The opinion of the court was delivered by: Ronald S.W. Lew
This Document Relates to: All Actions
JOINT FINAL PRETRIAL CONFERENCE ORDER
Pre-Trial Conference: January 11, 2011
Trial Date: January 25, 2011
Following pretrial proceedings, pursuant to Rule 16, F.R.Civ.P. and L.R. 16, IT IS ORDERED:
The parties to this matter are Plaintiff California State Teachers' Retirement System ("Plaintiff" or "CalSTRS") and Defendant Stuart H. Wolff ("Defendant" or "Mr. Wolff"). Mr. Wolff has been served and has appeared. All other parties named in the pleadings are now dismissed. The pleadings which raise the issues are the Second Amended Consolidated Complaint and Mr. Wolff's Answer thereto.
On September 29, 2003, the Honorable Marsha J. Pechman certified a class defined as follows:
All persons or entities (excluding defendants, any members of their immediate families, any person, firm, trust, corporation, present or former officer, director, or other individual or entity in which any Defendant has a controlling interest or which is affiliated with any of the Defendants, and any legal representatives, agents, affiliates, heirs, successors-in-interest or assigns of any excluded party), who purchased Homestore.com, Inc. Stock from January 1, 2000 through December 21, 2001.
On November 17, 2004, the Honorable Ronald S.W. Lew granted "Defendant
PWC's motion for an order establishing a subclass of Dismissed Defendants."
II.FEDERAL JURISDICTION AND VENUE
Federal subject matter jurisdiction exists pursuant to 28 U.S.C. §§ 1331 and 1337 and §27 of the Exchange Act, 15 U.S.C. §78aa. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. §240.10b-5, promulgated thereunder by the Securities and Exchange Commission ("SEC").
Venue is appropriate in the Central District of California pursuant to §27 of the Exchange Act and §28 U.S.C. 1391(b). Defendant resides in this District and a substantial part of the events or omissions allegedly giving rise to the claims occurred in this District.
Plaintiff proposes a total of a 10 day trial limit for evidence. General Signal Corp. v. MCI Telecommunications Corp., 66 F.3d 1500, 1508 (9th Cir. 1995) ("Generally, a district court may impose reasonable time limits on a trial.") Plaintiff proposes that each side be given 5 days to present evidence.
Mr. Wolff estimates that the trial of this complex securities class action will take approximately 15-20 trial days in total.
Mr. Wolff objects to Plaintiff's proposal to place an unreasonable and artificial limit on the time for trial, particularly where this "proposal" represents a last-minute change from an earlier estimate of approximately 8 days for plaintiffs' case in chief. Plaintiffs' proposal is nothing more than an effort to curtail Mr. Wolff's defense and prevent a fair trial of this case on the merits. This case covers a 2-year time frame and, according to plaintiffs, 121 corporate transactions, complex accounting issues and multiple public statements over that 2-year time frame. The parties have identified a minimum of 20 witnesses, including several expert witnesses, and hundreds of potential exhibits. A related criminal trial covering less than half the time period at issue here, and a more limited number of transactions and statements, required 40 trial days. Plaintiffs have resisted all efforts at settlement of this case and have insisted on a trial; they must at least be required to make it a fair one.
The trial is to be a jury trial.
The following facts are admitted and require no proof:
A.Facts Admitted By CalSTRS
1. CalSTRS is the third largest public pension fund in the United States. CalSTRS administers retirement, disability and survivor benefits for California's
public school educators in grades kindergarten through community college. CalSTRS serves approximately 686,855 members and benefit recipients. CalSTRS is administered by a 12-member Retirement Board and employs 540 employees.
2. CalSTRS purchased 431,123 total shares of Homestore common stock from May 4, 2000 to December 21, 2001, and invested a total of $13,361,336.03. This stock was purchased through the NASDAQ.
B.Facts Admitted By Mr. Wolff
1. Stuart H. Wolff was a founder of Homestore and served as Homestore's CEO and Chairman of its Board of Directors from approximately November 1996 to January 2002.
Note that Mr. Wolff does not agree to the above statement of CalSTRS' "admitted facts," at least part of which will be the subject of a pre-trial motion.
