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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 (N.D. Cal. Jan. 13, 2005)

Opinion

No. C 02-02270 JW.

January 13, 2005


ORDER GRANTING PLAINTIFFS' MOTION FOR CLASS CERTIFICATION


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 However, two of the original six lead plaintiffs have since withdrawn from this lawsuit.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.
Defendants do not object to Michael's recent withdrawal as lead plaintiff. (Defendants' Objection to Plaintiffs' Notice of Withdrawal of Ralph Michael, Docket Item No. 415, at 1:4.) However, Defendants nevertheless urge this Court to consider the arguments advanced in their Supplemental Memorandum Addressing New Evidence Obtained from Ralph Michael (hereinafter Defendants' Supplemental Memorandum Re: Ralph Michael, Docket Item No. 342). Defendants' Supplemental Memorandum Re: Ralph Michael, though, is aimed solely at Michael. The very purpose of Defendants' Supplemental Memorandum Re: Ralph Michael is to point out that " Michael's additional deposition testimony, and additional documents produced by Michael . . . confirm Michael's failure to satisfy Rule 23." (Defendants' Supplemental Memorandum Re: Ralph Michael at 1:8-9) (emphasis added). Notably, the subject of every heading in Defendants' Supplemental Memorandum Re: Ralph Michael — save for the "Introduction" and "Conclusion" — is Michael. See (Defendants' Supplemental Memorandum Re: Ralph Michael at 1:18) (" Michael Continues To Repudiate His Discovery Obligations") (emphasis added); (Defendants' Supplemental Memorandum Re: Ralph Michael at 4:23) (" Michael Apparently Does Not Have The Time Or Inclination To Fulfill His Duties As Class Representative") (emphasis added); (Defendants' Supplemental Memorandum Re: Ralph Michael at 5:18) (" Michael Does Not Communication With Or Supervise Lead Counsel In Any Meaningful Way") (emphasis added); (Defendants' Supplemental Memorandum Re: Ralph Michael at 6:26) (" Michael Has No Authority To Bring This Action") (emphasis added); (Defendants' Supplemental Memorandum Re: Ralph Michael at 7:10) (" Michael Is Subject To Unique Defenses As To His Nonreliance On The Integrity Of The Market") (emphasis added); (Defendants' Supplemental Memorandum Re: Ralph Michael at 8:2) (" Michael Is Subject To Unique Defenses Regarding His Pursuit Of A Parallel Action Against [REDACTED] For His Alleged Verisign Losses") (emphasis added); (Defendants' Supplemental Memorandum Re: Ralph Michael at 8:25) (" Michael Appears To Be Pursuing This Litigation For An Improper Purpose") (emphasis added); and (Defendants' Supplemental Memorandum Re: Ralph Michael at 11:1) (" Michael Is Inadequate To Serve As Class Representative Because He Lacks Credibility") (emphasis added). Because Defendants' Supplemental Memorandum Re: Ralph Michael is aimed solely at Michael and because Michael has withdrawn as lead plaintiff, this Court will not consider the arguments advanced in Defendants' Supplemental Memorandum Re: Ralph 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 Class Certification (hereinafter Plaintiffs' Motion, Docket Item No. 205). 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

FED. R. CIV. P. 23 (Rule 23) governs class certification. Before a class can be certified, four prerequisites must be satisfied:

One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. FED. R. CIV. P. 23(a). Here, Plaintiffs bear the burden of establishing these prerequisites, which are commonly referred to as (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy of representation. Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). In addition to satisfying Rule 23(a)'s four prerequisites, Plaintiffs must also show that the action satisfies one of the three conditions set forth in Rule 23(b).

IV. DISCUSSION

A. Plaintiffs Have Standing

As an initial matter, Defendants argue that class certification should be denied because "plaintiffs lack constitutional standing[.]" (Defendants' Memorandum of Points and Authorities in Opposition to Plaintiffs' Motion for Class Certification, hereinafter Defendants' Opposition, Docket Item No. 261, at 1:2-3.) Defendants argue that any misrepresentation made after the Lead Plaintiffs' last purchase of VeriSign stock could not possibly have caused them any injury. 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' Opposition at 3:26-28.) Defendants contend that misrepresentations made after said dates could not have caused injury to said Plaintiffs. Defendants conclude as follows: "Because none of the lead plaintiffs made any purchases after December 31, 2001, their purchases could not have been in connection with these allegedly false statements occurring after December 31. Thus, they have no standing." (Defendants' Opposition at 6:14-16.)

