Free Proposed Scheduling Order - District Court of Colorado - Colorado

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 1 of 15

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 04-CV-1006 RPM SPECIAL SITUATIONS FUND III, L.P., SPECIAL SITUATIONS CAYMAN FUND, L.P., SPECIAL SITUATIONS TECHNOLOGY FUND NEW, L.P., AND SPECIAL SITUATIONS TECHNOLOGY FUND II, L.P., on behalf of themselves and others similarly situated, Plaintiffs, v. QUOVADX, INC., LORINE R. SWEENEY, GARY T. SCHERPING, JEFFREY M. KRAUSS, FRED L. BROWN, J. ANDREW COWHERD, JAMES B. HOOVER, CHARLES J. ROESSLEIN and JAMES A. GILBERT, Defendants.

DEFENDANTS' [PROPOSED] SCHEDULING ORDER

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 2 of 15

1.

INTRODUCTION Defendants Quovadx, Inc. ("Quovadx" or the "Company"), Jeffrey M. Krauss, Fred L.

Brown, J. Andrew Cowherd, James B. Hoover, Charles J. Roesslein and James A. Gilbert (the "Quovadx Defendants") and defendants Lorine R. Sweeney and Gary T. Scherping hereby 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, Heller v. Quovadx, Inc., et al., No. 04-CV-0665, pending before this Court. On December 22, 2005, counsel for the Quovadx Defendants contacted counsel for the plaintiffs to discuss submitting a joint proposed scheduling order in compliance with the Court's standing order regarding scheduling conferences. As of the date of this filing, plaintiffs' counsel has neither proposed a schedule to defendants nor otherwise responded to counsel for the Quovadx Defendants; instead, plaintiffs appear to be relying on the schedule set forth at page 7 of their December 23, 2005 memorandum of law in support of their motion for voluntary dismissal of the claims against the individual defendants. Accordingly, defendants submit this [Proposed] Scheduling Order. Defendants wish to advise the Court that they do not oppose plaintiffs' December 23, 2005 motion for voluntary dismissal of the claims against the individual defendants. However, defendants believe that notice to members of the class, including notice of the dismissal of the claims against the individual defendants without prejudice, is necessary and proper at this stage of the proceedings. See, e.g., Dubin v. Miller, 132 F.R.D. 269, 273 (D. Colo. 1990) ("[N]otice should go out as promptly as circumstances permit."); Wright & Miller, Federal Practice & Procedure, Civil § 1788 ("Notice must be sent long before the merits of the case are adjudicated. Indeed, it should be sent as soon as practicable after the court determines that the class action is proper under [Rule 23](c)(1)."); Manual for Complex Litigation § 30.211 (3d ed.) (notice generally should be given promptly after class certification); cf. Grima v. Applied Devices Corp., 1
C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 3 of 15

78 F.R.D. 431, 432-33 (E.D.N.Y. 1978) (Rule 23.1 requires notice to absent plaintiffs even if proposed dismissal of claims is without prejudice). Defendants urge the Court to require plaintiffs to distribute notice of pendency of this action, along with notice of the dismissal of claims against the individual defendants, pursuant to the schedule proposed below. 2. APPEARANCES OF COUNSEL Appearances of counsel and the defendants represented are as follows: For Defendants Quovadx, Inc., Jeffrey M. Krauss, Fred L. Brown, J. Andrew Cowherd, James B. Hoover, Charles J. Roesslein and James A. Gilbert: Nicki Locker Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 Telephone: 650-493-9300 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 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 defendants' statements of defenses are based upon their current knowledge and, given the nature of the case, may be subject to amendment. In addition, in the event the Court grants plaintiffs' motion to dismiss the claims against the individual defendants and grants

2

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 4 of 15

plaintiffs' motion for partial summary judgment as to Quovadx's liability, the statements of the parties' liability defenses will be rendered moot. (a) Statement of Defenses by the Quovadx Defendants