The following facts, though stipulated, shall be without prejudice to any evidentiary objection:
1. Homestore is the largest Internet-based provider of residential real estate listings and related content in the world. During the years 2000-2001, Homestore maintained its principal place of business in Westlake Village, California.
2. During the years 2000-2001, Homestore stock traded on the NASDAQ under the symbol "HOMS," and now trades on the NASDAQ under the symbol "MOVE."
3. During the years 2000-2001, Homestore filed Form 10-Ks, Form 10-Qs, and other documents with the Securities & Exchange Commission.
VII.CLAIMS AND DEFENSES OF THE PARTIES
(a) Plaintiff, on behalf of the certified Class, plans to pursue the following claims against Wolff:
Claim 1: Wolff violated Section 10(b) of the Securities Exchange Act (15
U.S.C. §78j(b)) and SEC Rule 10b-5 (17 C.F.R. §240.10b-5); Claim 2: Wolff violated Section 20(a) of the Securities Exchange Act (15
(b) Elements Required To Establish Plaintiff's Claims Plaintiff's Statement of The Elements
1. Section 10(b) of the Securities Exchange Act
To prove a primary violation under Section 10(b), plaintiff must establish, by a preponderance of the evidence, the following six elements:
1. A material misrepresentation (or omission);
2. Scienter, i.e., a wrongful state of mind;
3. A connection with the purchase or sale of a security;
4. Reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as "transaction causation;"
6. Loss causation, i.e., a causal connection between the material misrepresentation and the loss.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-342 (2005); see also In re Homestore.com, Inc. Sec. Litig., 347 F. Supp. 2d 769, 783-788 (C.D. Cal. 2004) (discussing elements and application). / / / / / / /
2. Section 20(a) of the Securities Exchange Act
Section 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §78t(a), §20(a), provides:
Every person who, directly or indirectly, controls any person liable under any provision of this title, or of any rule or regulation thereunder, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
A violation of Section 20(a) is established where there is: (1) a primary violation of federal securities laws; and (2) the Defendant exercised actual power or control over the primary violator. Howard v Systems, Inc., 228 F.3d 1057 (9th Cir. 2000) (citation omitted).
Defendant Wolff's Statement of the Elements
Mr. Wolff asserts that the elements of the plaintiffs' claims are:
1. Section 10(b) of the Securities Exchange Act
In cases involving publicly traded securities and purchases or sales in public securities markets, the basic elements of a private claim for damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 include:
1. A misstatement of material fact made by the defendant;
2. With scienter, i.e., a wrongful state of mind;
3. In connection with the purchase or sale of a security;
4. Justifiable and reasonable reliance by the plaintiff on the alleged misstatement, also referred to as "transaction causation";
6. Loss causation, i.e., a proximate causal connection between the material misrepresentation and the alleged loss.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005) (citations omitted); Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999), cert. denied, 528 U.S. 1154 (2000);see also In re Homestore.com, Inc. Sec. Litig., 252 F. Supp. 2d 1018, 1041 (C.D. Cal. 2003) (holding that plaintiffs' claims in this case are based upon alleged false statements).
The nature and parameters of each of these basic elements, in turn, require the plaintiff to establish certain subsidiary matters and also limit the nature of proof which satisfies these elements, which Mr. Wolff will address when proposing jury instructions.
2. Section 20(a) of the Securities Exchange Act.
To establish a violation of Section 20(a) of the Securities Exchange Act of 1934, a plaintiff must prove, at least:
1. The "controlled" person is primarily liable for a violation of Section 10(b), meaning that the plaintiff must prove each of the elements of a Section 10(b) violation by the "controlled" person;
2. The defendant exercised actual power or control over the underlying primary violation, which means that the defendant exercised a significant degree of day-to-day operational control over the conduct constituting the violations, amounting to the power to dictate another person's conduct -- general control over a company is not enough; in an accounting case, this means that the defendant exercised specific control over the preparation and release of the financial statements; and,
