Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-01378/USCOURTS-casd-3_06-cv-01378-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1331 Fed. Question: Securities Violation

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1 06cv1231; 06cv1233; 06cv1309; 06cv1331; 06cv1378; 06cv1435

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

CHARLES RULAND, on behalf of himself

and all others similarly situated,

Plaintiff,

CASE NO. 06cv1231 BTM(WMc)

ORDER CONSOLIDATING CASES,

APPOINTING ROBERT SIBLEY AS

LEAD PLAINTIFF, AND

APPROVING LEAD COUNSEL

vs.

INFOSONICS CORP., JOSEPH RAM,

JOHN J. ALTHOFF, JEFFREY

KLAUSNER, JOSEPH MURGO, and

ABRAHAM ROSLER,

Defendant.

PETER POLIZZI, on behalf of himself

and all others similarly situated,

Plaintiff,

 vs.

INFOSONICS CORP., JOSEPH RAM,

JEFFREY KLAUSNER,

Defendants.

CASE NO. 06cv1233 BTM(WMc)

THOMAS E. SOWELL, on behalf of

himself and all others similarly situated,

Plaintiff,

 vs.

INFOSONICS CORP., JOSEPH RAM,

JOHN J. ALTHOFF, JEFFREY

KLAUSNER, JOSEPH MURGO, and

ABRAHAM ROSLER,

Defendants.

CASE NO. 06cv1309 BTM(WMc)

Case 3:06-cv-01378-JLS-WMC Document 30 Filed 10/23/06 Page 1 of 12
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2 06cv1231; 06cv1233; 06cv1309; 06cv1331; 06cv1378; 06cv1435

PAUL MARCOUILLER, on behalf of

himself and all others similarly situated,

Plaintiff,

 vs.

INFOSONICS CORP., JOSEPH RAM,

JEFFREY KLAUSNER,

Defendants.

CASE NO. 06cv1331 BTM(WMc)

BLAKE J. ANDERSON, individually and

on behalf of all other similarly situated,

Plaintiff,

 vs.

INFOSONICS CORP., JOSEPH RAM,

JEFFREY KLAUSNER,

Defendants.

CASE NO. 06cv1378 BTM(WMc)

ELLA M. SEAGO, on behalf of herself

and all others similarly situated,

Plaintiff,

 vs.

INFOSONICS CORP., JOSEPH RAM,

JEFFREY KLAUSNER, ABRAHAM G.

ROSLER,

Defendants.

CASE NO. 06cv1435 BTM(WMc)

Motions to consolidate and competing motions for appointment of lead plaintiff and

approval of lead plaintiff’s selection of counsel were filed by (1) Robert Sibley, Mark Ungar,

and Robert Lorizio (“SUL Group”); (2) Jonathon Ordway and Craig Coletta

(“Ordway/Coletta”); (3) Richard A Smee, Julio J. Ledesma Padilla, Edward K. Sowell, James

McCoy, Larry B. Stewart and Robert Kaplan (“Smee Group”); and (4) Elizabeth Brown and

Larry Christofferson (“Brown/Christofferson”). Motions filed by the “Virk Group” and the

“InfoSonics Investor Group” were withdrawn. 

The Court held a hearing on the motions on October 11, 2006. For the reasons

discussed below, the Court GRANTS the various motions to consolidate, GRANTS the SUL

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3 06cv1231; 06cv1233; 06cv1309; 06cv1331; 06cv1378; 06cv1435

Group’s motion for appointment of lead plaintiff as it pertains to Robert Sibley only, and

GRANTS the SUL Group’s motion for approval of lead plaintiff’s selection of counsel. All

other motions for appointment of lead plaintiff and approval of counsel are DENIED.

I. BACKGROUND

All of these class actions are brought by purchasers of common stock of InfoSonics

Corp. (“InfoSonics’) between May 8, 2006 and June 12, 2006. All of the actions allege that

InfoSonics and its top officers engaged in a scheme to defraud InfoSonics investors by

reporting false financial results on May 8, 2006 for its first quarter ending March 31, 2006.