Defendants made this same argument in their Motion for Partial Summary Judgment and Motion for Summary Judgment, or in the Alternative, Summary Adjudication (hereinafter Defendants' Motion for Partial Summary Judgment), filed on July 19, 2004. (Defendants' Motion for Partial Summary Judgment, Docket Item No. 286.) This Court rejected this argument. (Order Denying Defendants' Motion for Partial Summary Judgment and Motion for Summary Judgment, or in the Alternative, Summary Adjudication, hereinafter Order Denying Defendants' Motion for Partial Summary Judgment, at 5-7.) For the reasons set forth in its Order Denying Defendants' Motion for Partial Summary Judgment, this Court rejects Defendants standing argument here.

B. Plaintiffs Satisfy Rule 23(a)

1. Numerosity

Numerosity requires that "the class [be] so numerous that joinder of all members is impracticable." FED. R. CIV. P. 23(a)(1). Numerosity is a prerequisite which plaintiffs generally, and which Plaintiffs here, satisfy very easily.

Numerosity does not presume a strict numerical cut-off. Courts have certified classes whose membership sizes range from less than one hundred to over one hundred thousand. See, e.g., Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 88 F.R.D. 38, 44 (S.D.N.Y. 1980) ("The proposed class of 87 holders of . . . debentures is sufficiently numerous to make joinder of all class members impracticable") and Genden v. Merrill Lynch, Pierce, Fenner Smith, Inc., 114 F.R.D. 48, 51 (S.D.N.Y. 1986) ("[T]his . . . class may include as many as 150,000 investors. . . . [P]laintiffs have met the numerosity requirement."). In cases involving securities traded on national stock exchanges, numerosity is practically a given. "Defendants normally cannot and rarely do contest joinder impracticability in class actions brought on behalf of shareholders or traders in publicly owned and nationally listed corporations." ALBA CONTE HERBERT NEWBERG, NEWBERG ON CLASS ACTIONS § 22:16 (4th ed. 2002); see also id. ("In cases involving securities traded on the national stock exchanges, class members are usually so geographically dispersed and numerous that the joinder impracticability requirement is easily satisfied").

Defendants argue generally that Plaintiff's Motion fails because it fails to "actually demonstrate with evidence . . . that all Rule 23 requirements have been met." (Defendants' Opposition at 7.) This argument runs counter to the fact that, "federal trial courts are quite willing to accept common sense assumptions in order to support a finding of numerosity, often looking at the number of shares traded or transactions completed rather than seeking to determine directly the number of potential class members involved." CONTE NEWBERG, supra, § 22:16; see In re First Capital Holdings Corp. Fin. Prod. Sec. Litig., 1993 WL 144861 at *5 (C.D. Cal. 1993) ("Plaintiffs contend, and it seems reasonable to believe that there are several thousands members of the proposed class") (emphasis added).

VeriSign is publicly traded on the Nasdaq, a national stock exchange. (Second Amended Complaint at 7:1-2.) As Plaintiffs point out in their Motion, "Millions of VeriSign shares were traded daily during the Class Period, and over a billion shares were traded during the Class Period." (Plaintiff's Motion at 7:7-8.) "While the precise number of Class members is unknown, that number is certainly in the hundreds, or, more likely, thousands." (Plaintiff's Motion at 7:6-7.) Thus, Plaintiffs conclude, "joinder of all purchasers of VeriSign's stock during the Class Period would be impracticable[.]" (Plaintiff's Motion at 7:9-10.) This Court agrees, and finds that Plaintiffs have satisfied the numerosity prerequisite.

