Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-00392/USCOURTS-cand-3_05-cv-00392-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
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 alleged class period is April 10, 2003, through and including January 20, 2005. 

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE SIPEX CORPORATION 

SECURITIES LITIGATION

 /

AND CONSOLIDATED CASES

 /

No. C 05-00392 WHA

ORDER APPOINTING LEAD

PLAINTIFFS GLOBIS CAPITAL

PARTNERS LP AND SHAYE

HIRSCH

INTRODUCTION

Pursuant to the Private Securities Litigation Reform Act of 1995 (PSLRA),

Pub. L. No. 104–67, 109 Stat. 737 (codified as additions and amendments to 15 U.S.C. 77–78

and 18 U.S.C. 1964), this order appoints Globis Capital Partners LP and Shaye Hirsch as the

lead plaintiffs for two cases previously consolidated as the above-named action. The

consolidated actions involve securities fraud. This order sets forth the criteria for selection and

approval of lead plaintiff and also sets forth the procedure that will be used for the selection and

approval of class counsel. 

FACTS

These consolidated class actions arise from the alleged financial misrepresentation by

Sipex Corporation. Sipex designs, manufactures and markets semiconductors that are used by

original equipment manufacturers in the computing, consumer electronics, communications and

networking infrastructure markets (Jacobson Compl. ¶ 2). During the alleged class period,

Sipex reported positive results in its SEC filings (id. ¶ 3).1

 In publically disseminated press

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 Initially the following five related actions were filed: Barbara Keller v. Sipex, C05-00331 WHA,

Coil Partners, LLC v. Sipex, C05-00392 WHA, Levy v. Sipex, C05-00505 WHA and Alfred H. Jacobson v.

Sipex, C05-00712 WHA. Eventually, all the actions voluntarily dismissed except for Coil Partners, LLC v.

Sipex and Alfred H. Jacobson v. Sipex. They were consolidated into this action. 

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releases, the company attributed the results to increased semiconductor sales and cost savings

resulting from restructuring its operations (ibid). On January 20, 2005, after the market closed,

Sipex issued a press release announcing that it might need to restate its reported financial

statements for fiscal year 2003 and for the first three quarters of fiscal year 2004 due to possible

“improper recognition of revenue” and that the company’s audit committee and board of

directors had commenced an internal investigation of the matter (id. ¶ 4). As a result of the

investigation, Sipex stated that it would not be able to file its 2004 annual report with the SEC

on time (ibid.). In reaction to this news, the price of Sipex common stock dropped 23% from its

previous trading day’s closing price (ibid). 

Four class actions were filed.2

 Plaintiffs named Sipex corporation and its officers,

Douglas M. McBurnie, Walid Maghribi, Phillip Kagel and Clyde Ray Wallin as defendants. 

The complaints alleged that defendants violated Section 10(b) and 20(a) of the Securities

Exchange Act of 1934 and Rule10b-5, promulgated thereunder, by making allegedly false and

misleading statements, causing plaintiffs to purchase Sipex securities at artificially inflated

prices. 

Initially, there were several competing movants for the position of lead plaintiff: 

Walter Bednarszyk and James T. Collier, Roy and Margaret Gentles, the “Young Group” that

included six individuals and the “Globis Group” that included Globis Capital Partner LP and

Shaye Hirsch. Before the hearing on the appointment of lead plaintiff, the Court requested each

lead plaintiff to complete a questionnaire. The Court’s questionnaire alerted movants that it

would evaluate the qualifications of single investors, not groups, as lead plaintiffs. The Court’s

questions focused on the qualifications of the lead plaintiff, their experience in managing

litigation, potential conflicts and transactions related to the instant securities case. The Court

received back two questionnaires, one from Paul Packer, on behalf of Globis Capital Partners

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LP, and one from Shaye Hirsch. None of the other movants returned questionnaires. 

Subsequently, the Gentiles moved for withdrawal of appointment as lead plaintiff. 

