Ravens v. Iftikar

IRVING RAVENS, ROBERT W. BENZINGER and STEVE WILDT, on behalf of themselves and all others similarly situated, Plaintiffs, v. SYED H. IFTIKAR, MICHAEL J. PEREZ, DAVID I. CAPLAN, EUGENE BERTI, KENNETH S. HARDESTY, THOMAS LYMAN CHUN, J. BRENT NILSON, and SYQUEST TECHNOLOGY, INC., Defendants. No. C-96-1224-VRW VITO BELLEZZA and FRANK A. FIDELI, on behalf of themselves and all others similarly situated, Plaintiffs, v. SYED H. IFTIKAR, MICHAEL J. PEREZ, DAVID I. CAPLAN, EUGENE BERTI, KENNETH S. HARDESTY, THOMAS LYMAN CHUN, J. BRENT NILSON, and SYQUEST TECHNOLOGY, INC., No. C-96-1926-VRW [Related Cases] United States District Court Northern District of California Filed January 7, 1997 ORDER.
        These actions are subject to the amendments of the federal securities laws, enacted in the Private Securities Litigation Reform Act of 1995 (the "Reform Act" or "Act"), Pub L No 104-67, 109 Stat 737. By this enactment, Congress sought to remedy major flaws in private securities litigation. Senate Rep No 104-98, 104th Cong, 1st Sess, 1996 USCCAN 679. The principal flaw Congress perceived was the disproportionate influence lawyers have exerted over securities class actions:
The initiative for filing 10b-5 suits comes almost entirely from lawyers, not genuine investors. * * * Even worse, investors have great difficulty exercising any meaningful direction over the case brought on their behalf. The lawyers can decide when to sue and when to settle, based largely on their financial interests, not the interests of the purported clients.
Id at 685.
        Seeking to "transfer primary control of private securities litigation from lawyers to investors," id, Congress amended Title I of the Securities Act of 1933, 15 USC § 77a et seq, and Title I of the Securities Exchange Act of 1934, 15 USC § 78a et seq. Among other changes, these amendments established new procedures for selecting a lead plaintiff and counsel to represent a class in federal securities class actions.
        The Reform Act imposes a notice requirement on plaintiffs seeking to represent a class of investors requiring them to publish notice of "the pendency of the action, the claims asserted therein, and the purported class period." 15 USC §§ 77z-l(a)(3)(A)(I) & 78u-4(a)(3)(A)(I). The purpose of this is to enable investors to intervene in the litigation and take charge of it by, among other things, selecting the lawyers to represent the class and setting the terms of their compensation.
        Congress did not, however, require that this notice be subject to scrutiny and approval by the court before its publication. Nor did Congress make any provision for the situation which these cases present: namely, a notice which is inadequate to apprise investors of the claims asserted so that those who may wish to do so have a fair opportunity to intervene and assume control of the litigation.

I         The instant securities class actions were brought on behalf of a class of purchasers of Syquest Technology, Inc ("SYQT") stock during the period October 21, 1994, through February 2, 1996, shortly after the price of SYQT had fallen dramatically on the NASDAQ national market. The lawyers heading up both class actions are prominent "entrepreneurial" lawyers that specialize in, and have long dominated, securities class action practice.1 Representing the Bellezza plaintiffs are Gold, Bennett & Cera, LLP; Rabin & Garland; and Kenneth A. Elan. The Ravens plaintiffs are represented by Milberg, Weiss, Bershad, Hynes & Lerach; Schiffrin & Craig; and Lawrence G. Soicher. The Ravens plaintiffs have filed a motion to be appointed lead plaintiffs and for consolidation pursuant to section 21D(a)(3)(B) of the Act. As a prerequisite to this motion, they published notice purportedly in compliance with subparagraph (A) or section 21D(a)(3). Id at 4. The adequacy of that notice is the subject of this order.

