United States District Court, Southern District of California
July 10, 2003
IN RE APPLIED MICRO CIRCUITS CORP. SECURITIES LITIGATION, THIS DOCUMENT RELATE TO: ALL ACTIONS
The opinion of the court was delivered by: Judith Keep, District Judge
(1) GRANTING LEAD PLAINTIFF'S
MOTION FOR CLASS CERTIFICATION
This is a securities fraud class-action suit brought pursuant to the Securities Exchange Act of 1934, Rule 10-b5 promulgated thereunder, and the Private Securities Litigation Reform Act of 1995 ("PLSRA"). On May 14, 2003, Lead Plaintiff Florida State Board of Administration ("Lead Plaintiff), an institutional investor of the pension funds of the State of Florida, filed the instant motion for class certification. Defendants Applied Micro Circuits Corp., and individual defendants ("Defendants" or "AMCC") filed an opposition on June 2, 2003, to which Lead Plaintiff replied on June 16, 2003. All parties proceed through counsel. [ Page 2]
The background is taken from the amended complaint and other papers of the parties and does not constitute findings of fact by this court.
Applied Micro Circuits Corp. produces switching equipment for voice and data fiber optic networks. AMCC saw soaring sales, and an even higher flying stock price, in the late 1990s, selling to such telecom companies as Nortel, Cisco, Lucent, and JDSU as they quickly built fiber optic networks. The individual defendants ("insider defendants"), senior officers of AMCC, had extensive holdings in and much of their personal wealth tied up in their company's stock. In the fall of 2000, AMCC and the public received warnings that demand was falling rapidly for fiber optic products. By the end of October 2000, the entire telecom industry was in the doldrums, and AMCC's share prices fell significantly.
Plaintiff alleges the actionable conduct allegedly occurred from November 13, 2000 to February 5, 2001 (the "Class Period"). Essentially, Lead Plaintiff alleges that the individual Defendants intentionally issued false and misleading statements to prop up AMCC's stock price, while simultaneously unloading their inside shares. The gist of the alleged misleading statements is that AMCC's sales were growing in line with previous forecasts and AMCC was not experiencing the same problems of reduced demand and canceled orders as were their competitors and customers. At the same time that Defendants were publicly making such positive statements and denying rumors that AMCC was experiencing these industry-wide problems, Defendants knew that substantial amounts of AMCC's customer contracts were being canceled or delayed, and the company's customers were warning that future prospects were quite poor. During the Class Period (November 13, 2000 to February 5, 2001), the stock price of AMCC climbed back to its previous high, while the insider Defendants sold over $100 million of their own holdings. Less than one day after the last of these insider sales, AMCC reversed course in its public pronouncements and the stock rapidly declined, causing massive losses to the misled investors. [ Page 3]
A. Legal Standard for Class Certification
Fed.R.Civ.P. 23(a) provides four independently required criteria which must be met in order for a class to be certified:
(1) the class is so numerous that joinder of all
members is impracticable;
(2) there are questions of law or fact common to
(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.
A proposed class action must also satisfy one of the subdivisions of Rule 23(b). See Valentino v. Carte-Wallace, Inc. 97 F.3d 1227
,1233 (9th Cir. 1996). Lead Plaintiff argues that this motion is proper under Rule 23(b)(3). Rule 23(b)(3) requires that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Fed.R.Civ.P. 23(b)(3).
A court need not reach the merits of the action in determining whether a class action is appropriate. Eisen v. Carlisle and Jacqueline, 417 U.S. 156, 179, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974). However, a court may consider evidence even if that evidence also relates to the merits. Hanon v. Dataproducts Corp.. 976 F.2d 497, 509 (9th Cir. 1992). In analyzing a motion for class certification, a court should accept the substantive allegations of the complaint as true. Blackie v. Barrack, 524 F.2d 891, 901 n. 17 (9th Cir. 1975).
