Carl Waldrep, et al. v. ValueClick, Inc., et al. 07-CV...
Transcript of Carl Waldrep, et al. v. ValueClick, Inc., et al. 07-CV...
Case 2:07cv-05411DDP-AJW Document 53 Filed 06/26/08 Page 1 of 32 Page D #:1009
BARRACK, RODOS & BACINE STEPHEN R. BASSER (121590) [email protected] JOHN L. HAEUSSLER (215044) jhaeusslerbarrack.com 402 West Broadway, Suite 850 San Diego, CA 92101 Telephone: (619) 230-0800 Facsimile: (619) 230-1874
BARRACK, RODOS & BACINE LEONARD BARRACK DANIEL E. BACINE MARK R. ROSEN (13 9506)
[email protected] CHAD A. CARDER 3300 Two Commerce Square 2001 Market Street Philadelphia, PA 19103 Telephone: (215) 963-0600 Facsimile: (215) 963-0838 Counsel for Laborers' International Union of North America National (Industrial) Pension Fund and LIUNA Staff & Affiliates Pension Fund and Lead Counsel for Plaintiffs and the Class
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
CARL WALDREP, On Behalf of Himself and All Others Similarly Situated,
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Case No. 2:07-cv-0541 1-DDP-AJW
CLASS ACTION
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Plaintiff,
vs. VALUECLICK, INC., JAMES R. ZARLEY and SAMUEL J. PAISLEY,
Defendants
PLS.' OPP'NTODEFS.'RULE 11 MOTION Case No.: 2:07-cv-05411-DDP-AJW
PLAINTIFFS' OPPOSITION TO DEFENDANTS' RULE 11 MOTION
go 01 F911 TRIVESTO TO NINS -01 W01
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1 TABLE OF CONTENTS PAGE
1. INTRODUCTION .............................................................................................1
II. STATEMENT OF FACTS ................................................................................2
III. LEGAL STANDARDS UNDER RULE 11 AND THE PSLRA ..................7
A. Pleading Requirements ........................................................................7
B. Defendants' Misuse of Rule 11 to Challenge Confidential Witness Statements and Prejudice the Disposition of the Motion to Dismiss .................................................................................................8
IV. ARGUMENT ...............................................................................................10
A. Defendants' Submissions Create Factual Disputes Not Suited for Resolution on this Rule 11 Motion ....................................................10
B. Plaintiffs Have Acted Appropriately at All Times ............................12
C. Subsequent Events Reinforce Plaintiffs' Allegations ........................14
D. The Information Witnesses Gave to Plaintiffs' Investigators Properly Supports All of the Challenged Allegations ......................15
1. CW1 - Shayne Mihalka.........................................................15
2. CW2 - Gabriele Bennett........................................................16
3. CW3 —David Rose ................................................................18
4. CW4— Jason Nab ..................................................................19
5. CWS - Mary Kate Lawlor .....................................................20
6. CW6— Amanda Bashore .......................................................20
E. Gibson Dunn's Past Conduct of Using or Threatening Sanctions Motions for Tactical Advantage ........................................................22
V. CONCLUSION................................................................................................24
PLS.' OPP'NTODEFS.'RULE 11 MOTION Case No.: 2:07-cv-05411-DDP-AJW
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1 TABLE of AUTHORITIES
PAGE(S) Cases
Berson v. Applied Signal Tech., Inc., F.13d , 2008 WL 2278670 (9th Cir. June 5, 2008) .................................5
Browne v. N.A.S.D., Inc., 2006 U.S. Dist. LEXIS 35507 (ND. Tex. May 31, 2006)...........................25
Chambers v. NASCO, Inc., 501 U.S. 32,111 5.Ct. 2123, 115L.Ed.2d27 (1991) ..................................25
Crawford v. Deutsche Bank AG, 271 F.5upp.2d 829 (E.D. Va. 2003)...............................................................9
DeMarco v. Depotech Corp., 131 F.5upp.2d 1185(S.D. Cal. 2001) ..........................................................24
Edwards v. Whitaker, 868F.Supp.226(M.D.Tem. 1994) ............................................................13
Gotro v. R&B Really Group, 69 F.3d 1485 (9thCir. 1995)........................................................................24
Greenberg v. Sala, 82ZF.2d 882 (9th Cir. 1987)..........................................................................7
[larding Univ. v. Consulting Serv. Group, L.P., 48 F. 5upp.2d 765 (1'flI) . Ill. 1999) ...........................................................4, 10
Hartmarx Corp. v. Abboud, 326 F.3d 862 (7th Cir. 2003)..........................................................................8
In re Applied Micro Circuits Corp. Sec. Litig., 2002 U.S. Dist. LEXIS 22403 (S.D. Cal. Oct. 3, 2002) ........................ 10, 11
In re Equity Funding Corp. Sec. Litig., 416 TF.Supp. 161 (CD. Cal. 1916)................................................................10
In re Fischel, 557 F.2d 209 (9th Cir. 1977)........................................................................13
In re Grand Jury Investigation, 974 F.2d 1068 (9th Cir. 1992)........................................................................4
In re Humana Inc. Sec. Litig., 2000 U.S. Dist. LEXIS 21671 (W.D. Ky. Nov. 7, 2000) ............................12
In re Initial Pub. Offering Sec. Litig., 399 F.Supp.2d 361 (S.D.N.Y. 2005) aff'dmem., 2006 WL 1423785 (2d dir.), cert. denied, U.S. , 127 SQ. 733, 166 L.Ed.2d 562 (2006) .................8
PLS.' OPP'NTODEFS.'RULE 11 MOTION Case No.: 2:07-cv-05411-DDP-AJW
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1 In re JDS Uniphase Corp. Sec. Litig., 2008 WL 753758 (ND. Cal.TMar. 19, 2008) ......................................... 10, 11
In re Keegan Mgmt. Co., Sec. Litig., 78F.3d 4111 (9thCir. 1996)............................................................................ 4
In re Merrill Lynch Two Research Sec. Litig., 2004 WL 305809 (S.D.N.Y. Feb. 18, 2004) ..................................................8
In re New Motor Vehicles Canadian Exp. Antitrust Litig., 244 F.R.D. 70 (D. Me. 2007) ...........................................................10, 24, 25
In re Pro Quest Sec. Litig., 527F.Supp.2d 7T8 (ED. Mich. 2007) .........................................................11
In re SeeBevond Tech. Corp. Sec. Litig., 266 F.Supp.2d 1150 (CD. Cal. 2003)............................................................9
In re Spiegel, Inc. Sec. Litig. 38TF.Supp.2d 989 R. D. Ill. 2004) .............................................................15
Jorgensen v. Taco Bell Corp., 50 Cal.App.4th 1398 (1996)...........................................................................3
Kaplan v. Zenner, 956F.2d 149 (7thCir. 1992)........................................................................12
Kerns v. Spectralink Corp., 2003 U.S. Dist. LL}IS 6194 (D. Cob. Mar. 26, 2003)...............................24
Khan v. Park Capital Sec., LLC, 2004 WL 1753385 (ND. Cab. Aug. 5,2004) ................................................. 8
Kotakis v. Gruntal & Co., 2000 U.S. Dist. LEXIS 10094 (ND. Cab. July 11, 2000) ............................24
Kramer v. Raymond Corp. 1992 WL 122856 (E.D. Pa. May 29, 1992) .................................................14
Lichtenstein v. Consol. Serv. Group, Inc., 173 F.3d 17 (1st Cir. 1999) ......................................................................8, 12
