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MILBERG WEISS BERSHAD HYNES & LERACH LLP PATRICK J. COUGHLIN (111070) JEFFREY W. LAWRENCE (166806) JASON T. BAKER (212380) 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: [phone] (fax) - and WILLIAM S. LERACH (68581) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: [phone] (fax) SCOTT & SCOTT, LLC DAVID R. SCOTT 108 Norwich Avenue Colchester, CT 06415 Telephone: [phone] (fax) [Proposed] Co-Lead Counsel for Plaintiffs
13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DATE: July 27, 2001 TIME: 9:00 a.m. COURTROOM: 4, Honorable Susan Illston vs. VERSATA, INC., et al., Defendants. MICHAEL NANCE, Individually and On Behalf of All Others Similarly Situated, Plaintiff, ) ) ) ) ) ) ) ) ) ) ) No. C-01-1439-SI CLASS ACTION NOTICE OF MOTION, MOTION AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF FOR THE MOTION TO APPOINT GONNET INFORMATICA, CATU LTD. AND XIAOFAN WANG AS LEAD PLAINTIFF PURSUANT TO SECTION 21D(a)(3)(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND TO APPROVE LEAD PLAINTIFF'S CHOICE OF COUNSEL UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
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TABLE OF CONTENTS Page
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I. II. III. IV.
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 PROCEDURAL BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SUMMARY OF PENDING ACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A. The Versata Investors Should Be Appointed Lead Plaintiff . . . . . . . . . . . . . 7 1. The Versata Investors Believe They Have the Largest Financial Interest in the Relief Sought by the Class . . . . . . . . . . . . . . . . . . . . . . 7 The Versata Investors Are Qualified Under Rule 23 . . . . . . . . . . . . 8 The Versata Investors' Claims Are Typical of the Claims of the Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Versata Investors Will Fairly and Adequately Represent the Interests of the Class . . . . . . . . . . . . . . . . . . . . . . 9
b.
This Court Should Approve the Versata Investors' Choice of Counsel . . . . . . . 10
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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NOTICE OF MOTION AND MOTION TO: ALL PARTIES AND THEIR RESPECTIVE COUNSEL OF RECORD PLEASE TAKE NOTICE that on July 27, 2001, or as soon thereafter as this matter may be heard in the Courtroom of the Honorable Susan Illston, located at 450 Golden Gate Avenue, 17th Floor, San Francisco, California, the Versata Investors1 will, and hereby do, move this Court under 21D(a)(3)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78u-4(a)(3)(B), for the appointment of the Versata Investors as lead plaintiff in this action and to approve lead plaintiff's selection of counsel. This motion is made on the grounds that the Versata Investors are the most adequate plaintiff, having suffered estimated losses of at least $891,010. In addition, the Versata Investors meet the requirements of Rule 23 of the Federal Rules of Civil Procedure because their claims are typical of class members' claims and the Versata Investors will fairly and adequately represent the class. Finally, the Versata Investors have selected and retained national law firms with substantial experience in prosecuting securities fraud class actions to serve as class counsel. The motion is based on this notice of motion, the supporting memorandum of points and authorities, the Baker Decl., the pleadings and other files and records in each of these actions and such other written or oral argument as may be presented to the Court. MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION The Versata Investors, who collectively suffered at least $891,010 in losses from purchases of Versata securities, submit this memorandum of points and authorities in support of their motion, pursuant to 21D(a)(3)(B) of the Exchange Act, as amended by the PSLRA, for (1) appointment of lead plaintiff; The "Versata Investors" are Gonnet Informatica ("Gonnet"), Catu Ltd. and Xiaofan Wang ("Wang") three investors who purchased Versata, Inc. ("Versata" or the "Company") common stock between March 2, 2000 and March 29, 2001 (the "Class Period"). The Versata Investors have submitted the signed certifications required by 21D(a)(2)(A)(i)-(vi) of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are attached as Ex. A to the Declaration of Jason T. Baker in Support of: (1) Motion to Appoint Gonnet Informatica, Catu Ltd. and Xiaofan Wang as Lead Plaintiff Pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 and to Approve Lead Plaintiff's Choice of Counsel; and (2) Motion to Consolidate Related Actions ("Baker Decl."), filed concurrently herewith. The Private Securities Litigation Reform Act of 1995 ("PSLRA") specifically authorizes class members, regardless of whether they have filed a complaint, to move for appointment of lead plaintiff. See 15 U.S.C. 78u-4(a)(3)(B). The Versata Investors are identified in the chart entitled "Movants' Purchases, Sales and Losses," Baker Decl., Ex. B.
