Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_03-cv-05421/USCOURTS-cand-5_03-cv-05421-5/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH

E-FILED on 11/23/05 

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

In re LEAPFROG ENTERPRISES, INC.

SECURITIES LITIGATION

No. C-03-05421 RMW

ORDER ON LEAD PLAINTIFF SELECTION

[Re Docket Nos. 147, 152, 158] 

This Document Relates To:

 

 ALL ACTIONS.

This is a consolidated securities class action against LeapFrog Enterprises, Inc. ("LeapFrog") and

several of its former and current executives ("the individual defendants"). Both (1) William Sullivan and

Alice Cupples ("the Cupples Movants") and (2) The Parnassus Fund and the Parnassus Equity Fund

("Parnassus") move to be appointed lead plaintiff under the Private Securities Litigation Reform Act

("PSLRA"), 15 U.S.C.A. § 78u-4(a). LeapFrog and the individual defendants take no position on the

issue. The court has considered the moving and responding papers and heard oral argument. For the

reasons set forth below, the court appoints Parnassus lead plaintiff. 

I. BACKGROUND

On April 6, 2005 this court named the Cupples Movants lead plaintiffs in four related and

consolidated securities class actions alleging a class period of July 24, 2003 to February 10, 2004

("LeapFrog I"). On April 25, 2005 Parnassus filed a securities class action against (1) LeapFrog, (2)

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 2

James P. Curley ("Curley"), LeapFrog's former Chief Financial Officer, and (3) Thomas Kalinske,

LeapFrog's Chief Executive Officer ("LeapFrog II"). Seefer Decl. Supp. Cupples Rep. ("Seefer Reply

Decl.") Ex. A ("Parnassus Compl."). Parnassus purported to represent a class of investors who purchased

LeapFrog stock between February 11, 2004 to October 18, 2004. Id. at ¶ 1. Parnassus alleges that

LeapFrog (1) failed to disclose problems with its Information Technology ("IT") and supply chain, id. at ¶

39, (2) issued misleading fourth quarter 2003 results, id. at ¶ 40, (3) misrepresented future earning

capacity, id. at ¶¶ 41-43, and (4) gave false explanations for its first and second quarter 2004 losses, id. at

¶¶ 44-60. Parnassus claims to have lost nearly $10 million. Heffelfinger Decl. Supp. Parnassus' Mot.

("Heffelfinger Decl.") Ex. B. 

On June 17, 2005 the Cupples Movants filed an amended complaint in LeapFrog I. The amended

complaint alleges a new class period of July 24, 2003 to October 18, 2004. First Amended Complaint

("FAC") ¶ 1. The FAC names as defendants (1) LeapFrog, (2) Curley, (3) Kalinske, (4) Michael Wood,

LeapFrog's former Chief Executive Officer, (5) Timothy Bender ("Bender"), LeapFrog's President,

Worldwide Consumer Group, (6) Paul Rioux ("Rioux"), LeapFrog's former Co-Vice Chairman of the

Board, (7) James Marggraff ("Marggraff"), LeapFrog's Executive Vice President, Worldwide Content, and

(8) Robert W. Lally ("Lallay"), LeapFrog's former Executive Vice President, Education Training Group and

President, SchoolHouse Division. Id. at ¶¶ 14-21. Spanning one hundred and thirty-five pages, the FAC

bolsters its claims with interviews with confidential witnesses and evidence from a patent infringement suit

that LeapFrog brought against Fisher-Price in 2003. However, the Cupples Movants only claim to have

suffered about $36,000 in damages. Seefer Decl. Supp. Cupples Movants' Mot. ("Seefer Decl.") Ex. B. 

Before filing the FAC, the Cupples Movants moved to relate LeapFrog I and LeapFrog II. 

Parnassus responded by seeking to enjoin the Cupples Movants from litigating LeapFrog II. In the

alternative, Parnassus requested that the court make (1) the parties co-lead plaintiffs for the entire case or

(2) each party lead plaintiff for their respective original class periods. On July 5, 2005 the court related

LeapFrog I and LeapFrog II but ordered the Cupples Movants to re-publish notice of their amended

complaint. On July 27, 2005 the court denied Parnassus' motion as moot and explained that it would

consider pragmatic suggestions with respect to the lead plaintiff issue during the new lead plaintiff contest. 