Defendants cite one Ninth Circuit case, Donninger v. Pac. Northwest Bell, Inc., 564 F.2d 1304 (9th Cir. 1977), for the alleged principle that "class certification [is] properly denied where plaintiffs suppl[y] only `meager support' for certification. . . ." (Defendants' Opposition at 7:6-8.)Donninger is distinguishable on the ground that Plaintiffs, here, provided more support for certification than the plaintiffs in Donninger. The plaintiffs in Donninger submitted two affidavits, which added "little, if any factual support to the class action allegations[,]" and a memoranda of authority, which "likewise lack[ed] . . . articulable facts, [and] offer[ed] only vague and conclusory statements with little specific content."Donninger, 564 F.2d at 1309. Here, Plaintiffs' Motion sets forth articulable, factual support with specific content. Plaintiffs' Motion noted that over a billion shares of VeriSign were traded during the Class Period and estimated that the class size would number in the hundreds or thousands. This is enough to satisfy the numerosity prerequisite.

2. Commonality

Commonality requires that there be "questions of law or fact common to the class." FED. R. CIV. P. 23(a)(2). Commonality, like numerosity, is a prerequisite which plaintiffs generally, and which Plaintiffs here, satisfy very easily.

Commonality simply requires that there be at least one legal or factual issue common to the class. CONTE NEWBERG, supra, §§ 3:10 ("there need be only a single issue common to all members of the class"), 22:21 ("Rule 23(a)(2) requires a finding of a question of either law or fact common to class members as an initial prerequisite to class certification"); see also Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019 (9th Cir. 1998) ("All questions of fact and law need not be common to satisfy the rule"). Thus, the commonality prerequisite "is easily met in most cases." CONTE NEWBERG,supra, § 3:10; see also Hanlon, 150 F.3d at 1019 ("The commonality preconditions of Rule 23(a)(2) are less rigorous than the companion requirements of Rule 23(b)(3)").

Generally, Plaintiffs allege that, during the Class Period, Defendants injured putative class members by artificially inflating VeriSign's stock price through their knowing dissemination of false and misleading information about VeriSign's business operations, financial status, and future earnings prospects. (Plaintiffs' Motion at 3:11-4:19.) Specifically, Plaintiffs delineate at least six legal and factual questions common to class members: (1) whether Defendants violated federal securities laws, (2) whether Defendants misstated VeriSign's financial results in direct contravention of Generally Accepted Accounting Principles, (3) whether Defendants' documents, press releases, and public statements materially misrepresented (or omitted) information concerning VeriSign's business and finances, (4) whether Defendants acted with the requisite state of mind in misrepresenting material facts, (5) whether Defendants' material misrepresentations and/or omissions artificially inflated the VeriSign's stock price, and (6) whether the putative class members sustained damages. (Plaintiffs' Motion at 8:13-9:4.) These questions are sufficient to satisfy the commonality prerequisite. CONTE NEWBERG, supra, § 22:21 (commonality "is easily met in cases where class members all bought or sold the same stock in reliance on the same disclosures made by the same parties, even when damages vary").

In Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir. 1975), the Ninth Circuit affirmed the certification of a plaintiff class, where plaintiffs were a class of shareholders who purchased shares during a specific 27-month period. The plaintiffs inBlackie, much like Plaintiffs here, alleged that the corporation and its officers artificially inflated the corporation's stock price by misrepresenting the corporation's assets, operations, earnings, and future earnings prospects. Blackie, 524 F.2d at 902. The defendants inBlackie argued that there was no commonality because "the alleged misrepresentations [were] contained in a number of different documents." Id. The Ninth Circuit rejected this argument, noting that "[t]he overwhelming weight of authority holds that repeated misrepresentations of the sort alleged here satisfy the `common question' requirement." Id.

Confronted with a class of purchasers allegedly defrauded over a period of time by similar misrepresentations, courts have taken the common sense approach that the class is united by a common interest in determining whether a defendant's course of conduct is in its broad outlines actionable, which is not defeated by slight differences in class members' positions, and that the issue may profitably be tried in one suit.
Id.

The court's reasoning in Blackie applies with equal force here. Accordingly, this Court finds that Plaintiffs have satisfied the commonality prerequisite.