Defendants allegedly knew, or with deliberate recklessness disregarded, that InfoSonics had

improperly accounted for warrants it issued in connection with a January 2006 private

placement. On June 12, 2006, InfoSonics disclosed that it would need to restate its reported

net income for its first quarter of $1.738 million to $1.173 million due to the fact that

InfoSonics had improperly treated the warrants as a derivative liability instead of equity. 

InfoSonics stock fell more than 28% that day.

All of the actions include as defendants InfoSonics, Joseph Ram (current President,

CEO, and Director), and Jeffrey A. Klausner (CEO since 2003), and assert causes of action

under Section 10(b) of the Exchange Act and Section 20(a) of the Exchange Act. The Seago

case, 06cv1435, also names as a defendant Abraham Rosler (Executive Vice President and

a Director). The Ruland case, 06cv1231, and Sowell case, 06cv1309, also name as

defendants Rosler, John J. Althoff (President of Latin American operations), and Joseph

Murgo (Vice President of North American Sales & Marketing). Ruland and Sowell also assert

an additional cause of action under Section 20A of the Exchange Act (for insider trading). 

II. DISCUSSION

A. Consolidation

Consolidation is appropriate when there is a “common question of law or fact . . .

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4 06cv1231; 06cv1233; 06cv1309; 06cv1331; 06cv1378; 06cv1435

pending before the Court.” Fed. R. Civ. P. 42(a). All of these actions cover the same time

period, arise out of the same facts, and allege violations of the securities laws. Therefore,

the cases should be consolidated.

B. Lead Plaintiff

Four different groups of plaintiffs seek to be appointed lead plaintiff: (1) the SUL

Group; (2) Ordway/Coletta; (3) the Smee Group; and (4) Brown/Christofferson.

Brown/Christofferson has filed a notice of non-opposition to Ordway/Coletta’s motion. For

the reasons discussed below, the Court finds that Robert Sibley of the SUL Group is the

proper lead plaintiff.

1. Governing Law

Under the Private Securities Litigation Reform Act (“PSLRA”), no later than 20 days

after filing a class action securities complaint, a private plaintiff or plaintiffs must publish a

notice advising members of the purported plaintiff class of the pendency of the action, the

claims asserted, and 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). 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. Id. 

Within 90 days after publication of the notice, the Court shall consider any motion

made by a class member to serve as lead plaintiff. 15 U.S.C. § 78u-4(a)(3)(B)(i). The Court

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.” Id.

The presumptively most adequate plaintiff is the one who “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.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). “In other

words, the district court must compare the financial stakes of the various plaintiffs and

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determine which one has the most to gain from the lawsuit. It must then focus its attention

on that plaintiff and determine, based on the information he has provided in his pleadings and

declarations, whether he satisfies the requirements of Rule 23(a), in particular those of

‘typicality’ and ‘adequacy.’” In re Cavanaugh, 306 F.3d 726, 730 (9th Cir. 2002). 

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

purported plaintiff class that the presumptively most adequate plaintiff will not fairly and

adequately protect the interests of the class or is subject to unique defenses that render such

plaintiff incapable of adequately representing the class. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).

If the district court determines that the presumptive lead plaintiff does not meet the typicality

or adequacy requirement, the Court must then proceed to determine whether the plaintiff with

the next lower stake in the litigation has made a prima facie showing of typicality and

adequacy. Cavanaugh, 306 F.3d at 731. If so, that plaintiff becomes the presumptive lead

plaintiff and other plaintiffs must be given the opportunity to rebut that showing. Id. 

A straightforward application of the statutory scheme “provides no occasion for

comparing plaintiffs with each other on any basis other than their financial stake in the case.”

Cavanaugh, 306 F.3d at 732. Once the Court identifies the plaintiff with the largest stake in

the litigation, “further inquiry must focus on that plaintiff alone and be limited to determining

whether he satisfies that other statutory requirements.” Id. 

2. Groups of Plaintiffs

As an initial matter, the Court must determine whether it will allow a group of plaintiffs

to be designated “lead plaintiff.” 

The PSLRA provides that the court 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 . . . .” 15 U.S.C. § 78u-4(a)(3)(B)

(emphasis added). The PSLRA also provides that the court is required to adopt a

presumption that the most adequate plaintiff is “the person or group of persons” that has the

largest financial interest and otherwise satisfies the requirements of Rule 23. 15 U.S.C. §

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78u-4(a)(3)(B)(iii)(I) (emphasis added). 

