiffs' words, they "suffered significant losses in connection with their transactions in VeriSign stock during the Class Period." (Second Amended Complaint at 6:17-18.) Lead Plaintiffs seek, inter alia, damages to redress their losses. This is sufficient to establish standing.

For purposes of this motion, Defendants do not dispute that the Lead Plaintiffs themselves were injured in fact, or that their injury is fairly traceable to Defendants' alleged misrepresentations, or that their injury would be redressed by the relief that they seek. Instead, Defendants argue that the Lead Plaintiffs do not have standing because some putative class members were injured by misrepresentations made after the Lead Plaintiffs had already acquired VeriSign stock. Defendants would have this Court place the cart before the horse. To find standing, this Court need only find (as it does) that the Lead Plaintiffs satisfy threshold individual standing. The typicality of the Lead Plaintiffs' claims to the putative class is governed by FED. R. CIV. P. 23. Because this Court finds that the Lead Plaintiffs have individually satisfied Article III standing, it denies Defendants' Motion against them.

B. Plaintiff Sheet Metal Has Standing

The second part of Defendants' Motion is directed specifically against Plaintiff Sheet Metal. Defendants argue that § 10(b) of the Exchange Act protects only those "participants in securities transactions who make investment decisions." (Defendants' Motion at 10:3.) Defendants argue that Sheet Metal "does not have standing to bring a 10(b) claim . . . because it did not make any investment decision to acquire or sell VeriSign securities . . ." (Defendants' Motion at 8:20-23.) According to Defendants, Sheet Metal delegated complete decision-making authority to its investment managers, and so played "absolutely no part in the decision of its investment managers to purchase VeriSign." (Defendants' Motion at 11:11-12.) Defendants heavily rely upon a Seventh Circuit decision, Congregation of the Passion, Holy Cross Province v. Kidder Peabody Co., 800 F.2d 177 (7th Cir. 1986), to support their argument.

In Congregation, plaintiff Congregation of the Passion, Holy Cross Province ("Congregation"), a religious organization, entrusted millions of dollars to an investment advisor to manage. Congregation conferred upon the investment advisor the "full discretion to develop and implement a prudent portfolio strategy[.]" Congregation, 800 F.2d at 178-79. The investment advisor used his discretion to place a number of high-risk orders with over thirty dealers. The dealers merely executed the transactions, and never offered any investment advice. The investment advisor ultimately depleted the millions of dollars entrusted to him, and Congregation sued both him and the dealers for violating § 10(b) of the Exchange Act. The Seventh Circuit affirmed summary judgment for the dealers. The court held that, under the Exchange Act, the dealers owed no duty to disclose any information to Congregation because Congregation had transferred "full authority to make investment decisions" to its investment advisor. Id. at 181. Defendants argue that, like Congregation, Sheet Metal transferred "full authority to make investment decisions" to its investment managers. Thus, Defendants conclude, Sheet Metal does not have standing to bring a claim under § 10(b) of the Exchange Act. This argument fails for two reasons.

1. There Is A Genuine Issue of Material Fact

First, even if this Court assumed arguendo thatCongregation is binding authority in this District, Defendants still have not persuaded this Court that there is no genuine issue of material fact. Undoubtedly, Defendants have satisfied their initial burden of producing evidence that negates an essential element of Plaintiffs' claims. Nissan Fire Marine Ins. Co., 210 F.3d at 1102 ("A moving party without the ultimate burden of persuasion at trial . . . has . . . the initial burden of production . . . on a motion for summary judgment. . . . In order to carry its burden of production, the moving party must produce either evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of persuasion at trial."). To support their argument that Sheet Metal did not make any investment decisions, Defendants excerpt, inter alia, portions from William Doms's deposition that suggest that Sheet Metal transferred "full authority to make investment decisions" to its investment managers. For example, Doms testified that he did not know that Sheet Metal had purchased VeriSign stock until after this litigation had commenced. (Huang Decl. Ex. A 129:7-19.) Furthermore, Doms testified that neither he nor Sheet Metal ever discussed VeriSign or other specific stock purchases/sales with Sheet Metal's investment managers. (Huang Decl. Ex. A 127:8-25, 128:4-15.)

William Doms is Sheet Metal's administrator. (Huang Decl. Ex. A 9:10-12.)

Plaintiffs respond by excerpting different portions from the same deposition that suggest that Sheet Metal actually "retained . . . discretion and provided . . . parameters" for Sheet Metal's investment managers to follow. (Plaintiffs' Opposition to Defendants' Motion, Docket Item No. 303, at 12:18-19.) For example, Doms testified that Sheet Metal's investment managers only exercised discretion within the guidelines set by Sheet Metal. (Huang Decl. Ex. A 138:7-9) ("StoneRidge [one of Sheet Metal's investment managers] is given the authority to manage within the guidelines that [Sheet Metal's] trustees set . . ."). Furthermore, Doms testified that Sheet Metal's trustees monitored its assets on a quarterly basis to ensure that Sheet Metal's investment managers stayed within the guidelines. (Huang Decl. Ex. A 124:17-24, 152:12-13, 153:2-8.) At least one court in this District has distinguished Congregation on similar grounds. Cox v. Bateman Eichler, Hill Richards Inc., 765 F. Supp. 601, 608 n. 3 (N.D. Cal. 1990) (J. Patel) (see infra Part IV.B.2. for a further discussion of Cox).

