Free Proposed Scheduling Order - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 04-CV-0665 RPM DAVID HELLER, Individually and on behalf of all others similarly situated, Plaintiff, v. QUOVADX, INC., LORINE R. SWEENEY and GARY T. SCHERPING, Defendants.

[PROPOSED] SCHEDULING ORDER

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1.

INTRODUCTION The parties hereto submit this [Proposed] Scheduling Order pursuant to

D.C.COLO.L.Civ.R. 16.2(A) and the Court's prior orders in both this action and a related action, Special Situations Fund III L.P, et al. v. Quovadx, Inc., et al., No. 04-CV-1006, pending before this Court. 2. APPEARANCES OF COUNSEL Appearances of counsel and the parties represented are as follows: For Lead Plaintiff David Heller: Ex Kano S. Sams II Lerach Coughlin Stoia Geller Rudman & Robbins LLP 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415-288-4545 For Defendant Quovadx, Inc. ("Quovadx"): John P. Stigi III Wilson Sonsini Goodrich & Rosati, P.C. One Market Street, Spear Tower, Suite 3300 San Francisco, CA 94105 Telephone: 415-947-2000

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For Defendants Lorine R. Sweeney and Gary T. Scherping: Frederick J. Baumann Rothgerber Johnson & Lyons LLP One Tabor Center, Suite 3000 1200 Seventeenth Street Denver, CO 80202-5855 Telephone: 303/628-9542 3. STATEMENT OF CLAIMS AND DEFENSES The parties' statements of claims and defenses are based upon their current knowledge and, given the nature of the case, may be subject to amendment. (a) Plaintiff's Statement of Claims

This is an action on behalf of a class defined in this Court's April 12, 2005 Order Certifying Class: all persons who purchased publicly traded Quovadx securities on the open market from the period October 22, 2003 to March 15, 2004 (the "Class Period") with the exception of the following: defendants Quovadx, Inc., Lorine R. Sweeney, and Gary T. Scherping ("Defendants"), members of the immediate family of the Defendants, any person, firm, trust, corporation, officer, director, or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, and the legal representatives, agents, affiliates, heirs, successors in interest, or assigns of any excluded party. On October 22, 2003, Quovadx announced its highest reported quarterly revenue in Company history. The majority of this tremendous increase was due to the signing of the largest software contract in its corporate history -- an agreement with Infotech Network Group ("Infotech"), purportedly a consortium of 15 Indian information-technology companies. On November 3, 2003, less than two weeks later, Quovadx publicly-announced its intention to 2
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acquire Rogue Wave Software ("Rogue Wave") in a cash and stock transaction valued at $71 million. Discussions and negotiations concerning this potential acquisition, including the financial terms thereof, had been ongoing since at least July 2003. Quovadx completed the acquisition on December 19, 2003. Then, on March 15, 2004, less than five months after Quovadx announced its banner third quarter and its acquisition of Rogue Wave, Quovadx announced that it would be restating its previously-reported financial results to remove the revenue and income it recognized in connection with its agreement with Infotech, stating that collection was not probable as of September 30, 2003 -- the close of the third quarter 2003. Quovadx admitted that third quarter software license revenue had been overstated by an astounding 143%, and fourth quarter software license revenues were overstated by approximately 118%. The Company reported that it would reverse the entire $11 million of reported income attributable to its contract with Infotech. The stock dropped more than 28% per share on this news, closing at $3.58 per share on March 16, 2004. Plaintiff contends that the Company's massive restatement was not an innocent mistake. The Company's false financials had artificially inflated the price of its stock at a time when it was negotiating the purchase of Rogue Wave for a combination of cash and stock. Using its inflated stock as currency, Quovadx was able to acquire Rogue Wave on more favorable terms than it could have if it had properly reported its financial results. On April 12, 2004, the Company announced that after informally investigating the restatement, the Securities and Exchange Commission ("SEC") had decided to launch a formal investigation. At the same time, the Company announced that Quovadx's Chief Executive Officer ("CEO"), defendant Lorine R. Sweeney ("Sweeney"), and its Chief Financial Officer

