Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-05138/USCOURTS-cand-3_03-cv-05138-6/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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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE PORTAL SOFTWARE, INC

SECURITIES LITIGATION.

 /

No C-03-5138 VRW

ORDER

Plaintiffs allege violation of the Securities Act of 1933

(the “‘33 Act”) and the Securities Exchange Act of 1934 (the “‘34

Act”) on behalf of investors who purchased securities of Portal

Software, Inc, between May 20, 2003, and November 13, 2003,

inclusive (the “class period”). In particular, plaintiffs assert

that defendants violated generally accepted accounting principles

(GAAP) by inflating artificially the price of Portal’s stock and

making false and misleading statements on which plaintiffs relied,

thereby incurring substantial financial losses from purchasing

Portal stock at fraudulently inflated prices.

On August 17, 2006, the court denied defendants’ motion

to dismiss plaintiffs’ claims under sections 11, 12(a)(2) and 15 of

the ‘33 Act and granted defendants’ motion to dismiss plaintiffs’

claims under sections 10(b)and 20(a) of the ‘34 Act. Doc #155.

Additionally, because plaintiffs had amended their complaint four

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times but still had not satisfied the Private Securities Litigation

Reform Act’s (PSLRA) heightened pleading requirements, the court

dismissed plaintiffs’ claims under the ‘34 Act with prejudice. Id.

The parties reached a settlement on March 9, 2007, Doc

#168, and now seek preliminary approval of various aspects of the

settlement. In particular, plaintiffs seek: (1) provisional

certification of the settlement class; (2) preliminary approval of

the settlement reached by the parties; (3) approval of the proposed

form of notice; (4) establishment of a schedule for class members

to object to the settlement and (5) a hearing on final approval of

the settlement at which class members may be heard. Doc #167. 

I

Portal provides billing and subscriber management

solutions to its clients primarily through its “Infranet” software,

for which Portal charges companies “license fees.” Doc #135, ¶ 68. 

Portal also charges customers “service fees” for system

implementation, consulting, maintenance and training. Id. 

Following the “dot-com” market crash of 2001, Portal lost many of

its dot-com startup customers and incurred financial losses that

wiped out more than 96% of its equity. Id ¶ 69.

Portal subsequently began to market its Infranet product

to more established and sophisticated business customers, including

telecommunications providers. Id. Portal’s new clients required

greater software customization than had the dot-com startups, which

in turn affected how Portal could recognize license fee revenues. 

Id. Plaintiffs contend that under GAAP, a software provider cannot

recognize licensing revenues for software that requires

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customization for a client until a substantial portion of the

modification has been completed. Id ¶¶ 4, 44(e), 69. Although

Portal historically could recognize revenue when it delivered its

Infranet product to its dot-com clients, the greater customization

required by Portal’s new, more established clients required the

company to defer recognizing revenue from many of its contracts

until customization was complete. Id ¶ 153. Plaintiffs allege

that during the class period, Portal began to manipulate its

license fees to recognize more revenue “up-front.” Id ¶¶ 70-71.

On September 12, 2003, Portal completed a secondary

offering to the public at a price of $13.25 per share, thereby

generating $60 million in net proceeds. Id ¶ 9. On November 13,

2003, defendants announced that due to contract delays, revenue

recognition deferrals and service execution issues, Portal expected

net losses of $0.36 to $0.40 per share for the third quarter of

fiscal year (FY) 2004. Id ¶ 10. These losses contrasted with the

$0.04 net profits per share that Portal had previously projected

for the quarter. Id. After this announcement, Portal’s common

share price plummeted more than 42.5% to $8.77 in after-hours

trading. Id ¶ 113. 

Plaintiffs’ complaint alleges that the accounting fraud

described above was undertaken by defendants to inflate Portal’s

reported revenue numbers, which were then used by defendants to

create false and misleading statements regarding Portal’s financial

health and future business prospects. According to plaintiffs,

these false and misleading statements artificially inflated

Portal’s stock price and allowed defendants to complete a $60

million secondary offering on September 12, 2003. Plaintiffs’

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claims for violations of the ‘33 Act are based on alleged false and

misleading statements made in the registration statement and

prospectus issued in connection with the secondary offering. Id,

¶¶ 142-165. Plaintiffs’ claims for violations of the ‘34 Act are

based on alleged false and misleading statements disseminated to

the investing public via SEC filings and press releases. Id, ¶¶

166-181.