In analyzing a motion for summary judgment, this Court must draw all reasonable inferences in favor of the non-movant, including questions of credibility and of the weight to be accorded to particular evidence. Masson, 501 U.S. at 520. Drawing all reasonable inferences in favor of Plaintiffs, this Court finds that Defendants' motion for summary judgment must fail. Plaintiffs have raised a triable issue of fact. InCongregation, Congregation apparently retained only the authority to increase/decrease the investment fund and ultimately to dismiss the investment advisor. Congregation, 800 F.2d at 181. Plaintiffs have factually distinguished Congregation. Plaintiffs contend that Sheet Metal's delegation of authority to its investment managers was much more restricted than Congregation's delegation of "full authority" to its investment advisor. Because this issue can potentially affect the outcome of this case, it is material.

2. Congregation Is Not Binding Authority in this District

Defendants' Motion suffers from a second infirmity:Congregation is not binding authority in this District. Notably, Defendants do not cite any authority from this District or the Ninth Circuit to support their claim that "entities that entirely abdicate their investment decisions to third-parties . . . cannot bring federal securities claims because they do not have standing as purchasers or sellers." (Defendants' Motion at 8.) In fact, as mentioned above, supra Part IV.B.1., at least one court in the Northern District of California has expressly distinguished Congregation. In Cox v. Bateman Eichler, Hill Richards Inc., 765 F. Supp. at 608 n. 3, Judge Patel distinguished Congregation on grounds similar to those advanced by Plaintiffs here. Judge Patel noted that, unlike Congregation, which gave its investment advisor the "full discretion to develop and implement a prudent portfolio strategy," the plaintiff inCox had "set forth specific guidelines and gave express instructions on the permissible scope of investments." Id. Judge Patel concluded that, "Because [the plaintiffs] did not `relinquish total control over investment decisions,' [Congregation] do[es] not govern." Id. The same reasoning can be applied here.

Furthermore, Plaintiffs cite multiple cases from this District that seem to undercut Congregation's legal authority. In In re Terayon Communications Sys., Inc. Sec. Litig., 2003 U.S. Dist. LEXIS 2852, at *12 (N.D. Cal. Feb. 24, 2003), Judge Patel (as Chief Judge of the Northern District of California) found a class representative adequate, despite the fact that he became aware that he had owned Terayon stock after his broker had already sold it. Judge Patel observed that:

It is inevitable that some, if not most, investors rely on the advice of brokers and other specialists wholly or in part. Indeed, a large number of class members in any securities class action are likely to fall in this category. The fact that an investor seeking to be a class representative is in this category does not disqualify him; in fact, he is probably representative of a large number of class members.
Id. Similarly, in In re Pizza Time Theatre Sec. Litig., 112 F.R.D. 15, 22 (N.D. Cal. 1986), Judge Aguilar found a class representative adequate, despite the fact that "she was a passive investor who made no decision to purchase Pizza Time stock herself but rather relied on the purchase decision of a stockbroker."

Defendants reply by arguing that this caselaw is inapposite. Defendants observe that Terayon and Pizza Time Theatre did not involve motions for summary judgment on the issue of standing; they involved motions for class certification. (Defendants' Reply at 7:8-20.) This observation, however, actually undermines Defendants' argument. As Defendants themselves note, standing issues are resolved before class certification. "When a class has not yet been certified . . ., standing must be determined based on the individual standing of the lead plaintiffs. This is a threshold issue which must be addressed before a court may even consider the Rule 23 class certification requirements." (Defendants' Reply at 2:3-6).Terayon and Pizza Time Theatre certified classes. Under Defendants' very own logic, then, the fact that Judges Patel and Aguilar resolved the issue of class certification suggests that there were no standing problems in appointing passive investors as class representatives.

V. CONCLUSION

For the reasons stated above, this Court denies Defendants' Motion for Partial Summary Judgment and Motion for Summary Judgment, or in the Alternative, Summary Adjudication.


Summaries of

In re Verisign, Inc. Securities Litigation

United States District Court, N.D. California, San Jose Division
Jan 13, 2005
No. C 02-02270 JW (PVT) (N.D. Cal. Jan. 13, 2005)
Case details for

In re Verisign, Inc. Securities Litigation

Case Details

Full title:In re VERISIGN, INC. SECURITIES LITIGATION

Court:United States District Court, N.D. California, San Jose Division

Date published: Jan 13, 2005

Citations

No. C 02-02270 JW (PVT) (N.D. Cal. Jan. 13, 2005)