United States District Court, N.D. California, San Jose Division
In re EXTREME NETWORKS, INC. SECURITIES LITIGATION
ORDER GRANTING LEAD PLAINTIFF'S MOTION FOR FINAL
APPROVAL OF CLASS ACTION SETTLEMENT AND PLAN OF ALLOCATION;
GRANTING LEAD COUNSEL'S MOTION FOR AN AWARD OF
ATTORNEYS' FEES AND PAYMENT OF EXPENSES [RE: ECF 172,
LABSON FREEMAN, UNITED STATES DISTRICT JUDGE.
27, 2019, the Court heard (1) Lead Plaintiff's Motion for
Final Approval of Class Action Settlement and Plan of
Allocation (Appr. Mot., ECF 172), and (2) Lead Counsel's
Motion for an Award of Attorneys' Fees and Payment of
Expenses (Fees Mot., ECF 173). For the reasons discussed
below and those stated on the record at the hearing on the
motions, the motions are GRANTED.
a putative class action for securities fraud brought against
Extreme Networks, Inc. (“Extreme”) and its
officers Charles W. Berger, John T. Kurtzweil, and Kenneth B.
Arola (“Individual Defendants”) (collectively
with Extreme, “Defendants”). Founded in 1966,
Extreme is a Delaware corporation with its principal offices
in San Jose, California. See First Am. Compl.
(“FAC”) ¶ 2, 32, ECF 105. Extreme develops
and sells network infrastructure equipment such as wired and
wireless devices for accessing the Internet, as well as
related software. Id. ¶ 2. The Individual
Defendants were officers and directors of Extreme during the
time relevant to this litigation. Defendant Charles W. Berger
was Extreme's President and Chief Executive Officer
(“CEO”) and a member of Extreme's Board of
Directors from April 2013 until April 19, 2015. Id.
¶ 34. Defendant John T. Kurtzweil was Extreme's
Chief Financial Officer (“CFO”) and Senior Vice
President from June 29, 2012 until June 1, 2014. Id.
¶ 35. From June 2, 2014 until September 30, 2014,
Kurtzweil served as Special Assistant to the CEO.
Id. Defendant Kenneth B. Arola was the Company's
CFO and Senior Vice President from June 2, 2014 through May
2016. Id. ¶ 36.
First Amended Complaint (“FAC”) alleges that
Defendants misrepresented to investors the success of
Extreme's post-acquisition integration with its former
competitor, Enterasys Networks, Inc.
(“Enterasys”), as well as developments in
Extreme's “key partnership” with Lenovo Group
Ltd. (“Lenovo”). See, e.g., id.
¶¶ 1-18. Defendants' positive representations
to investors about the resulting “synergies” from
the Enterasys integration and benefits of the Lenovo
partnership-including a commitment that cost savings from
these arrangements would lead to double-digit revenue growth
and a 10% operating margin by June 2015-caused Extreme's
stock price to rise. Id. ¶¶ 17-19.
Extreme's stock price then dropped when Extreme reported
disappointing financial results at various points between
February 2014 and the end of the Class Period on April 9,
2015. Id. ¶¶ 20-22.
on six confidential witnesses (“CWs”), Lead
Plaintiff Arkansas Teacher Retirement System
(“ATRS” or “Lead Plaintiff”) alleged
that Defendants knew or recklessly disregarded material
adverse facts regarding the lack of any integration plan for
the Enterasys merger, which was not “on track” or
“complete” as represented. Id. ¶
13. ATRS also pointed to accounts from CWs that the Lenovo
partnership was largely unproductive, in direct contrast to
Defendants' representations to the market. Id.
¶ 17. According to ATRS, Defendants' false
statements caused Extreme's stock to trade at
artificially inflated prices between September 12, 2013, and
April 9, 2015 (the “Class Period”), reaching a
high of $8.14 per share on January 23, 2014. Id.
¶ 19. ATRS alleges that four partial corrective
disclosures by Defendants announcing revenue shortfalls,
guidance misses, and turnovers of Extreme executives, caused
the stock price to plummet as the undisclosed risks relating
to Enterasys integration and Lenovo partnership materialized.