3. Typicality

Unlike numerosity and commonality, which focus on the characteristics of the class, typicality and adequacy focus on the characteristics of the class representatives. CONTE NEWBERG, supra, § 3:13. Typicality requires that the claims or defenses of the "representative parties [be] typical of the claims or defenses of the class," FED. R. CIV. P. 23(a)(3), and resembles the commonality prerequisite. General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 158 n. 13 (1982) ("The commonality and typicality requirements of Rule 23(a) tend to merge. Both serve as guideposts for determining whether under the particular circumstances maintenance of a class action is economical and whether the named plaintiff's claim and the class claims are so interrelated that the interests of the class members will be fairly and adequately protected in their absence."). The purpose of typicality is to "assure that the interest of the named representative aligns with the interests of the class." Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). "Typicality refers to the nature of the claim or defense of the class representative, and not to the specific facts from which it arose or the relief sought." Id. (emphasis added). "The test of typicality `is whether other members have the same or similar injury, whether the action is based on conduct which is not unique to the named plaintiffs, and whether other class members have been injured by the same conduct.'" Id. (quoting Shwartz v. Harp, 108 F.R.D. 279, 282 (C.D. Cal. 1985)). Defendants challenge the typicality of Plaintiffs OTC, WTC, and Donnelly (collectively, the "Illuminet Plaintiffs").

The Illuminet Plaintiffs claim, as all other plaintiffs in this case claim, that, during the Class Period, Defendants artificially inflated VeriSign's stock price through misrepresentations or omissions. Furthermore, the Illuminet Plaintiffs claim that, because they acquired VeriSign stock during the Class Period, they were damaged thereby. Their claims are typical of those of the class. Again, typicality refers to the nature of the claim or defense of the class representative, and not to the specific facts from which it arose or the relief sought. The conduct that allegedly injured the Illuminet Plaintiffs also allegedly injured the other class members. Moreover, the injury that the Illuminet Plaintiffs allegedly suffered is similar to that allegedly suffered by other class members.

The Illuminet Plaintiffs, however, did not acquire VeriSign stock via the open market. Instead, they acquired VeriSign stock in exchange for Illuminet stock when VeriSign acquired Illuminet. Defendants argue that "due to the manner in which [the Illuminet Plaintiffs] acquired their shares, they are not typical of . . . open-market purchasers." (Defendants' Opposition at 23:4-6.) That is, unlike "a typical investor, who can point to a specific action (the purchase) that resulted from the alleged misrepresentations[,]" the Illuminet Plaintiffs "must show [that] their inaction (of simply retaining their shares) was a result of defendants' alleged misrepresentations." (Defendants' Opposition at 23:7-11.) Thus, Defendants conclude, "the Illuminet Plaintiffs are atypical[.]" (Defendants' Opposition at 23:12-13.)

Defendants rely upon a single case outside of this Circuit to support their argument: In re Bank of Boston Corp. Sec. Litig., 762 F. Supp. 1525, 1534 (D. Mass. 1991). Bank of Boston involved a securities class action lawsuit. There, the court concluded that Alcan Levy ("Levy"), a former shareholder of BankVermont and a proposed class representative, who acquired Bank of Boston stock via Bank of Boston's acquisition of BankVermont, "cannot be considered typical of the Main Class [a class consisting of persons who purchased common stock during the class period]." Id. The court noted that: "Levy can claim only that this [allegedly false and misleading] information induced him to inaction rather than action; that is, that Levy was induced merely to retain his shares until the time for exchange arrived rather than to purchase or sell Bank [of Boston] stock." Id. "[T]he inherent difficulty of proving both inaction and injury flowing therefrom poses a unique obstacle to Levy's recovery that the Main Class should not confront." Id. Defendants here seize upon this language to support their argument. (Defendants' Opposition at 23:14-20.)