Viorris v. Wachovia Sec., Inc., 448 F.3d 268 (4th Cir. 2006)..........................................................................8
Novak v. Kasaks 216 F.3d ii00 (2d Cir.), cert. denied, 531 U.S. 1012, 121 S.Ct. 567,148 L.Ed.2d 486 (2000) ...........9
O'Neil v. Ret Plan for Salaried Employees of RICO Gen. Inc., 1992 U.S. Dist. LEXIS 237 (SONY. Jan. 7, 19½)...................................24
Operating Eng 'r Pension Trust v. A-C Co., 859 F.2d 1336 (9th Cir. 1988)....................................................................7,8
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1 Riverhead Say. Bank v. Nat? Mortgage Equity Corp., 893 F.2d 1109 (9thCir. 1990)........................................................................8
Seltzer v. Morton, 336 Mont. 225, 154P.3d561 (2007) .....................................................22,23
Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186F.3d 157 (2dCir. 1999) ...........................................................................8
Simon v. G.D. Searle & Co., 816 F.2d 397 (8th Cir.), cert. denied, 484 U.S. 917, 108 S.Ct. 268, 98 L.Ed.2d 225 (1987) .............14
State Farm Fire & Cas. Co. v. Superior Court, 54 Cal.App.4th 625 (1997)...........................................................................13
Tellabs, Inc. v. Makor Issues & Rights, Ltd., U.S. , 127 S.Ct. 2499,2506, 168 L.Ed.2d 179, 189-90 (2007).............9
Thomas v. Capital Sec. Serv., 836 Fid 866 (5th Cir. 1988)........................................................................12
TruittSuperior Court, v. 59 Cal.App.4th 1183 (1997)...........................................................................3
United States v. Chevron Texaco Corp., 241 F.Supp.2d 1065 (ND. Cal. 2002) .........................................................14
United States v. Horowitz, 756 F.2d 1400 (9th Cir.), cert. denied, 474 U.S. 822, 106 S.Ct. 74, 88 L.Ed.2d 60 (1985) .................11
United States v. Taylor, 716 F.2d 701 (9thCir. 1983)........................................................................11
Watkins v. Miller, 92 F. Supp.2d 824 (S.D. Ind. 2000) ................................................................9
Wu Group v. Synopsys, Inc., 2005 WL 1926626 (ND. Cal. Aug. 10, 2005).......................................10, 11
Yesner v. Spinner, 765 F.Supp. 48 (E.D.N.Y. 1991)....................................................................9
Zaldivar v. City of Los Angeles, 780 F.2d 823 (9th C'ir. 1986)........................................................................25
Other Authorities 15 U.S.C. § 78u-4(c)(1) ..........................................................................................24
Advisory Corn. Notes on 1993 Amend. to Rule 11 ................................................25
PLS.' OPP'NTODEFS.'RULE 11 MOTION Case No.: 2:07-cv-05411-DDP-AJW
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1 I. INTRODUCTION
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This is a securities fraud case arising from a long-standing practice in which
3 the corporate defendant built a business plan around the fraudulent use of email
4 and internet promotions to generate data and leads to be sold to its advertising
5 customers. In pursuing this strategy, defendants were engaged in a blatant,
6 knowing violation of federal law, which, not surprisingly, triggered an FTC
7 investigation. The disclosure of that investigation prompted customers to flee the
8 company to avoid the associated stigma, and the FTC ultimately secured the
9 largest fine to date in the history of the CAN-SPAIVI Act —$2.9 million - from the
10 corporate defendant.
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Despite (or perhaps because of) all of this, defendants have pursued a
12 conscious strategy to attack those who seek to call them to account for their
13 actions, rather than answering for their knowing and willful violation of the law.
14 Defendants' Rule 11 motion, and the steps they took in preparation for that, form
15 the keystone of that strategy. Recognizing that plaintiffs are dependent upon
16 former employees and other third-party witnesses voluntarily providing details to
17 satisfy the demanding pleading requirements of the PSLRA, defendants pursued a
18 course designed to intimidate Lead Counsel by methodically identifying each and
19 every confidential witness cited in the complaint in order to get them to withdraw
20 or modify the statements they made to plaintiffs' investigators, even if all they
21 were willing or able to say was that they had no memory of their conversations
22 with plaintiffs' investigators or that they had merely reported general discussion or
23 speculation.
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In fact, this very case demonstrates the reasons why the courts ordinarily do
25 not require securities fraud complaints to disclose the names of their confidential
26 sources. Once the witnesses' identities are exposed, defendants are in a position
27 to exploit their natural tendency to not be publicly linked with any action against
22 their former employers. Many witnesses then recant, change their stories or do
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1 anything else to avoid being accused of assisting plaintiffs' counsel, particularly
2 where defendants are in a position to exert pressure by virtue of confidentiality or
3 severance agreements, the promise or prospect of paying benefits to the
4 terminated employees, or fear of being blacklisted in their entire industry for
5 having assisted the shareholders' representatives in assembling the evidence of
6 defendants' fraud.
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Lead Plaintiffs will demonstrate below that the motion is completely
8 without merit and should be rejected, and Lead Plaintiffs should be compensated
9 for all of the effort and expense required to respond to this baseless attack.
10 II. STATEMENT OF FACTS
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By Order entered Nov. 21, 2007, this Court appointed the LIUNA Funds as
12 Lead Plaintiff and Barrack, Rodos & Bacine as Lead Counsel to prosecute this
13 class action.
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Barrack, which had investigated the case for the LIUNA Funds prior to the
15 filing of the lead plaintiff motion, responded by continuing and expanding its
16 investigation for the purpose of preparing the Consolidated Class Action
17 Complaint ("CCAC" or "complaint"), which was filed with the Court in January,
18 2008. In doing so, Barrack engaged in extensive research on ValueClick,
19 examining a host of public sources, including securities filings, public
20 announcements, analyst reports, news stories and relevant web sites.
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In addition to studying these public sources, Barrack hired L.R. Hodges &
22 Associates, a very reputable investigative firm with over 20 years of experience
23 working on some of the most important securities actions ever prosecuted, to
24 identify, locate and, where possible, interview former employees who may have
25 knowledge not reflected in the public sources that may help satisfy the demanding
26 requirements of the PSLRA. Declaration of Lynne R. Hodges at ¶4-5. These
27 confidential witnesses provided substantial, credible information concerning
22 defendants' fraudulent conduct as set forth in detail in the complaint.