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("CFO"), defendant Gary T. Scherping ("Scherping") -- individuals responsible for the Company's financial results and reposting -- had suddenly resigned. Moreover, on May 13, 2004, the Company announced that two additional distributor agreements entered into in 2003, totaling $1 million, would "require further review," and that Quovadx's 2004 1Q04 Form 10-Q would therefore be delayed. In addition, according to an anonymous letter addressed to the SEC, there were three more contracts, worth in excess of $450,000, that were improperly recorded by Quovadx in the third quarter. The letter provided detailed information concerning these transactions, including the allegation that Quovadx employees prepared false shipping documents for the purposes of revenue recognition. The Company's audit committee also released its findings related to the Infotech contract that, plaintiff alleges, indicated that the transaction was fraudulent. These findings included: (i) prior to its agreement with Quovadx, Infotech had never been a software distributor or reseller; (ii) it could not be determined whether Infotech's purported line of credit ever existed; (iii) a separate outsourcing agreement with Infotech, along with discussions concerning a possible $10 million per year of additional outsourcing to be paid by Quovadx to Infotech, likely induced Infotech to enter into the unusual software transaction; and (iv) Quovadx prepaid millions of dollars to Infotech, including $2 million in March 2004, for the likely purpose of allowing Infotech to establish letters of credit necessary for it to pay Quovadx -- demonstrating that, in effect, Quovadx was paying itself. The report further stated that Quovadx expected to receive payment from Infotech only if and when it received sufficient cash from the resale of the Company's products -- thus, the entire contract was a contingent sale. On May 14, 2004, the Company announced that, as a result of its internal investigation of the circumstances relating to the restatement, it had terminated the Executive Vice President of Sales, severed relations with its former President and CEO Sweeney and CFO Scherping, 4
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discontinued further severance payments to these former executives, and demanded the return of severance payments already paid to them and the return of prior compensation, including bonuses. (b) Statement of Defenses by Defendant Quovadx, Inc.

This suit arises out of Quovadx's announcement on March 15, 2004 that the Company would restate its third quarter 2003 ("3Q03") financial statements and revise its previously announced preliminary fourth quarter 2003 ("4Q03") and full year 2003 financial results. Quovadx disclosed that it was restating and revising these financial results to remove from its published financial reports for 2003 all revenue previously recognized in connection with transactions between the Company and Infotech. Defendants believe that they has several meritorious defenses to plaintiffs' claims that the restatement of Quovadx 3Q03 financial statements and the revision of its preliminary 4Q03 and full year 20003 results was the result of securities fraud. First and foremost, defendants did not know, and in the exercise of reasonable care could not have known or had reasonable grounds to believe, that any misstatements or omissions of material fact existed in any of Quovadx's publicly filed annual or quarterly reports or in any statement issued in connection therewith. In addition, all the accounting matters alleged to form the basis for plaintiffs' claims were reviewed and approved by the Company's independent auditor, Ernst & Young LLP ("E&Y"). Defendants believe that the evidence will show that its management did not know collection from Infotech was not probable at the time the revenue was recognized on the sales to Infotech. Defendants also believe that the evidence will establish that management did not engage in a scheme to fraudulently inflate Quovadx financial results and increase its stock price in order to acquire Rogue Wave on more favorable terms.

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Second, Quovadx has raised additional affirmative defenses to plaintiff's claims asserted under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC. As the First Affirmative Defense, Quovadx has alleged that plaintiff and the members of the class are barred from claiming injury or damage, if any, because they failed to make reasonable efforts to mitigate such injury or damage, which would have prevented their injury or damages, if any. As the Second Affirmative Defense, Quovadx has alleged that plaintiff and the members of the class were expressly advised in Quovadx's public filings and otherwise regarding the material facts concerning their investments, and plaintiff and the class therefore assumed the risk of any loss and is estopped from recovering any relief. As the Fourth Affirmative Defense, Quovadx has alleged that at the time plaintiff and other members of the class acquired Quovadx stock, plaintiff and other members of the class knew of the alleged untrue statements or omissions. As the Fifth Affirmative Defense, Quovadx has alleged that plaintiff's claims are barred in whole or in part by the doctrines of waiver, estoppel, ratification and/or unclean hands. As the Sixth Affirmative Defense, Quovadx has alleged that any recovery for damages allegedly incurred by plaintiff and the class members, if any, is subject to offset in the amount of any tax benefits actually received by plaintiff and the class members through their investments. As the Ninth Affirmative Defense, Quovadx has alleged that plaintiff's claims are barred in part or in whole because plaintiff cannot demonstrate reliance on any allegedly untrue statement of material fact, omissions of material fact, misleading statements, or other actions allegedly made by Quovadx. Quovadx has withdrawn its Third, Seventh, Eighth and Tenth Affirmative Defenses to the amended complaint.