Even if Bank of Boston was binding authority in this District, it would be distinguishable from this case. First, inBank of Boston, Levy did not even gain information regarding Bank of Boston during the class period. Id. ("Levy . . . gained information regarding the Bank [of Boston] primarily, if not entirely, from the Prospectus and Registration Statement issued in connection with the BankVermont merger and distributed to him . . . at least six months prior to the start of the Class Period") (emphasis added). Naturally, then, Levy was atypical of the Main Class. Here, however, "it is undisputed that the Prospectus for the Illuminet acquisition was issued during the Class Period and contains the exact same allegedly false and misleading statements as those actionable by the open market purchasers." (Plaintiffs' Reply in Further Support of Plaintiffs' Motion, hereinafter Plaintiffs' Reply, Docket Item No. 318, at 12:15-17.) Second, the Main Class in Bank of Boston was defined more narrowly than the class here. In Bank of Boston, the Main Class "consist[ed] of all persons who purchased [Bank of Boston] common stock . . . on the open market during the [class period]. . . ." Id. at 1530 (emphasis added). Naturally, then, Levy, who acquired Bank of Boston common stock via Bank of Boston's acquisition of BankVermont, was atypical of the Main Class. Here, however, the proposed class is broader than the Main Class in Bank of Boston. In this case, the proposed class consists of "persons and entities that purchased or otherwise acquired the common stock of VeriSign [during the Class Period]." (Second Amended Complaint at 1:5-8) (emphasis added). The Illuminet Plaintiffs, then, having "otherwise acquired" VeriSign stock, are not atypical of the class. Third, SEC v. Nat'l Secs., Inc., 393 U.S. 453 (1969), tends to undermine Defendants' argument that "[t]he Illuminet Plaintiffs' manner of acquisition" renders them atypical of investors who actually purchase stock. (Defendants' Opposition at 23:7-8.) In Nat'l Secs., the United States Supreme Court interpreted § 10(b) of the Exchange Act and SEC Rule 10b-5, two legal provisions at issue here. See (Second Amended Complaint at 61:3-63:14.) In that case, the Court directly "address[ed] [itself] to the meaning of the words `purchase or sale' in the context of § 10(b)." Nat'l Secs., 393 U.S. at 466. The Court observed that, "Section 10(b) and Rule 10b-5 together constitute one of the several broad anti-fraud provisions contained in the securities laws. . . . For the statute and the rule to apply, the allegedly proscribed conduct must have been `in connection with the purchase or sale of any security.'" Id. The Court held that the exchange of shares in a merger qualifies as a "purchase or sale" under § 10(b) and Rule 10b-5. Id. at 467 ("Therefore we conclude that [the] shareholders [of Producers Life Insurance Company, who acquired National Securities Inc.'s shares via the latter's merger with the former,] `purchased' shares in [National Securities, Inc.] by exchanging them for their old stock"); see also 1 A.A. SOMMER, JR., FEDERAL SECURITIES EXCHANGE ACT OF 1934 § 5.04[2][d] (2004) ("[T]he Supreme Court has held that the simple exchange of shares in a merger qualifies as a purchase or sale when shareholders become `shareholders in a new company' as a result of `an alleged deception [that] has affected shareholders' decisions in a way not at all unlike that involved in a typical cash sale or share exchange") (citing Nat'l Secs.). For these reasons, Bank of Boston is inapposite here.

4. Adequacy

Adequacy requires that "the representative parties will fairly and adequately protect the interests of the class." FED. R. CIV. P. 23(a)(4). The Ninth Circuit has recognized two criteria for determining adequacy. "First, the named representatives must appear able to prosecute the action vigorously through qualified counsel, and second, the representatives must not have antagonistic or conflicting interests with the unnamed members of the class." Lerwill v. Inflight Motion Pictures, Inc., 582 F.2d 507, 512 (9th Cir. 1978) (citing Nat'l Assoc. of Reg'l Med. Programs, Inc. v. Mathews, 551 F.2d 340 (D.C. Cir. 1976)). The purpose of adequacy "is to protect the legal rights of absent class members." CONTE NEWBERG, supra, § 3:21. "This prerequisite, essential to meet due process standards, must be satisfied at all stages of a class action, because the final judgment in a class action is binding on all those whom the court determines are members of the class." Id. (footnotes omitted).

a. The Lead Plaintiffs Appear Able to Prosecute the Action Vigorously Through Qualified Counsel

As Plaintiffs point out, the

Lead Plaintiffs have expressed their willingness to serve as Class representatives, and to prosecute this case on behalf of the entire Class. Lead Plaintiffs Sheet Metal Workers' Pension Fund, Oregon Telephone Company, Wilson Telephone Company, . . . and Donnelly as Trustee for the Donnelly Living Trust have also been actively involved with this litigation, including, but not limited to, the review and filing of the [Consolidated Amended Class Action Complaint], the review and filing of the proposed [Consolidated Second Amended Class Action Complaint], regular communication with counsel on case status, and responding to numerous discovery requests propounded by defendants. They are also willing to attend depositions and trial in connection with this litigation.