Accordingly, it seems that there are instances where it is proper to appoint a group

of persons as “lead plaintiff.” However, the PSLRA does not provide any guidance as to

when multiple plaintiffs should be permitted to serve as lead plaintiff.

Some courts have allowed aggregation of unrelated plaintiffs without imposing

additional requirements. See Aronson v. McKesson HBOC, Inc., 79 F.Supp.2d 1146, 1153

n.8 (N.D. Cal. 1999) (listing cases). Others have held that the term “group” should be

construed narrowly to mean a group of persons with meaningful preexisting relationships and

the cohesiveness to actively oversee the litigation. Aronson; In re Network Associates, Inc.,

Sec. Litig., 76 F. Supp. 2d 1017, 1023-27 (N.D. Cal. 1999); In re Razorfish, Inc. Sec. Litig.,

143 F. Supp. 2d 304 (S.D.N.Y. 2001); In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803, 815

(N.D. Ohio 1999).

The cases that hold that the term “group” does not extend to any collection of

individuals explain that one of the principal purposes of the PSLRA was to prevent lawyerdriven litigation and to allow for institutional plaintiffs with big financial stakes and expertise

in the area to serve as lead plaintiff and control the litigation. Network Associates, 76 F.

Supp. 2d at 1023. If courts permit lawyers to designate unrelated plaintiffs as a “group” and

aggregate their financial stakes, the purpose of the PSLRA would be undermined. As

explained by one district court:

The larger the group, the less incentive any single member of the group - and

certainly the group as a whole - will have to exercise any supervision or control

over the litigation . . . . This is especially so if the group consists of not only a

larger number of persons, but also of persons who bear no relation and have

no connection with one another beyond the fact that they suffered financial loss

as a result of a drop in the price of their shares of stock. Without some

cohesiveness within the group, or something to bind them together as a unit,

there is no reason for the individual members of the group to speak and act

with a uniform purpose . . . and, because there is no reason for the individual

members to act collectively (no structure for decision making, etc.), the group

as a whole will not engage in monitoring. Thus the problem sought to be

remedied by the [Reform Act’s] lead plaintiff provisions will remain

unaddressed.

Telxon Corp., 67 F. Supp. 2d at 815-16.

The reasoning of these cases is persuasive. Appointment of lead counsel should not

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depend on which law firm can accumulate the most class members. 

Here, it does not appear that there is any real preexisting relationship between or

among the various members of the individual groups. The tie that binds the members of

each group is representation by the same lawyers. Therefore, the Court will look at each

movant individually when evaluating who should be appointed lead plaintiff.

3. Lead Plaintiff Analysis

a. Notice and Publication

Shalov Stone & Bonner LLP, counsel-of-record in 06cv1233, published the required

notice in Market Wire on June 13, 2006. Hulett Harper Stewart LLP, counsel-of-record in

06cv1231 and 06cv1309, also published a notice in PRNewswire on June 15, 2006. The

various motions are timely filed.

b. Financial Interest

There is no prescribed method for determining which movant has the largest financial

interest. The Ninth Circuit notes that “the court may select accounting methods that are both

rational and consistently applied.” Cavanaugh, 306 F.3d at 730 n. 4. 

Many courts apply the following four factors in making the financial interest

determination: (1) the number of shares purchased; (2) the number of net shares purchased;

(3) the total net funds expended by the plaintiffs during the class period; and (4) the

approximate losses suffered by the plaintiffs. Lax v. First Merchant’s Acceptance Corp.,

1997 WL 461036, * 5 (N.D. Ill. Aug. 11, 1997); In re Olsten Corp. Securities Litig., 3 F. Supp.

2d 286, 296 (E.D.N.Y. 1998). In re McKesson HBOC, Inc. Securities Litig., 97 F. Supp. 2d

993 (N.D. Cal. 1999).

The application of the first three factors is rather straightforward. Movant Sibley (of

the SUL Group) purchased the greatest number of shares during the class period – 102,380.