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(c)

Statement of Defenses by Defendants Lorine R. Sweeney and Gary T. Scherping

Defendants Lorine R. Sweeney and Gary T. Scherping, the former CEO and CFO, respectively, of Quovadx, join in the Statement of Defenses submitted by Quovadx. Sweeney and Scherping deny that they have any liability to plaintiffs in this action. To that end, they will mount several defenses to plaintiffs' claims that the restatement of Quovadx 3Q03 financial statements and the revision of its preliminary 4Q03 and full year 2003 results were caused by securities fraud. To the extent that Sweeney and Scherping even participated in decisions to enter into agreements with the Infotech Network Group and to recognize revenue on those contracts, they acted at all times in good faith and without knowledge or reason to believe that collection from Infotech was not probable at the time the revenue was recognized on the sales to Infotech. Moreover, Sweeney and Scherping did not attempt to fraudulently inflate Quovadx financial results and increase its stock price in order to acquire Rogue Wave on more favorable terms. All the accounting matters alleged to form the basis of plaintiffs' claims were reviewed and approved by various experts, including inside and outside counsel for Quovadx and their independent auditor, E&Y. Thus, any losses or damages that plaintiffs suffered could not have been caused by Sweeney and Scherping's actions or omissions. Sweeney and Scherping have raised the additional affirmative defenses to plaintiff's claims asserted under Sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC: (1) that Sweeney and Scherping acted in good faith and had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which their liability is alleged to exist, and therefore, pursuant to Section 20(a) of the 1934 Act, Sweeney and Scherping have no liability for any act or omission so alleged; (2) that plaintiff's claims are barred in whole or in part because plaintiff cannot establish the primary 7
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liability necessary to assert a control person liability claim; (3) that every act or omission alleged in the Complaint was done or omitted in good faith conformity with the rules and regulations of the SEC, and there is no liability for any such act or omission alleged; (4) that plaintiff cannot demonstrate reliance on any allegedly untrue statement of material fact, omissions of material fact, misleading statements, or other actions allegedly made by Sweeney or Scherping; and (5) that any recovery for damages allegedly incurred by plaintiff and members of the class, if any, is subject to offset in the amount of any tax benefits received by plaintiff or members of the class through their investments. Sweeney and Scherping have withdrawn their Third, Fourth, Fifth, and Ninth Affirmative Defenses to the amended complaint. 4. UNDISPUTED FACTS The following facts are undisputed: · · Quovadx is a global platform software and vertical solutions company. The Company's software and services help healthcare, insurance and other companies integrate their technology systems and business processes. · Quovadx is comprised of two primary divisions: the Rogue Wave Software division and the Enterprise Application division. · · Quovadx acquired the Rogue Wave Software division during the Class Period. Jurisdiction is conferred by § 27 of the 1934 Act and venue is proper under the 1934 Act because defendants conducted business in this District. · · Sweeney was President, CEO and a director of Quovadx during the Class Period. Scherping was Executive Vice President of Finance and CFO of Quovadx during the Class Period. Scherping assisted in the preparation of the Company's financial statements.

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5.

COMPUTATION OF DAMAGES Plaintiff seeks compensatory damages, pre-judgment interest, post-judgment interest,

reasonable attorneys' fees, expert witness fees and other costs. Plaintiff also seeks any other further relief as the Court deems just and proper, including any extraordinary, equitable and/or injunctive relief as permitted by law or equity to attack, impound or otherwise restrict defendants' assets to assure that plaintiff has an effective remedy. Plaintiff has not yet retained a testifying expert on damages. Plaintiff need not disclose an expert damage analysis until the time required by Fed. R. Civ. P. 26(a)(2). Defendants also have not yet retained a testifying expert on damages, and similarly need not disclose an expert damage analysis until the time required by Fed. R. Civ. P. 26(a)(2). 6. REPORT OF PRECONFERENCE DISCOVERY AND MEETING UNDER FED. R. CIV. P. 26(f) The defendants' production of documents in response to plaintiff's document requests satisfies defendants' obligations to provide a copy or description of documents pursuant to Fed. R. Civ. P. 26(a)(1)(B). 7. CASE PLAN AND SCHEDULE (a) Deadline for Joinder of Parties and Amendment of Pleadings

Motions for leave to amend pursuant to Fed. R. Civ. P. 15 shall be filed on or before February 28, 2006. (b) Discovery Cut-off Date

Fact discovery shall conclude by March 31, 2006. All motions related to fact discovery shall be filed no later than April 28, 2006. (c) Dispositive Motion Schedule

Dispositive motions shall be filed on or before June 30, 2006.

