Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04509/USCOURTS-cand-3_06-cv-04509-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

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The four actions are Hacker v. Petershcmidt, No. C-06-03468; Sherupski v. Puckett, No. C-06-

04524; Koning v. Puckett, No. C-06-04509, and Bowie v. Black, No. C-06-04479.

United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

MANFRED HACKER,

Plaintiff,

 v.

DAVID PETERSCHMIDT, et al.,

Defendants. /

Nos. C 06-03468, C 06-04479, C 06-04509, C

06-04524 SI

ORDER GRANTING PLAINTIFFS

SHERUPSKI AND HACKER’S MOTION

TO CONSOLIDATE ACTIONS AND

APPOINT LEAD PLAINTIFF AND LEAD

COUNSEL

On September 29, 2006, the Court heard argument on plaintiffs Henry Sherupski and Manfred

Hacker’s motion to consolidate actions and appoint lead plaintiff and lead counsel. Having considered

the arguments of counsel and the papers submitted, and for good cause shown, the Court hereby

GRANTS plaintiffs Sherupski and Hacker’s motion.

BACKGROUND

Plaintiffs Henry Sherupski and Manfred Hacker filed the instant motion on August 21, 2006,

seeking an order from the Court (1) consolidating four related shareholder derivative actions1

 now

pending on behalf of Openwave Systems, Inc. (“Openwave”) against certain of its officers and directors;

and (2) appointing Henry Sherupski and Manfred Hacker as lead plaintiffs and their counsel, Lerach

Coughlin Stoia Geller Rudman & Robbins LLP (“Lerach Coughlin”) and Scott & Scott, LLC (“Scott

& Scott”), as lead counsel. On August 28, 2006, James Koning, plaintiff in another of the four

derivative actions, joined in the instant motion. Plaintiff in the fourth action, Claude P. Bowie, Jr., has

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filed an opposition to Sherupski and Hacker’s motion to appoint themselves lead plaintiffs and their

counsel lead counsel. Bowie requests that the Court appoint him lead plaintiff, and his counsel lead

counsel, with respect to just two of the many causes of action brought by the plaintiffs. Bowie does not

oppose the motion to consolidate.

All four actions involve allegations of stock option backdating by top insiders of Openwave

between 1999 and 2006. The actions allege that this backdating, involving the illegal diversion of

millions of dollars, caused Openwave to issue materially false and misleading financial statements in

violation of the federal securities and state corporation laws. 

The Sherupski complaint alleges the following causes of action against the entire board of

directors and various officers: (i) violations of section 10(b) and Rule 10b-5 of the Exchange Act, (ii)

violations of section 14(a) of the Exchange Act, (iii) violations of section 20(a) of the Exchange Act,

(iv) a demand for an accounting of all stock options grants, (v) breach of fiduciary duty and/or aiding

and abetting, (vi) abuse of control, (vii) gross mismanagement, (viii) constructive fraud, (ix) corporate

waste, (x) unjust enrichment, (xi) rescission, (xii) violation of California Corporations Code section

25402, and (xiii) breach of fiduciary duties for insider selling and misappropriation. 

The Hacker complaint alleges the following causes of action against the directors and various

officers: (i) breach of fiduciary duty, (ii) abetting a breach of fiduciary duty, (iii) unjust enrichment, and

(iv) rescission.

The Koning complaint alleges the following causes of action against the directors and various

officers: (i) a demand for accounting of all stock option grants, (ii) breach of fiduciary duty and/or

aiding and abetting, (iii) abuse of control, (iv) gross mismanagement, (v) constructive fraud, (vi)

corporate waste, (vii) unjust enrichment, (viii) rescission, (ix) violation of California Corporations Code

section 25402, and (x) breach of fiduciary duties for insider selling and misappropriation of information.

The Bowie complaint alleges the following causes of action against the directors and various

officers: (i) violations of section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder,

(ii) violations of section 20(a) of the Exchange Act, (iii) breach of fiduciary duties, (iv) a demand for

accounting of all stock option grants, (v) abuse of control, (vi) gross mismanagement, (vii) constructive

fraud, (viii) corporate waste, (ix) unjust enrichment, and (x) rescission.