(See Exh. E to Supp. Decl. of Weber.) Movant Ordway (of Ordway/Coletta) purchased

63,500 shares, the next greatest number. Sibley also had the greatest number of net shares

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(shares purchased minus shares sold during the class period) - 40,480. Ordway’s net shares

equaled 30,000. However, Ordway expended more net funds (amounts spent on class

period purchases less proceeds of class period sales) than Sibley. Ordway expended total

net funds of $828,919 as compared to $768,859.25 expended by Sibley. 

Sibley and Ordway disagree over how to calculate the fourth factor, approximate

losses. Ordway argues that approximate loss should be measured by net loss. Ordway’s

net loss is $258,419 while Sibley’s net loss is $183,521. Sibley argues that approximate loss

should be measured by the cost of retained shares less the price at which those shares were

sold. (Sibley calls this loss calculation a “Dura Loss.”) Under Sibley’s method, Sibley’s

losses are $405,946.56 and Ordway’s losses are $150,462.00.

The difference between the two methods is that Ordway’s net loss method takes into

account losses (in Ordway’s case) and gains (in Sibley’s case) made on trades before the

June 12 announcement, whereas Sibley’s method eliminates the effect of the “in-and-out”

trades. Although there is no clear correct method for determining approximate loss, the

Court finds that Sibley’s method is the better measure of financial stake in the case.

The focus of the Court’s evaluation is which movant “has the most to gain from the

lawsuit.” Cavanaugh, 306 F.3d at 730. Although a precise determination of damages is not

possible at this stage of the litigation, courts typically equate “largest financial interest” with

the amount of potential recovery. Siegall v. Tibco Software, Inc., 2006 WL 1050173 (N.D.

Cal. Feb 24, 2006); In re Network Associates, Inc., Sec. Litig., 76 F. Supp. 2d 1017, 1030

(N.D. Cal. 1999). 

In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the Supreme Court

held that a plaintiff binging a federal securities fraud action must prove proximate causation

and economic loss. The Supreme Court explained that an inflated purchase price due to

deception or misrepresentation does not in and of itself constitute or proximately cause the

relevant economic loss. At the moment the transaction takes place, the plaintiff has suffered

no loss because the inflated purchase payment is offset by ownership of a share that at that

instant possesses equivalent value. Id. at 343. If the purchaser sells the shares before the

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 Had Sibley purchased stock before the class period and sold it for a profit during

the class period, such windfall gains would be deducted from Sibley’s losses.

9 06cv1231; 06cv1233; 06cv1309; 06cv1331; 06cv1378; 06cv1435

truth becomes known, the misrepresentation will not have led to any loss. Id. If the

purchaser sells the shares after the truth is disclosed, “an initially inflated purchase price

might mean a later loss.” Id. However, “[w]hen the purchaser subsequently resells such

shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation,

but changed economic circumstances, changed investor expectations, new industry-specific

or firm-specific facts, conditions, or other events, which taken separately or together account

for some or all of that lower price.”

Here, there does not appear to be any allegation that the truth began to leak out

before June 12, 2006. Furthermore, it would be too complicated at this stage of the litigation

to make findings of fact regarding any potential partial disclosures and the effect, if any,

these disclosures had on the price of the stock. Therefore, the Court will not consider any

losses suffered by Ordway as a result of transactions prior to that date. See Kops v. NVE,

2006 WL 2035508 (D. Minn. July 19, 2006) (explaining that unless a partial disclosure

occurred before the end of the Class Period, the plaintiff who sold all of his shares before the

truth was revealed did not suffer any loss as a result of the defendants’ actions). See also

In re McKesson HBOC, Inc., Sec. Litig., 97 F. Supp. 2d 993 (N.D. Cal. 1999) (holding that

it was inappropriate to count losses or profits by “in-and-out” traders and assuming a

constant fraud premium despite movant’s argument that partial disclosures may have begun

seeping into the pool of information available to the investors).

Similarly, the Court disregards any gains made by Sibley as a result of in-and-out

transactions prior to June 12. All of the stock sold by Sibley during the class period was also

purchased during the class period. Accordingly, it makes sense for the Court to assume that

the “fraud premium” – the amount by which the stock price was inflated because of the

alleged misrepresentations – stayed constant during the four-week class period. Network

Associates, 76 F. Supp. 2d at 1027. Therefore, any profits made by Sibley during this time

would not be attributable to the misrepresentations and should not offset future losses.1

 

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Ignoring in-and-out losses or gains, the focus is on the net number of shares

purchased. “At least as a first approximation, the candidate with the most net shares

purchased will normally have the largest potential damage recovery.” Network Associates,

76 F.Supp. 2d at 1027. 

As discussed above, Sibley has the greatest number of net shares purchased -

40,480. Accordingly, for our purposes, Sibley has the largest potential recovery. Of course,

what damages may be ultimately recovered by the various plaintiffs is a different issue that

the Court does not decide. 