PLS.' OPP'N TO DEFS.' RULE 11 MOTION Case No.: 2:07-cv-05411-DDP-AJW
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The investigation that yielded these facts was always conducted
appropriately and professionally. As reflected in the declarations of Lynne
Hodges and the two investigators who worked directly with the confidential
witnesses, Jason Rowe and Amy Riviere, the investigators were truthful with all
witnesses, and did not misrepresent either their engagement or the purpose of the
interviews. Hodges Dccl. ¶4, 6-13; Declaration of Jason Rowe at 117-9, 11, 14-
15, 26, 31, 41; Declaration of Amy Riviere at ¶3-9, 13, 15, 21. The investigators
also always followed precautions to contact and interview only persons who are
not current employees of the defendant or its subsidiaries, and they sought to
reconfirm their status when they spoke to each witness. Rowe Dccl. ¶1 1-12;
Riviere Dccl. ¶5-6. If, as sometimes could happen, a witness did not initially
indicate that he or she was a current employee but in the course of the interview
made a statement suggesting that they were, the investigators would politely but
promptly terminate the conversation. Rowe Dccl. ¶12; Riviere Dccl. ¶6. No
of plaintiffs complaint is based in any way upon any inadvertent
communication with current employees of ValueClick or its subsidiaries.' The
investigators properly memorialized their interviews in memoranda
contemporaneously prepared after the interviews and provided to Lead Counsel
for use in drafting the complaint. 2
Defendants' citation to Cal. Rule of Professional Conduct 2-100 does not support their motion. Any inadvertent communication with current employees would not violate Rule 2-100 because the ban on ex parte communications only applies when counsel has actual, not constructive knowledge of their representation. Truitt v. Superior Court, 59 Cal.App.4th 1183, 1188-89 (1997); Jorgensen v. Taco Bell Corp., 50 Cal.Ap.4th 1398 (1996). As set forth in the accompanying declarations from plaintiffs investigators, they never intentionally contacted anyone believed to be a current employee of ValueClick or one of its subsidiaries. Rowe Dccl. ¶12; Riviere Dccl.
In addition to the declarations from each of plaintiffs' investigators, plamtiffs have moved
to
submit, for in camera review, the memoranda the investigators contemporaneously prepared memorializing the results of each interview, along with other materials from their investigative file. See Advisory Committee Notes on 1983 amendments (no requirement to disclose privileged communications or work product to support challenged pleading, and court may issue appropriate orders after in camera inspection); In re Grand Jury
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Even before the CCAC using that information was filed, defendants'
counsel, Gibson Dunn & Cmtcher ("GDC"), sought to derail the litigation. GDC
wrote to Lead Counsel suggesting that plaintiffs' investigators were improperly
interviewing witnesses. Lead Counsel promptly spoke with L.R. Hodges, and
confirmed that the investigators were instructed not to, and were not contacting
current employees, and that if a witness belatedly suggested that he or she were a
current employee, consistent with longstanding LRHA practice, the interview
would be immediately terminated. Declaration of Mark R. Rosen ¶22. Having
reconfirmed that the investigation was being properly conducted, Lead Counsel
elected not to respond to defendants' letter. When defense counsel later repeated
similar allegations, Lead Counsel again looked into the matter, confirmed the
appropriateness of the investigation, and so advised GDC. Rosen Dccl. ¶31.
The complaint filed in January, 2008 relied, in part, upon information that
six confidential witnesses provided to plaintiffs' investigators, as memorialized in
the investigators' confidential memoranda. In accordance with recognized
precedents, plaintiffs did not identify these six witnesses by name in the
complaint, instead identified them as confidential witnesses (CW1 -6) and
provided their titles, job responsibilities and reported dates of employment.
Defendants, drawing upon these very descriptions, were able to identify and
contact each of these individuals. For reasons currently known only to the
witnesses and defendants' counsel or own investigators, but consistent with GDC's
past conduct in contacting and attempting to intimidate hostile witnesses, see infra
Investigation 974 F.2d 1068, 1072 (9th Cir. 1992) (claim ofprivilege is not compromised by in camera review); see Harding Univ. v. Consulting Serv. Group L.P. 48 ltSupp.2d 765, 768 (ND. Ill. 1999). Such a review will confirm that plaintiffs have always had substantial support for the complaint's factual allegations. Moreover, in conducting this review2 the Court may consider evidence discovered after the filing of the cornplamt m determining that the allçgations are not frivolous and therefore not subject to Rule 11 sanction. See In re Keegan Mgmt. Co., Sec. Litig., 78 F3 431, 434 (9th Cir. 1996) (district court erred in failing to consider after-acquired evidence that would have adequately supported complamt).
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at 22-24, defendants were able to procure signed declarations dated in February
and March 2008 that, defendants claim, dispute the allegations in the CCAC.
In fact, upon closer examination, the defendants' declarations contain far
less than meets the eye. None of the confidential witnesses denied being
interviewed. Some of these declarations merely claimed they "really don't
remember how anything works at ValueClick" and "do not recall providing the
information" they gave plaintiffs' investigators, compare Lawlor Dccl. ¶3-4 with
Rowe Dccl. ¶42-47. Others, following defendants' mantra that nothing can be
alleged for which the witness did not have "direct" knowledge, 3 suggest that they
did not have "first hand" knowledge of some of the quoted information, while
never denying that they said it, Mihalka Dccl. ¶6, or claim to have shared "isolated
comments" or "general statements I recall being overheard while at ValueClick,"
Rose Dccl. ¶14. Others assert "surprise" that they were listed as confidential
witnesses because the complaint failed to include "many positive details" about
their employment at ValueClick or speculate that it is "entirely possible" that the
company may have behaved appropriately. Bennett Dccl. ¶5-7. The declarations
also quibble about the details of their employment or claim that descriptions they
gave about ValueClick or its WebClients subsidiary were statements about
"general practice" throughout the industry, Rose Dccl. ¶5; Mihalka Dccl. ¶4, 6,
as if that someone immunizes defendants' fraudulent conduct. And some
declarations even put provably false or misleading statements in the mouths of the
confidential witnesses. For example, compare Mihalka Dccl. ¶5, Bennett Dccl.
¶3, Rose Dccl. ¶4 and Defs. R. 11 Motion at 4, 15 (claiming plaintiffs'
In fact, the Ninth Circuit's recent decision has effectively removed that issue from the litigation. In rejecting what the Court of Appeals characterized as the defendants' "quibble" that plaintiffs' confidential witnesses "weren't in a position to see" the disputed events "first hand," the Ninth Circuit explained that Lilt's entirely plausible" that persons m their position "would know, or could
reasonably deduce" the relevant information to sustain the securities fraud complaint. Berson v. Applied Signal Tech., Inc., F.3d , 2008 WL 2278670, *2 (9th Cir. June 5, 2008) (emphasis added). Such a showing has clearly been made here.
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1 investigators were "intentionally vague about why they were approaching the
2 witnesses and who they were representing" and each was surprised his or her
3 statement had been used in a complaint against ValueClick) with Rowe Dccl. ¶26;
4 Riviere Dccl. ¶9 & Ex. A (at request of Mihalka, investigator sent standard letter
5 of confirmation to witness concerning engagement and purpose of call). Yet the
6 fact that defendants made a concerted effort to get statements from every single
7 confidential witness, even when their declarations they were willing to sign
8 expressed only minor disagreements with the allegations of the complaint, speaks
9 volumes about defendants' use of Rule 11 as a tactical tool to attack Lead Counsel
10 and undermine this litigation.