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and (2) approval of lead plaintiff's selection of counsel. The Versata Investors proffer three class members, who together suffered at least $891,010 in losses, for appointment as lead plaintiff. Section 21D of the Exchange Act, as amended by the PSLRA, establishes the procedure for the selection of lead plaintiff to oversee class actions brought under the federal securities laws.2 Specifically, 21D(a)(3)(A)(i) provides that, within 20 days after the date on which a class action is filed under the PSLRA, the plaintiff or plaintiffs shall cause to be published, in a widely circulated national businessoriented publication or wire service, a notice advising members of the purported plaintiff class (I) of the pendency of the action, the claims asserted therein, and the purported class period; and (II) that, 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. 15 U.S.C. 78u-4(a)(3)(A)(i). Additionally, 21D(a)(3)(B)(i) of the Exchange Act directs this Court to consider any motions brought by plaintiffs or purported class members to appoint lead plaintiffs filed in response to any such notice by not later than 90 days after the date of publication or as soon as practicable after this Court decides any pending motion to consolidate any actions asserting substantially the same claim or claims.3 Under this provision of the Exchange Act, this Court "shall" appoint the "most adequate plaintiff" to serve as lead plaintiff and shall presume that plaintiff is the person, or group of persons, that (aa) has either filed the complaint or made a motion in response to a notice ...;
(bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and (cc) Procedure. otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil
15 U.S.C. 78u-4(a)(3)(B)(iii)(I).
2
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In December 1995, Congress amended the Exchange Act by enactment of the PSLRA. These amendments are contained in 21D of the Exchange Act, 15 U.S.C. 78u-4.
3
There is currently a stipulation pending court approval of consolidation of the related class actions pending in this District. Each of these actions generally alleges the same violative conduct by substantially the same defendants to artificially inflate the price of Versata's securities by making false and misleading statements about Versata's business. Differences can be resolved through the filing of a consolidated complaint.
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The Versata Investors have suffered losses of at least $891,010 as a result of their purchases of Versata securities during the Class Period. The Versata Investors believe they have the largest financial interest in the relief sought by the class. See Baker Decl., Ex. B. The Versata Investors also seek the Court's approval of their selection of counsel as provided by the statute. II. PROCEDURAL BACKGROUND Presently pending in this District are six related securities class action lawsuits: Abbreviated Case Name Nance v. Versata, Inc., et al. ("Nance") Pernot, et al. v. Versata Inc., et al. Dyal v Versata Inc., et al. Cotterill v. Versata Inc., et al. ("Cotterill") Landau v. Versata Inc., et al. Hagaman v. Versata Inc., et al. ("Hagaman") Case No. C-01-1439-SI C-01-1559-SI C-01-1703-SI C-01-1731-SI C-01-1786-SI C-01-2264-BZ Filing Date 04/12/01 04/20/01 05/01/01 05/03/01 05/08/01 06/08/014
Each of these actions alleges claims for violation of the Exchange Act and Securities and Exchange Commission ("SEC") Rule 10b-5 promulgated thereunder on behalf of investors who purchased or otherwise acquired Versata securities during the Class Period. Concurrent with the filing of this motion, the Versata Investors have also filed a motion to consolidate the above related class actions pending in this District. A stipulation for consolidation of the actions is also pending before the Court. The Exchange Act, as amended by the PSLRA, requires prompt publication of notice advising class members of their right to move within 60 days of publication to be appointed lead plaintiff. On April 11, 2001, pursuant to 21D(a)(3)(A)(i) of the Exchange Act, plaintiff in the Nance action published a notice of pendency of the action on Business Wire. Baker Decl., Ex. C. The notice advised class members of the existence of the lawsuit and described the claims asserted. This motion is timely filed within 60 days from the publication of that notice.5
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The Hagaman complaint has not yet been related, but it makes substantially the same claims as the other five related actions.
5
Section 21D(a)(3)(A)(ii), 15 U.S.C. 78u-4(a)(3)(A)(ii), provides that if more than one action is filed on behalf of a class asserting substantially the same claims, only plaintiffs in the first-filed action are required to publish the notice.