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 Network Group ("Infotech"). The Quovadx Defendants have asserted various affirmative defenses to plaintiffs' claims under Sections 11 and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77k and 77o. In the event the Court grants plaintiffs' motion to dismiss the claims asserted against the individual defendants, all but the Fifth, Ninth, Tenth and Eleventh Affirmative Defenses will be rendered moot. As the Fifth Affirmative Defense, the Quovadx Defendants have alleged that all or a portion of the losses and damages alleged by Special Situations and members of the class are attributable to causes other than any actions or omissions for which defendants are responsible. As the Ninth Affirmative Defense, the Quovadx Defendants have alleged that plaintiffs 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 Tenth Affirmative Defense, the Quovadx Defendants have alleged that any recovery for damages allegedly incurred by plaintiffs and members of the class, if any, is subject to offset in the amount of any tax benefits or other benefits received by plaintiffs or members of the class through their investments. As the Eleventh Affirmative Defense, the Quovadx Defendants have alleged that plaintiffs and members of the class do not 3
C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 5 of 15

have standing under Section 11 of the 1933 Act to the extent they did not acquire their shares pursuant to or traceable to the Registration Statement. (b) 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 the Quovadx Defendants. 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 ("Infotech") 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, Ernst & Young LLP. Thus, any losses or damages that plaintiffs suffered could not have been caused by Sweeney and Scherping's actions or omissions. Defendants Sweeney and Scherping have raised the following affirmative defenses to plaintiffs Special Situations' claims asserted under Sections 11 and 15 of the 1933 Act, 15 U.S.C. §§ 77k and 77o: (1) that the Complaint fails to state a claim on which relief may be granted; (2) that the plaintiffs and the class have failed to plead fraud or its predicate acts with 4
C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 6 of 15

sufficient particularity; (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 Securities & Exchange Commission ("SEC"), and there is no liability for any such act or omission alleged; (4) that Sweeney and Scherping had, after reasonable investigation, reasonable grounds to believe and did believe, at the time the Registration Statement became effective, that the statements therein were true and that there was no material omission required or necessary to make the statements not misleading; (5) that all or a portion of the losses and damages alleged by plaintiffs and the class are attributable to causes other than any actions or omissions for which Sweeney and Scherping are alleged responsible; (6) that some or all of the matters now claimed by the amended complaint to be the subject of misrepresentations and omissions were publicly disclosed or were in the public domain and, accordingly, were available to plaintiffs and the class and were at all times reflected in the price of Quovadx's common stock; (7) that, if any false or misleading statement was made or if any material fact required to be stated or necessary to make any statement made not misleading was omitted, which the defendants deny, then plaintiffs and the class were aware of that alleged misstatement or omission and did not rely upon it in acquiring Quovadx's common stock; (8) that plaintiffs and the class were expressly advised in Quovadx's public filings and otherwise regarding the material facts and risks concerning their investments, and that, therefore, plaintiffs and the class therefore assumed the risk of any loss and are estopped from recovering any relief; (9) that plaintiffs and 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; (10) that any recovery for damages allegedly incurred by plaintiffs and the class, if any, is subject to offset in the amount of any tax benefits or other benefits received by plaintiffs and the class through their

5

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 7 of 15

investments; (11) 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 15 of the 1933 Act, Sweeney and Scherping have no liability for any act or omission so alleged; (12) plaintiffs and the class do not have standing under Section 11 of the 1933 Act to the extent that they did not acquire their shares pursuant to or traceable to the Registration Statement; and (13) plaintiffs and the class do not have standing under Section 11 of the 1933 Act because they acquired their shares of Quovadx stock without any investment decision caused by or in reliance upon any statement or omission in the Registration Statement. 4. UNDISPUTED FACTS The following facts are undisputed by the Defendants: · · 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. · This Court has jurisdiction over the claims asserted in this case, and venue is proper because defendants conducted business in this District. · · Sweeney was President, CEO and a director of Quovadx. Scherping was Executive Vice President of Finance and CFO of Quovadx. Scherping assisted in the preparation of the Company's financial statements. · On November 11, 2003, Quovadx filed its quarterly report on Form 10-Q with the SEC for the quarter ending September 30, 2003, which included $4.6 million in revenue from the 3Q03 sale to Infotech and deferred the remaining $3 million, expecting to recognize it over the next four quarters.