Id. ¶ 20-22.
have agreed to pay $7, 000, 000 in cash, to secure a
settlement of the claims in the Action and related claims
that could have been brought (“Released Claims”).
litigation has a long history of nearly four years. In
October of 2015, two securities class action complaints were
filed on behalf of individuals who invested in Extreme during
the relevant time period. On December 1, 2015, the Court granted
the parties' stipulation to consolidate the two actions.
ECF 18. On June 28, 2016, the Court appointed ATRS as Lead
Plaintiff, Labaton Sucharow LLP as Lead Counsel, and Berman
DeValerio as Liaison Counsel to represent the
putative class. ECF 75.
September 26, 2016, ATRS filed a Consolidated Class Action
Complaint on behalf of all investors who purchased the
publicly traded common stock of Extreme and/or
exchange-traded options on such common stock during the Class
Period. See Consol. Compl. ¶ 1, ECF 87. Prior
to filing the Consolidated Complaint, Lead Counsel conducted
extensive factual investigation, including reviewing SEC
documents, press releases, and other publicly available
information, as well as reviewing research reports issued by
financial analysists and other public data. Villegas Decl.
ISO Final Appr. (“Villegas Decl.”) ¶ 17, ECF
174. Lead Counsel also interviewed former employees of
Extreme and other persons with relevant knowledge and
consulted with an economics expert for loss causation and
damages. Id. The Consolidated Complaint asserted two
causes of action, based on the facts described above: (1)
violation of § 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 against all Defendants; and (2) violation
of § 20(a) of the Securities Exchange Act of 1934
against the Individual Defendants for liability as control
persons of Extreme. See generally Consol. Compl.
November 10, 2016, Defendants moved to dismiss the
Consolidated Complaint. See ECF 89. On April 17,
2017, the Court granted Defendants' motion with leave to
amend because ATRS had failed to adequately plead that
Defendants made any false or misleading statements and that
they did so with scienter. See ECF 102 at 42. On May
29, 2017, ATRS filed its First Amended Complaint, asserting
the same two causes of action for securities violations
against the same Defendants, focusing their amended factual
allegations on statements that the Court had indicated were
actionable. See generally FAC. Prior to filing the
FAC, ATRS contacted 148 former employees of Extreme and
interviewed 24 of those employees. Villegas Decl. ¶ 25.
ATRS also consulted with an expert in the field of executive
compensation. Id. On July 10, 2017, Defendants filed
a motion to dismiss the FAC. See ECF 107. On March
21, 2018, the Court granted in part and denied in part
Defendants' motion to dismiss, finding that ATRS stated a
claim under Section 10(b) and Rule 10b-5 against all
Defendants except Kurtzweil and that ATRS stated a claim
under Section 20(a) against the Individual Defendants. On
June 21, 2018, more than one and a half years after the
Consolidated Complaint was filed and over two and a half
years after the lawsuit's inception, Defendants answered
the FAC. See ECF 145.
parties then engaged in some discovery, including numerous
requests for production and interrogatories and their
responses, as well as depositions. Lead Plaintiff served
eighty-seven requests for the production of documents on
Defendants on April 30, 2018. Villegas Decl. ¶ 33.
Defendants served responses and objections to Lead
Plaintiff's document requests on June 14, 2018.
Id. The parties exchanged initial disclosures on May
21, 2018. Id. And the parties met and conferred
extensively regarding the production of electronically stored
information and a protective order governing the disclosures
in the action. Id. ¶ 34.
with discovery, the parties engaged in mediation and
settlement discussions. On July 18, 2018, the parties
attended an in-person mediation with Robert A. Meyer, Esq.
(“Mr. Meyer”), an experienced mediator.
Id. ¶¶ 35-36. The initial mediation was
preceded by the exchange of mediation statements and
Defendants' production of approximately 1, 270 pages of
documents, including Board of Director minutes and
presentations, which Lead Counsel reviewed. Id.
¶¶ 36-37. Following rigorous arm's length
negotiations led by Mr. Meyer, the parties accepted a
mediator's proposal on August 17, 2018. Id.
¶ 38. On September 26, 2018, the parties entered into a
settlement term sheet, and on November 30, 2018, ATRS filed
the finalized settlement agreement in support of its motion
seeking preliminary approval of the settlement. See
ECF 155, 156-1.