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Having decided that they were now able to set a trap for the unwary,
12 defendants chose not to timely make a Rule 11 demand upon plaintiffs or
13 otherwise contact Lead Counsel to promptly disclose the new declarations at a
14 time in February or March 2008 when plaintiffs might have promptly re-
15 interviewed the witnesses without suspicion. Instead, defendants elected to lay in
16 wait and filed their motion to dismiss the complaint. The defendants timed the
17 filing of their Rule 11 papers so that they would be filed on the last possible date
18 to be heard on the same time as the motion to dismiss. And as defendants' reply
19 brief on their motion to dismiss now confirms, defendants are attempting to
20 bootstrap their motion to dismiss, arguing that the Court cannot credit the
21 complaint's allegations because they are challenging them in their Rule 11 motion.
22 Def. Reply Mem. in Support of Motion to Dismiss at 10-11. Of course, by taking
23 this approach, defendants are effectively making the equivalent of a motion for
24 summary judgment before plaintiffs or the Court could ever consider the
25 significant factual dispute underlying defendants' attack upon the complaint and
26 Lead Counsel.
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As plaintiffs will explain below, and demonstrate in even greater detail in
22 the declarations of plaintiffs' counsel and investigators, the statements of the
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1 confidential witnesses referenced in the complaint were derived from information
2 that these witnesses freely and willingly provided to plaintiffs' investigators, long
3 before defendants or their representatives were in a position to exert pressure or
4 attempt to intimidate them into withdrawing or altering their stories. And
5 plaintiffs' continuing investigation has uncovered additional evidence
6 reconfirming the validity of these charges.
7
Neither Lead Counsel nor the plaintiffs' investigators did anything improper
8 or unethical, let alone sanctionable under Rule 11. In fact, as plaintiffs will
9 explain below, if there is any conduct that warrants additional scrutiny here, it is
10 the actions of GDC, which has a track record of witness threats or Rule 11
11 motions to intimidate their adversaries or gain other tactical advantage.
12 IlL LEGAL STANDARDS UNDER RULE 11 AND THE PSLRA
13
A. Pleading Requirements
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Rule 11(b) imposes three substantive requirements upon a pleading,
15 namely, that: (1) it not be presented for any improper purpose; (2) the claims be
16 warranted by existing law or a non-frivolous argument for revising that law; and
17 (3) the factual contentions have evidentiary support. While defendants have
18 separately moved to dismiss the complaint for failure to state a claim, it appears
19 that defendants are asserting no Rule 11 grievance as to points (1) or (2), and
20 therefore predicate their motion solely upon the evidentiary basis for the
21 allegations of the pending complaint.
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In considering a Rule 11 motion, the Ninth Circuit has repeatedly noted the
23 view of the Advisory Committee on the Federal Rules that Rule 11 "is not
24 intended to chill an attorney's enthusiasm or creativity in pursuing factual or legal
25 theories," and that courts are "expected to avoid using the wisdom of hindsight" in
26 assessing the reasonableness of a pleading. Operating Eng 'r Pension Trust v. A-C
27 Co., 859 F.2d 1336, 1344 (9th Cir. 1988); Greenberg v. Sala, 822 F.2d 882, 887
22 (9th Cir. 1987); see In re Initial Pub. Offering Sec. Litig., 399 F.Supp.2d 369, 371
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(S.D.N.Y. 2005), aff'd mem., 2006 WL 1423785 (2d Cir.), cert. denied, U.S.
127 S.Ct. 733, 166 L.Ed.2d 562 (2006). The Ninth Circuit has also cautioned
that "Rule 11 is an extraordinary remedy ... to be exercised with extreme
caution," Operating Eng 'r, 859 F.2d at 1345, and Rule 11 sanctions are to be
issued only in the exceptional case where the claim is "patently unmeritorious or
frivolous," Riverhead Say. Bank v. Nat'l Mortgage Equity Corp., 893 F.2d 1109,
1115 (9thCir. 1990).
It is also clear that the enactment of the PSLRA did not alter Rule li's
substantive standards. Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group,
Inc., 186 F.3d 157, 167 (2d Cir. 1999); Hartmarx Corp. v. Abboud, 326 F.3d 862,
866 (7th Cir. 2003). Moreover, at least some courts have taken a more lenient
approach to judging the conduct of plaintiffs counsel in a securities action under
the PSLRA where, as here, much of the evidence is in the hands of the defendants.
E.g., Khan v. Park Capital Sec., LLC, 2004 WL 1753385, *45 (ND. Cal. Aug. 5,
2004). See Lichtenstein v. ConsoL Serv. Group, Inc., 173 F.3d 17, 23 (1st Cir.
1999) (one of the factors considered in determining whether litigant conducted a
reasonable inquiry into the facts and law is ease or difficulty of access to requisite
information). Applying these standards, Rule 11 sanctions are not appropriate
even if a court ultimately determines that the claims warrant dismissal unless a
particular allegation is "utterly lacking in support." In re Merrill Lynch Tyco
Research Sec. Litig., 2004 WL 305809, *5 (S.D.N.Y. Feb. 18, 2004); see Morris
v. Wachovia Sec., Inc., 448 F.3d 268, 277 (4th Cir. 2006) ("Factual allegations fail
to satisfy Rule 11 (b)(3) when they are 'unsupported by any information obtained
prior to filing.") (emphasis in original).
B. Defendants' Misuse of Rule 11 to Challenge Confidential Witness Statements and Prejudice the Disposition of the Motion to Dismiss
Before addressing the merits of defendants' attack upon plaintiffs' use of
confidential witnesses, it is worth noting at the outset that there is nothing wrong
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1 with relying upon confidential sources in pleading a securities fraud complaint. In
2 fact, courts have noted with approval the use of such witnesses in meeting the
3 pleading requirements of the PSLRA. Novak v. Kasaks, 216 F.3d 300, 314 (2d
4 Cir.), cert. denied, 531 U.S. 1012, 121 S.Ct. 567, 148 L.Ed.2d 486 (2000); In re
5 SeeBeyond Tech. Corp. Sec. Litig., 266 F.Supp.2d 1150, 1156-59 (C.D. Cal. 2003)
6 (Pregerson, J.) (following Novak); see also Tellabs, Inc. v. Makor Issues & Rights,
7 Ltd., U.S. , 127 S.Ct. 2499, 2506, 168 L.Ed.2d 179, 189-90 (2007) (noting
8 complaint's reliance upon numerous confidential sources).
9
Moreover, the proposition that actual or reported changes in witness
10 accounts undermine the validity of pleadings made in reliance upon information
11 provided in confidence by those witnesses, or give rise to a Rule 11 violation, is
12 simply mistaken. See Yesner v. Spinner, 765 F.Supp. 48, 54 (E.D.N.Y. 1991)
13 (where plaintiffs counsel undertook reasonable inquiry prior to signing pleading,
14 fact plaintiff subsequently took different or contradictory position during
15 discovery does not make pleading sanctionable under Rule li's objectively
16 reasonable test). The courts have long noted that cases in which "witnesses later
17 recant for a host of possible reasons are not uncommon," Watkins v. Miller, 92
18 F.Supp.2d 824, 854 (S.D. Ind. 2000); see Novak, 216 F.3d at 314 (recognizing that
19 witnesses may be deterred by fear of "retaliation against them.") Accordingly, the
20 fact that defendants' counsel or agents may have succeeded in getting their former
21 employees to offer a different version of events does not support any asserted
22 Rule 11 violation. See Crawford v. Deutsche Bank AG, 271 F.Supp.2d 829, 833
23 (E.D. Va. 2003) (deny Rule 11 motion where parties had different interpretation
24 of evidence and case came down to credibility determination by jury).