(Plaintiffs' Motion at 10:25-11:4.) Notably, both Sheet Metal and the Illuminet Plaintiffs have already sat for depositions. See (Decl. of Dennis J. Herman in Support of Plaintiffs' Reply, Docket Item No. 317, Exs. A-E); see also (Plaintiffs' Reply at 6:22-23) ("Sheet Metal has produced over 130,000 pages of documents in this litigation"). Moreover, lead counsel in this lawsuit (namely, Milberg Weiss Bershad Hynes Lerach LLP ("Milberg Weiss"), Law Offices of Bernard M. Gross, P.C., and Cohen, Milstein, Hausfeld Toll, P.L.L.C.) are experienced and competent. See (Decl. of Shirley H. Huang in Support of Plaintiffs' Motion, hereinafter Huang Decl., Docket Item No. 206). Defendants do not contest this. Thus, it seems, the named representatives appear able to prosecute this action vigorously through qualified counsel.

b. The Lead Plaintiffs Do Not Have Antagonistic or Conflicting Interests with the Unnamed Members of the Class

In order for the Lead Plaintiffs to be adequate, they must not have interests that conflict with the unnamed class members.

Various courts have articulated a standard for Rule 23(a)(4) [adequacy] and have used language that resembles the lack of conflict approach. Courts have required `identity of interests,' `coextensive interests,' `coincidence of interests,' `common interests,' `compatible interests,' and `shared issues and interests.' Basically, these standards reflect the accepted notion that the plaintiff should not have conflicts of interest with the class members. That is, they assume that the plaintiff whose interests coincide . . . with those of the class will not have conflicts with class members or amongst class representatives themselves.

CONTE NEWBERG, supra, § 3:23 (emphasis added) (footnotes omitted); see also id. ("Lack of conflict remains the most direct approach for determining whether a plaintiff is an adequate representative for the class"). The crux of Plaintiffs' complaint is that Defendants, through the dissemination of materially false and misleading information, artificially inflated the price of VeriSign's stock during the Class Period. In reliance upon Defendants false and misleading statements, Plaintiffs acquired VeriSign stock at artificially inflated prices and were damaged thereby. The Lead Plaintiffs' claims and the unnamed class members' claims do not conflict. They all arise out of the same set of facts — Defendants' alleged misrepresentations during the Class Period. See (Plaintiffs' Motion at 11:6-7) ("They [the Lead Plaintiffs] have no conflicting interests with unnamed Class members, and, moreover, have the same claim as each class member") and (Plaintiffs' Reply at 9:27-10:2) ("The Illuminet Plaintiffs and the class members who bought on the open market were victims of the same alleged fraudulent misrepresentations and omissions, perpetrated by the same group of defendants"). Thus, the named representatives are adequate.

Defendants attack the adequacy of two Lead Plaintiffs, in particular: (1) Donnelly and (2) Sheet Metal. First, Defendants argue that Donnelly is inadequate because he has not "turned over complete responsibility for the case to . . . class counsel appointed by this Court." (Defendants' Opposition at 10:17-19);see also (Defendants' Opposition at 10:19-23). Having already determined that Donnelly is an adequate representative, this Court will not, in the absence of binding authority to the contrary, determine otherwise. Second, Defendants argue that Sheet Metal is inadequate because of its "failure and professed inability" to produce documents in other parties' possession. (Defendants' Opposition 19:13-14.) Plaintiffs retort that:

The documents that defendants characterize as `key documents' that Sheet Metal failed to provide are business records of its outside fund manager. These are not Sheet Metal's documents, nor are these documents in the possession, custody, or control of Sheet Metal. Defendants neglect to mention that these outside managers have produced documents reflecting Sheet Metal's VeriSign's trades and other information regarding VeriSign securities pursuant to subpoenas issued by defendants. Those managers refused to produce documents reflecting their transactions in other securities on behalf of different clients — an action that was upheld by the Eastern District of Pennsylvania.