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The case cited by Sherupski and Hacker as the legal standard for appointment of lead plaintiff

and counsel, TCW Tech. Ltd. P’ship v. Intermedia Commc’ns, Inc., No. 18336, 2000 Del. Ch. LEXIS

147, at *10 (Del. Ch. Oct. 17, 2000), involved consolidation of class and individual actions, which

require a different set of considerations than pure derivative shareholder actions. The selection of lead

plaintiff and counsel in shareholder class actions is governed by Federal Rule of Civil Procedure 23(a)

and section 21(d) of the Private Securities Litigation Reform Act of 1995 (PSLRA). See 15 U. S.C. §

78u-4(a)(3). The Ninth Circuit provided additional, specific guidance for selecting lead plaintiffs in

securities class actions in In re Cavanaugh, 306 F.3d 726, 729-30 (9th Cir. 2002). These rules do not

apply to a pure derivative shareholder action brought on behalf of the corporation under Rule 23.1.

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All four cases are in the very early stages of litigation; no discovery has been taken, nor any

answers or substantive motions filed. Sherupski and Hacker together hold over 5,500 shares of

Openwave common stock, with a current value of over $42,500. See Mot. 4:5-7, Downs Decl., Ex. E.

LEGAL STANDARD

Federal Rule of Civil Procedure 42(a) provides:

When actions involving a common question of law or fact are pending before the court,

it may order a joint hearing or trial of any or all the matters in issue in the actions; it may

order all the actions consolidated; and it may make such orders concerning proceedings

therein as may tend to avoid unnecessary costs or delay.

Fed. R. Civ. P. 42(a). “The district court has broad discretion under this rule to consolidate cases

pending in the same district.” Investors Research Co. v. U.S. Dist. Court for Cent. Dist. of Cal., 877

F.2d 777, 777 (9th Cir. 1989). Upon consolidation, pursuant to Rule 42(a), the district court, “if it sees

fit, may appoint one or more attorneys as liaison counsel, lead counsel, or trial counsel for the

consolidated cases and accordingly assign the designated lawyers specific responsibilities.” 9 Charles

Alan Wright & Arthur R. Miller, Federal Practice and Procedure: Federal Rules of Civil Procedure

§ 2385 (2006). 

Federal Rule of Civil Procedure 23.1 provides general guidance for selecting an adequate

plaintiff in derivative actions by shareholders, stating in pertinent part: “The derivative action may not

be maintained if it appears that the plaintiff does not fairly and adequately represent the interest of the

shareholders or members similarly situated in enforcing the right of the corporation or association.”2

According to the Ninth Circuit, for purposes of Rule 23.1, “[a]n adequate representative must have the

capacity to vigorously and conscientiously prosecute a derivative suit and be free from economic

interests that are antagonistic to the interests of the class.” See Larson v. Dumke, 900 F.2d 1363, 1367

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(9th Cir. 1989) (citing Lewis v. Curtis, 671 F.2d 779, 788-89 (3d Cir.), cert. denied, 459 U.S. 880, 74

L. Ed. 2d 144, 103 S. Ct. 176 (1982); Owen v. Modern Diversified Industries, Inc., 643 F.2d 441, 443-44

(6th Cir. 1981) (no antagonistic interests); GA Enterprises, Inc. v. Leisure Living Communities, Inc., 66

F.R.D. 123, 125-27 (D. Mass. 1974), aff'd, 517 F.2d 24, 26-27 (1st Cir. 1975)). The Ninth Circuit has

further held that “an evaluation of [the following] factors is important in determining the adequacy of

representation by a derivative plaintiff under Rule 23.1":

"(1) indications that the plaintiff is not the true party in interest; (2) the plaintiff's

unfamiliarity with the litigation and unwillingness to learn about the suit; (3) the degree

of control exercised by the attorneys over the litigation; (4) the degree of support

received by the plaintiff from other shareholders; . . . (5) the lack of any personal

commitment to the action on the part of the representative plaintiff"; Rothenberg v.