Settlement Agreement, Allocation Plan, and Notice
March 13, 2019, the Court granted ATRS's motion for
preliminary approval of class action settlement and approved
the forms of notice to the Settlement Class. See ECF
167. The class includes “all persons and entities that
purchased or otherwise acquired the publicly traded common
stock and exchange-traded call options, and/or sold put
options, of Extreme Networks, Inc. during the period from
September 12, 2013 through April 9, 2015, inclusive, and who
were damaged thereby.” See ECF 156-1
(“Agreement”) at 10 ¶ hh. Under the
Settlement Agreement, Extreme has agreed to provide a
settlement fund in the amount of $7 million. See
Agreement at 10 ¶ gg, 13 ¶ 6. Of the $7 million,
the Settlement Class will receive what remains after
subtracting the cost of any attorney's fees and expenses,
notice and administration costs, Lead Plaintiff's service
awards, and applicable taxes (the “Net Settlement
Fund”). Villegas Decl. ¶ 62; Agreement ¶ 26.
The Net Settlement Fund will be distributed among claimants
on a pro rata basis based on “Recognized
Loss” formulas tied to claimants' potential damages
and developed by ATRS's expert. Settlement Agreement
¶¶ 22-26; Villegas Decl. ¶ 63; ECF 167
¶¶ 48-57. Each claimant's calculated recognized
loss will be compared to the aggregate recognized loss of all
claimants to determine that claimant's pro rata
share of the settlement fund. Villegas Decl. ¶ 64.
Because the Court dismissed claims prior to February 5, 2014,
but the class covers individuals who purchased shares prior
to that date, those individuals' claims will be
calculated using 20% of the alleged artificial inflation of
the share prices. Id. ¶ 63.
Court preliminarily approved, and the Settlement
Administrator (“KCC”) and the parties complied
with, the following notice process: KCC obtained the names
and addresses of potential settlement class members from
listings provided by Extreme's transfer agent and from
banks, brokers, and other nominees. Villegas Decl. ¶ 42;
Villegas Decl., Ex. 2 ¶¶ 1-7, ECF 174-2. KCC sent
by first-class mail notice packets (containing the notice and
claim form) to settlement class members and potential
nominees (third-party purchasers who may have purchased
shares on behalf of potential claimants). Villegas Decl.
¶ 42; Villegas Decl., Ex. 2 ¶¶ 4-7. As of June
4, 2019, KCC had mailed 27, 972 notice packets. Suppl. Decl.
of Lance Cavallo ¶ 2, ECF 177. The summary notice was
also published in Investor's Business Daily and
disseminated over PR Newswire. Villegas Decl. ¶
43. KCC also created and maintained a settlement website.
Villegas Decl., Ex. 2 ¶ 10.
Agreement (and approved notice plan) contemplates a process
for direct payments to the class members. First, class
members needed to submit by June 6, 2019 a simple claim form
for their shares purchased during the class period. Villegas
Decl. ¶ 61; ECF 167. The direct mail and website notices
informed members of the opportunity to opt out through a
simple form. Requests for exclusions or objections needed to
be filed by May 23, 2019. Villegas Decl. ¶ 45; ECF 167.
Once KCC has processed submitted claims and provided
claimants with an opportunity to cure deficiencies or
challenge rejection determinations, payment distributions
will be made to eligible claimants through PayPal (for all
payments below $10.00 and for payments between $10.00 and
$100.00 for those who elect this option), or by check.
Villegas Decl. ¶ 65. At least six months after the
initial distribution of the funds, any funds remaining will
be redistributed to those who have previously cashed their
checks. Id. This process will be repeated until the
remaining sum is no longer economically feasible to
distribute. At that time, Lead Counsel will request with the
Court that the unclaimed balance be distributed to a Cy
Pres Recipient: Consumer Federation of America
(“CFA”). Id. CFA is a national
non-profit consumer advocacy organization for investor
protection; it has been approved as a Cy pres
beneficiary in several securities cases in California.
Id. ¶ 66.
June 4, 2019, 1, 244 valid claims had been submitted,
representing over 66, 777, 000 shares of common stock
purchased during the class period. Villegas Decl., Ex. 2
¶¶ 5-6. Of those claims, 888 were filed by or on
behalf of institutions and 356 claims were submitted by or on
behalf of individuals. Id. ¶ 5.
