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PrediWave Corp. v. Simpson Thacher & Bartlett LLP

December 2, 2009

PREDIWAVE CORPORATION, PLAINTIFF AND APPELLANT,
v.
SIMPSON THACHER & BARTLETT LLP, ET AL., DEFENDANTS AND RESPONDENTS.



(Santa Clara County Super. Ct. No. 1-08-CV 110304). Hon. Joseph Huber.

The opinion of the court was delivered by: Elia, J.

CERTIFIED FOR PUBLICATION

PrediWave Corporation (PrediWave) sued Simpson Thatcher & Barlett LLP ("defendant law firm"), attorney George M. Newcombe, and attorney Alexis S. Coll-Very, who had previously represented both PrediWave and its former president and CEO, Jianping "Tony" Qu ("Qu"). Defendants successfully brought a special motion to strike under the anti-SLAPP statute (Code Civ. Proc., § 425.16).*fn1 PrediWave appeals from the order granting the motion.*fn2 (§§ 425.16, subd. (i); § 904.1.)

We reverse.

A. Procedural History and Background

Appellant PrediWave filed a complaint for damages stating four causes of action: (1) breach of fiduciary duty by defendants, (2) constructive fraud by defendants, (3) legal malpractice by defendants, and (4) violation of Business and Professions Code section 17200 et seq. by defendant law firm.

On June 10, 2008, defendants filed an anti-SLAPP motion pursuant to section 425.16. Appellant PrediWave subsequently filed a first amended complaint.*fn3 The trial court did not consider this latter complaint in ruling on the anti-SLAPP motion. (See Sylmar Air Conditioning v. Pueblo Contracting Services, Inc. (2004) 122 Cal.App.4th 1049, 1052, 1054-1056 [no right to avoid an anti-SLAPP motion by filing an amended complaint pursuant to section 472 prior to the hearing on the motion]; Navellier v. Sletten (2003) 106 Cal.App.4th 763, 772 [refusing leave to amend to assert a cause of action for malicious prosecution because plaintiff cannot use "eleventh-hour amendment" to plead around anti- SLAPP motion]; Simmons v. Allstate Ins. Co. (2001) 92 Cal.App.4th 1068, 1073-1074 [no express or implied right in section 425.16 to be granted leave to amend complaint]; but see Nguyen-Lam v. Cao (2009) 171 Cal.App.4th 858, 873 ["trial court did not err in permitting plaintiff to amend her complaint to plead actual malice in conformity with the proof presented at the hearing on the strike motion"].)

The original complaint states that the PrediWave was organized and exists under the laws of the State of California with its principal place of business in Fremont, California. According to the complaint, defendants began representing PrediWave in early May 2004. Defendants also represented PrediWave, its affiliated companies, and CEO Qu in litigation with New World TMT Limited ("New World"). In June 2005, defendants withdrew as counsel for PrediWave, its companies, and Qu. Defendant law firm received $10 million for representing PrediWave.

The complaint alleges that Qu perpetrated fraud upon New World by making false representations and withholding material information regarding PrediWave products. Qu allegedly induced New World to purchase all PrediWave's preferred shares for $35 million, to spend over $381 million to purchase PrediWave's defective Video-on-Demand ("VOD") Set-Top Box ("STB") and related hardware and software, and to invest $256.4 million in the purchase of all the preferred shares of affiliated companies.

The complaint alleges that, pursuant to the PrediWave Preferred Stock Purchase Agreement, New World appointed two board directors, Douglas Chan and Fu Sze Shing ("Fu") to PrediWave's Board of Directors and they served from 2000 to April 2004. According to the complaint, on April 23, 2004, New World's Chairman, Dr. Henry Cheng, "cancelled New World's outstanding VOD STB order" and, on April 24, 2004, New World replaced Chan with Jimmy Li as its second outside director.

The complaint indicates that directors Li and Fu became aware of purported board resolutions approving bonuses of over $95 million to Qu and other corporate spending for Qu's benefit and alleged that the two directors "became concerned that Qu was diverting millions of dollars in assets from PrediWave." It states that, on April 28, 2004, the two directors sent a letter to Qu informing him that they were exercising their right as PrediWave directors to inspect PrediWave's books and records pursuant to the California Corporations Code. On April 29, 2004, they sent letters to PrediWave's financial institutions informing them that they were commencing an audit and any withdrawal over $500,000 was required to be cosigned by a New World representative and requesting a summary of PrediWave's accounts and notice of withdrawals exceeding $500,000 (referred to in the complaint as the "Bank Letters").

The complaint states: "On May 3 and 13, 2004, New World sent additional letters to Prediwave rejecting and/or revoking its acceptance of the VOD STBs and all other goods supporting the VOD STBs, and notifying Prediwave that it was in breach of the parties' agreements and warranties."