Security Management Co., 667 F.2d 958, 961 (11th Cir. 1982) (citations omitted), (6)

the remedy sought by plaintiff in the derivative action; (7) the relative magnitude of

plaintiff's personal interests as compared to his interest in the derivative action itself; and

(8) plaintiff's vindictiveness toward the defendants. Davis v. Comed, Inc., 619 F.2d 588,

593-94 (6th Cir. 1980).

Larson, 900 F.2d at 1367. “These factors are intertwined or interrelated, and it is frequently a

combination of factors which leads a court to conclude that the plaintiff does not fulfill the requirements

of 23.1." Id. (internal quotation omitted). While these factors are usually used to determine the

adequacy of a plaintiff facing a motion to dismiss, motion for summary judgment, or other substantive

motions, they appear suitable as well for informing the selection of a lead plaintiff at the consolidation

stage.

DISCUSSION

I. Consolidation

The four related cases at issue all arise from the same alleged backdating of stock options by

Openwave, and allege substantially overlapping causes of action. The cases thus involve common

questions of law and fact, and appear ripe for consolidation. There is no opposition to consolidation,

and the Court ORDERS all four derivative action consolidated for all purposes, including trial, under

Rule 42(a). 

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II. Lead plaintiffs and counsel

Sherupski and Hacker argue that they should be appointed lead plaintiffs because: (1) they

engaged in careful investigation resulting in quality pleadings; (2) they have a significant financial

interest in the outcome of this litigation, as collectively they own over 5,500 Openwave shares; and (3)

“Sherupski has confirmed his desire to zealously prosecute this action by lodging a Freedom of

Information Act request with the SEC and making a shareholder inspection demand upon the Company”

(Mot. 9:20-10:2). 

Bowie does not seek to be named lead plaintiff for the entire action, but rather seeks to be named

lead plaintiff only with respect to the alleged violations of sections 14(a) and 20(a) (as it relates to

section 14(a)) of the Exchange Act (claims (ii) and (iii) of the Sherupski complaint, and claims (i) and

(ii) of the Bowie complaint). To establish a claim under section 14(a) of the Exchange Act, plaintiffs

need only allege that some part of a proxy statement “contain[s] any statement which, at the time and

in the light of the circumstances under which it is made, is false or misleading with respect to any

material fact, or which omits to state any material fact necessary in order to make the statements therein

not misleading . . .” 15 U.S.C. § 78n. The requisite state of mind under this section is negligence. See

In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1263 (N.D. Cal.); Wilson v. Great

American Indus., Inc., 855 F.2d 987, 995 (2d Cir. 1988); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d

1281-1301 (2d Cir. 1973). 

Unlike Sherupski, Bowie does not allege violations of section 10(b) and Rule 10b-5, which

require plaintiffs to allege fraudulent intent, and require plaintiff to plead those allegations with

particularity. See 15 U.S.C. § 78u-4(b)(2); In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974

(9th Cir. 1999). Bowie argues that therefore, if the same plaintiff and counsel bring both the section

10(b) and the section 14(a) claims, there is a danger that the section 14(a) claims will be “dismissed

because they are engulfed in Sherupski’s allegations that defendants engaged in fraudulent activity.”

Opp’n 2:11-12. 

Bowie argues that the pleadings themselves provide a strong example of why the Court should

name a separate plaintiff and counsel for the section 14(a) claims. According to the opposition, 

while counsel for Sherupski boasts that his Complaint “is 35 pages in length, consists of

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132 paragraphs, and alleges 13 separate counts of violations,” (see Motion at 9:15-16),

only plaintiff Bowie’s Complaint details the information necessary to maintain the

Company’s § 14(a) claim, including the dates on which the Board ordered the Company

to send shareholders the Notice of [] Meeting of Stockholders and Proxy Statement

between 2001 and 2005 (the “Definitive Proxy” or “Definitive Proxies”) and which of

the Individual Defendants caused and/or participated in issuing, filing and disseminating

a particular Definitive Proxy.