 

c. Typicality and Adequacy

Claims are “typical”under Rule 23 if they are “reasonably co-extensive with those of

absent class members; they need not be substantially identical.” Hanlon v. Chrysler Corp.,

150 F.3d 1011, 1019 (9th Cir. 1998). Sibley’s claims arise out of the same events and are

based on the same legal theories as the claims of the other class members. Therefore,

Sibley satisfies the “typicality” requirement.

Representation is “adequate” when the representative’s interests are not antagonistic

to the interests of absent class members, it is unlikely that the action is collusive, and counsel

for the class is qualified and competent. In re Northern Dist. of Cal., Dalkon Shield IUD Prod.

Liab. Litig., 693 F.2d 847, 855 (9th Cir. 1982). Sibley has made a prima facie showing of

adequacy which has not been rebutted by the other movants. Sibley certainly has incentive

to prosecute this action vigorously and states that he is willing to serve as a representative

on behalf of the class. (Sibley Decl., ¶ 3.) There is no showing that there is collusive action,

and Sibley’s retained counsel is clearly qualified and competent.

Accordingly, the Court appoints Sibley as lead plaintiff.

4. Lead Counsel Analysis

Under the PSLRA, once the court has designated a lead plaintiff, that plaintiff “shall

subject to the approval of the court, select and retain counsel to represent the class.” 15

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U.S.C. § 78u-4(a)(3)(B)(v). The PSLRA “evidences a strong presumption in favor of

approving a properly-selected lead plaintiff’s decisions as to counsel selection and counsel

retention.” In re Cedant Corp. Litig., 264 F.3d 201, 276 (3d Cir. 2001). 

The Court’s inquiry should be “limited to whether the lead plaintiff’s selection and

agreement with counsel are reasonable on their own terms.” Cedant, 264 F.3d at 276.

Ultimately, the inquiry concerns “whether the lead plaintiff’s choices were the result of a good

faith selection and negotiation process and were arrived at via meaningful arms-length

bargaining.” Id. 

The SUL movants ask the Court to approve their selection of Klafter & Olsen and

Berger & Montague to serve as co-lead counsel and Hulett Harper Stewart LLP to serve as

local “liaison counsel.” It appears that all of these firms have the expertise to fulfill the role

of lead counsel. 

As explained at the hearing, Sibley contacted Klafter & Olsen as a result of the

published notice. The Court has no reason to believe that the retention of Klafter & Olsen

was anything other than the result of a good faith selection and negotiation process.

Accordingly, the Court approves Klafter & Olsen and Berger & Montague as co-lead

counsel and Hulett Harper Stewart LLP as local liaison counsel. As discussed at the hearing,

the Court cautions counsel to avoid duplicating work done by co-counsel, performing

unnecessary work, or incurring unjustified costs.

III. CONCLUSION

 For the reasons discussed above, the motions to consolidate are GRANTED. Case

Nos. 06cv1231, 06cv1233, 06cv1309, 06cv1331, 06cv1378, and 06cv1435 are hereby

consolidated for all pretrial proceedings. The caption page on all future filings shall contain

all of the captions. All future docketing will be done in Case No. 06cv1231, which shall be

the main file. 

The Court also GRANTS the SUL Group’s motion for appointment of lead plaintiff as

it pertains to Robert Sibley only. The Court appoints Robert Sibley as lead plaintiff. The

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Court also GRANTS the SUL Group’s motion for approval of lead counsel. The Court

approves Klafter & Olsen and Berger & Montague as co-lead counsel and Hulett Harper

Stewart LLP as local “liaison counsel.” The Court DENIES the remaining motions for

appointment of lead plaintiff and motions for approval of lead counsel.

IT IS SO ORDERED.

DATED: October 23, 2006

Hon. Barry Ted Moskowitz

United States District Judge

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