(Plaintiffs' Reply at 6:24-7:7.) This dispute is of minimal consequence because it does not alter the fact that Sheet Metal's interests do not conflict with the unnamed members of the class.

C. Plaintiffs Satisfy Rule 23(b)(3)

In addition to satisfying Rule 23(a)'s four prerequisites, Plaintiffs must also show that their action satisfies one of the three conditions set forth in Rule 23(b). Plaintiffs argue that this action satisfies the condition set forth in Rule 23(b)(3). Rule 23(b)(3) states:

(b) An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition: . . . (3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individuals members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.

Class actions are particularly well-suited in the context of securities litigation, wherein geographically dispersed shareholders with relatively small holdings would otherwise have difficulty in challenging wealthy corporate defendants. ALBA CONTE HERBERT NEWBERG, NEWBERG ON CLASS ACTIONS § 22:1 (4th ed. 2002); see also Amchem Products v. Windsor, 521 U.S. 591 (1997) ("Predominance is a test readily met in certain cases alleging . . . securities fraud") and In re United Energy Corp. Solar Power Modules Tax Shelter Investments Securities Ligitation, 122 F.R.D. 251, 253 (C.D. Cal. 1988) ("In a securities case, the requirements of Rule 23 should be liberally construed in favor of class actions").

Here, the issues common to the class — namely, the nature and extent of Defendants' alleged misrepresentations and the like — are predominant. Plaintiffs' entire Second Amended Complaint centers around these issues. Also, a class action is the superior method for adjudicating this lawsuit. "Where classwide litigation of common issues will reduce litigation costs and promote greater efficiency, a class action may be superior to other methods of litigation. A class action is the superior method for managing litigation if no realistic alternative exists." Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234-35 (9th Cir. 1996) (citations omitted). Plaintiffs point out that, "While the precise number of Class members is unknown, that number is certainly in the hundreds, or, more likely, thousands. Millions of VeriSign shares were traded daily during the Class Period, and over a billion shares were traded during the Class Period." (Plaintiff's Motion at 7:6-8.) The size of this class renders impracticable any possible alternatives to the class action, such as joinder. In any event, Defendants do not dispute that class certification is appropriate under Rule 23(b)(3). For these reasons, this Court concludes that this lawsuit satisfies Rule 23(b)(3).

D. Milberg Weiss Shall Be Class Counsel

FED. R. CIV. P. 23(g) mandates that "a court that certifies a class must appoint class counsel." At present, there are at least three different law firms acting as co-lead counsel for Plaintiffs: (1) Milberg Weiss, (2) Law Offices of Bernard M. Gross, P.C., and (3) Cohen, Milstein, Hausfeld Toll, P.L.L.C. Furthermore, it appears that three additional firms purport to represent some of the Lead Plaintiffs. See (Defendants' Opposition at 10:8-12). According to Defendants, some "of the lead plaintiffs communicate only with one of the other firms and not with counsel appointed by this Court." (Defendants' Opposition at 10:16-17.) "Having the plaintiff group manage, control, and direct six different law firms is undeniably an unwieldy task[.]" (Defendants' Opposition at 10:13-14.) This Court agrees. Given the commonality of interests amongst Plaintiffs, only one law firm need act as lead counsel in this lawsuit. This Court provisionally appoints Milberg Weiss as sole lead counsel for Plaintiffs. Milberg Weiss has many years of experience with respect to securities class action lawsuits. (Huang Decl. Ex. A.) Moreover, its size and success suggest that it has the resources necessary to represent Plaintiffs adequately. Lastly, Milberg Weiss apparently has done the most amount of work in this case. Even a cursory review of the docket sheet reveals that the vast majority of documents filed on behalf of Plaintiffs in this matter were, in fact, filed by Milberg Weiss.

V. CONCLUSION

For the reasons set forth above, this Court grants Plaintiffs' Motion for Class Certification. Also, this Court provisionally appoints Milberg Weiss Bershad Hynes Lerach LLP as sole lead counsel for Plaintiffs. The parties shall file and serve any objections to this provisional appointment on or before January 24, 2005. If this Court receives no objections on or before that date, it intends to convert its provisional appointment into a permanent one.


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 (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 (N.D. Cal. Jan. 13, 2005)