United States District Court, N.D. California
February 23, 2004.
In re TERAYON COMMUNICATIONS SYSTEMS, INC. SECURITIES LITIGATION This Document Relates To: ALL ACTIONS
The opinion of the court was delivered by: MARILYN PATEL, Chief Judge, District
MEMORANDUM AND ORDER
These consolidated securities class actions were brought on behalf of
individuals who purchased the publicly traded common stock of Terayon
Communications Systems, Inc. between November 15, 1999 and April 11,
2000. The parties came before the court on Defendants' Motion to
disqualify Lead Plaintiffs Cardinal Partners and Marshall Payne. Having
reviewed the motion and after hearing on the matter, the court has
concerns not only about the appropriateness of Cardinal Partners and
Marshall Payne as lead plaintiffs but also about the role of lead
counsel. For the reasons set forth below, the court issues the following
memorandum and order.
I. Cardinal's Investment in Terayon
Cardinal Investment Company ("Cardinal") is an investment company
located in Dallas Texas. Cardinal was founded and is operated by Edward
("Rusty") Rose, III. Marshall Payne is an employee of Cardinal, as are
James Traweek, Jr. and Kent McGaughy. Declaration of Christopher A. Patz
("Patz Decl.") Ex. 11.
In August of 1999 a publication called "Short Alert" identified Terayon
as a good candidate
for short selling. Id., Ex. 1 (Alpert Dep. At 20:14-21:9). A
"short sale" is a security trading practice "in which a party speculates
that a particular stock will go down in price and seeks to profit from
that drop." Lapidus v. Hecht, 232 F.3d 679, 680 (9th Cir.
2000)(quotations and citations omitted). The party places an order to
sell a security it does not own. The party borrows the security from a
broker and covers the short by subsequently purchasing the security and
returning the recently purchased security to the broker. If in the
interim period the security's price declined, the purchaser makes a
profit. If the price of the security increased in the interim, the
purchaser takes a loss.
After becoming aware of Terayon stock through the "Short Alert,"
Cardinal began shorting Terayon's stock in its clients' accounts. Patz
Decl. Ex. 3 (Cardinal Dep. At 108:13-110:8). The parties on whose behalf
Cardinal shorted the stock were: Cardinal Partners, Marshall Payne and at
least five other individuals and entities. During the third quarter of
1999, Rusty Rose also personally accumulated a large short position in
Terayon. By March 2000, Rose had a short position in approximately
125,000 shares of Terayon and Cardinal had another 400,000 shares on
behalf of its clients. Id. Exs. 11 &12 (Rose Dep. at
121:3-8)(Cardinal Dep. at 108:22-109:2). Marshall Payne's largest short
position was roughly 14,000 shares.
In the Spring of 2000 Cardinal also bet that the price of Terayon stock
would fall by buying "put options." "A put option is the right to sell a
security at a specified price; thus, the value of a put option increases
as the price of the underlying security falls." Magma Power Co. v.
Dow Chem. Co.. 136 F.3d 316, 321 n.2 (2d Cir. 1998).
Instead declining as Cardinal had bet, Terayon's stock price rose
dramatically. When Cardinal first purchased Terayon stock in August 1999
its highest price had been $41 5/8. In March 2000 Terayon's stock hit an
all time high price of $277 5/8. By March 2000, Cardinal and Rose were
short more than 500,000 shares equivalent to an $80 million loss
for Cardinal and a loss of $25 million for Rose personally.
Defendants assert that to counteract its losses Cardinal devised a
"game plan" to drive down the price of Terayon stock and that this "game
plan" was implemented during the class period. Cardinal had a thesis that
CableLabs would not accept Terayon's S-CDMA technology as a
in the industry. See e.g. Patz Dec. Ex. 1. (Alpert Dep.
at 120:12-21). Based on this thesis Cardinal claimed that statements
Terayon made to the contrary were fraudulent. Cardinal undertook a
campaign to inform the market and regulatory agencies about this alleged
fraud and about perceived weaknesses in Terayon's business strategy.
Cardinal's goal was to have the market lower the value of Terayon stock
which would "help [Cardinal's] investment pay off." Patz Dec. Ex. 1
(Alpert Dep. at 125:7-24).