The complaint indicates that, after being hired, defendants "conferred with Qu" and the common stock board members and, on May 19, 2004, defendants filed "a peremptory lawsuit" in Los Angeles County (the "L.A. action") against the two outside directors instead of investigating their claims or recommending to the Board that an independent investigation of the "merits of their allegations" be conducted. According to the complaint, the L.A. action "falsely accused" the two directors of breaching their fiduciary duties to PrediWave "by requesting to inspect PrediWave's books and records and seeking to investigate fraud by PrediWave's management" and by sending the Bank Letters. The L.A. action sought to block their inspection of corporate books and records. The present complaint alleges that the next day, May 20, 2004, defendants sought a temporary restraining order (TRO) and preliminary injunction against the two outside directors and these "aggressive tactics were designed to impede Messrs. Li and Fu's investigation." According to the complaint, the trial court denied the TRO and defendants subsequently withdrew the application for a preliminary injunction.

The complaint further alleges that, when director Li was "en route to PrediWave's offices" on May 24, 2004 for an arranged inspection of PrediWave's books and records, defendants notified Li that permission to inspect would be denied unless Li "signed an agreement imposing strict limits on his use of the books and records-limits far more draconian that those involving trade secrets and confidential information to which Mr. Li's counsel had agreed in principle." When Li did not agree, defendants refused to permit Li access to PrediWave's books and records.

The complaint indicates that, on May 25, 2004, New World filed a lawsuit against PrediWave, its affiliated companies, and Qu in Santa Clara County (the "Santa Clara action"). It avers that New World's Santa Clara action alleged fraud, breach of contract, negligent misrepresentation, and breach of fiduciary duties by Qu and PrediWave and specified, among other things, that Qu had "looted PrediWave and its affiliates of more than $100 million in unearned 'bonuses' and other abusive perquisites" and had "defrauded New World into investing in PrediWave and its affiliates...."

The complaint in this case states that Li was forced to file a petition for writ of mandate to enforce his right to inspect PrediWave's books and records. Defendants unsuccessfully sought to disqualify Li's counsel in that proceeding and PrediWave appealed the ruling, allegedly "as a tactic to further delay inspection of PrediWave's books and records."

The complaint states that the defendants "stonewalled discovery" in the L.A. action "to prevent... Li and Fu from obtaining documentary evidence of Qu's theft of funds, thereby enabling Qu's fraud." The complaint alleges that defendants "adopted a strategy of delaying and blocking written and oral discovery" in the Los Angeles and Santa Clara actions. This led to "significant motion practice," which "resulted in significant delay and concomitant cost to PrediWave, and facilitated Qu's continued fraud and theft of PrediWave assets." It asserts that the irreconcilable conflict of interest obstructed Li and Fu's attempts to uncover Qu's fraud and theft of funds, enabled Qu to continue looting PrediWave, and "unnecessarily extended litigation that should have been resolved without incurring millions in legal fees."

After a court issued a writ of mandate, documents were produced but defendants stamped them "confidential" and took the position that the documents could not be used in the L.A. and Santa Clara actions. The present complaint states that the pleading in the L.A. action was amended to "claim erroneously that Mr. Li also breached his fiduciary duty to PrediWave by conducting a review of PrediWave's corporate documents pursuant to his rights under the California Corporations Code."

The complaint recites that, in July 2004, New World appointed Bruce Keiser as a PrediWave director, a replacement for Fu.

The complaint indicates that, in August 2004, PrediWave paid Qu "a $25 million bonus... that had allegedly been approved by PrediWave's Board in January 2004." The complaint also states that Qu caused himself to be paid a $25 million bonus in December 2004.

The complaint indicates that, at his May 17, 2005 deposition in the Los Angeles action, Qu, while being represented by defendants, denied that PrediWave's transactions with a company called Modern Office Technology (MOT) constituted fraud despite being presented with certain documents suggesting MOT had ties to Qu's family. According to the complaint, it was eventually proven in New World's Santa Clara action that "MOT was a 'dummy' company through which Qu inflated the price of component parts to the PrediWave System" and the "marked-up prices accrued to the benefit of MOT, which held bank accounts in China opened by Qu's mother." It states that "[b]loated profits of approximately US$35 million were generated by MOT" and "[t]his scheme defrauded both PrediWave and New World." The complaint alleges that defendants "failed to investigate whether Qu and his family or friends controlled MOT, whether MOT in fact existed as a real business, and whether the MOT transactions were legitimate, or sham transactions costing PrediWave and New World millions of dollars."

According to the complaint, in December 2005, when defendants were no longer representing PrediWave or Qu, Qu transferred $40.8 million from his Merrill Lynch account in San Francisco to an overseas account.

The complaint indicates that, on March 29, 2006, New World obtained a preliminary injunction against PrediWave and several PrediWave companies and a writ of attachment and it then levied on PrediWave's bank accounts. On April 14, 2006, PrediWave filed for bankruptcy protection.*fn4 It is alleged that, on July 6, 2006, New World obtained relief from the automatic bankruptcy stay in order to prosecute its claims.

The complaint alleges that, in July and August 2006, Qu sold two of his real properties for ...


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