3. The defendant acted with the requisite culpable state of mind.
Paracor Finance Corp. v. Gen'l Electric Capital Corp., 96 F.3d 1151 (9th Cir. 1996); In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1277 (N.D. Cal. 2000); Howard v. Hui, 2001 U.S. Dist. Lexis 15443 (N.D. Cal. 2001); A. Bromberg & L. Lowenfels, SECURITIES FRAUD AND COMMODITIES FRAUD, Vol. 4, § 7:340 (West, June 2004); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976); 15 U.S.C. § 78u-4(f)(2)(A).(c) Evidence Relied Upon By Plaintiff To Prove Its Claims Against Wolff Plaintiff asserts that it can establish violations of Section 10(b) and 20(a) through evidence of some or all of the following:
* On January 1, 2010, Wolff entered into a Binding Plea Agreement with the United States Attorney's Office for the Central District of California. According to the document, he plead guilty to criminal conspiracy in violation of Title 18, United States Code, Section 371, which consists of
(1) an "agreement between two or more people to commit the crime of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5;" (2) entered into by Stuart Wolff with the knowledge of "its object and intending to help accomplish it;" and that "[o]ne of the members of the conspiracy performed at least one overt act for the purpose of carrying out the conspiracy."
* On December 2, 2010, Wolff entered into an agreement with the Securities and Exchange Commission consenting to Final Judgment of Permanent Injunction and Other Relief. By the terms of the Final Judgment, Wolff agreed to be found "liable for disgorgement of profits gained as a result of the conduct alleged in the Complaint." In addition, Wolff was restrained and enjoined from any further violations Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78,(b)(5), and Rules 10b-5 and 13b2-2, thereunder, 17 C.F.R. §§ 240.10b-5 & 240.13b2-2, and from aiding and abetting violations of Section 13(a) and 13(b)(2)(A) of the Exchange Act, 15 U.S.C. §§ 78m(a) & 78m(b)(2)(A), and Rules 12b-20, 13a-13 and 13b2-1, thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-13 & 240.13b2-1.
* Stuart Wolff was a founder of Homestore and served as Homestore's CEO and Chairman of its Board of Directors from November 1996 to January 2002.
* During the Class Period, Wolff sold hundreds of thousands of shares of Homestore stock for a substantial profit while in possession of adverse, material, non-public information regarding the true financial condition of Homestore.
* During the Class Period, Wolff made numerous public statements about Homestore's financial condition, including in Press Releases, speeches, communications with analysts and filings with the Securities & Exchange Commission.
* During the Class period, all senior management and department heads, including Giesecke, Shew and Tafeen, reported directly to Wolff.
* Wolff enjoyed a very close relationship, and worked directly with Tafeen, on a day-to-day basis. Tafeen was one of Wolff's first and most important hires as he was forming Homestore. Wolff spoke to Tafeen "about 20 times per day." Wolff also placed extreme pressure on Tafeen to obtain revenues at any cost.
* Wolff was a "very, very hands-on manager" who established a "tone at the top" style of leadership and played a dominant role at Homestore.
* Wolff himself was an aggressive deal-maker who displayed knowledge of how deals worked. For example, at Homestore board meetings, Wolff presented management's position regarding various transactions and acquisitions, often providing detailed explanations of the transactions.
* Wolff also set the financial goals for Homestore. Wolff had detailed knowledge about Homestore's finances and was "intimately involved in the finance process." Wolff was "very involved in . . . helping to set goals in terms of where revenue should be, where earnings per share should be as well as getting into detailed discussions with individual managers and their departments" in order to make sure that the financial goals were met. Likewise, although Wolff may not have been involved in the actual physical preparation of the financial statements, he was directly involved in the financial process to make sure that Homestore met his revenue targets.
* Wolff set Homestore's financial goals against what was deemed to be "Tier 1" companies, which included Yahoo!, eBay and Amazon. These companies were determined to be "Category Killers," i.e., they led their category in their industry. As decided by Wolff, Homestore was going to beat revenue expectations by a certain amount and a certain percentage. The goals set by Homestore were unrealistic and arbitrary.
* Wolff made it clear that those under him were to use any means necessary to achieve those financial goals in order to fuel Homestore's stock price. Wolff understood that if Homestore missed its numbers, the stock would get crushed by Wall Street. Wolff was also very cognizant of the market's reaction to Homestore's business deals.