A         The requirement that notice be given to class members of an action under FRCP 23(b)(3) is one of constitutional dimension. See Mullane v. Central Hanover Bank & Trust Co, 339 US 306 (1950); In re Gypsum Antitrust Cases, 565 F2d 1123 (9th Cir 1977). This constitutional minimum has historically been satisfied if notice was afforded before the court adjudicated the rights of absent class members. By enactment of the Reform Act, Congress appended a further statutory requirement of notice at the very outset of the litigation. See §§ 27 and 21D of the Securities Exchange Acts of 1933 and 1934, 15 USC §§ 77z-l(a)(3)(A)(I) & 78u-4(a)(3)(A)(I).
        Under these identical provisions of the Reform Act, a plaintiff seeking to represent a class of investors:
Shall cause to be published in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported class--

(I) of the pendency of the action, the claims asserted therein, and the purported class period;

(II) that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class.
        Although the Reform Act does not specifically define the required notice, it must minimally contain the three elements described in the above provision: (1) "pendency of the action;" (2) "claims asserted therein;" and (3) "purported class period." The first and third of these elements are relatively straightforward; the plaintiff must state that a class action is pending and he must specify the dates of the class period. The second element is far less clear.
        "Claims asserted therein" might refer to the nature and character of the class action or, alternatively, it might simply require a recitation of the statutory basis for the suit. To decide which of these constructions Congress intended, the court must consider the legislative history of the Act and the interpretations which courts have given such language in analogous contexts.

B         The overriding goal of the Reform Act is to displace figurehead plaintiffs with real investors in securities class actions. See Senate Rep No 104-98, 104th Cong, 1st Sess, 1996 USCCAN 679, 685. To do this, Congress replaced the antiquated practice of selecting representative plaintiffs by "the race to the courthouse" with a more rational selection system. See id at 689. Under the new system, it is expected that the most adequate representative of the class will emerge from a competition among all qualified investors. To ensure that all such investors make an informed decision whether to throw their hats into the ring, Congress implemented the notice requirements of sections 27 and 21D.
        The notice provisions are only effective, however, if qualified investors are notified of the nature and character, not just the existence, of the claims asserted. An investor can only make an informed determination whether intervention appropriate to protect his interests if he is provided information describing the legal and factual basis of the claims. A mere recitation of the statute, or statutes, under which the claim is brought is simply inadequate to give an investor the information necessary to make the decision to intervene or not.
        An appropriate analog for what the Reform Act requires is the notice that has historically been required under Rule 23 of the Federal Rules of Civil Procedure. Rule 23(c)(2) mandates that, prior to class certification, the named plaintiff must provide potential class members with "the best notice practicable under the circumstances." The basic purpose of this notice requirement is to "present a fair recital of the subject matter of the suit and to inform all class members of their opportunity to be heard." In re Gypsum Antitrust Cases, 565 F2d 1123, 1125 (9th Cir 1977). In furtherance of this goal, the Fifth Circuit set forth the following standard for Rule 23(c)(2) notice:
Not only must the substantive claims be adequately described but the notice must also contain information reasonably necessary to make a decision to remain a class member and be bound by the final judgment or opt out of the action. The standard then is that the notice required by subdivision (c)(2) must contain information that a reasonable person would consider to be material in making an informed, intelligent decision of whether to opt out or remain a member of the class and be bound by the final judgment.
In re Nissan Motor Corp Antitrust Litigation, 552 F2d 1088, 1104-05 (5th Cir 1977); see also In re Domestic Air Transportation Antitrust Litigation, 141 FRD 534, 553 (ND Ga 1992) ("Notice must not only reach the affected parties, but it must also convey its message in a meaningful way."). A qualified investor considering whether to challenge the named plaintiffs for lead plaintiff designation will need at least this much information to make a rational decision whether to commit the resources necessary to represent the class.
        Similar concerns guide the courts in their evaluation of the notice required for class action settlement agreements. Under FRCP 23(e), courts require parties to settlement agreements to notify the public of the "claims asserted therein," which includes the "nature of the pending action." See Maher v Zapata Corp, 714 F2d 436, 451 & n26 (5th Cir 1983); Scholes v Stone, McGuire & Benjamin, 839 F Supp 1314, 1320 (ND Ill 1993). "Notice in a class suit must present a fair recital of the subject matter and of the
proposed terms * * *." Miller v Republic National Life Ins Co, 559 F2d 426, 429 (5th Cir 1977). Such detailed notice is necessary to "provide[] the shareholders with sufficient information for them to make a 'rational decision whether they should intervene in the settlement approval procedure."' Id at 451, quoting Wright & Miller, Federal Practice & Procedure: Civil § 1839 (1972). Since the court presumes that Congress was aware of these judicial interpretations of "claims asserted therein" when it enacted the Reform Act and since qualified investors need such information at the lead plaintiff designation stage to make a rational decision whether to intervene, the court concludes that sections 27 and 21D require plaintiffs, either in the published notice or the complaint, to provide other shareholders with notice of the nature and character of the claims asserted in the class action.