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III.
SUMMARY OF PENDING ACTIONS Versata provides a suite of software and services designed to enable its customers to rapidly
deploy e-business software applications that can be modified quickly to meet changing business requirements. 2.6 In January 1995, Versata commenced development efforts on its initial software products, from which it generated revenue from late 1995 through early 1998. In September 1998, Versata introduced the first generation of what is now its Versata E-Business Automation System. To date, it has licensed its products and services to over 500 customers around the world. Since the second quarter of 1998, Versata has purported to have generated revenue exclusively from its web-based software products and related services. Id. On or about March 2, 2000, Versata filed its Registration Statement/Prospectus with the SEC, which described the Company's revenue recognition policy as following "Statement of Position 97-2 'Software Revenue Recognition.'" 19. The Initial Public Offering ("IPO") was a success in that Versata sold 3.85 million shares for net proceeds of $83.8 million. 20. On March 29, 2000, SG Cowen Securities Inc. ("Cowen") initiated coverage of Versata and issued a report based on conversations with Versata management. The report stated in part: Versata enables the above objectives with an industrial-strength environment which allows automatic generation and maintenance of ebusiness applications upon specification of business rules in an easy English-like language and based upon industry standard Java. This unique feature combination has been much appreciated by customers who have helped Versata grow explosively from below $4MM in 1998 to over $12MM in 1999 and likely growing to over $36MM in 2000. A significant upside driver to Versata is a new and important relationship with IBM, where its WebSphere web application server product will be tightly integrated with the value-added business rules server offered by Versata and sold jointly by both organizations, a strong endorsement for Versata and an upside driver starting later this year. * * *
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6
Growing sales capacity: Versata's revenue prospects are likely to be driven both by rapidly expanding sales force and improved product versions. Over the next year, sales capacity should grow a lot faster than revenue growth in our model driven by new hires, expanding quotas, geographic expansion and more indirect channel leverage. 21.
All paragraph references ("") are to the Cotterill complaint unless otherwise noted. -4-
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On April 24, 2000, Versata issued a press release entitled "Versata Revenue Up 468% Year Over Year, and 96% Quarter Over Quarter." The press release also quoted Versata's President and CEO, Jack Hewitt ("Hewitt"), as stating: "We are very pleased with this record performance in our first quarter coming out of the box as a publicly-held company. Revenue growth was very strong in both our lines of business and in our major geographic markets. At the same time, we saw another increase in our average sales price. And while producing these record results, the company continued to aggressively invest in our technology, markets, channels and infrastructure to support growth going forward." 22. The next day, Cowen issued a report on Versata by Syed, based on statements made by Versata
8 management, which raised 2000 revenue forecasts to $53 million and reduced 2000 loss per share 9 forecasts to $0.84. 23. 10 On July 24, 2000, Versata issued a press release entitled "Versata Software Sales Up 47% 11 Quarter Over Quarter, and 453% Year Over Year," which stated in part: 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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Second quarter software license revenue grew 47% over the prior quarter, compared with a 38% sequential growth rate in the first quarter. Professional services revenues and support fees increased 31% over the preceding quarter. Versata's rapid growth in revenues resulted from a breadth of positive factors including higher average sales price, new customers, repeat orders from existing customers, and growth in international markets. Hewitt was quoted as saying: "We are excited that our software revenue growth accelerated to the second quarter, but even more gratifying is the list of world-class organizations who joined the ranks of our customers and partners this quarter. These top-tier customers and partners confirm the broad application of Versata's technology and the market's embrace of our compelling value proposition." 24. On October 23, 2000, Versata issued a press release entitled "Versata Delivers Strong Second Quarterly Results; Reports 41% Sequential Software Growth, Improving Margins and Pro Forma Net Loss of $0.20 Per Share," which quoted Hewitt as follows: "Q3 was another outstanding quarter for Versata as we continue to benefit from the global shift to the Internet as the standard platform for automating mainstream business operations,"said Jack Hewitt, President and Chief Executive Officer of Versata, Inc. "Our results speak for themselves, but I am particularly pleased with our software revenue growth and the improvements in our margins, DSO's and use of cash." 26. On February 5, 2001, Versata issued a press release entitled "Versata's 2000 Revenues Increase 363% Year-Over-Year; Focuses on Achieving Profitability in 2001." This press release quoted Hewitt