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 Although no party has moved to consolidate the cases, this court's April 6, 2005 order

automatically consolidates related cases for pretrial purposes. See April 6, 2005 Order at 8:11-15.

2 The statute also requires the first plaintiff to file a complaint to post notice of the case "in a

widely circulated national business-oriented publication or wire service." 15 U.S.C. § 78u-4(a)(3)(A). 

This notice must state that "any member of the purported class may move the court to serve as lead

plaintiff." 15 U.S.C. § 78u-4(a)(3)(A)(i)(II). 

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 3

On August 3, 2005 the Cupples Movants re-published notice of the amended complaint. Both parties

timely moved to be appointed lead plaintiff.1 

II. ANALYSIS

A. The PSLRA

The PSLRA establishes a blueprint for a court to follow while selecting a lead plaintiff in a securities

class action:

[T]he court shall consider any motion made by a purported class member . . . and shall

appoint as lead plaintiff the member or members of the purported plaintiff class that the

court determines to be most capable of adequately representing the interests of class

members . . . .

***

[T]he court shall adopt a presumption that the most adequate plaintiffinany private action

arising under this chapter is the person or group of persons that . . . in the determination

of the court, has the largest financial interest in the relief sought by the class; and . . .

otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.

***

The presumption . . . may be rebutted only upon proof by a member of the purported

plaintiff class that the presumptively most adequate plaintiff--

(aa) will not fairly and adequately protect the interests of the class; or

(bb) is subject to unique defenses that render such plaintiff incapable of adequately

representing the class.

15 U.S.C. § 78u-4(a)(3)(B).2 

In the Ninth Circuit, courts must apply the statute in a strictly regimented manner. First, the court

"compare[s] the financial stakes of the various plaintiffs and determine which one has the most to gain from

the lawsuit." In re Cavanaugh, 306 F.3d 726, 730 (9th Cir. 2002). Second, the court determines

whether that plaintiff's pleadings and declarations reveal that he satisfies Rule 23's "typicality" and

"adequacy" requirements. Id. If not, the court makes the same inquiry about the plaintiff with the secondlargest financial stake in the litigation. Id. When the court finds a plaintiff who fulfills these criteria, "the

process turns adversarial and other plaintiffs may present evidence that disputes the lead plaintiff's prima

facie showing of typicality and adequacy." Id.

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 4

It is undisputed that Parnassus' alleged losses dwarf those of the Cupples Movants. Indeed,

Parnassus claims to have suffered $10 million in damages, while the Cupples Movants allege losses of only

$36,000. Thus, unless the Cupples Movants show that Parnassus is inadequate, the court cannot make

them lead plaintiffs without subverting the PSLRA. Attempting to avoid this conclusion, the Cupples

Movants cast their motion as one to "continue" serving as lead plaintiffs. They cite Judge Wallace's

concurrence in Cavanaugh for the proposition that a "lead plaintiff can be removed 'only after a finding

that they are inadequate.'" Cupples Movants' Mot. at 3:12-13 (quoting Cavanaugh, 306 F.3d at 741

(Wallace, J., concurring) (emphasis in original). This argument lacks merit. Because this court ordered the

Cupples Movants to re-publish notice of their amended complaint—thus triggering a new lead plaintiff

selection process—they are no longer lead plaintiffs. Second, the Cupples Movants argue that "they have

already conferred substantial benefits to the class through their vigorous prosecution of the case." Id. at

11:18-19. Indeed, over the last two years, the Cupples Movants have (1) filed a comprehensive amended

complaint, (2) procured twenty-two document preservation subpoenas, and (3) developed an intimate

knowledge of the case. Nevertheless, Cavanaugh squarely holds that such peripheral issues cannot be the

basis for elevating a particular plaintiff to lead status. See id. at 732 (reversing district court's decision to

appoint lead plaintiff based on fee arrangement with counsel because "the Reform Act provides in

categorical terms that the only basis on which a court may compare plaintiffs competing to serve as lead is

the size of their financial stake in the controversy") (emphasis in original). 

In addition, Parnassus satisfies both the "adequacy" and "typicality" requirements of Rule 23.