6

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 8 of 15

·

On November 12, 2003, Quovadx filed the S-4 Registration Statement with the SEC for the issuance of Quovadx stock that would be provided to Rogue Wave shareholders in connection with the acquisition.

·

The Registration Statement incorporated by reference Quovadx's Form 10-Q for 3Q03.

· ·

The Registration Statement became effective on December 10, 2003. On February 11, 2004, Quovadx publicly announced its preliminary results for 2003 and 4Q03, which included revenue from the 4Q03 sale to Infotech.

·

On March 15, 2004, Quovadx announced that it was restating its 3Q03 financial results and revising its previously announced preliminary 4Q03 and 2003 full year financial results to remove all revenue associated with sales to Infotech.

· 5.

This action was filed on May 17, 2004.

COMPUTATION OF DAMAGES Section 11(e) of the 1933 Act sets forth the method for computing damages in this case: The suit authorized under subsection (a) of this section may be to recover such damages as shall represent the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought: Provided, That if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading, such portion of or all such damages shall not be recoverable. . . .

15 U.S.C. § 77k(e).

7

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 9 of 15

Assuming the Court grants plaintiffs' motion to dismiss the claims against the individual defendants and plaintiffs' motion for partial summary judgment as to Quovadx's liability, the only matter remaining in this case will be a determination of damages. The three main issues regarding damages in this case will be (1) the extent to which class members disposed of their Quovadx stock prior to March 15, 2004; (2) the extent to which class members disposed of their Quovadx stock, and the prices at which they disposed of their Quovadx stock, after March 15, 2004; and (3) the extent to which "any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading." With respect to the first and second issues, the members of the class are in the best position to provide information regarding their disposition of Quovadx stock. Defendants suggest that the notice of pendency request that class members promptly provide to the parties specific information regarding their disposition of Quovadx stock to enable their respective damages experts to calculate damages properly under Section 11(e). With respect to the third issue, defendants intend to demonstrate that much of the "depreciation in value" of Quovadx stock between the date the Registration Statement became effective and the date on which this action was filed "result[ed] from" matters other than the falsity of the Company's 3Q03 financial statements. Defendants intend to show that a significant amount of "depreciation in value" of Quovadx stock actually "result[ed] from" other matters that occurred after the effective date of the Registration Statement, such as the revision of the Company's 4Q03 financial results, the threatened delisting of the Company's stock from Nasdaq in April 2004, and the sudden drop in the Company's cash from March to April 2004.

8

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 10 of 15

Defendants note that this issue involves separate questions of law and of fact. Whether certain matters are deemed to be "part of the registration statement, with respect to which his liability is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading" within the meaning of Section 11(e) is in the first instance a question of law. Defendants understand plaintiffs to be asserting that this case involves both an alleged misstatement (the inclusion in the Registration Statement of the 3Q03 revenues which were subsequently restated) and alleged omissions (the omission of facts, disclosed in May 2004, that allegedly made the 3Q03 revenues unrecognizable in the first place). Plaintiffs contend that the expansion of their case to include the alleged omissions will have the effect of expanding the scope of recoverable damages by allowing the class to recover for the "depreciation in value" caused by events and disclosures that occurred after the effective date of the Registration Statement. Defendants believe that plaintiffs' legal theory is not supported by authority and intend to move promptly for partial summary judgment on this issue. Defendants suggest that this question of law should be resolved before any of the experts undertake their analyses of damages. In contrast to this threshold legal issue, the extent to and amount by which matters outside the Registration Statement caused the "depreciation in value" of Quovadx stock is an issue of fact to be decided by the trier of fact with the benefit of expert analysis. Defendants have not yet retained a testifying expert on damages, and submit that expert disclosures should be made as required by Fed. R. Civ. P. 26(a)(2) pursuant to the schedule set forth below. 6. REPORT OF PRECONFERENCE DISCOVERY AND MEETING UNDER FED. R. CIV. P. 26(f) The Quovadx Defendants have shared with plaintiffs in this action Defendants' entire production of documents in response to document requests in Heller, which satisfies the 9
C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 11 of 15