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(d)

Expert Witness Disclosure

Each separately represented party may designate up to three experts. The parties who have the burden of proof on issues for which they intend to submit expert reports shall make their expert witness disclosures required by Fed. R. Civ. P. 26(a)(2)(B) no later than April 28, 2006. Responsive expert witness disclosures shall be made no later than May 31, 2006. Rebuttal expert witness disclosures shall be made no later than June 16, 2006. Expert witness depositions shall be completed by July 21, 2006. Notwithstanding the provisions of Fed. R. Civ. P. 26(a)(2)(B), no exception to the requirements of the Rule will be allowed unless approved by this Court. (e) Proposed Deposition Schedule

Plaintiff either has noticed or anticipates noticing the following depositions: Mark Benjamin, Afshin Cangarlu, Christopher Conte, Cory Isaacson, Juan Perez, Ann Ting, Lona Collins, Mark Rangell, David Nesvisky, Methodist Hospital System, Ronald Renjilian, Banner Health, Micro Star Inc., Gary Scherping, Lorine Sweeney, Dennis Pryor, Madhavan Pillai, Jim Wilson and Arlyn Dozeman. Defendants Sweeney and Scherping anticipate noticing the following depositions: Linda Wackwitz, Deborah Dean, Jessica Jorgensen, Tammy McLaren, Sy Nayman, Gloria Cox, Kathleen Bruch, May Hu, Dan Guidice, Richard Nelli, Wes Staggs, Larry Thede, Harvey Wagner, Mel Keating, Jeffrey M. Krauss, Charles J. Rosselein, Fred L. Brown, James A. Gilbert, J. Andrew Cowherd, James B. Hoover, Don Ferrar, Andrew Cotton, Greg Barnes, Arthur F. Schneiderman, Raj S. Judge, Art Cobb and Amberen Hassan. The parties shall meet and confer to determine the dates, times and locations of these depositions.

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(f)

Schedule for Requests for Production of Documents, Interrogatories and Requests for Admissions

All interrogatories and requests for admissions shall be served no later than February 28, 2006. (g) Discovery Limitations

Plaintiff is limited to 30 depositions (in addition to the depositions of parties and designated experts), subject to a showing of good cause for additional depositions. Defendants collectively are also limited to 30 depositions (in addition to the depositions of parties and designated experts), subject to a showing of good cause for additional depositions. The presumptive limits on the time allotted for each deposition as set by the Federal Rules of Civil Procedure shall apply, subject to a showing of good cause for additional time. The presumptive limits on written discovery as set by the Federal Rules of Civil Procedure also shall apply. 8. COMPLIANCE WITH FED. R. CIV. P. 26(f) The parties participated in a mediation on December 13-14, 2005, and are continuing to work with the mediator (Hon. Layn Phillips) to resolve remaining issues between the parties. The parties anticipate that a settlement, if any, may be reached within the next several weeks. 9. OTHER SCHEDULING ISSUES In the event the action is not resolved prior to trial, plaintiff anticipates a 21-day jury trial, while defendants anticipate a ten day trial.

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10.

AMENDMENTS TO SCHEDULING ORDER This scheduling order may be altered or amended only upon a showing of good cause.

It is so ORDERED, DATED this __________ day of _______________________, 2006. BY THE COURT:

HON. RICHARD MATSCH UNITED STATES DISTRICT JUDGE

Submitted by, Dated: December 28, 2005 WILSON SONSINI GOODRICH & ROSATI Professional Corporation John P. Stigi III /s/ John P. Stigi III JOHN P. STIGI III One Market Street, Spear Tower, Suite 3300 San Francisco, CA 94105 Telephone: 415/947-2000 415/947-2099 (fax) WILSON SONSINI GOODRICH & ROSATI Professional Corporation Nina F. Locker Kent W. Easter 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: 650/493-9300 650/493-6811 (fax) DILL DILL CARR STONBRAKER & HUTCHINGS, P.C. John A. Hutchings Adam P. Stapen 455 Sherman Street, Suite 300 Denver, CO 80203 Telephone: 303/777-3737 303/777-3823 (fax)

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Counsel for Defendant Quovadx, Inc. Dated: December 28, 2005 ROTHGERBER JOHNSON & LYONS LLP Frederick J. Baumann /s/ Frederick J. Buamann FREDERICK J. BAUMANN One Tabor Center, Suite 3000 1200 Seventeenth Street Denver, CO 80202-5855 Telephone: 303/628-9542 303/623-9222 (fax) WILMER CUTLER PICKERING HALE & DORR LLP Charles E. Davidow Christopher Davies Michael Mugmon 2445 M Street, N.W. Washington, DC 20037 Telephone: 202/663-6000 Counsel for Defendants Lorine R. Sweeney and Gary T. Scherping Dated: December 28, 2005 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP Jeffrey W. Lawrence Dennis J. Herman Ex Kano S. Sams II /s/ Ex Kano S. Sams II EX KANO S. SAMS II 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax) Lead Counsel for Plaintiff David Heller

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