"Under Rule 23's permissive standards, representative claims are 'typical' if they are reasonably coextensive

with those of absent class members; they need not be substantially identical." Hanlon v. Chrysler Corp.,

150 F.3d 1011, 1020 (9th Cir. 1998). Representatives are "adequate" unless they suffer from a conflict of

interest with other class members or will not vigorously prosecute the case. Id. The court's primary

concern with Parnassus is that Parnassus does not allege that it purchased any LeapFrog stock from July

24, 2003 to February 10, 2004. In its tentative ruling, the court suggested that Parnassus might lack

standing to pursue claims on behalf of class members who did buy securities during this period. However,

upon further reflection, this concern is unfounded. "[B]ecause the PSLRA mandates that courts must

choose a party who has, among other things, the largest financial stake in the outcome of the case, it is

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 5

inevitable that, in some cases, the lead plaintiff will not have standing to sue on every claim." Hevesi v.

Citigroup Inc., 366 F.3d 70, 82 (2d Cir. 2004). Indeed, Article III standing and Rule 23 typicality are

discrete inquiries. For example, in In re VeriSign, Inc., 2005 WL 88969 *4 (N.D. Cal. 2005),

defendants argued that the lead plaintiffs lacked standing to sue for alleged misrepresentations that occurred

after they had purchased stock. The court rejected this argument, reasoning that the lead plaintiffs needed

only to prove that they suffered a concrete injury because of defendants' wrongdoing, not every injury

alleged by the class:

Defendants' argument is a non sequitur. Their starting point is sound, but their conclusion

is not. As a matter of logic, it is true that misrepresentations made after a person's

purchase of stock could not possibly have induced that person to purchase that stock.

However, as a matter oflaw, itdoesnotfollowthatsucha person'cannotrepresent absent

class members for such a claim' . . . [¶]. In the class action context, Article III standing

simply requires that the class representatives satisfy standing individually. No more is

required. 'Once threshold individualstanding by the class representative is met, a proper

party to raise a particular issue is before the court, and there remains no further separate

class standing requirement in the constitutional sense.' Once the class representatives

individually satisfy standing, that is it: standing exists. 'The presence ofindividualstanding

is sufficient to confer the right to assert issuesthat are commonto the class, speaking from

the perspective of any standing requirements.' 

Id. at *4-*5 (quoting Alba Conte & Herbert Newberg, Newberg on Class Actions § 2:5 (4th ed. 2002));

see also Tanne v. Autobytel, Inc., 226 F.R.D. 659, 667 (C.D. Cal. 2005) (holding that putative lead

plaintiff satisfied "typicality requirement when his "claims are substantially similar, if not identical, to those of

other class members who invested in . . . stock during the [c]lass [p]eriod"). Because Parnassus alleges that

it relied on defendant's misrepresentations and purchased stock at an artificially inflated rate between

February 11, 2004 to October 18, 2004, it appears to have standing to assert claims on behalf of the class. 

In addition, Parnassus' allegations share a common factual and legal thread with all class members: that

defendants' misrepresentations artificially increased the price of LeapFrog stock during the class period. 

Accordingly, Parnassus' claims are "reasonably coextensive" with those of absent class members. 

In its tentative ruling, the court also noted that Parnassus' lack of pre-February 11, 2004 stock

purchases might create a conflict of interest with other class members. This concern also appears to be

overstated. For one, in the securities class action context, courts rarely hold that the specter of such a

conflict renders a class representative inadequate. Cf. In re Seagate Tech. II Secs. Litig., 843 F.Supp.

1341, 1365-66 (N.D. Cal. 1994) ("in the interest of accommodating the strong sentiments which favor the

use of class actions in securities fraud cases, the court concludes that certain minimal levels of antagonism

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 6

[between class members] must be tolerated"); In re Gemstar-TV Guide Intern., Inc. Secs. Litig., 209

F.R.D. 447, 453 (C.D. Cal. 2002) (rejecting argument that putative lead plaintiff suffered from disabling

conflict of interest despite the fact that it retained most of its stock during the class period while other class

members sold their shares). Moreover, there is little risk that Parnassus will fail to prosecute the July 24,

2003 to February 11, 2004 class period diligently. Like class members who purchased stock during that

time, Parnassus has a vested interest in proving that defendants' allegedly false statements artificially

increased the price of LeapFrog securities. See Parnassus Compl. ¶ 7 ("LeapFrog's stock was artificially

inflated during the class period"). Presumably, Parnassus can recover for any amount it overpaid, even if

the misrepresentations occurred before it bought stock. Therefore, because Parnassus' interests appear to

be reasonably aligned with all class members, it is an adequate lead plaintiff. 