The plaintiff carries the burden of demonstrating satisfaction of the prerequisites for class certification. Mantolete v. Bolger, 767 F.2d 1416, 1424 (9th Cir. 1985). The plaintiff's failure to prove any one of Rule 23's requirements destroys the alleged class action. Rutledge v. Electric Hose & Rubber Co., 511 F.2d 668, 673 (9th Cir. 1975). Courts must rigorously assess whether the four prerequisites have been met. General Tel. Co. v. Falcon, 457 U.S. 147, 161, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982). Conditional certification of an improper class on a speculative possibility that it may later meet the requirements is improper, Blackie, 524 F.2d at 901. Ultimately, the class certification [ Page 4]
determination is committed to the discretion of the district court. Price v. Lucky Stores. Inc.. 501 F.2d 1177, 1179 (9th Cir.1974). See, e.g., Schwartz v. Upper Deck Co., 183 F.R.D. 672 (S.D. Cal. 1999).
Lead Plaintiff argues it has met the requirements of Rule 23(a) and Rule 23(b)(3). Defendants, however, argue that class certification is not available for Lead Plaintiff because Lead Plaintiff has failed to establish the required elements of Rule 23(a) and Rule 23(b). In the alternative, Defendants request the creation of a separate insider trading subclass pursuant to Rule 23(a)(B). The court will first look to the issue of class certification, then Defendants' request for the creation of a subclass.
1. Rule 23(a)(1): Numerosity
Rule 23(a)(1) requires that Lead Plaintiff demonstrate the class is so numerous that joinder of all members is impracticable. Fed.R.Civ.P. 23(a)(1). For purposes of Rule 23(a)(1) "impracticability does not mean impossibility, but only the difficulty or inconvenience of joining all members of the class." Harris v. Palm Springs Alpine Estates. Inc.. 329 F.2d 909, 913-14 (9th Cir. 1964) (citation omitted).
According to Lead Plaintiff, AMCC issued 298 million shares of common stock during the Class Period, and therefore it presumes that the Class has thousands of members. Motion at 7. Plaintiff alleges it acquired more that 400,000 shares of AMCC common stock and sustained a loss exceeding $5 million. Motion at 4. Lead Plaintiff argues that because of these facts, it has satisfied the numerosity requirement of Rule 23(a)(1). Defendants do not dispute this argument, and the court agrees with Lead Plaintiff that it has satisfied the numerosity requirement of Rule 23(a)(1).
2. Rule 23(a)(2) Commonality and Rule 23(b)(3) Predominance
Rule 23(a)(2) requires questions of law or fact common to the class. Fed.R.Civ.P. 23(a)(2). Rule 23(b)(3) requires that the proposed class representative establish that common questions of law or fact predominate over individual questions and that a class action is superior to other available methods of adjudication. Fed.R.Civ.P. 23(b). Because the argument for or against these two requirements are related, the court will consider them together. [ Page 5]
According to Lead Plaintiff, the questions of law or fact common to the class relate to a "common course of business." Motion at 7. Specifically, Lead Plaintiff states:
In this case, every member of the Class acquired
securities that were artificially inflated by the
[D]efendants' false statements and wrongful
conduct during the Class Period. A common core
of facts rendered AMCC's public statements false
and misleading. The questions of law and fact
common to the members of the Class which
predominate over questions that may affect
individual Class members include the following:
a) Whether the federal securities laws were
violated by [D]efendants' acts as alleged
b) Whether AMCC issued false and misleading
statements during the Class Period;
c) Whether the individual defendants caused
AMCC to issue false and misleading statements
during the Class Period;
d) Whether [D]efendants acted knowingly
or with deliberate recklessness in issuing
false and misleading statements;
e) Whether market prices of AMCC common stock
and options during the Class Period were
artificially inflated or distorted because
of [D]efendants' conduct complained of
f) Whether the members of the Class have
sustained damages, and, if so, what is the
proper measure of damages.
Motion at 8:15-9:9.