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as saying, "While our Q4 results disappointing, were we believe we are on the right track to achieve profitability this year. 28. At this point, the Company's stock had dropped to less than $10, but it was still inflated due to management's "bullish" statements and what were later revealed to be Versata's false financial results. In fact, on February 6, 2001, Cowen issued a report on Versata, which was based on management's statements and stated in part, "Management is still bullish on the future noting that despite the miss, revenue still increased by 220% Y/Y." 29. On February 7, 2001, Versata announced Jim Doehrman's ("Doehrman") appointment as Executive Vice President and Chief Financial Officer. Versata issued a press release in connection with the announcement wherein Doehrman was quoted as saying, "I believe Versata has a solid financial position, great products and an excellent market opportunity." 30. The next month, Versata experienced more turnover in upper management. On March 29, 2001, Versata appointed Doug Roberts ("Roberts") as Interim Chief Executive Officer. Versata issued a press release announcing this change, which stated in part, "Together with our other seasoned executives, we believe we are in a strong position to refocus our strategy and maintain our path to profitability." 31. On the same day, after close of the market, Versata issued a press release entitled "Versata Delays Filing of Form 10-K and Updates Guidance on First Quarter 2001 Financial Results." In this shocking release, Versata announced that it would eliminate fully 30% of its domestic and international contractors and employees. The release's other revelations included that Versata would delay filing of its Form 10-K while the Company looked into "certain transactions from 2000 that may not have met the company's revenue recognition policy." 32. The last revelation was that Versata had to restate its first quarter guidance downward from $16 to $17 million previously announced, to only $10 to $11.5 million. 32. A day later, on March 30, 2001, NASDAQ halted trading of Versata and requested additional information from the Company. By the time trading was halted, the stock had fallen to only $0.28 per share, 99% lower than its Class Period high of $100-15/16 per share. 5. Finally, on April 4, 2001, Versata disclosed that it had received the request for additional information from the NASDAQ Stock Market. Versata admitted that: "Nasdaq's request centers on
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Versata's internal inquiry into certain transactions in 2000 that may not have met the company's revenue recognition policy." Thereafter, Versata shareholders filed suit seeking relief from defendants' fraud. IV. ARGUMENT A. The Versata Investors Should Be Appointed Lead Plaintiff 1. The Versata Investors Believe They Have the Largest Financial Interest in the Relief Sought by the Class
The PSLRA provides that this Court: 7 8 9 10 11 12 13 14 15 15 U.S.C. 78u-4(a)(3)(B)(iii)(I) (emphasis added). 16 Thus, the statutory language explicitly provides that a "member or members" of the class, or a 17 "person or group of persons," may combine to constitute "the largest financial interest" entitled to 18 presumptive appointment as lead plaintiff. See Reiger v. Altris Software, Case No. 98cv0528J (JFS), 19 1998 U.S. Dist. LEXIS 14705, at *13-*14 (S.D. Cal. Sept. 14, 1998); In re Advanced Tissue Sciences 20 Sec. Litig., 184 F.R.D. 346, 350 (S.D. Cal. 1998). 21 During the Class Period, the Versata Investors purchased Versata securities at prices inflated by 22 defendants' false statements and collectively suffered losses of at least $891,010. See Chart of Movants' 23 Purchases, Sales and Losses. Baker Decl., Ex. B. Specifically, Gonnet sustained losses of over $478,564, 24 Catu Ltd. lost over $220,452 and Wang's losses were at least $191,993. The Versata Investors believe 25 they have the largest financial interest in the outcome of this litigation and, therefore, are presumptively 26 entitled to appointment as lead plaintiff. 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)(bb). 27 28
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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 (hereafter in this paragraph referred to as the "most adequate plaintiff") in accordance with this subparagraph. 15 U.S.C. 78u-4(a)(3)(B)(i). Moreover, the statute requires this Court to adopt a rebuttable presumption that: [T]he most adequate plaintiff in any private action arising under this chapter is the person or group of persons that * * * (bb) in the determination of the court, has the largest financial interest in the relief sought by the class ....
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2.