The Cupples Movants argue that "any movant that would ask the [c]ourt to . . . displace lead

plaintiff and lead counsel" despite their substantial work on the case "is not the most adequate plaintiff." 

Cupples' Mot. at 19:3-9. Of course, Parnassus could make a nearly-identical claim about the Cupples

Movants, who tried to subsume LeapFrog II by moving to relate the cases despite suffering a meager

fraction of Parnassus' losses. In any event, the Cupples Movants cite no authority to suggest that

Parnassus' desire to be lead plaintiff renders it inadequate. 

In addition, the Cupples Movants also claim that Parnassus is not adequate because, about a

decade ago, the Securities and Exchange Commission ordered it to cease and desist violating the securities

laws. See In re Parnassus Incs., Administrative Proceeding File No. 3-9317, 1998 SEC LEXIS 1877, at

*73-78 (Sept. 3, 1998). The Cupples Movants cite Shi v. SINA Corp., 2005 WL 1561438 (S.D. N.Y.

2005) for the proposition that "[n]umerous courts have rejected the appointment of persons [who] have

committed fraud or engaged in other forms of dishonesty as lead plaintiffs and class representatives." 

Cupples' Reply at 15:8-11. However, Shi held that an individual who had been convicted on felony fraud

charges was unsuitable to serve as lead plaintiff. See Shi, 2005 WL 1561438 at *4. Not only is Parnassus

an institution—and thus less amenable to a generalization about its "character"—but it was accused of a

lesser form of wrongdoing. The court does not believe that the proceeding against Parnassus suggests that

it is unfit to be lead plaintiff. Accordingly, the court appoints Parnassus lead plaintiff and approves

Parnassus' selection of counsel. 

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 7

The court recognizes that counsel for the Cupples Movants may be entitled to more compensation

for their work to date than the usual amount counsel for unsuccessful putative lead plaintiffs receive. That

issue, however, can be resolved at the time the fees are awarded should plaintiffs prevail or settle. The

court also incorporates by reference the relevant aspects of pages 7-14 of its April 6, 2005 order as though

set forth herein. In particular, the court grants Parnassus thirty days to file a consolidated amended

complaint. Defendants shall have thirty days after Parnassus files its complaint to respond. The parties may

alter either deadline by agreement. 

 

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 8

III. ORDER

1. The court Parnassus lead plaintiff and approves Parnassus' choice of counsel.

DATED: 11/23/05 /s/ Ronald M. Whyte

RONALD M. WHYTE

United States District Judge

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER ON LEAD PLAINTIFF SELECTION—C-03-05421 RMW

DOH 9

Notice of this document has been electronically sent to:

Counsel for Plaintiffs:

Patrick J. Coughlin patc@mwbhl.com 

Darren J. Robbins e_file_sd@lerachlaw.com 

Gwendolyn R. Giblin ggiblin@gbcslaw.com 

Marc S. Henzel mhenzel182@aol.com 

William S. Lerach billl@lerachlaw.com 

Kimberly C. Epstein kimcor@lerachlaw.com

Luke O Brooks lukeb@mwbhl.com 

Christopher Paul Seefer chriss@mwbhl.com 

Solomon B. Cera scera@gbcslaw.com 

David Avi Rosenfeld drosenfeld@geller-rudman.com 

Laurence D. King lking@kaplanfox.com 

Counsel for Defendants:

Daniel W. Turbow dturbow@wsgr.com 

 Kassra Powell Nassiri knassiri@wsgr.com 

Counsel for Movants:

Michael M. Goldberg info@glancylaw.com 

Darren J. Check dcheck@sbclasslaw.com 

Linda M. Fong lfong@kaplanfox.com 

Counsel for Third Party Plaintiff:

Christopher Heffelfinger cheffelfinger@bermanesq.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not registered for

e-filing under the court's CM/ECF program.

Dated: 11/23/05 DOH

Chambers of Judge Whyte

Case 5:03-cv-05421-RMW Document 183 Filed 11/23/05 Page 9 of 9