20, 2019, the Court held a hearing on the motions. Counsel
represented on the record at the hearing that a total of 3,
845 claims had been received, constituting a response rate of
approximately 14 percent. Counsel also represented that of
these claims, over 3, 000 had been filed by or on behalf of
institutions and approximately 400 by or on behalf of
individuals. The deadline to submit claims had passed, but
Counsel was continuing to accept claims through an informal
grace period. At the hearing, this Court ordered Lead Counsel
to post by June 21, 2019 a firm grace period termination date
of June 28, 2019 on the website maintained by KCC, and to
accept only claims filed before that date as determined by
postmark and email timestamp. Only two requests for exclusion
were received by June 20, 2019, one of which was deemed
invalid for failing to provide the requisite information and
neglecting to cure the deficiency when notified by KCC that
the exclusion request was invalid. Villegas Decl., Ex. 2
¶ 3. There were no objectors before the deadline and no
objectors appeared at the hearing. Id. Counsel
represented on the record at the hearing that initial
distribution was expected to commence in December 2019. The
Court indicated on the record that both motions would be
granted. On the day of the hearing, the Court issued an order
approving the Plan of Allocation. ECF 180.
MOTION FOR FINAL APPROVAL OF CLASS ACTION SETTLEMENT
order to grant final approval of the class action settlement,
the Court must determine that (1) the class meets the
requirements for certification under Federal Rule of Civil
Procedure 23, and (2) the settlement reached on behalf of the
class is fair, reasonable, and adequate. See Staton v.
Boeing Co., 327 F.3d 938, 952 (9th Cir. 2003)
(“Especially in the context of a case in which the
parties reach a settlement agreement prior to class
certification, courts must peruse the proposed compromise to
ratify both the propriety of the certification and the
fairness of the settlement.”).
The Class Meets the Requirements for Certification under Rule
action is maintainable only if it meets the four requirements
of Rule 23(a):
(1) the class is so numerous that joinder of all members is
(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). In a settlement-only certification
context, the “specifications of the Rule- those
designed to protect absentees by blocking unwarranted or
overbroad class definitions- demand undiluted, even
heightened, attention.” Amchem Prods., Inc. v.
Windsor, 521 U.S. 591, 620 (1997).
addition to satisfying the Rule 23(a) requirements,
“parties seeking class certification must show that the
action is maintainable under Rule 23(b)(1), (2), or
(3).” Id. at 614. Plaintiffs seek
certification under Rule 23(b)(3), which requires that (1)
“questions of law or fact common to class members
predominate over any questions affecting only individual
members” and (2) “a class action is superior to
other available methods for fairly and efficiently
adjudicating the controversy.” Fed.R.Civ.P. 23(b)(3).
Court concluded that these requirements were satisfied when
it granted preliminary approval of the class action
settlement. See ECF 167. The Court is not aware of
any new facts which would alter that conclusion. However, the
Court reviews the Rule 23 requirements again briefly, as
first to the Rule 23(a) prerequisites, the Court has no
difficulty concluding that because the class contains
thousands of members (3, 845 claims filed as of the June 20,
2019 hearing), joinder of all class members would be
impracticable. The commonality requirement is met because the
key issues in the case are the same for all class members,
including, for example, whether Defendants misrepresented
material facts or omitted material facts for publicly traded
stocks in violation of the law and whether these alleged
actions artificially inflated the stock price. See
Villegas Decl. ¶ 31. ATRS's claims are typical of
those of the class, as it advances the same claims, shares
identical legal theories, and allegedly experienced losses
from Extreme's misrepresentations. See Hanlon v.
Chrysler Corp., 150 F.3d 1011, 1020 (9th Cir. 1998)
(typicality requires only that the claims of the class
representatives be “reasonably co-extensive with those
of absent class members”). Finally, to determine
ATRS's adequacy, the Court “must resolve two
questions: (1) do the named plaintiffs and their counsel have
any conflicts of interest with other class members and (2)
will the named plaintiffs and their counsel prosecute the
action vigorously on behalf of the class?” Ellis v.
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