Quovadx Defendants' obligations, in connection with both actions, to provide a copy or description of documents pursuant to Fed. R. Civ. P. 26(a)(1)(B). As noted above, counsel for the Quovadx Defendants attempted to meet and confer with counsel for plaintiffs in advance of filing this [Proposed] Scheduling Order, but counsel for plaintiffs declined to respond or propose a schedule. 7. CASE PLAN AND SCHEDULE Defendants propose the following 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) Notice to Members of the Plaintiff Class

Plaintiffs shall prepare a notice of pendency of this action, which shall include notice of the dismissal of claims against the individual defendants without prejudice, as well as a request that class members provide complete information regarding the dates, amounts and prices of dispositions of Quovadx stock they acquired pursuant to the Registration Statement, in a form approved by the Court. Plaintiffs shall mail such notices no later than January 31, 2006. The notices shall require responsive information by March 31, 2006. (c) Fact Discovery Cut-off Date

In the event the Court denies plaintiffs' motion to dismiss claims against the individual defendants in this action, fact discovery shall conclude within three months after such a ruling by the Court. All motions related to fact discovery shall be filed no later than one month after the conclusion of fact discovery. The parties shall attempt in good faith to coordinate discovery proceedings with the plaintiff in the Heller action to avoid or minimize duplication and unnecessary expense. 10
C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 12 of 15

(d)

Dispositive Motion Schedule

As noted above, defendants do not oppose plaintiffs' motion to dismiss claims against the individual defendants. Defendants' response to plaintiffs' motion for partial summary judgment on liability issues only is due to be filed on January 20, 2006. In the event the Court grants plaintiffs' motion to dismiss claims against the individual defendants, plaintiffs' motion for partial summary judgment as to the individual defendants will be rendered moot. Quovadx hereby advises the Court that it does not intend to oppose plaintiffs' motion for partial summary judgment. Defendants shall move for partial summary judgment regarding damages no later than February 3, 2006. (e) Expert Witness Disclosures

Plaintiffs' expert witness disclosures required by Fed. R. Civ. P. 26(a)(2)(B) shall be made no later than April 28, 2006. Defendants' expert witness disclosures shall be made no later than May 31, 2006. Plaintiffs' 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. (f) Proposed Deposition Schedule

In the event the Court grants plaintiffs' motion to dismiss claims against the individual defendants, there will be no depositions other than those involving damages experts. In the event the Court denies plaintiffs' motion to dismiss claims against the individual defendants in this action, the parties will meet and confer regarding the deposition schedule. The parties shall attempt in good faith to coordinate discovery proceedings with the plaintiff in the Heller action to avoid or minimize duplication and unnecessary expense.

11

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 13 of 15

(g)

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. (h) Discovery Limitations

In the event the Court denies plaintiffs' motion to dismiss claims against the individual defendants in this action, plaintiff should be 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 should be 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 should 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. The parties have not discussed settlement further and do not currently anticipate reaching a settlement in this action. 9. OTHER SCHEDULING ISSUES In the event the Court grants plaintiffs' motion to dismiss the claims against the individual defendants, defendants anticipate a five day trial.

12

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 14 of 15

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) Counsel for Defendants Quovadx, Inc., Jeffrey M. Krauss, Fred L. Brown, J. Andrew Cowherd, James B. Hoover, Charles J. Roesslein and James A. Gilbert 13
C:\NrPortbl\PALIB1\YMC\2790817_3.DOC

Case 1:04-cv-01006-RPM

Document 134

Filed 12/28/2005

Page 15 of 15

Dated: December 28, 2005

ROTHGERBER JOHNSON & LYONS LLP Frederick J. Baumann s/ Frederick J. Baumann 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

14

C:\NrPortbl\PALIB1\YMC\2790817_3.DOC