On October 19, 1999, Cardinal sent a copy of its thesis to reporter
Brenda Moore at The Wall Street Journal. Id. Ex. 1
(Alpert Dep. at 127:1-8); Ex. 8; Ex. 3 (Cardinal Dep. at 135:18-136:10;
Ex. 15. Moore did write an article about Terayon which appeared in
The Wall Street Journal on December 29, 1999, however the
price of Terayon stock remained stable in the two week period after
the article appeared. In October 1999 Cardinal also began communicating
about Terayon to the Milberg Weiss firm, now designated as lead counsel
for plaintiffs in this case. Patz Dec. Ex. 12 (Traweek Dep. at
201:1-202:14). Traweek testified that from 1999 to April 2000 he
personally contacted the Milberg Weiss firm "on the order of ten
During January and February of 2000, Rose and his staff considered
"ways in which Cardinal Investment Company could communicate its views
about Terayon to the public." Id. Ex. 11 (Rose Dep. at
58:6-25). In this time period, Cardinal employee Kent McGaughy created a
document entitled "Game Plan" which document begins by posing the
question "What are the key levers we can pull?" Id. Ex. 20.
Whether McGaughy created this document of his own accord or at Rose's
suggestion is in dispute. Id. Ex. 11 (Rose Dep. at 58:6-25);
McGaughy Supp. RT at 31:5-11. Plaintiffs insinuate that McGaughy then did
nothing about the "Game Plan," but this assertion is belied by the
deposition testimony where it is clear that the substance of the "Game
Plan" was discussed with other Cardinal employees. Compare
Plaintiffs' Response to Motion at 8:14-17 ("three pages of hand written
notes . . . which were not even shown to anyone else hardly qualifies
as an elaborate game plan") with Patz Dec. Ex. 1 (Alpert Dep. at
117:6-118:16.)(discussions were had among Cardinal employees about the
"Game Plan"). Moreover, Cardinal employees in fact pursued the agenda
items listed on the plan.
One of the items on McGaughy's "Game Plan" called for Cardinal to
encourage CableLabs to make a statement about Terayon. Cardinal hoped
CableLabs would state unequivocally that Terayon's technology would not
be part of a DOCSIS standard, thus lowering Terayon's market value.
Id. Ex. 8 (McGaughy Dep. at 44:18-45:6). See also
Id. Ex. 11 (RoseDep. 104:14-23)(Rose communicated Cardinal's
thesis with the wish that "everyone would divest their holdings in
Terayon" and the wish that the "stock price of Terayon would go down.")
It is undisputed that Cardinal employees bombarded CableLabs with
calls. See e.g. Id. Ex. 5 (Fellows Dep.
181:20-182:10)(Alpert alone made 50 phone calls to Fellows). It is also
undisputed that starting in February 2000, Cardinal began a letter
writing campaign regarding Terayon to the Securities and Exchange
Commission ("SEC")*fn2, the National Association of Securities Dealers
("NASD") and the Assistant United States Attorney for the Southern
District of New York. Cardinal's opening letter to the SEC was 12 pages
long with 56 footnotes and claimed that "TERAYON HAS BLATANTLY LIED ABOUT
ITS INDUSTRY IN EVERY SEC DOCUMENT IT HAS FILED SINCE IT WENT PUBLIC IN
ORDER TO FALSELY INFLATE MARKET PERCEPTION ABOUT ITS TECHNOLOGY." Patz.
Dec. Ex. 36 at 2 (emphasis in the original). Cardinal wrote letters in a
similar vein to the SEC on February 23, March 8, March 15, March 20,
April 12 and April 25, 2000.
Starting in February 2000 Internet web site postings encouraged parties
to contact the Milberg Weiss firm about a proposed lawsuit against
Terayon. Despite the fact that these web postings in February 2000
claimed a lawsuit against Terayon was imminent, the stock drop which is
the issue of the current lawsuit did not occur until April 12, 2000.
See Patz Dec. Ex. 19 (postings of a_r_san of 2/09/00, 3:12 p.m.