25
All of this underscores the wisdom of the Advisory Committee that Rule 11
26 motions should not be used as a device to test sufficiency of allegations or in an
27 attempt to intimidate an adversary. Unfortunately, that is precisely what
22 defendants are doing here. Defendants have filed a Rule 11 motion challenging
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the factual allegations underlying the complaint in order to poison the court's
consideration of plaintiffs' claims on their motion to dismiss, and have now asked
the Court to consider their Rule 11 in ruling upon their Rule 12(b)(6) motion.
Def. Reply Mem. in Support of Motion to Dismiss at 10-11; see In re New Motor
Vehicles Canadian Exp. Antitrust Litig., 244 F.R.D. 70, 73-74 (D. Me. 2007)
(where thrust of sanctions motion is to challenge institution of case, it is better
practice for courts to defer consideration of motion so that it will not have
implications for upcoming summary judgment practice).
IV. ARGUMENT
A. Defendants' Submissions Create Factual Disputes Not Suited for Resolution on this Rule 11 Motion
Defendants' gambit here - identifying and contacting confidential witnesses
and inducing them to sign declarations drafted by defense counsel disputing some
or all of the information they previously gave to the plaintiffs' investigators to
provide a pretext for their Rule 11 challenge to a securities complaint - has been
repeatedly rejected by the courts within this Circuit, and elsewhere, whether or not
they ultimately grant or deny a motion to dismiss under Rule 12(b)(6). In re
Applied Micro Circuits Corp. Sec. Litig., 2002 U.S. Dist. LEXIS 22403, *3031
(S.D. Cal. Oct. 3, 2002) (Keep, D; Wu Group v. Synopsys, Inc., 2005 WL
1926626, *1213 (ND. Cal. Aug. 10, 2005) (Jenkins, D; In re JDS Uniphase
Corp. Sec. Litig., 2008 WL 753758, *34 (ND. Cal. Mar. 19, 2008) (Wilken, D; In re Equity Funding Corp. Sec. Litig., 416 F.Supp. 161, 193-94 (C.D. Cal. 1976)
(Lucas, D; Harding Univ., 48 F.Supp.2d at 768-70. Where, as here, plaintiffs
submitted declarations or other evidence attesting to the fact that the confidential
witnesses made the statements attributed to them, the courts rejected defendants'
Rule 11 motion, reasoning that the dispute whether the witnesses made the
statements attributed to them by the plaintiffs "is essentially a credibility question"
Not surprisingly, defendants cite none of these decisions in their Rule 11 papers.
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and that "Rule 11 sanctions are not appropriate in that context." Wu Group, supra
at * 13 -, see JDS Uniphase, supra at *3..4; Applied Micro Circuits, supra at * 31.
Judge Keep cut to the heart of the issue when she explained, "Plaintiff provides a
explanation as to why sources are now contradicting themselves;
Plaintiff claims the change occurred after having been contacted by Defendants'
attorneys." Applied Micro Circuits, id. (emphasis added). In fact, courts have
criticized defendants for doing precisely that, noting that "seeking out and
obtaining a declaration" from a confidential witness relied upon in a plaintiffs
complaint while the parties are subject to the automatic discovery stay is "wholly
improper." See, e.g., In re ProQuest Sec. Litig., 527 F.Supp.2d 728, 740 (ED.
Mich. 2007).
Even a cursory review of the defendants' and plaintiffs' competing
declarations demonstrates that there are factual disputes concerning what the
confidential witnesses knew and said that cannot be resolved at this stage in the
proceedings. By filing their Rule 11 motion now, defendants would intrude upon
the exclusive province of the jury to determine the credibility of witnesses and
resolve evidentiary conflicts. United States v. Horowitz, 756 F.2d 1400, 1406 (9th
Cir.), cert. denied, 474 U.S. 822, 106 S.Ct. 74, 88 L.Ed.2d 60 (1985); United
States v. Taylor, 716 F.2d 701, 711 (9th Cir. 1983).
Moreover, because defendants' Rule 11 motion raises significant factual
issues, plaintiffs must be afforded a reasonable opportunity to conduct discovery
and develop the factual record that addresses the merits of the plaintiffs'
allegations and sheds light on whether defendants' factual contentions are true. 5
As the Seventh Circuit explained, when defendants' Rule 11 motion is predicated
on challenging the basis for the complaint's factual allegations, the Rule 11 motion
"cannot be determined until such time as the party claiming those facts has had an
By separate motion being filed today, plaintiffs have cross-moved to strike the defendants' declarations or to permit discovery concerning the disputed factual issues.
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adequate opportunity to develop his proof" Kaplan v. Zenner, 956 F.2d 149, 152
(7th Cir. 1992) (internal quotations omitted). And the determination whether a
pleading is well grounded in fact and law may not be feasible until after an
evidentiary hearing on summary judgment or even after trial. Thomas v. Capital
Sec. Serv., 836 F.2d 866, 881 (5th Cir. 1988). See Lichtenstein, 173 F.3d at 23
(defer consideration of sanctions motion until end of case); In re Humana Inc.
Sec. Litig., 2000 U.S. Dist. LEXIS 21671, *2728 (W.D. Ky. Nov. 7, 2000) (deny
Rule 11 motion where plaintiffs' counsel was provided with evidence tending to
refute allegations but was denied opportunity to depose witness as to whether
prior statement upon which plaintiff relied was accurate).
B. Plaintiffs Have Acted Appropriately at All Times
Defendants' frivolous attacks upon plaintiffs' actions in prosecuting this
litigation are directly addressed and rebutted in the four declarations being
submitted in connection with this opposition. Together, they recite, in far more
detail than can fit within this legal memorandum, how plaintiffs conducted an
appropriate investigation and Lead Counsel carefully prepared the CCAC
reflecting the results of the information obtained in their detailed investigation of
defendants' fraudulent conduct. Plaintiffs shall briefly address some of their
specific charges below.
First of all, the record establishes that plaintiffs' investigators disclosed
their engagement to all persons they interviewed. Riviere Dccl. ¶7-9, 13, 21;
Rowe Dccl. ¶7-8, 14, 26, 31, 42. See also Investigative Memoranda offered for
in camera review. Moreover, the suggestion that plaintiffs' investigators refused
to provide this information is refuted by a letter they sent to one of the
confidential witnesses at his request. Rowe Dccl. ¶ 26; Riviere Dccl. ¶9 & Ex.
A. 6 Similarly, defendants' suggestion that Mr. Rowe misled Mr. Rose concerning
6 Defendants' willingness to make the allegation that "[e]ach witness was surprised to learn that his or her statements had been used in a complaint against ValueClick," Def. R. 11 Motion at 4, when plaintiffs' investigator provided a
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his nexus to the FTC investigation is directly refitted by Mr. Rowe's declaration.
Rowe Dccl. ¶14-15.
Another scurrilous charge leveled by defendants is that plaintiffs'
investigators solicited the disclosure of confidential or privileged information.
The investigators' declarations (as well as their interview memoranda) confirm
that they told each witness they interviewed that they were not seeking any such
disclosures. Rowe Dccl. ¶12; Riviere Dccl. ¶10. A review of Mr. Rowe's
declarations concerning the interviews of Ms. Bennett and Mr. Rose further
confirms that their conversations did not cover any privileged communications.