The Court held a hearing on the appointment of lead plaintiff on May 12, 2005. The

only candidates present were Mr. Packer, on behalf of Globis, and Mr. Hirsch. The Court

questioned both plaintiffs on their qualifications, experience and financial loss. 

Mr. Packer is the managing member of Globis Capital Partners LP, a hedge fund that

deals with small and mid-cap-value companies. He has previous experience as a lead-plaintiff. 

Before the alleged class period he held 520,570 shares of Sipex stock. During the alleged class

period he purchased 1,110,086 shares of stock and sold 1,201,229 shares of stock. Despite

being a net seller during the alleged class period, Globis’ alleged estimated loss is $725,857, a

point discussed below. Mr. Hirsch is an individual investor. During the alleged class period he

bought $7,000 shares. He estimates his total loss to be between $20,000 and $25,000. Globis

and Mr. Hirsch asked the Court to appoint them as joint lead-plaintiffs. Mr. Packer and Mr.

Hirsch are friends and their families have known each other for many years. Each had seen the

published notice of the class action and had contacted the law firm of Bernstein Liebhard &

Lipshitz LLP. The firm represents Mr. Packer in other matters and Mr. Hirsch had a personal

relationship with a partner at the firm. 

At the hearing, the Court noted that Globis appears to have been a net seller and asked

counsel to provide the Court with supplemental briefing as to whether defendants would assert

at class certification that Globis is not an appropriate class representative. The defendants and

Globis provided the Court with supplemental briefing. Defendants’ position is that Globis,

being a net seller, profited from the alleged stock price inflation and therefore is not

representative of a typical and adequate plaintiff in this class action. Globis’ position is that it

is an adequate and typical lead plaintiff in this class action if one calculates financial loss using

a “first-in/first-out” (FIFO) method of accounting. This issue is addressed in depth below.

After the hearing, three of the fives cases were voluntarily dismissed and the Court

issued an order consolidating the remaining two actions. The following two actions were

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consolidated into the present case: Coil Partners, LLC v. Sipex, C05-00392 WHA and Alfred

H. Jacobson v. Sipex, C05-00712 WHA. 

ANALYSIS

The PSLRA seeks to place a real investor, not a lawyer, in charge of the litigation on

behalf of the class. This statutory responsibility now resides in what the PSLRA calls the “lead

plaintiff.” This representative acts as a fiduciary for all members of the proposed class and

must provide fair and adequate representation and management to obtain the largest recovery

for the proposed class consistent with good faith and meritorious advocacy. 

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 the most capable of

adequately representing the interests of the class members in accordance with this

subparagraph.” 15 U.S.C. § 78u-4(a)(3)(B)(I). The Act creates a rebuttable presumption that

the most adequate plaintiff should be the plaintiff who: (1) has brought the motion for

appointment of lead counsel in response to the publication of notice; (2) has the “largest

financial interest” in the relief sought by the class; and (3) otherwise satisfies the requirements

of FRCP 23. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(aa)–(cc). The above presumption may be

rebutted only upon proof that the presumptive lead plaintiff (1) will not fairly and adequately

protect the interests of the class or (2) 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)(aa)–(bb).

The PSLRA does not provide any guidance concerning the method of calculating which

plaintiff has the “largest financial interest.” See 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(bb). Courts

in this district have equated “largest financial interest” with the amount of potential recovery. 

See In Re Critical Path, Inc. Sec Litig., 156 F. Supp. 2d 1102, 1107–08 (N.D. Cal 2001); In Re

Network Assocs., Inc. Sec. Litig., 76 F. Supp.2d 1017, 1030 (N. D. Cal. 1999); Weisz v. Calpine

Corp., 2002 WL 32818827, *5 (N.D. Cal 2002). In determining which lead plaintiff has

suffered the greatest loss under the PSLRA, the law regulating securities losses must be

reviewed in part, a discussion that will presently include the issue of the “first-in/first-out”

(FIFO) and “last-in/first-out” (LIFO) methods.