II

A

Pursuant to FRCP 23, plaintiffs seek provisional

certification of their settlement class, which comprises all

purchasers of Portal securities during the class period.

FRCP 23(a) sets forth the preliminary requirements to

certifying a class action: (1) the class must be so numerous that

joinder of all members is impracticable; (2) there must be

questions of law or fact common to the class; (3) the claims or

defenses of the representative parties must be typical of the

claims or defenses of the class and (4) the representative parties

must be able fairly and adequately to protect the interests of the

class. FRCP 23(a); see also, e g, Armstrong v Davis, 275 F3d 849,

868 (9th Cir 2001); Walters v Reno, 145 F3d 1032, 1045 (9th Cir

1998).

“In determining the propriety of a class action, the

question is not whether the plaintiff or plaintiffs have stated a

cause of action or will prevail on the merits, but rather whether

the requirements of Rule 23 are met.” Eisen v Carlisle &

Jacquelin, 417 US 156, 178 (1974) (quoting Miller v Mackey Intl,

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452 F 2d 424 (5th Cir 1971)) (internal quotation marks omitted). 

“A Rule 23 determination is wholly procedural and has nothing to do

with whether a plaintiff will ultimately prevail on the substantive

merits of its claim.” Little Caesar Enter v Smith, 172 FRD 236,

241 (ED Mich 1997). On a motion for class certification, the court

“is bound to take the substantive allegations of the complaint as

true.” Blackie v Barrack, 524 F2d 891, 901 n17 (9th Cir 1975). 

Nonetheless, the court is “at liberty to consider evidence which

goes to the requirements of Rule 23 even though the evidence may

also relate to the underlying merits of the case.” Hanon v

Dataproducts Corp, 976 F 2d 497, 509 (9th Cir 1992). 

The court first assesses whether the FRCP 23(a)

requirements of numerosity, commonality, typicality and adequacy

are met. Under FRCP 23(a)(1), the class must be “so numerous that

joinder of all members is impracticable.” Plaintiffs estimate that

their proposed class contains “thousands” of members, Doc #167 at

11, and assert that joinder would be impracticable because class

members are geographically dispersed throughout the United States. 

The court agrees and finds that the numerosity requirement of Rule

23(a)(1) is satisfied.

The court also concludes that the commonality requirement

is met. To satisfy FRCP 23(a)(2), “[t]he existence of shared legal

issues with divergent factual predicates is sufficient, as is a

common core of salient facts coupled with disparate legal remedies

within the class.” Hanlon v Chrysler Corp, 150 F3d 1011, 1019 (9th

Cir 1998). Plaintiffs allege, inter alia, that all class members

paid artificially inflated prices for Portal stock due to

defendants’ misrepresentations. Doc #167 at 12-13. Common issues

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of law and fact include whether defendants violated the Securities

Act and, if so, whether the price of Portal stock was inflated

artificially. All class members’ claims share these and other

common questions of law and fact.

Along these lines, the court concludes that the named

plaintiffs’ claims appear to be typical of the putative class. 

“The test of typicality is whether other members have the same or

similar injury, whether the action is based on conduct which is not

unique to the named plaintiffs, and whether other class members

have been injured by the same course of conduct.” Hanon, 976 F2d

at 508 (internal quotation omitted). See also Estate of Jim

Garrison v Warner Brothers et al, 1996 WL 407849 at *2 (CD Cal

1996) (“Typicality in the antitrust context will be established by

plaintiffs and all class members alleging the same antitrust

violation by the defendants”). 

Here, the typicality requirement is satisfied by the

class representatives — John Romeo and Pipefitters Local 522 & 633

Pension Trust Fund (“Pipefitters”) — because their claims and those

of the class members they seek to represent derive from the same

set of operative facts. Romeo purchased 504,896 shares of Portal

common stock during the settlement class period; Pipefitters

purchased 2,500 shares of Portal stock in the secondary offering. 