Rowe Dccl. ¶17, 34.
The fact that Mr. Rose complained in the presence of a number of company
officials, including someone he identified as a "Legal Affairs Manager" and
another witness identified as an attorney, and that both the legal and non-legal
personnel had the same reaction - that the company made more money by not
fixing the problem of continuing to send email solicitations to persons who
wanted to "unsubscribe" and therefore would not change these practices, Rowe
Dccl. ¶17, does not render the fact of his complaining or their stated refusal to act
a privileged communication. State Farm Fire & Cas. Co. v. Superior Court, 54
Cal.App.4th 625, 640 (1997) (privilege does not protect independent facts
establishing that communication took place); Edwards v. Whitaker, 868 F.Supp.
226, 228 (M.D. Tenn. 1994) (privilege does not protect disclosure of
communications where attorney acts as business advisor or obtains information in
capacity as supervisor of another employee). This is especially true where, as
here, the attorney was part of a team conducting business and was not asked to
render any legal advice. See In re Fischel, 557 F.2d 209, 211-12 (9th Cir. 1977)
("An attorney's involvement in, or recommendation of, a transaction does not
standard letter explicitly disclosing the purpose of his contact when requested, bespeaks defendants' own failure to conduct an appropriate investigation before making their Rule 11 motion here.
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1 place a cloak of secrecy around all of the incidents of such a transaction."). See
2 generally Kramer v. Raymond Corp., 1992 WL 122856, *1 (E.D. Pa. May 29,
3 1992) (privilege construed narrowly, especially where corporation seeks to shield
4 communications to in-house counsel). Here defendants have clearly failed to meet
5 their burden to make a clear showing that Mr. Rose communicated with an in-
6 house counsel for the primary purpose of obtaining legal, not business advice, as
7 he made the same statement in the presence of other non-legal company
8 supervisors. 7 United States v. ChevronTexaco Corp., 241 F.Supp.2d 1065, 1076
9 (ND. Cal. 2002). See Simon v. G.D. Searle & Co., 816 F.2d 397, 403 (8th Cir.),
10 cert. denied, 484 U.S. 917, 108 S.Ct. 268, 98 L.Ed.2d 225 (1987) (business
11 communication not privileged based upon copying counsel on memorandum).
12
C. Subsequent Events Reinforce Plaintiffs' Allegations
13
If the Court harbored any doubt about plaintiffs' good faith basis for the
14 allegations of the complaint, subsequent developments have confirmed their
15 validity. Specifically, after Lead Plaintiffs filed the CCAC, the FTC filed a
16 complaint against and entered into a stipulated judgment with ValueClick in
17 which the FTC enumerated many of the same misdeeds cited in the Lead
18 Plaintiffs' complaint. Compare CCAC ¶25, 42 - 46 with FTC Complaint ¶1 7-
19 42. Moreover, the stipulated judgment contained defendants' agreement that the
20 complaint stated a claim against defendants under the FTC Act and the CAN-
21 SPAIVI Act to the extent that it called for prospective injunctive relief. When
22 viewed in conjunction with the FTC's collection of a record $2.9 million fine from
23 ValueClick for violating these laws, this hardly suggests that the CCAC's similar
24 allegations are unfounded. Furthermore, a review of the partial disclosure of the
25 FTC's own file on ValueClick, which was produced pursuant to the Freedom of
26 Information Act, provides further evidence of both consumer complaints and the
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fact that the FTC had communicated with ValueClick long before its May 16,
2007 letter concerning other compliance issues.
D. The Information Witnesses Gave to Plaintiffs' Investigators Properly Supports All of the Challenged Allegations
The courts have long recognized that it is perfectly appropriate for a
plaintiff to rely upon reports of outside investigation, even though they have never
been subjected to cross-examination or any other adversarial testing in framing
allegations. In re Spiegel, Inc. Sec. Litig., 382 F.Supp.2d 989, 1013-14 (ND. Ill.
2004). Here each allegation attributed to one or more confidential witnesses was
based upon information provided by those witnesses, as confirmed by the
investigators declarations. 8 See Rosen Dccl. Ex. A (comparing each allegation
based upon confidential witness information in CCAC to Rowe and Riviere
declarations). A detailed review of the specific allegations attributed to each
confidential witness and the declarations pertaining to them is set forth in Rosen
Dccl. ¶35-52. A summary follows. 9
1. CW1 - Shayne Mihalka
Mr. Mihailca (CW1) does not challenge the statement in the complaint that
advertisers paid the company for securing email addresses and other identifiers or
profile information obtained through various ads ran by WebClients, including
those that flash on the screen, pop-ups and e-mail campaigns. CCAC ¶25; see
Rowe Dccl. ¶29.
The complaint further alleges that CW1 stated that when consumers opened
an email or clicked on an ad, they were typically put through several stages in
•Defendants' ad hominem attack upon Mr. Rowe's statements about private investigators is also addressed in his declaration, Rowe Dccl. 11t 48-49, and need pot be repeated here.
The investigators' investigative memoranda, which are being offered for in camera review, also refute any suggestion that the investigators did not uncover this information and provide it to Lead Counsel prior to the tiling of the CCAC.
The complaint's allegations are also borne out by the investigative memoranda thathave been submitted under seal.
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1 which they had to provide information and usually had to buy something, often a
2 magazine subscription, before they qualified for any "free" gift. CCAC ¶42, n. 5.
3 (This is similar to the allegations in the FTC's own complaint against ValueClick.
4 FTC complaint at ¶20-21.) Mr. Mihalka does not deny making a statement
5 along these lines, but claims (1) he was making a statement about "the general
6 practice in the lead generation industry" (2) he does "not have first-hand
7 knowledge of WebClient's gift redemption procedures" but (3) that "my
8 understanding is that you do not have to make a purchase to receive the 'free' gift
9 for a WebClient's offer." Mihalka Dccl. ¶6 (emphasis added). It is curious how
10 Mr. Mihalka reconciles his purported complete lack first-hand knowledge on
11 ValueClick's practices while affirmatively asserting a specific "understanding"
12 that it did not follow general industry practices here. Moreover, this unusual
13 juxtaposition of ignorance and faith conflicts with plaintiffs' investigator's
14 recollection that Mr. Mihalka had specifically described ValueClick's lead
15 generation campaign and said that it was also consistent with "standard practice"
16 of its competitors. Rowe Dccl. ¶29.
17
2. CW2 - Gabriele Bennett
18
Four paragraphs of the complaint cited CW2 (Ms. Bennett) to the effect that
19 the sweepstake campaigns were phony (CCAC ¶35, 37), these campaigns were
20 conceived of and approved by top managers of WebClients, including Messrs.
21 Gray and Piotroski (CCAC ¶38), and onerous hurdles were placed upon persons
22 trying to collect "free" gifts, including a Home Depot gift card (CCAC ¶45).
23 Remarkably, Ms. Bennett does not directly dispute the central allegation
24 attributed to her - that the sweepstake campaigns were phony, no drawings were
25 ever held and there was no procedure to select a winner. CCAC ¶35. The most
26 she would say was a half-hearted statement that, "I cannot confirm that these
27 statements are true ... I do not have personal knowledge of ValueClick's
22 administration of sweepstake prizes .... ValueClick may very well have selected
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sweepstakes winners and awarded prizes, and I would not have been aware of
that practice in my role with the company." Bennett Dccl. ¶6 (emphasis added).