Defendants, however, argue that Lead Plaintiff has not satisfies either the commonality or the predominance requirement. According to Defendants, Lead Plaintiff alleges a "fraud on the market" presumption of reliance which affords Lead Plaintiff "a rebuttable presumption of reliance on [D]efendants' alleged misrepresentations. . . ." Opposition at 7:10-12. Defendants argue this theory is premised on the presumption of "an efficient market." Opposition at 7. It is Defendants' contention that the market for AMCC shares during the Class Period was not efficient, and therefore Lead Plaintiff cannot rely on the "fraud on the market theory." The result, according to Defendants, is that without the "fraud on the market theory, each purported class member must make an individualized showing of reliance." Opposition at 11:12-14. In conclusion, Defendants argue that Lead Plaintiff "has not met its burden of proving that common questions of law or fact predominate over questions affecting individual members," and therefore certification is not available. Opposition at 11:17-21.
Additionally, Defendants argues that because the "fraud on the market" theory is unavailable, "each purported class member must make an individualized showing of reliance [citation]. This will require thousands of individualized factual findings. Such testimony will likely require months to complete and would overwhelm any other fact-finding burden placed upon the trier of fact at trial." [ Page 6]
Opposition at 11:13-16. According to Defendants, this increased work-load prevents class certification "from being the superior method of resolving this dispute." Opposition at 11:19-20. Therefore, Defendants posit that neither Rule 23(a)(2) nor Rule 23(b)(3) has not been satisfied.
Lead Plaintiff emphatically rejects Defendants' argument stating:
Indeed, in a classic case of blame shifting,
after haying successfully exploited an efficient
market, [D]efendants hypocritically attempt to
avoid liability by claiming that the very vehicle
that enabled them to artificially buoy and
increase the price of AMCC stock — an
efficient impersonal market that sets a fair
price upon absorbing all publicly available
information that it assumes is true —
actually did not exist during the Class Period. As
with their other abusive tactics, [D]efendants'
ludicrous assertions should be rejected.
Reply at 2:4-9.
The court agrees with Lead Plaintiff's position, although it does not condone the pejorative adjectives. Defendants are requesting this court make a factual determination regarding the efficiency or inefficiency of the market during the Class Period. A motion for class certification is an inappropriate forum for this argument; this motion "need not reach the merits of the action in determining whether a class action is appropriate." Eisen 417 U.S. at 179; Basic v. Levinson, 485 U.S. 224, 249 n. 29 (1988) ("proof of [whether securities are traded on a well-developed, efficient, and information-hungry market] is a matter for trial"); see also Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir. 1999) (affirming the decertification of a class for failure to show an efficient market at the summary judgment, not the class certification, stage). The court, therefore, rejects Defendants' market efficiency argument as this time as an inappropriate bases upon which to deny class certification, and finds that Lead Plaintiff has satisfied both Rule 23(a)(2) and Rule 23(b)(3).
3. Rule 23(a)(3): Typicality
Rule 23(a)(3) requires that the plaintiff establish the claims or defenses of the representative party are typical of the claims or defenses of the class. Fed.R.Civ.P. 23(a)(3). According to Lead Plaintiff, it was damaged "because it acquired securities inflated by the false and misleading statements rendered by AMCC." Motion at 10. Additionally, Lead Plaintiff argues that every member of the class was "similarly damaged," and because the claims arise from the "same event or course of conduct giving rise to the claims of their class members typicality is satisfied." Motion at 10, quoting In re United [ Page 7]
Energy Corp. Solar Power Modules Tax Shelter Invs. Sec. Litig., 122 F.R.D. 251, 256 (C.D. Cal. 1988), Defendants do not address this requirement. The court agrees with Lead Plaintiff's analysis, and finds that Lead Plaintiff has satisfied the typicality requirement of Rule 23(b)(3).