* Wolff was not only involved in setting the financial goals for Homestore but where the revenue sources were coming from. Although Wolff was not personally involved in executing the transactions and was knowledgeable about the transactions through his contact with Tafeen and his review of R&O schedules. The R&O schedules identified the "plugs" or revenues needed to meet Homestore's quarterly numbers and were the basis for meetings attended by Wolff, Tafeen, Giesecke and Shew, wherein the group discussed among other matters, individual deal terms and how much revenue would be recognized from a particular transaction.
* Wolff was also directly and substantially involved in the fraudulent transactions with many companies including AOL, Translations, and Cendant.
* During the Class period, Wolff knowingly had and/or approved Homestore's entry of fraudulent transactions with AOL, Cendant, L90, Budget, Translations, Dell Corporation, Bank of America, RealNet, GMAC, Promisemark, Classmates, Hometest, Dorado, and iPlace. All of these deals were restated as revenue recognition for these deals were not allowed under accounting standards.
* Wolff held a two-thirds interest in an investment partnership entitled SPD, LLC ("SPD"). SPD stood for Stuart Wolff, Peter Tafeen and David Rosenblatt, Homestore's General Counsel. In March 2000, SPD invested in a company entitled Translations.com. On June 6, 2000, Translations purchased $500,000 in advertising from Homestore. On June 29, 2000, Homestore wired $500,000 to Translations. Homestore was forced to restate $500,000 in revenues from transactions related to Translations because it was unclear why Homestore wired $500,000 to Translations. The investigative team believed that the payment may have been for equity interest in Translations, which was diverted to SPD - Wolff's personal investment vehicle.
* In March of 2001, Homestore entered into acquisition discussions with AOL, nicknamed the "Final Four," i.e., the NCAA basketball finals. Homestore's management, including Wolff, sought this merger with the understanding that merger would hide Homestore's fraudulent transactions with AOL. AOL decided against the acquisition sometime in the second quarter of 2001. It was in this context that Wolff wrote to AOL requesting that "[AOL] send me back or destroy all confidential material related to our recent acquisition discussions." Wolff also stood to personally make over $100 million if the acquisition was completed.
* On May 7, 2001, Wolff attended a meeting with Tafeen, Giesecke and Shew at the Cal Amigos ranch. Entering into the meeting, the group, including Wolff understood that Homestore was $40 million short of its projected revenues for the quarter. During the meeting, Tafeen stated that: "Alls (sic) we have is AOL, Cendant, and barter" to make up for the shortfall. Shew then explained to the group that Homestore had "to be careful with these transactions because we have to document them in a certain way in order to get revenue." Shew then reiterated that there could be nothing for PricewaterhouseCoopers, its auditors, to see on the documentation for the AOL deal.
* Wolff approved any check in an amount above $50,000 and any wire transfer in excess of $250,000. In early June 2001, Wolff, authorized payment to AOL for a transaction whereby Homestore would receive $31.5 million in gross revenue and during the three-week period from June to July of 2001. As part of this transaction, Wolff authorized $40-45 million in wire transfers to other entities. Although the wire transfer forms authorized payment to a third party vendor, Shew affirmatively told Wolff that they related to the AOL transactions. Shew would: "always tell [Wolff] what [the wire transfer authorization forms] related to. The fact that they related to third-party vendor transactions was inconsequential to what the wire was being prepared for. The wire was being prepared for a circular flow."
* At the end of June 2001, a dispute between AOL and Homestore arose regarding the credit risk AOL was assuming in completing the fraudulent triangular deals. During this period, Wolff also directly received and sent numerous emails to AOL requesting payment from AOL as part of the triangular deals. Wolff also participated in a conference call with AOL wherein the triangular structure was discussed in detail and Wolff was provided a schedule depicting the circular flow of money.
* More than half way through the third quarter, Wolff knew that Homestore was millions of dollars short of its projected revenues. He was urged to reset the guidance for the quarter but decided against it. In a "last-ditch" effort, when "[t]he house of cards is coming tumbling down," Wolff sat in the back of a town car with Shew and Giesecke conspiring about how they could "get enough revenue for Q3" so that their numbers would at least be "respectable" and their stock would only "get just a little hammered by Wall Street." On September 6, 2001, rather than lower expectations, Wolff authorized Homestore to issue a press release reaffirming their third quarter guidance. On October 3, 2001, just 27 days later, Homestore announced that it ...