("Will there be a class action suit? Messrs Lerach, Weiss will be looking
into it.") and 2/09/00, 5:42 p.m. ("I am in the process of faxing my TERN
stock transactions to [Milberg Weiss] to initiate the class action
lawsuit."). The court notes that the class period in the original
complaint, i.e. the first day on which plaintiffs claim they were
damaged, was February 9, 2000 the same day these Internet postings
appeared. Defendants assert that these web postings were part of
plaintiffs' alleged scheme to drive the price of the stock down.
In early April 2000 Cardinal Partners purchased April "puts" on Terayon
stock. Id. Ex. 3 (Cardinal Dep. At 13:2-22), Ex. 23, Ex. 60.
The "puts" expired on April 15, 2000. Thus Cardinal was betting that
something would cause a decline in Terayon stock between April 7 and
April 15. On April 11, 2000 Cardinal employee Kent McGaughy called into
Terayon's quarterly earnings conference call. McGaughy used a false name,
and posing as a bona fide securities analyst, accused Terayon of
fraud. Defendants assert that two other people participated in the
conference call at Cardinal's behest. These two, Jonathan Daws and Amir
Elgindy also used false names and raised issues of alleged fraud by
On April 12, 2000, Terayon's stock price fell. April 12, 2000 also
constituted one of the ten worst declines in NASDAQ history. Plaintiffs
filed their complaint in the Central District of California on April 13,
2000 clearly indicating that plaintiffs had been in contact with
counsel for some time prior to the April 12, 2000 stock decline. While
the complaint purports to have been signed on April 12, 2000, the
attached "Certification of Named Plaintiff'signed by named plaintiff in
that case, Shlomo Birnbaum, was dated April 11, 2000 one day
prior to Terayon's stock plunge. While neither Cardinal Partners or Payne
were named as plaintiffs in the Birnbaum complaint, much of the language
of the complaint very closely tracks the language of Cardinal's letters
to the SEC. Cardinal Partners and Payne signed their Certification of
Named Plaintiffs on April 14, 2000.
Milberg Weiss's relationship with Rose was not limited to the Terayon
case. As set out in the Fields v. Biomatrix case,
198 F.R.D. 451, 454 (D.N.J. 2000) the Milberg Weiss firm also represented Rose
in an almost identical short sale stock case. As in the case at
bar, defendants in Fields also asserted that Rose and
his associates had "systematically [made] false and misleading
allegations against Biomatrix on Internet message boards" and again as
here, the messages advised investors that the writer was planning a
securities fraud action and that interested parties should contact the
Milberg Weiss firm.
The complaint in the Fields case also was "almost entirely copied from
letters written to members of Genzyme's board of directors and to the SEC
by short seller, Edward W. "Rusty" Rose, III, and his associates" who had
been trying unsuccessfully for months to get Genzyme's board to
cancel the merger in order to cause a decline in Biomatrix stock
prices. Fields, 198 F.R.D. at 455.
II. Prior Class Certification Procedures
The original action filed in the Central District of California
(Birnbaum) and those filed here in the Northern District
(Henry and Pludo) listed the class period as February
2, 2000 to April 11, 2000 inclusive. See Patz Dec., Exs 24, 47.
On April 14, 2000, Cardinal Partners and Payne each prepared a
"Certification of Named Plaintiff Pursuant to Federal Securities Laws."
Patz. Dec., Exs. 24, 27. Pursuant to 15 U.S.C. § 78u-4(a)(2)(A)(iv), the
proposed named plaintiffs are to state on the certification "all of the
transactions of the plaintiff in the security that is the subject of the
complaint during the class period specified by the complaint."
Id. (emphasis added). The Certifications filed by Cardinal
Partners and Payne were deficient on their face as they did not reveal
Cardinal Partners "put" transactions made in early April. Because
Cardinal and Payne's numerous short sales all occurred outside this
February-April window, counsel and plaintiffs were not at that
time required by the statute to list the short sales on the
certification. Nonetheless, given the magnitude of the short sales, and
that the losses incurred during the class period were as a result of the
short sales prior to the class period, these transactions were highly
relevant to the case. The court assumes that plaintiffs' counsel was
aware of these short sales when it drafted the original complaint with
the February to April class period.
