Free Order on Motion to Appoint Counsel - District Court of Colorado - Colorado

Case 1:04-cv-01006-RPM

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Senior District Judge Richard P. M atsch

Civil Action No. 04-cv-1006-RPM GAYLE HENDERSON, individually and on behalf of all others similarly situated, Plaintiff, v. QUOVADX, INC. LORINE R. SWEENEY and GARY T. SCHERPING, JEFFREY M . KRAUSS, FRED L. BROWN, J. ANDREW COWHERD, JAM ES B. HOOVER, CHARLES J. ROESSLEIN, and JAM ES A. GILBERT, Defendants.

ORDER FOR APPOINTM ENT OF SPECIAL SITUATIONS FUNDS AS LEAD PLAINTIFF

On M ay 17, 2004, plaintiff Gayle Henderson brought this securities fraud action, claiming violations of §§ 11 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k and 77o. This action is brought on behalf of persons and entities " who acquired Quovadx common stock in connection with Quovdadx' exchange offer for all outstanding shares of Rogue Wave Software, s Inc. (" Rogue Wave" which became effective on or about December 19, 2003." (Compl. ¶ 2). ) The complaint alleges " that Quovadx' Registration Statement on Form S-4 relating to the s

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exchange offer by Quovadx for Rogue Wave, dated December 10, 2003, was materially false and misleading and misrepresented material facts, including among other things, Quovadx' financial s results for the third quarter 2003." ( Id.). The present action is related to another pending securities fraud class action entitled Heller v. Quovadx, Inc., et al., Civil Action No. 04-cv-665-RPM . The complaint in Civil Action No. 04-cv-665 also arises out of allegations that Quovadx misrepresented its financial condition. That complaint is brought against the Company and two individual defendants and claims violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Civil Action No. 04-cv-665 is brought on behalf of persons who purchased Quovadx' publicly traded securities on the open market during the period from s October 22, 2003, to M arch 15, 2004. (Am. Compl. ¶¶ 1, 62; Civil Action No. 04-cv-665RPM ). The Private Securities Litigation Reform Act (" PSLRA" requires the appointment of a ) lead plaintiff after appropriate notice to the members of the purported class. 15 U.S.C. § 77z-1; 15 U.S.C. § 78u-4. The court has already determined that Civil Action No. 04-cv-665 and Civil Action No. 04-cv-1006 will proceed as separate class actions, although discovery may be coordinated. In Civil Action No. 04-cv-665, a lead plaintiff has been appointed on behalf of the § 10(b) class of open market purchasers. An order granting certification of that class was entered on April 12, 2005.

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In this action there are two pending motions for appointment of lead plaintiff for the § 11 class. The two movants are (1) M r. Ronald Dean Hallman, Jr. (" r. Hallman" and (2) a group M ), of four investment funds, collectively referred to as the Special Situations Funds (" SSF" Gayle ). Henderson, the original plaintiff, moved for appointment as lead plaintiff on M ay 17, 2004, but her motion has been abandoned.1 The movants have conducted discovery relevant to the lead plaintiff issue. They have exchanged documents, and depositions have been taken of M r. Hallman and of M r. Austin M arxe, the designated spokesperson for SSF with direct knowledge of the business decisions of the four funds. All discovery disputes have been resolved. A hearing on the competing motions for appointment of lead plaintiff was held on June 24, 2005. For the purpose of appointing a lead plaintiff, the court must presume that the most adequate plaintiff is the person or group of persons that-(aa) has either filed the complaint or made a motion in response to a notice under subparagraph (A)(i); (bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and (cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure. 15 U.S.C. § 77z-1(a)(3)(B)(iii)(I). The presumption may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff " not will

According to SSF, " Gayle Henderson now agrees that Special Situations should be appointed as the lead plaintiff." (SSF br., Dec. 22, 2004, at 5). No counsel appeared on behalf of M s. Henderson at the hearing on June 24, 2005.
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fairly and adequately protect the interests of the class;"or " subject to unique defenses that is render such plaintiff incapable of adequately representing the class." 15 U.S.C. § 77z1(a)(3)(B)(iii)(II)(aa) and (bb). SSF is an institutional investor comprised of four investment funds, each of which is organized as a limited partnership. The four funds are (1) Special Situations Fund III, L.P.; (2) Special Situations Cayman Fund, L.P.; (3) Special Situations Fund New, L.P., and (4) Special Situations Technology Fund II, L.P. The funds share a common place of business in New York, New York. They obtain capital from private investors and invest that capital in the equity securities of publicly traded companies. The limited partners of the funds include pension funds, public charitable endowments, college and university endowments, and individuals. SSF investors include the New York Zoological Society, Saint Lawrence University, and M ass M utual Insurance Company. Three registered investment companies serve as investment advisors to the funds ­ AWM Investment Company, Inc., M GP Advisers Limited Partnership, and SST Advisers, L.L.C. Each of the four funds has as its general partner one of the three investment companies. M r. M arxe and M r. David Greenhouse are principals in those investment companies. There is no dispute that SSF has a larger financial interest in the relief sought by the class than does M r. Hallman. The terms of the Quovadx exchange offer provided that Rogue Wave shareholders would receive cash and 0.5292 shares of Quovadx common stock for each share of