Like the other settlement class members, class representatives

allege they were damaged by their purchases of Portal common stock.

Hence, the claims of the class representatives are typical of those

of the settlement class. 

Finally, FRCP 23(a)(4) provides that class

representatives — both named plaintiffs and their counsel — must

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“fairly and adequately protect the interests of the class.” 

Legal adequacy turns on two questions: “(1) do named plaintiffs and

their counsel have any conflicts of interest with other class

members and (2) will the named plaintiffs and their counsel

prosecute the action vigorously on behalf of the class?” Hanlon,

150 F3d at 1020. 

Regarding the second inquiry, the court has no reason to

doubt that plaintiffs’ counsel acted vigorously on behalf of the 

class. Yet the first inquiry gives the court pause, as the

representatives may have a conflict of interest with the class

relating to the pooling of ‘33 and ‘34 Act claimants in this case. 

Such a conflict may exist if the representatives’ proportionate

financial interest in the ‘33 and ‘34 Act claims deviates

significantly from the entire class’s interest in these claims. 

For example, if the class representatives purchased a higher number

of shares in the secondary offering (giving rise to ‘33 Act claims)

as compared to the class, the representatives may be tempted to

divert settlement proceeds from ‘34 Act to ‘33 Act claims. 

According to plaintiffs, Romeo purchased 504,896 shares

of Portal common stock during the settlement class period and

Pipefitters purchased 2,500 shares of Portal stock in the secondary

offering. But this assertion does not establish that the

representatives’ financial interest with respect to these claims is

proportionate with those of the entire class. That said, this

conflict may have little consequence here due to the court’s

dismissal of the ‘34 Act claims. Nonetheless, the court expects

counsel to address this issue in its briefing for the final

approval hearing. 

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In addition to satisfying the Rule 23(a) prerequisites,

the class must also satisfy one of the three alternatives listed

under Rule 23(b). Walters, 145 F3d at 1045. Plaintiffs bear the

burden of demonstrating that they have satisfied all four FRCP

23(a) elements and one FRCP 23(b) alternative. Zinser v Accufix

Research Institute, Inc, 253 F3d 1180, 1186 (9th Cir 2001). 

Failure to carry the burden on any FRCP 23 requirement precludes

certifying a class action. Burkhalter Travel Agency v MacFarms

Int’l, Inc, 141 FRD 144, 152 (ND Cal 1991) (Jensen, J) (citing

Rutledge v Electric Hose & Rubber Co, 511 F2d 668 (9th Cir 1975)).

Plaintiffs have opted to proceed under FRCP 23(b)(3),

which authorizes the court to certify a class action if “the

questions of law or fact common to the members of the class

predominate over any questions affecting only individual members,

and * * * a class action is superior to other available methods for

the fair and efficient adjudication of the controversy.” FRCP

23(b)(3). See also Zinser v Accufix Research Inst, Inc, 253 F3d

1180, 1189 (9th Cir 2001). The matters pertinent to such a finding

include: (a) the interest of members of the class in individually

controlling the prosecution or defense of separate actions; (b) the

extent and nature of any litigation concerning the controversy

already commenced by or against members of the class; (c) the

desirability or undesirability of concentrating the litigation of

the claims in the particular forum; (d) the difficulties likely to

be encountered in the management of a class action. Id.

The objective behind the two requirements of Rule

23(b)(3) is the promotion of economy and efficiency. See FRCP

23(b)(3) advisory committee notes. When common issues predominate,

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class actions achieve these objectives by minimizing costs and

avoiding the confusion that would result from inconsistent

outcomes. Id.

To predominate, common questions “need not be dispositive

of the litigation.” Romero v Producers Dairy Foods, Inc, 235 FRD

474, 489 (ED Cal 2006). Rather, the court must identify issues

involved in the cases and determine which of them “are subject to

generalized proof * * * applicable to the class as a whole” and

which must be the subject of proof on behalf of individualized

class members. Id. “Because no precise test can determine whether

common issues predominate, the court must pragmatically assess the

entire action and the issues involved.” Id. Courts in securities

cases, as in other cases, typically evince a greater willingness to

certify classes involving individualized damages, as opposed to

individualized liability issues. See Alexander v QTS Corp, 1999 US

Dist LEXIS 11842 (ND Ill 1999).