II A
        With these principles in mind, the court will consider the adequacy of the notice provided by the plaintiffs in this case. In its entirety, the published notice reads:

TO: All purchaser of SyQuest Technology, Inc. common
stock during the period October 21, 194 to February 1,
1996
On April 2, 1996, a class action, Ravens, et al. v. Iftikar, et al., C-96-1224-VRW, was filed in the U.S. District Court for the Northern District of California, which asserts claims for violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934. Any member of the proposed class may move the Court to serve as lead plaintiff no later than 60 days from the date of this Notice. For more information contact William S. Lerach, Milberg Weiss Bershad Hynes & Lerach LLP, 619/231-1058.
        Such cursory notice does not comply with section 21D of the Securities Exchange Act of 1934. There is no explanation of the legal theory underlying plaintiffs' suit; no discussion of who violated the Securities Exchange Act of 1934; and no description of the alleged wrongdoing that forms the basis of the complaint. In short, the notice does not provide shareholders with sufficient information to make a rational decision whether to intervene in the suit.
        Nor is this defect cured by the invitation in the notice to call the lead lawyer at his office for more information. That lawyer has an incentive to discourage, rather than foster, investor competition. See Elliott J. Weiss & John S. Beckerman, Let the Money do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale LJ 2053, 2099-2100 (1995). Without a public record of what is communicated, courts cannot simply assume that plaintiffs' lawyers will give an impartial and objective description of the nature and character of the claims asserted in the suit. The court would be shirking its responsibility to putative class members if it deemed such "behind-the-scenes" notice to be adequate. Cf Gold Strike Stamp Co v Christiansen, 436 F2d 791, 799 (l0th Cir 1970) ("[Rule 23] places control of class actions and in particular the issuance of notice to members of the class under the control and thus the discretion of the trial judge."). Under these circumstances, the court cannot deem the notice published by the Ravens plaintiffs to be adequate.

B         A diligent investor, however, will not place sole reliance on the published notice to learn all the information necessary to make an informed decision to intervene. Where the notice itself is deficient, a rational investor might decide to inspect the courthouse files to ascertain the legal and factual basis for plaintiffs' complaint. See, e.g., Valerio v Boise Cascade Corp, 80 FRD 626, 636 (ND Cal 1978) (finding notice adequate, in part, because it noted that all documents were available for inspection at courthouse).
        In this case, however, the diligent investor would be stymied in his efforts because he would be met with verbose, amorphous and confusing complaints. The complaint filed by the Ravens plaintiffs contains over fifty-five pages of painstakingly detailed allegations of evidentiary facts. The Bellezza complaint rings in at just under forty pages of turgidity. Such complaints contribute to the "plague of burdensome and prolix complaints that have become fashionable in securities fraud cases today." In re Glenfed, Inc Securities Litigation, 42 F3d 1541, 1555 (9th Cir 1994) (Nelson, J., concurring). They are so distended and prolix that an investor who obtained copies of the pleadings would not be able to divine the legal and factual basis of plaintiffs' claim. Such notice is not the best practicable under the circumstances. See In re Domestic Air Transportation Antitrust Litigation, 141 FRD 534, 553 (ND Ga 1992); see also Senate Rep No 104-98, 104th Cong, 1st Sess, 1996 USCCAN 679, 691 (citing with approval advice of lawyer that "settlement notices provided to class members are often obtuse and confusing, and should be written in plain English"). For these reasons, the court finds that the plaidtiffs have not satisfied the notice requirements of the Reform Act, and these cases may not proceed as class actions at this time. Presumably, plaintiffs will seek to correct the deficiencies of the notice given. To that end, the court will conduct a case management conference on a date to be arranged by the clerk.

III         Plaintiffs have made an ex parte request for expedited discovery in support of their motion to freeze certain of defendants assets. The court will DEFER ruling on this request pending further proceedings.
        Similarly, in light of the concerns discussed above, the court DECLINES to refer this case at this time to a magistrate judge to broker settlement discussions.

IV         For the reasons stated above, the court ORDERS as follows:
        The Ravens plaintiff's motion to be appointed lead plaintiff pursuant to § 21D(a)(3)(B) of the Act is DENIED without prejudice.
        IT IS SO ORDER.




        1. For instance, the Milberg firm enjoys a very large share of the securities class action practice throughout the United States. "They've Cornered the Market," Nat'l LJ, Apr 27, 1992, at 1.