Opp’n 3:19-25, citing Bowie Complaint ¶¶ 9-20, 41, 52.

The Court is not convinced of the utility of appointing separate lead plaintiff and counsel for the

section 14(a) claims. While the Bowie Complaint appears to provide very detailed allegations relating

to the section 14(a) claims, Bowie does not argue that Sherupski’s 14(a) pleadings are deficient. Indeed,

as Bowie points out, section 14(a) claims need not be pleaded with particularity; thus the fact that the

Sherupski Complaint provides less than detailed allegations regarding section 14(a) violations does not

necessarily compel the conclusion that Sherupski, his counsel, or his complaint are inadequate. 

Moreover, there appears to be little risk that the section 14(a) claims will be treated lightly in

favor of the section 10(b) claims. The allegations of false and misleading proxy statements, which form

the basis of the section 14(a) claims, also appear to provide at least some of the basis for the 10(b)

claims. For example, paragraphs 2 and 3 of the Sherupski Complaint allege: 

Between 1999 and present, Defendants also caused Openwave to file false and

misleading statements with the Securities and Exchange Commission (“SEC”), including

Proxy Statements filed with the SEC which stated that the options granted by Openwave

carried with them an exercise price that was not less than the fair market value of

Openwave stock on the date of grant and issuance. 3. In fact, Defendants were aware

that the practices employed by the Board allowed the stock option grants to be backdated

to dates when the Company’s shares were trading at or near the lowest price for that

relevant period. 

Sherupski Complaint ¶¶ 2-3 (emphasis added). It thus appears that the filing of false proxy statements

is a basis for both the section 10(b) and the section 14(a) claims. The Court is therefore unpersuaded

by Bowie’s suggestion that in straining to prove the section 10(b) allegations, Sherupski and Hacker will

fail to properly support the section 14(a) claims. 

If the full efficiency of consolidating these actions is to be realized, the Court must select a

limited number of lead plaintiffs and counsel. Four actions are being consolidated here; it seems

somewhat counterproductive to maintain three lead plaintiffs (Sherupski, Hacker, and Bowie) and their

counsels. Moreover, naming a separate lead plaintiff and counsel for just two of the claims, which do

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not necessarily involve distinct questions of law or fact, does not seem the most efficient course. Three

of the four plaintiffs in these actions support selection of Sherupski and Hacker as lead plaintiffs.

Sherupski and Hacker have demonstrated substantial financial interest in the outcome of these actions.

There is no indication that Sherupski and Hacker would “not fairly and adequately represent the interests

of the shareholders . . . in enforcing the right of the corporation,” in light of the eight factors identified

by the Ninth Circuit. Fed. R. Civ. P. 23(1); see Larson, 900 F.2d at 1367. The Court therefore finds

that naming a separate lead plaintiff and counsel for the section 14(a) claims would be inefficient, and

accordingly GRANTS plaintiffs Henry Sherupski and Manfred Hacker’s motion to appoint themselves

as lead plaintiffs. 

The Court also finds Sherupski and Hacker’s selected counsel wholly adequate to serve as lead

counsel. Both Lerach Coughlin and Scott & Scott have extensive experience in prosecuting shareholder

derivative litigation arising out of illegal corporate activities. See Downs Dec., Exs. H, I. Three of the

four plaintiffs support their selection as lead counsel, and the fourth plaintiff Bowie makes no attack on

their adequacy or skill. 

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby GRANTS plaintiffs

Sherupski and Hacker’s motion to consolidate actions and appoint themselves lead plaintiffs and their

counsel lead counsel, and DENIES plaintiff Bowie’s request to appoint him lead plaintiff and his

counsel lead counsel with respect to defendants’ alleged violations of sections 14(a) and 20(a) (as it

relates to the section 14(a) claims) of the Exchange Act. 

IT IS SO ORDERED.

Dated: October 11, 2006 

SUSAN ILLSTON

United States District Judge

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