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Under the purchaser-seller rule, only purchasers who actually buy or sellers who

actually sell in reliance on fraud may sue. Those who simply refrain from buying or selling,

even if in reliance on fraud, may not sue. Blue Chip Stamps et al. v. Manor Drug Stores, 421

U.S. 723, 731–755 (1975). The class period begins when the market was first defrauded. It

ends on the date when the truth was fully revealed or when the misinformation became too stale

to matter. Those defrauded in between can sue. Once the full truth comes out, an investor

electing to keep the stock and gamble on the future events cannot sue for future losses. 

Otherwise, securities manipulators would become guarantors of a floor market price — even

after their manipulations had run their course. See, e.g., SEC v. Shapiro, 494 F.2d 1301, 1309

(2nd Cir. 1979). 

The rule of loss causation, in the typical case, requires that the purchaser prove that

when the truth came out, the stock price dropped and did so by reason of the exposure of the

fraud rather than by reason of industry-wide down trends or other negative factors.

Dura Pharmaceuticals, Inc., v. Michael Brudo, ___ U. S. ___, 125 S. Ct. 1627, 1631 (2005). 

Put another way, it is not enough to show that at the time of the purchase, the misrepresentation

had created a so-called “fraud premium,” i.e., that had the truth been known at the time of

purchase, the market price would have been lower. Rather than focusing on the time of the

purchase, we must, for damages purposes, focus on the time of the sale and determine the

extent to which revelation of fraud depressed the price as of the sale date. To be more precise,

the key inquiry is to isolate the extent of misrepresentations (originally inducing the purchase)

that became known during the time the shares were held and then to determine the contributory

and cumulative effect of those revelations on the price as of the date of sale, the date of sale

being the date of an actual sale within the class period or, constructively, the end of the class

period for all shares held to the end. 

Suppose a share is purchased for $100 in reliance on an actionable misrepresentation. 

The entire truth then suddenly comes out. The share price immediately drops $60. The only

reason for the plunge is the revelation. The entire $60 is recoverable. 

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What happens, however, if the defrauded investor sells before the end of the class

period? In the case of a purchaser (within the class period) who sells before any of the truth is

revealed, of course, recovery might be doubtful. This is because the market has absorbed the

misinformation and imposed a fraud premium on both the purchase and sale. Often the fraud

premium will be the same in each case, thus cancelling the loss. In the case of a purchaser

(within the class period) who sells immediately after a partial revelation of the truth with a

resultant plunge in the stock price, the critical inquiry, again, is the extent to which the partial

revelation has depressed the price as of the date of the sale. Again, the focus is not on the fraud

premium on the day of purchase. The focus must be on the day of sale and on the contribution

to the loss due to the partial revelation of fraud. 

Turning now to a scenario closer to our immediate case, what happens when an investor

already owns some shares going into the class period and/or trades actively within the class

period? When an investor already owns shares at the outset of the class period and sells them

during the class period, the investor actually profits from the fraud by recovering a fraud

premium over and above the true value of the shares. When the same investor already holds

shares at the outset of the class period but, in addition, buys and sells shares during the class

period, the gains received must be used to reduce the losses incurred. Otherwise, the investor

would reap a windfall. 

Over the course of the class period, there are two items needed for this calculus. One

may be called the “loss-causation contribution.” This is the contribution made to the overall

loss by revelation of fraud between the dates of the purchase and sale. This item is relevant to

recoverable damages as set forth by the Supreme Court. See Dura Pharm. Inc., 125 S. Ct. at

1631–2. The other is the “fraud premium,” i.e., the extent to which the price remains inflated

due to unrevealed fraud. The second item is relevant to the offsetting of windfall for shares sold

during the class period. 

The LIFO/FIFO issue arises, among other scenarios, when a trader has an inventory of

the shares in question going into the class period and trades during the class period, as here. 