On June 12, 2000 plaintiffs filed a motion in the Pludo
action to appoint Cardinal Partners, Marshall Payne and three other
individuals as lead plaintiffs. This motion states that Marshall and
Payne had suffered losses of almost $2.5 million during the February to
April class period, but omitted the fact that these losses resulted from
Cardinal Partners and Payne's significant short position in Terayon.
Counsel for Cardinal and Payne also indicated that "there is no evidence
of any antagonism between interests of these individuals and the proposed
class members." Terayon Lead Plaintiffs' Group Motion at 13:4-5. Counsel
made no mention to the court either in papers or at the hearing that lead
plaintiffs had significant short sales in Terayon stock. See
Motion Transcript of 8/7/00 in Henry v. Terayon. On September
19, 2000 this court appointed Cardinal Partners, Payne
and the three other individuals as lead plaintiffs and approved the
plaintiffs' selection of counsel Milberg Weiss as lead counsel.
Two days after the court ruled on the lead plaintiff issue, the Milberg
Weiss firm filed the consolidated class complaint. The consolidated
complaint changed the class period to November 15, 1999 to April 11,
2000. While the new class period clearly encompassed lead plaintiffs'
vast short sales, plaintiffs' counsel did not provide the court with
updated Certifications of Named Plaintiffs which corresponded to the new
class period, nor did counsel apprise the court of the short sales which
now clearly came within the class period. The court is left to wonder
whether once the court's Srutiny of lead plaintiffs had concluded,
counsel felt free to manipulate the class period.
On July 25, 2002 plaintiffs filed their motion for class certification.
Plaintiffs' counsel did not propose that lead plaintiffs Cardinal
Partners or Marshall Payne be certified as class representatives. It is
clear from the deposition testimony that counsel for plaintiffs made the
determination not to request class representative status for either
Cardinal Partners or Marshall Payne. At the hearing on the present
motion, counsel for plaintiffs explained this choice in the following
way: "It's unfair to have the class not saddled with but
be responsible for what Cardinal Partners did or didn't do since they
there's no question they did a lot of due diligence in
investigating this company." September 8, 2003 Hearing Transcript at
A. Appointment as a Lead Plaintiff
The Private Securities Litigation Reform Act ("PSLRA") sets forth a
rebuttable presumption that the "most adequate plaintiff," i.e., the one
who is to be selected as lead plaintiff, is the one who:
(aa) has either filed the complaint or made a
motion in response to a notice under subparagraph
(bb) in the determination of the court, has the
largest financial interest in the relief sought by
the class; and
(cc) otherwise satisfies the requirements of Rule
23 of the Federal Rules of Civil Procedure.
15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).
This presumption may be rebutted only upon proof by a member of the
purported plaintiff class that the presumptively most adequate
plaintiff (a) will not fairly and adequately protect the interests of the
class; or (b) is subject to unique defenses that render such plaintiff
incapable of inadequately representing the class.
15 U.S.C. § 78u-4(a)(3)(B)(iii)(II) (emphasis added).
In order to be appointed a lead plaintiff the prospective lead
plaintiff must satisfy the requirements of typicality and adequacy set
forth in Rule 23 of the Federal Rules of Civil Procedure. Federal Rule of
Civil Procedure 23(a)(4) provides that the representative parties must
"fairly and adequately protect the interests of the class." Fed.R. Civ.
P. 23(a)(4). Generally, plaintiffs bear the burden of showing that their
claims are typical, as well as the burden of demonstrating that other
prerequisites to class action are satisfied. Fed.R.Civ.P. Rule 23(a);
see Staton v. Boeing 2002 WL 31656586 (9th Cir. 2002); see
also In re Dalkon Shield IUD Products Liability Litigation,
693 F.2d 847 (9th Cir. 1982)
Defendants present several arguments as to why plaintiffs Cardinal
Partners and Marshall Payne should no longer be designated as lead
plaintiffs. Defendants assert that Cardinal and Payne should not be lead
plaintiffs as they were short-sellers. Defendants contend that
neither Cardinal Partners nor Marshall Payne relied on Terayon's
representations and thus cannot represent other plaintiffs in a fraud on
the market case. Finally defendants assert that these two plaintiffs have
a conflict of interest with the plaintiffs' class and cannot act as
fiduciaries as required by Federal Rule of Civil Procedure 23.