 Here, the common questions concern whether defendants

violated the Securities Act and, if so, whether such violations

affected the price plaintiffs paid for Portal stock. See, e g,

Freedman v La-Pac Corp, 922 F Supp 377, 399-400 (D Or 1996); In re

Emulex, 210 FRD 717, 721 (CD Cal 2002) (granting motion for class

certification because “[t]he predominant questions of law or fact

at issue in this case are the alleged misrepresentation defendants

made during the class period and are common to the class”); In re

Unioil Sec Litig, 107 FRD 615, 622 (CD Cal 1985) (“As plaintiffs’

claim is based on a common nucleus of misrepresentations, material

omissions and market manipulations, the common questions

predominate over any differences between individual class members

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with respect to damages, causation or reliance.”). Accordingly,

the court finds that common questions of law and fact predominate

over individual questions and that class treatment of this matter

is superior to any other available means of adjudication. 

B

 The court next considers whether the proposed settlement

should be preliminarily approved.

“[The] preliminary determination establishes an initial

presumption of fairness * * *.” In re General Motors

Corp, 55 F3d 768, 784 (3d Cir 1995) (emphasis added). As

noted in the Manual for Complex Litigation, Second, “[i]f

the proposed settlement appears to be the product of

serious, informed, non-collusive negotiations, has no

obvious deficiencies, does not improperly grant

preferential treatment to class representatives or

segments of the class, and falls within the range of

possible approval, then the court should direct that the

notice be given to the class members of a formal fairness

hearing * * *.” Manual for Complex Litigation, Second §

30.44 (1985). In addition, “[t]he court may find that

the settlement proposal contains some merit, is within

the range of reasonableness required for a settlement

offer, or is presumptively valid.” Newberg on Class

Actions § 11.25 (1992).

Schwartz v Dallas Cowboys Football Club, Ltd, 157 F Supp 2d 561,

570 n12 (ED Pa 2001). In other words, preliminary approval of a

settlement has both a procedural and a substantive component. 

The court finds that the procedure for reaching this

settlement was fair and reasonable and that the settlement was the

product of arms-length negotiations. Doc #167. Experienced

counsel on both sides, each with a comprehensive understanding of

the strengths and weaknesses of each party’s respective claims and

defenses, negotiated this settlement over an extended period of

time in early 2007. Doc #167 at 3-8.

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The substantive fairness and adequacy of the settlement

and plan of allocation confirms this view of the fair procedures

used to reach the settlement. To evaluate adequacy, courts

primarily consider plaintiffs’ expected recovery balanced against

the value of the settlement offer. See Armstrong, 616 F2d at 314;

Grunin v Int'l House of Pancakes, 513 F2d 114, 124 (8th Cir 1974). 

The proposed settlement agreement provides that

defendants will pay $3,250,000 in cash into a fund to be

distributed to class members. Doc #167 at 2. Considering the

maximum provable damages in this case, $13 million, balanced

against the value of the settlement offer, the settlement

consideration seems reasonable, particularly in light of the

court’s dismissal of the ‘34 Act claims. Based on the risk of

summary judgment, which defendants had filed before settlement, see

Doc #158, and the anticipated expense and complexity of further

litigation, the court cannot say that the proposed settlement is

obviously deficient or is not “within the range of possible

approval.” Schwartz, 157 F Supp 2d at 570 n12. 

The court also preliminarily approves plaintiffs’

proposed plan of allocation, which differentiates between the ’33

Act and the ’34 Act claimants. Lead counsel employed a damages

consultant, Bjorn Steinholt, to draft a plan of allocation to

ensure a fair distribution of the available settlement proceeds. 