In fact, Mr. Rowe's declaration confirms not only that Ms. Bennett did
make all of the cited statements, she also explained in considerable detail how this
was done. Rowe Dccl. ¶32-39. Mr. Rowe's declaration also directly refutes Ms.
Bennett's declaration that "I have no way of knowing whether or not prizes have
been awarded in connection with such sweepstakes, regardless of how long they
have been running or whether or not they have been renewed. Bennett Dccl. ¶7,
explaining that in her initial interview Ms. Bennett volunteered to look at
WebClients' current campaigns and confirmed the continuation of this scheme of
running fake sweepstakes and called Mr. Rowe back for a follow up interview
sharing what she had learned. Rowe Dccl. ¶36-39.
The complaint also alleges how the phony sweepstakes were conceived and
directed by top managers, including Messrs. Gray and Piotroski, with the help of
in-house lawyers, Alex Hartzer and Shannon Gierasch. CCAC ¶38. The best
defendants can offer in response is the statement "I do not have personal
knowledge of the specific involvement (if any) of Josh Gray, Scott Piotroski, Alex
Hartzer, or Shannon Gierasch in any particular sweepstakes campaign..." Bennett
Dccl. ¶8 (emphasis added), even though Mr. Rowe's declaration confirms that Ms.
Bennett specifically stated that the campaigns were conceived of, and directed by
the top managers of WebClients - Josh Gray and Scott Piotroski - and that
Bennett also named Hartzer and Gierasch, whom she described as attorneys in the
WebClients legal department, as also participating. Rowe Dccl. ¶34. 10
Ms. Bennett also does not deny making her quoted statement about the
Home Depot promotion, CCAC ¶ 45 but now seeks to downplay her statement as
merely "a personal opinion," adding that she (now) has no reason to believe that
10 Mr. Rowe's declaration adds, "I did not ask her about the legal department or about any of the communications with WebClients attorneys."
legal Dccl.
¶34.
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ValueClick's promotions were run in any way inconsistent with their disclosed
terms or in violation of the law. Bennett Dccl. ¶9. By contrast, Mr. Rowe's
declaration sets forth details of Ms. Bennett's interview statement confirming the
complaint's allegations about the Home Depot gift offer, including details of its
requirements to make purchases to receive the "free" gift. Compare CCAC ¶45
with Rowe Dccl. ¶40. "
3. CW3 - David Rose
Mr. Rose (CW3) does not deny the seven paragraphs in the complaint that
provide considerable detail concerning the operation of sweepstakes campaigns
and offers of "free" gifts, including the company's specifically setting up shell
corporations to shield WebClients' involvement in the scam. CCAC ¶36, 39-40,
42, 46-48. Instead, he attempts to minimize them as, "general statements I recall
having overheard while at ValueClick" or "some isolated comments or jokes
made by others," adding "I have no reason to believe that ValueClick was
engaged in any unlawful conduct." Rose Dccl. ¶1 4-15 (emphasis added). And
while Mr. Rose denies having warned his superiors that there would be a sharp
drop in revenue because the company was selling the same leads to the same
people, he does not deny that he was "consistently told that as long as the numbers
'were good' then 'we aren't going to fix what ain't broke." Compare CCAC ¶ 48
with Rose Dccl. ¶17.
The declaration of one of plaintiffs' investigators paints a far different story.
Rowe Dccl. ¶14-25. Mr. Rowe noted that in response to his initial contact "Mr.
Rose immediately stated 'boy have you come to the right place, I have lots of din
on them." and in his follow up interview, "Rose made statements that during his
As further proof of Ms. Bennett's willing cooperation with plaintiffs' investigators Mr. Rowe also points out that "Bennett suggested I contact two additional tormer employees of WebClients, also provided background information about their roles at WebClients and the type of information she believed they could provide." Rowe Dccl. ¶41.
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employment with ValueClick he found the company was 'not in compliance' with
certain requirements relating to email advertisements and that he reported his
to the company's management" and contrary to his prior experience
working for two other companies in the same industry, ValueClick had no
compliance officer. Rowe Dccl. 11t14-15 (emphasis added). The investigator's
declaration also specifically confirms that the witness determined when he arrived
at the company that WebClients was not "scrubbing" its emailing lists against any
"unsubscribed lists," which he said was a requirement of the CAN-SPAIVI Act,
and that it was not engaging in standard "best business practices" because it had
no procedure in place to provide its customers with "unsubscribed" lists. Rowe
Dccl. 116-17. The investigator also confirms that the witness repeatedly raised
these failures in the company's emailing practices with various superiors,
including a company officer, Executive Vice President Josh Gray, and Shannon
Gierasch of the Legal Department, and that he was consistently rebuffed by all.
Rowe Dccl. ¶17.12
4. CW4 - Jason Nab
The only statement attributed to CW4 (Mr. Nab) in the complaint is that
CW4 "confirms that ValueClick was not honoring opt-out requests that it
received" and "[flnstead ... continued to 'broker out' the consumers' email
addresses for a variety of other advertising promotions, forcing the consumer to
have to separately attempt to opt-out after receiving each new promotion." CCAC
¶39, n. 4. Mr. Nab now claims to have "no knowledge in any way, whatsoever,
how ValueClick handled the opt-outs and how one went about unsubscribing from
12 Mr. Rowe also stated that when the witness identified Gierasch as "the Legal Department Manager" the investigator "never initiated any discussion about Rose's contacts with Gierasch or the legal department ... had no information that he had such contacts until [Rose] offered that Gierasch was present and joined in responses by Piotroski and Gray when Rose expressed his concerns to them" and "[a]fter Rose offered this information about (nerasch, I did not inquire further about his contacts with her or anyone from the legal department." Rowe Dccl.
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1 certain promotions." Nab Dccl. ¶4. Not only did one of plaintiffs' investigators,
2 Amy Riviere, report that Mr. Nab made these statements, she explained Mr. Nab's
3 personal familiarity with the issue. Riviere Dccl. ¶ 24-25.
4
5. CWS - Mary Kate Lawlor
5
The complaint contains specific information provided by CW5 (Ms.
6 Lawlor) concerning a "free" gift advertising campaign for Applebee's. CCAC ¶
7 44. These allegations are confirmed in the declaration of one of plaintiffs'
8 investigators. Rowe Dccl. ¶42-45. Instead of contesting these claims, Ms.
9 Lawlor states that she does "not recall providing the information" attributed to
10 CWS and insists "I really don't remember how anything works at ValueClick
11 and do not believe I have any information that would make me a relevant witness
12 in this case." Lawlor Dccl. ¶ 4 (emphasis added). Barring a sudden change in her
13 health, it is certainly unlikely that her memory would have deteriorated so sharply
14 in the 2 1/2 months between her March 18, 2008 declaration and her January 5,
15 2008 interview with Mr. Rowe in which she disclosed it was at least a regular
16 practice for WebClients to require consumers to make one or more purchases to
17 receive the free gifts, and specifically described an Applebee's "free" gift
18 campaign. Rowe Dccl. ¶44-45.