4. Rule 23(a)(4): Adequacy
Rule 23(a)(4) requires the representative party to fairly and adequately protect the interest of the class. Fed.R.Civ.P. 23(a)(4). According to Lead Plaintiff, there are two conditions which must be met in order to satisfy this requirement. First, "the named representative must appear able to prosecute the action vigorously through qualified counsel," and "second, the representatives must not have antagonistic of conflicting interest with the unnamed members of the class." Motion at 11:10-13, citing Lerwill v. Inflight Motion Pictures. Inc., 582 F.2d 507, 512 (9th Cir. 1978). Lead Plaintiff contends it meets both requirements. Lead Plaintiff avers it satisfies the first condition by citing the following: (i) this court appointed it Lead Plaintiff on November 5,2001; (ii) it has extensive experience prosecuting securities fraud actions; and (iii) it has "zealously" prosecuted this class actions, including withstanding motions to dismiss and participating in discovery. Motion at 11-12. Lead Plaintiff contends it satisfies the second condition because its interest in "obtaining the maximum possible recovery is therefore coextensive with the interests of all members of the class." Id.
Defendants do not address this requirement in its pleadings. The court finds counsel for Lead Plaintiff is able to vigorously prosecute the class action. The court finds that the interests of Lead Plaintiff is coextensive with the Class, since they bring identical claims under the federal securities laws. Therefore, Lead Plaintiffs interests are not antagonistic to the class. For these reasons, the court finds that Rule 23(a)(4) is satisfied.
The court finds that Lead Plaintiff has satisfied all of the requirements of Rule 23(a) and Rule 23(b). As such, the court CERTIFIES the action as a class action pursuant to Rule 23 and appoints Lead Plaintiff as Class Representative. [ Page 8]
C. Defendants Alternative Argument
In the alternative, Defendants request the court create a separate subclass for the insider trading claim to "protect the interests of all members of both classes." Opposition at 13:3-5. According to Defendants, Lead Plaintiff is asserting two different types of claims under one single class: one for traditional misstatements designed to artificially inflate AMCC's stock price; another one for insider trading. Opposition at 12:18-22. Defendants contend these two different causes of action require establishing different facts and entail different theories of recovery. Therefore, Defendants request the creation of the subclass.
To allege an insider trading cause of action, a plaintiff must purchase shares contemporaneously with the insider. Neubronner v. Milken. 6 F.3d 666. 670 (9th Cir. 1993). According to Defendants, "contemporaneous" means a same day sale. Defendants argues that at the closest, the individual defendants sold shares within two days of the named plaintiffs. Because the transactions occurred two days apart, as opposed to on the same day, Defendants argue the transactions are not contemporaneous. In support of its position, Defendants cites to In re AST Research Sec. Litig., 887 F. Supp. 231 (C.D.Cal. 1995) holding same-day definition of contemporaneous; Buban v. O'Brien, 1994 U.S. Dist. LEXIS 8643 (N.D. Cal. 1994) holding three day period failed to meet contemporaneous requirement; and Neubronner, 6 F.3d at 669-70 holding that the contemporaneous requirement must be construed strictly.
The court rejects Defendants' argument. First, this court is not bound by decisions of other district courts. Second, the Ninth Circuit has not provided a temporal definition of "contemporaneous." See Brody v. Transitional Hospitals Corp., 280 F.3d 997 (9th Cir. 2002). Moreover, Lead Plaintiff argues that Defendants are asking the court to make a factual and legal finding that two days is not "contemporaneous." According to Lead Plaintiff, this inquiry in inappropriate on a motion for class certification. This court agrees. The court will not, at this juncture, decide whether transactions which occur within two days constitutes "contemporaneous" as required by the federal securities laws. As such, the court DENIES Defendants' request for the creation of a subclass. [ Page 9]
For the foregoing reasons, the court GRANTS Plaintiff's motion (i) to have this action maintained as a class action pursuant to Rule 23 and (ii) to appoint Lead Plaintiff as Class Representative. The court DENIES Defendants' request for the creation of a subclass.
IT IS SO ORDERED [ Page 1]
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