Plaintiffs argue that defendants have no standing to challenge the
appointment of lead plaintiffs and that even if they did, there is no
reason that short sellers cannot be lead plaintiffs.
A. Standing to Challenge the Appointment of Lead
Lead plaintiffs have a fiduciary duty to "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." In re Network Assocs., Inc. Sec.
Litig., 76 F. Supp.2d 1017, 1020 (N.D. Cal. 1999). As noted above,
the PSLRA provides that the presumption of adequacy of a lead plaintiff
"may be rebutted only upon proof by a member of the purported plaintiff
class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II). Plaintiffs read this
section to act as an absolute bar to a motion brought by the defendants
or for that matter presumably to the court acting sua sponte
based on information made available to it. In support of their
proposition, plaintiffs cite to Wenderhold v. Cylink Corp..
188 F.R.D. 577 (N.D. Cal 1999). The Wenderhold case is inapposite
as the court specifically did not reach the issue of defendants'
standing. The Wenderhold court did, however, reiterate a court's ongoing
obligation to determine the appropriateness of the lead plaintiffs.
Wenderhold, 188 F.R.D. at 584. (regardless of whether
defendants have standing to object, the court is required to determine
whether the proposed lead plaintiffs are capable of adequately protecting
the interests of the class members).
Nor does Takeda v. Turbodvne, 67 F. Supp.2d 1129 (C.D. Cal
1999) aid plaintiffs' argument. Although the court in Takeda
found that defendants lacked standing at the early stages of the
proceeding it did not rule out the possibility that defendants would
later have standing to make such a challenge. More importantly,
Takeda held that the court could "raise and address certain of
the concerns addressed in defendants' statement" sua sponte.
Takeda. 67 F. Supp.2d 1138. See also Field v.
Biomatrix, 198 F.R.D. 451, 454 (D.N.J. 2000).
In re Cavanaugh, the only Ninth Circuit law plaintiffs cite,
is inapposite due to the procedural posture of the case at bar. In
re Cavanaugh, 306 F.3d 726 (9th Cir. 2002). In Cavanaugh,
the Ninth Circuit reviewed on a writ the district court's use of an
interview process to select the lead plaintiff. The Ninth Circuit
rejected this process, referring the court back to the lead plaintiff
selection scheme elaborated under the PSLRA. No defendant in
Cavanaugh sought to have input into the lead plaintiff
decision, so the case is not dispositive. Nor had discovery already been
taken. In the case at bar, extensive discovery has been taken and the
case is on the brink of trial. Therefore, the court does not find
What is clear under the reasoning of Wenderhold and
Takeda, is that the court has a duty to monitor whether lead
plaintiffs are capable of adequately protecting the interests of the
class members. As the court held in In re Critical Path, "the
fact that a searching inquiry under Rule 23 is not required at this stage
of the litigation does not mean that the Court must pay mere lip service
to the requirement of the statute that a prospective lead plaintiff'
satisf[y] the requirements of Rule 23.'" In re Critical Path. Inc.
Sec. Litig., 156 F. Supp.2d 1102 (N.D. Cal. 2001). See
15 U.S.C. § 78u-4(a)(3)(b)(iii)(I)(cc). The doctrine against conducting
a searching inquiry under Rule 23 at the earliest stage of the lawsuit
encourages efficiency. However, the court has a continuing responsibility
to determine whether lead plaintiffs meet the typicality and adequacy
prongs of Rule 23 such that the interests of the class are protected.
See, e.g. Z-Seven Fund. Inc. v. Motorcar Parts &
Accessories, 231 F.3d 1215, 1218-19(9th Cir. 2000)(district court
may make changes to lead plaintiff status consistent with court's
continuing duty to ensure adequate representation of class.).