The Versata Investors Are Qualified Under Rule 23
Section 21D(a)(3)(B)(iii)(I)(cc) of the Exchange Act provides at the outcome of the litigation, the lead plaintiff must also "otherwise satisf[y] the requirements of Rule 23 of the Federal Rules of Civil Procedure." Id. With respect to the qualifications of the class representative, Rule 23(a) requires generally that the claims be typical of the claims of the class and that the representative will fairly and adequately protect the interests of the class. As detailed below, the Versata Investors satisfy the typicality and adequacy requirements of Rule 23(a) and are qualified to be appointed. a. The Versata Investors' Claims Are Typical of the Claims of the Class
The typicality requirement of Rule 23(a)(3) is satisfied when the named plaintiffs have (1) suffered 10 the same injuries as the absent class members, (2) as a result of the same course of conduct by defendants, 11 and (3) their claims are based on the same legal issues. Hanon v. Dataproducts Corp., 976 F.2d 497, 12 508 (9th Cir. 1992); Haley v. Medtronic, Inc., 169 F.R.D. 643, 649 (C.D. Cal. 1996); In re Cirrus 13 Logic Sec., 155 F.R.D. 654, 657 (N.D. Cal. 1994); A & J Deutscher Family Fund v. Bullard, [198614 1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) 92,938, at 94,579 (C.D. Cal. 1986); Schwartz v. 15 Harp, 108 F.R.D. 279, 282 (C.D. Cal. 1985). The questions of law and fact common to the members 16 of the class that predominate over questions which may affect individual class members include the 17 following: 18 (a) 19 20 (c) 21 Class Period; 22 (d) 23 statements; 24 (e) 25 Period because of defendants' conduct complained of herein; and 26 (f) 27 measure of damages. 28
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Whether the federal securities laws were violated by defendants' acts as alleged herein; Whether Versata issued false and misleading statements during the Class Period; Whether defendants caused Versata to issue false and misleading statements during the
(b)
Whether defendants acted knowingly or recklessly in issuing false and misleading financial
Whether the market prices of Versata securities were artificially inflated during the Class
Whether the members of the class have sustained damages and, if so, what is the proper
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As a result, there is a well defined community of interest in the questions of law and fact involved in this case, and the claims asserted by the Versata Investors are typical of the claims of the members of the proposed class. The Versata Investors and members of the class allege that defendants violated the Exchange Act by publicly disseminating materially false and misleading statements about Versata during the Class Period. The Versata Investors, as did all of the members of the proposed class, acquired Versata securities at prices artificially inflated by defendants' fraudulent misrepresentations and omissions and were damaged thereby. Because the claims asserted by the Versata Investors are based on the same legal theories and arise "from the same event or course of conduct giving rise to the claims of other class members," typicality is satisfied. In re United Energy Corp. Solar Power Modules Tax Shelter Inv. Sec. Litig., 122 F.R.D. 251, 256 (C.D. Cal. 1988); accord Blackie v. Barrack, 524 F.2d 891, 902-03 & n.19 (9th Cir. 1975). b. The Versata Investors Will Fairly and Adequately Represent the Interests of the Class
The Versata Investors' interests are clearly aligned with the members of the proposed class, and there is no evidence of any antagonism between the interests of these individuals and the proposed class
15 members. As detailed above, the Versata Investors share substantially similar questions of law and fact 16 with the members of the proposed class, and their claims are typical of the members of the class. The 17 Versata Investors have amply demonstrated their adequacy as class representatives by signing sworn 18 certifications affirming their willingness to serve as, and assume the responsibilities of, a class representative. 19 See Baker Decl., Ex. A. In addition, the Versata Investors have selected the law firms of Milberg Weiss 20 Bershad Hynes & Lerach LLP ("Milberg Weiss") and Scott & Scott, LLC ("Scott & Scott"), two firms 21 highly experienced in prosecuting securities class actions such as this, to represent them. See Baker Decl., 22 Exs. D-E. 23 Therefore, the Versata Investors satisfy the requirements of Rule 23 and all of the PSLRA's 24 prerequisites for appointment as lead plaintiff in this action and should be appointed lead plaintiff pursuant 25 to 15 U.S.C. 78u-4(a)(3)(B). 26 27 28
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B.
This Court Should Approve the Versata Investors' Choice of Counsel
The PSLRA vests authority in the lead plaintiff to select and retai...