Suppose one share is owned going into the class period, another share is then bought in reliance

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 This Court expresses no opinion on the scenario in which the stock price goes up during the class

period in the presence of fraud but where the stock price would have gone up even in absence of the fraud. See

Dura Pharm., Inc., 125 S. Ct. at 1632. 

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on the fraud, one share is then sold midway through the class period and, finally, one share is

sold at the end of the class period. Recovery is allowable, of course, only for the share

purchased during the class period. But which share was sold when? Under FIFO, the

previously-held (non-actionable) share would be the first sold share. The fraud-induced

(actionable) share would be the last. Under LIFO, it would be the opposite. In doing the math

for the recoverable loss and the offsetting windfall, it would be necessary to determine the fraud

premium and loss-causation contribution. Depending on which of the two sales is deemed to be

actionable, these calculations will vary.3

 

The FIFO method would dictate that the actionable purchase was sold later. That loss

would be offset by a windfall of any fraud premium received on the first sale. The LIFO

method would dictate that the actionable purchase was sold first. There would be no windfall

on the later sale since, by definition, any fraud premium will always completely be eliminated

by the end of the class period. This, plus the fact that the recoverable loss will often be less

during the mid-range of the class period explains why defendants prefer the LIFO method and

plaintiffs prefer the FIFO, although this preference can be reversed in particular cases. 

In the Court’s view, LIFO is closer to the economic realities of market investing and the

purposes of the securities acts. If a trader buys and sells the same number of shares of the same

issue, on the same day, the economic reality of the basic investment decision is a net of one

against the other, i.e., no change in position, at least as of the end of the day. Put differently, if

a trader buys and sells shares of the same issue over a brief period, the trader is relying on the

same basic market analysis and same market information. If a fraudulent misrepresentation has

affected the market, it has affected both sides of the equation. The LIFO method better tracks

the impact of investment decisions and how market fraud impacts them. This is at the core of

the securities acts. So, this Court will follow a LIFO convention for investors who both buy and

sell within the class period. 

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This conclusion is in accordance with the weight of authority. See, e.g., In re McKesson

HBOC, Inc. Sec. Litig., 97 F. Supp. 2d 993, 996 fn.2 (N. D. Cal. 1999); In re Network Assoc.

Inc. Sec. Litig., 76 Supp. 2d 1017, 1027 (N.D. Cal. 1999); Weisz v. Calpine Corp., 2002 WL

32818827, *7 (N.D. Cal 2002); In re Clearly Canadian Sec. Litig., 1999 U.S. Dist. LEXIS

14273, *12–14 (N.D. Cal. 1999); In re Comdisco Sec. Litig., 150 F. Supp. 2d 943, 945 (N.D. Ill.

2001). 

At the May 12, 2005 hearing, counsel for Globis relied on an unpublished decision,

Plumbers & Pipefitters Local 572 Pension Fund v. Cisco Sys., Inc., 2004 U.S. Dist. LEXIS

27008 (N.D. Cal. 2004), that cites Broudo v. Dura Pharmaceuticals Inc., 339 F.3d 933, 938

(9th Cir. 2003), for the proposition that damages may be proved by simply showing that

plaintiffs purchased stock at an inflated price. As discussed, Broudo has been subsequently

overturned by Dura Pharmaceuticals, Inc. v. Michael Broudo, 125 S. Ct. 1627, 1631 (2005). In

its supplemental briefing, Globis cited published cases that used FIFO as an accounting

methodology for determining financial losses and several unpublished cases. See e.g. Chill v.

Green Tree Financial Corp., 181 F.R.D. 398, 411 (D. Minn 1998); Vansguard v. Ariba, Inc., 

C-03-00277 JF, slip op. (N.D. Cal. 2003). These cites, however, are not helpful. While the

courts accepted the calculation of damages based on FIFO, they did not arrive at the application

of FIFO after a reasoned discussion of the merits. It was merely a background fact.