Normally, these issues would have been raised at the time the lead
plaintiffs moved to be appointed as class representatives. Plaintiffs'
counsel circumvented this inquiry by determining to only seek class
representative status for the three individual defendants and not for
Cardinal Partners and Payne. But for the machinations of plaintiffs'
counsel, the defendants likely would have been able to present evidence
regarding the fitness of Cardinal and Payne as lead plaintiffs at an
earlier stage in the litigation. Based on the above, the court finds that
it has an obligation to consider the material presented by defendant as
to Cardinal and Payne's fitness to continue as lead
B. Lead Plaintiff as Short Sellers
Defendants advance several arguments as to why plaintiffs should be
disqualified as lead plaintiffs due to their short sale purchases of
Terayon stock. Defendants first assert that being a short sale purchaser
is per se disqualifying for a lead plaintiff. Defendants further
argue that Cardinal and Payne cannot be adequate lead plaintiffs in this
case since the case is premised on a fraud on the market theory and those
two plaintiffs cannot demonstrate reliance on the alleged
misrepresentations made by Terayon. In a similar vein, defendants argue
that Cardinal and Payne have a fatal conflict of interest with the rest
of the plaintiff class. Plaintiffs generally allege damages based on the
devaluation of Terayon stock, whereas Cardinal and Payne actively
sought to drive down the price of Terayon stock.
Citing In re Critical Path, defendants assert that short
sellers cannot be named as lead plaintiffs.*fn3 In Critical
Path, Columbus Capital, one of the proposed lead plaintiffs, had
purchased 410,000 shares and sold 20,000 shares short. Based on these
short sales, the court found Columbus Capital not a suitable lead
plaintiff. The court held that it would be "a poor choice to appoint a
class representative who engaged in a trading practice premised on the
belief the stock would fall." Critical Path, 156 F. Supp.2d at
1110. The court analyzed that an issue arises with short sellers as to
whether the seller was actually relying on the market price, and that
"the court is not served by its representative coming under such
scrutiny." Id. See also Weisz v. Calpine Corp.. No. C
02-1200 SBA, slip op. at 12 (N.D. Cal. Aug. 19, 2002). Apparently, the
desire to avoid such scrutiny was also the motivating factor in
plaintiffs' decision not to seek class representative status for Cardinal
and Payne. Moreover, unlike in Critical Path, where the lead
plaintiff had both short and long purchases, according to deposition
testimony, Cardinal Partners never intended at any point to take a long
position in Terayon. Patz Dec. Ex. 1 (Alpert Depo. 22:4-10).
Plaintiffs cite no controlling precedent on this issue. Moreover, the
court finds the cases plaintiffs rely on to be either inapposite or
unpersuasive. The holding of Danis v. USN Communications,
189 F.R.D. 391 (N.D. Ill. 1999) was rejected by the Northern District Court
in Critical Path and is distinguishable on the facts as well.
In Danis, the court recognized the inherent potential for
conflict in a fraud on the market case between lead plaintiff Thomas
Karr, who had engaged in short sales, and other plaintiffs who had not:
"[t]he motivations behind short selling may indeed be inconsistent with
the assumptions underlying the fraud on the market theory."
Danis, 189 F.R.D. at 396. Although the court ultimately
approved Karr, it did so because Karr had made both short sales and
ordinary stock purchases during the class period. The Danis
court found that Karr could use "these [ordinary] purchases to invoke the
fraud on the market presumption of reliance." Id. Unlike Karr,
neither Cardinal nor Payne made ordinary purchases other than those
needed to cover their short sales.
The court finds plaintiffs' citation to Fields v. Biomatrix,
198 F.R.D. 451, 454 (D.N. J. 2000) illuminating not for its reasoning or
holding but for the facts of the case which tend to support defendants
claims about Cardinal and Payne. If the court had reservations about the
"typicality" of short sellers Cardinal and Payne before, the
Fields case provides the response. While some short sales may
not, in and of themselves render a lead plaintiff's claims atypical, a
pattern of affirmatively engaging in campaigns devised to lower the price
of the stock in question certainly contains within it the seeds of
discord between lead plaintiffs and the remaining plaintiffs.*fn4 Based
upon the exposition herein, to the extent that Cardinal and Payne appear
as lead plaintiffs or class representatives, the court removes them from
those respective positions.