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Rogue Wave. As of December 16, 2003, the combined Rogue Wave stock holdings of the four SSF funds was 693,304 shares. SSF received cash and 366,896 shares of Quovadx stock in the exchange transaction. SSF claims losses arising out of the Quovadx exchange in the amount of $1,474,921.92. Before the exchange M r. Hallman held 197,615 shares of Rogue Wave. As a result of the exchange transaction, M r. Hallman received cash and 104,577 shares of Quovadx stock. He claims losses of approximately $139,000. SSF has the larger financial interest even if the losses of the four funds are not aggregated. One of the funds, Special Situations Fund III, L.P., received 222,895 shares of Quovadx stock in the exchange transaction. It appears that M r. Hallman would be a suitable class representative, but SSF is presumed to be the most adequate plaintiff because of its larger financial interest. The question then is whether M r. Hallman has shown that SSF will not fairly and adequately protect the interests of the class or that it is subject to unique defenses rendering SSF incapable of adequately representing the class. M r. Hallman suggests that SSF' interests are too closely aligned with Quovadx to ensure s vigorous prosecution of the class, and he argues that during the class certification proceedings SSF' adequacy as a class representative may be subject to attack as a result of SSF' s s relationships with Rogue Wave and Quovadx. Before the Rogue Wave/Quovadx exchange transaction, SSF owned approximately 10% of the outstanding shares of Rogue Wave. SSF also owned Quovadx stock since at least 2001. Records of SSF' stock transactions show that in s

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addition to receiving Quovadx stock in the Rogue Wave exchange transaction, SSF purchased Quovadx stock in the open market and continued to do so even after M arch 15, 2004. SSF analysts have participated in investor-information calls when Rogue Wave and Quovadx provided information to its shareholders. M r. Hallman has also submitted copies of documents from the files of SSF reflecting private conversations between SSF analysts and Quovadx executives. M r. Hallman has not produced any evidence that SSF received any non-public information about Rogue Wave or Quovadx through these conversations. The evidence submitted by M r. Hallman does not demonstrate that SSF would be subject to unique defenses as a representative of the § 11 class, or that it is otherwise incapable of adequately representing that class. SSF has shown that it is interested in aggressively litigating this action on behalf of the § 11 class and that it has the resources to do so. The statutory presumption that the most adequate plaintiff in the one with the largest financial interest reflects a preference for institutional investors as lead plaintiffs. Communications between managers of institutional investors and company representatives are not unusual. The fact that an institutional investor had communications with company representatives does not render it an inadequate representative, in the absence of any evidence that the investor received non-public information or had some special relationship with the defendants. The argument advanced by M r. Hallman runs contrary to PSLRA' policy of favoring institutional investors as lead s plaintiffs.

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M r. Hallman also argues that SSF might not fairly and adequately represent the § 11 class because it has a significant § 10(b) claim. M r. Hallman contends that SSF in negotiating a settlement might be tempted to sacrifice the interests of the § 11 class members because it also stands to benefit as a member of the § 10(b) class. M r. Hallman asserts that he is the better class representative because his representation would be free of any such conflicts. The potential conflict raised by M r. Hallman is speculative and insufficient to rebut the presumption that SSF is the most adequate plaintiff. SSF would have no incentive to disfavor the § 11 class. That is especially so because SSF owns more shares acquired through the exchange offer (366,896 shares) than through its open market purchases during the § 10b class period (313,000 shares). The potential for conflict has been eliminated by having two classes and separate class representatives. In addition, to the extent that M r. Hallman is concerned about the settlement process, any proposed settlement of the claims of the class would be subject to the procedures set forth in Fed. R. Civ. P. 23(e). Pursuant to that rule, the court must approve any settlement of the claims, issues, or defenses of a certified class. Fed. R. Civ. P. 23(e)(1)(A). Notice of a proposed settlement must be given to all class members who would be bound by it, and the court may approve such a settlement only after a hearing and on finding that the settlement is fair, reasonable, and adequate. Fed. R. Civ. P. 23(e)(1)(B) and (C). Other concerns raised by M r. Hallman are either insignificant or have been remedied.

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M r. Hallman points out that SSF did not originally file the certification required of prospective class plaintiffs under the PSLRA. See 15 U.S.C. § 77z-1(a)(2)(A). SSF has since provided the pertinent information through discovery and the declaration of M r. M arxe. M r. Hallman also complains of an initial failure by SSF to produce some documents in response to his discovery requests, but that discovery dispute was resolved when SSF produced the documents. In sum, M r. Hallman has not come forth with evidence sufficient to rebut the presumption that SSF is the most adequate lead plaintiff based on the size of its financial interest in the relief sought by the class. Based on the foregoing, it is ORDERED that the motion of the Special Situations Funds for appointment as lead plaintiff is granted; it is FURTHER ORDERED that on or before July 29, 2005, the Special Situations Funds shall move for approval of lead counsel. Entries of appearance must be made in accordance with D.C.COLO.L.CivR 11.1. The motion should include a copy of any retainer or fee agreement between the Special Situations Funds and the law firm of Lowenstein and Sandler, P.C. with respect to this litigation; it is

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FURTHER ORDERED that on or before July 29, 2005, the Special Situations Funds shall file an amended complaint with a caption showing it as the lead plaintiff. The amended complaint may include other modifications the lead plaintiff deems appropriate. Dated: June 29th , 2005 BY THE COURT: s/Richard P. M atsch

Richard P. M atsch, Senior District Judge

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