Since Globis, an active trader, was a net seller throughout the class period, there is a

plausible chance that Globis will have no net recovery. This is not yet certain, however,

because the necessary calculations are unknowable at this early stage. Only with the benefit of

expert evidence could the necessary items be determined and then netted. For the time being,

Globis has a sufficient stake to be appointed as one of two lead plaintiffs. Because the net loss

is speculative for Globis at this point and because Globis may eventually be shown to have no

net loss, Mr. Hirsch will be made a co-lead plaintiff. This ruling is without prejudice to defense

arguments to be made later, on the class certification motion. The same is true for the other

Rule 23 issues raised by the defense. (No other competing lead plaintiff is challenging the Rule

23 qualifications of the pending candidates). 

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RESPONSIBILITIES OF LEAD PLAINTIFF

The lead plaintiffs must take affirmative steps to keep themselves informed at all times

of the progress and status of the case, the strengths and weaknesses of the case, the prospects for

settlement, and the resources invested in the suit or proposed to be invested. With respect to

each major litigation event, such as important motions, settlement discussions, trial, and trial

preparation, the lead plaintiffs must actively inform themselves in advance and shall have the

authority and responsibility to direct counsel, after, of course, receiving the advice of counsel. 

The lead plaintiffs must consult with counsel in advance to determine whether major tasks

proposed by counsel are likely to add more value to the case than would be incurred in time and

expense. The lead plaintiffs shall meet in person with lead trial counsel at least quarterly to

review the progress and status of the case, shall attend all major hearings and mediation

sessions and shall, at a minimum, attend all sessions of the trial where the jury is present. And,

of course, the lead plaintiff must give testimony. No settlement will be approved by the Court

without the lead plaintiffs’ careful recommendation in favor of it. Reasonable travel, telephone

and business expenses incurred as a result of the lead plaintiff duties, if detailed and itemized,

may be reimbursed as expenses from any recovery. 

Appended to this order are two forms of certification which Mr. Hirsch and Mr. Packer,

on behalf of Globis Partners LLP, individually, must sign, file and serve on or before 

JUNE 1, 2005, in order to complete the appointment, obligating themselves to carry out the

responsibilities as lead counsel and the procedure for selecting and approving class counsel, a

procedure to which this order now turns. 

PROCEDURE FOR SELECTING AND APPROVING CLASS COUNSEL

Under the PSLRA, “[t]he most adequate plaintiff shall, subject to the approval of the

court, select and retain counsel to represent the class.” 15 U.S.C. 78u-4(a)(3)(B)(v). Selection

and approval of class counsel are important responsibilities for the lead plaintiff and the court. 

The selection and approval require an assessment of the strengths, weaknesses and experience

of counsel as well as the financial burden — in terms of fees and costs — on the class. 

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Wenderhold v. Cylink Corp., 191 F.R.D. 600, 602–03 (N.D. Cal. 2000); Network Assocs.,

76 F. Supp. 2d at 1033–34. 

Any important decision made by a fiduciary should be preceded by due diligence. A

lead plaintiff is a fiduciary for the investor class. No decision by the lead plaintiff is more

important than the selection of class counsel. Consequently, the lead plaintiff should precede

his or her choice with due diligence. The extent of such due diligence is a matter of judgment

and reasonableness based on the facts and circumstances. 

 The lead plaintiffs should immediately proceed to perform their due diligence and,

through counsel, move for the appointment and approval of their selected counsel no later than

JUNE 17. The motion should be accompanied by declarations from each lead plaintiff

explaining the due diligence undertaken by each with respect to the selection of class counsel. 

The declarations should also explain why the counsel selected was favored over other potential

candidates. The declarations should be filed under seal and not served on defendants. The

motion for approval of lead plaintiffs’ choice of counsel, however, should be served on defense

counsel. No hearing will be held on the motion unless the Court determines that it would be

beneficial. Once class counsel is approved, the first order of business will be to file a

consolidated complaint. The Court expects this to be done by JULY 14 and any motion to

dismiss to be filed by AUGUST 11.

IT IS SO ORDERED.

Dated: May 24, 2005. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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