C. Concerns about Lead Counsel
The court is extremely concerned by the lack of candor to the court by
plaintiffs and by lead counsel. As in the Fields case, evidence
in the record indicates that counsel had been working with plaintiffs
Cardinal and Payne significantly in advance of the filing of the
complaint. In October 1999 Cardinal began passing information about
Terayon to the Milberg Weiss firm. Patz Dec. Ex. 12 (Traweek Dep. at
In both the Fields case and the case at bar, posting on
Internet web sites encouraged parties to contact the Milberg Weiss firm
not only before the complaint was filed, but at least in the Terayon case
at least two months before there was even a drop in the stock price.
Despite the fact that these web festings in February 2000 claimed a
lawsuit against Terayon was imminent, the stock drop which is the issue
of the current lawsuit did not occur until April 12, 2000. Questions
arise as to what knowledge of, or participation in, this plan the Milberg
Weiss firm may have had.
Plaintiffs filed their complaint on April 13, 2000. While the
Birnbaum complaint purports to have been signed on April 12,
2000, the attached "Certification of Named Plaintiff was dated April 11,
2000 one day prior to Terayon's stock plunge. This fact again
raises issues about knowledge by counsel of plaintiffs' actions during
the Terayon conference call, which actions were allegedly intended to
devalue Terayon stock.
The court is of the impression that the Milberg Weiss firm was in close
contact with plaintiff Cardinal significantly in advance of the time the
suit was filed as much of the language of the complaint tracks the
language of Cardinal's letters to the SEC. The court is also greatly
troubled by an apparent attempt to mislead the court as to the scope and
nature of lead plaintiffs' holdings in Terayon stock. As noted above, the
Certifications filed by Cardinal Partners and Payne did not reveal
Cardinal Partners "put" transactions, nor did they reveal Cardinal
Partners and Payne's short sales in Terayon stock. That counsel made a
change to the class period only two days after this court approved lead
plaintiffs, coupled with the fact that counsel made no effort to update
the certifications so that they would accord to the requirements of
15 U.S.C. § 78u-4(a)(2)(A)(iv), gives rise to the presumption that these
actions were taken intentionally to avoid closer court scrutiny of
plaintiffs Cardinal Partners and Payne. Counsel's later decision not to
request class representative status for either Cardinal Partners or
Marshall Payne is similarly suspect. All of these issues leave the court
to speculate whether counsel for plaintiffs actively participated in or
provided advice to plaintiffs regarding their scheme to cause a fall in
Terayon's stock price.*fn5 In either case, the court finds that it is
probable that there is a conflict not only between lead plaintiffs and
the class but also between lead counsel and the remainder of the class.
As detailed above, the court finds that according to information
currently available to it, lead plaintiff's do not meet the typicality
and adequacy of representation requirements of Rule 23 and this are not
appropriate lead plaintiffs.
As it relates to class counsel, the court has serious concerns about
potential conflicts of interest and also counsel's candor to the court.
As the court indicated at the hearing, the court wishes further discovery
into at a minimum, the following issues:
(1) The number of cases or actions in which Milberg Weiss represents
Rose, Payne, Cardinal Partners any other Cardinal entity or affiliate;
(2) The dates that Milberg Weiss was first contacted by each of those
parties and the date
Milberg Weiss was retained as counsel by each of those parties;
(3) The amount of fees billed to those entities and paid by them and
the dates of such billings and payments;
(4) The fee arrangements that existed between those parties and the
Milberg Weiss firm since the beginning of any representation by Milberg
Weiss of any of these parties through and including the present.
(5) The names of all attorneys at the Milberg Weiss firm who have
worked for any of these clients, the dates they provided such services,
and if the work was related to a filed action, to which action was it
Counsel for defendants may also propound any relevant discovery seeking
non-privileged information by _______________.*fn6
The Milberg Weiss firm shall have thirty (30) days from service this
order to file the information ordered by this court.
The Milberg Weiss firm shall have thirty (30) days from the service of
the discovery requests to respond to the discovery propounded by
defendants on these issues, with copies to defense counsel and the court.
IT IS SO ORDERED.