Steinholt’s proposed plan distinguishes between class members

asserting ‘34 Act claims, comprising all members who purchased

Portal common stock during the class period, and those asserting

‘33 Act claims, comprising members who purchased stock in the

September 12, 2003, secondary offering. Doc #170. Because the

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court dismissed the ‘34 Act claims with prejudice, settlement class

members asserting a ‘34 Act claim will be allocated 5% of the total

settlement proceeds, after fees and expenses. Doc #170, ¶ 10. The

remaining 95% of the total settlement proceeds, after fees and

expenses, will be allocated to settlement class members with a ‘33

Act claim. Id. 

Courts frequently endorse distributing settlement

proceeds according to the relative strengths and weaknesses of the

various claims. See In re Warner Communications Sec Litig, 618 F

Supp 735, 745 (SDNY 1985), aff’d, 798 F2d 35 (2d Cir 1986); In re

Agent Orange Prod Liab Litig, 611 F Supp 1396, 1411 (EDNY 1985)

(“[I]f one set of claims had a greater likelihood of ultimate

success than another set of claims, it is appropriate to weigh

‘distribution of the settlement * * * in favor of plaintiffs whose

claims comprise the set’ that was more likely to succeed.”)

(quoting In re Corrugated Container Antitrust Litig, 643 F2d 195,

220 (5th Cir 1981)); Petrovic v AMOCO Oil Co, 200 F3d 1140, 1152

(8th Cir 1999) (upholding distribution plan where class members

received different levels of compensation and finding that no

subgroup was treated unfairly). Distinguishing between the ‘33 and

‘34 Act claims seems appropriate here, as the court dismissed the

‘34 Act claims with prejudice before settlement. Accordingly, the

court cannot conclude that the plan of allocation is obviously

deficient or is not “within the range of possible approval.” 

Schwartz, 157 F Supp 2d at 570 n12. 

The court next takes up the form of notice. At the

hearing on the present motion, the court instructed counsel to

include their estimated lodestar in the notice to enable class

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members to assess the reasonableness of counsel’s fee request. The

declaration, Doc #173, and amended notice, Doc #174, Ex A-1,

subsequently submitted by counsel comply with the court’s request.

Plaintiffs propose that notice be disseminated to all

class members who can be identified with reasonable effort to

inform them of the terms of the settlement, their rights in

connection with the settlement and the date of the final approval

hearing. Doc #167 at 19; Doc #174, Ex A-1. Plaintiffs further

propose that a summary notice, see Doc #174, Ex A-3, be published

in the national edition of Investor’s Business Daily. 

The court agrees with plaintiffs that notice by mail and

publication is the “best notice practicable under the

circumstances,” as mandated by FRCP 23(c)(2)(B). See also In re

Domestic Air Transp Antitrust Litig, 141 FRD 534, 550-51 (ND Ga

1992) (providing that notice by mail to those class members who

could be identified and by publication only to those who could not

be identified satisfies due process requirements); Manual for

Complex Litigation (4th ed 2004) § 21.311 (“Publication in

magazines, newspapers, or trade journals may be necessary if class

members are not identifiable after reasonable effort”). 

Accordingly, the court APPROVES the proposed form of notice, as to

both form and content.

//

//

//

//

//

//

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III

In sum, the court GRANTS plaintiffs’ motion for 

provisional certification of the settlement class, APPROVES

preliminarily the proposed settlement and plan of allocation and

ORDERS the following schedule for further proceedings:

Date Event

July 5, 2007 Notice mailed to settlement class

and summary notice published

August 13, 2007 Deadline to postmark objections or

opt out

August 20, 2007

Deadline for filing briefing in

support of final approval of

settlement

September 6, 2007, at 2:00 pm Hearing on final approval of

settlement

At the final approval hearing on September 20, 2007, at

2:00 pm, the court will determine: (1) whether the proposed

settlement should be approved as fair, reasonable and adequate; (2)

the merits of objections, if any, made to the settlement or any of

its terms; (3) the amount of litigation costs, expenses and

attorney fees, if any, that should be awarded to class counsel; and

(4) other matters related to the settlement. 

IT IS SO ORDERED.

 

 VAUGHN R WALKER

 United States District Chief Judge

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