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6. CW6 - Amanda Bashore
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The complaint contains only one paragraph drawing upon an interview with
21 Ms. Bashore (CW6), which alleges: (1) before the existence of the investigation
22 was publicly acknowledged (May 18, 2007), ValueClick met with all WebClients
23 and ValueClick employees in its Harrisburg office asserting that there was no FTC
24 investigation and the company was not violating any FTC guidelines; (2)
25 employees, including CW6, were later instructed to tell customers that they did
26 not know about any FTC investigation; (3) customers did, in fact, express concern
27 about the company's FTC compliance with FTC guidelines; and (4) the company
22 had lost customers as a result. CCAC ¶ 87. Ms. Bashore now claims that the only
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time the issue of an FTC investigation was addressed by management was May 9,
2007 and that at that time, WebClients' management stated that "we were not
under an FTC investigation for our lead generation activities and that
Management felt that we did comply with applicable regulations." Bashore Dccl.
¶5 (emphasis added). Ms. Bashore also insists "I have no knowledge regarding
customers expressing concern over an investigation and ValueClick losing
customers as a result, nor did I make any statements to that effect." Bashore Dccl.
¶4.
Ms. Bashore was much more forthcoming in her interview with one of
plaintiffs' investigators, Amy Riviere, who reports that Bashore told her about two
meetings, the first in April 2007, when Scott Piotroski assured all of the
employees that the company was not being investigated and was not violating any
FTC guidelines, and a later one in May 2007 where her supervisor, Rebecca
Wink, instructed her and other account managers what to do if customers inquired
about an FTC investigation. Riviere Dccl. 11t17-18. Riviere also specifically
noted that Ms. Bashore informed her that customers were concerned about FTC
guidelines and that the company lost customers as a result. Riviere Dccl. ¶20.13
13 At this stage in the proceedings, Lead Plaintiffs cannot know why Ms. Bashore, or any other witness, appears to have changed his or her story, but there may be a clue m Riviere Dccl. ¶ Th, which notes:
Once the interview was underway and certain questions had been posed, Ms. Bashore asked whether the interview was confidential and expressed concern about a non-disclosure agreement. I informed Ms. Bashore that I could not provide legal advice. I further informed her that I could not guarantee confidentiality and explained how information from informal interviews might typically be used. I specifically told her that the information she provided could be incorporated into a consolidated complaint by the attorneys for the shareholders and that while her name would likely not be used in that complaint, her title and job description might be included. After this explanation, she continued to answer questions posed.
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1 E. Gibson Dunn's Past Conduct of Using or Threatening Sanctions Motions for Tactical Advantage
Until plaintiffs are afforded an opportunity to conduct discovery on all of
the disputed issues, plaintiffs cannot establish what defendants' counsel or agents
said or did to persuade any confidential witness to sign a declaration denying
knowledge of, modifying, or renouncing part or all of their statements or what
other evidence will confirm plaintiffs' allegations. However, the Court may take
judicial notice of other situations in which GDC attorneys have used the threat or
assertion of legal process against witnesses to try to get them to change their
testimony.
The most notable example is set forth in detail in the unanimous opinion of
the Montana Supreme Court in Seltzer v. Morton, 336 Mont. 225, 154 P.3d 561
(2007). Seltzer arose indirectly from a dispute between an art collector and the
gallery as to whether a painting was the work of one artist, Charles M. Russell, or
another, less distinguished artist, O.C. Seltzer. The purchaser contacted Mr.
Seltzer, "the world's foremost expert on the works of O.C. Seltzer, and to a lesser
extent, an expert on the works of C.M. Russell." 336 Mont. at 231, 154 P.3d at
571-72. Seltzer expressed his opinion to Morton that "it was clearly and
obviously not an authentic Russell," and explained in detail the basis for his
conclusion, which was seconded by another recognized expert, 336 Mont. 232-34,
154 P. 3d at 572-573. Shortly before filing suit against Seltzer, a GDC lawyer sent
a demand letter to both experts stating:
1. Each of you will draft a letter to our specifications
completely recanting and withdrawing any statement you have
previously made regarding the authenticity of the painting currently
owned by Mr. Morton.
2. In the letter, among other admissions you will make, you
will admit that you did not perform a detailed examination of the
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painting and that your "opinion" was merely conjecture on your
part. 14
***
Mr. Morton gave you every chance to withdraw your damaging
comments over the better part of eight months during last year. Each
of you elected to ignore his pleas or simply dismissed then,. You will
not have that luxury this time around. We expect immediate
cooperation on the drafting of your "withdrawal of opinion" or
litigation will be filed without any further discussion. And given the
opportunity afforded you to rectify this wrong, and your refusal to do
so, punitive damages will be requested.
336 Mont. at 239, 154 P.3d at 576 (emphasis added). When Seltzer refused, GDC
sued him in federal court on behalf of Morton. After Morton's complaint was
dismissed with prejudice as a result of the "acknowledged awareness" that Morton
could not prevail on the merits, 336 Mont. at 243, 154 P.3d at 578, Seltzer sued,
inter a/ia, Morton and GDC for malicious prosecution and abuse of process. In
issuing a judgment of $9.9 million in punitive damages against GDC, the Montana
Supreme Court condemned "the sort of saber-rattling, chest-thumping approach
typified by the comment of GDC's counsel" and concluded "GDC's use of the
judicial system amounts to legal thuggery" that is "truly repugnant to
foundational notions of justice and is therefore highly reprehensible" and worthy
of a "particularly severe sanction." 336 Mont. 292-93, 154 P.3d at 609 (emphasis
added).
Moreover, GDC is no stranger to other actions aggressively, but
unsuccessfully, challenging a complaint's factual allegations, by motion or threat.
For example, in Kerns v. Spectra/ink Corp., 2003 U.S. Dist. LEXIS 6194, *6 (D.
Note the similarity in the language used in the declarations defendants obtained from the confidential witnesses here. See, e.g., Bennett Dccl. 11t 6-7, 9; Rose Dccl. ¶ 14.
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Cob. Mar. 26, 2003), the court rejected GDC's Rule 11 motion, explaining
"Defendants repeated suggestions that the allegations in the Complaint ... 'are
entirely false,' are ... inappropriate for this Court to consider" at the motion to
dismiss stage of the litigation. 15 GDC's actions and own public statements 16
suggest that it may view the filing of Rule 11 motions as simply one more tactical
weapon to secure some advantage in litigation. 17
'WA CONCLUSION
The courts have shown an increasing awareness of the fundamental flaw in
the approach followed by some defendants seeking to use Rule 11 in a frontal
assault on plaintiff class actions. As one district court explained, "a Rule 11
See also Gotro v. R&B Realty Group 69 F.3d 1485 (9th Cir. 1995) (upheld district court's refusal to grant GDC's RulIe 11 motion claiming that plaintiffs attorneys misrepresented facts to the court); In re New Motor Vehicles Canadian Exp. Antitrust Litig., 236 F.R.D. 53(D.Me. 2006) (GDC was counsel for the only defendant in nationwide multi-district litigation that filed a Rule 11 motion, which the court concluded would disrupt schedule for handling of litigation); Kotakis v. Gruntal &Co. 2000 U.S. Dist: LEXIS 10094, *1819 (ND. Cal. July 11, 2000) (GDC motion f2or Rule 11 sanctions against pro se litigant was denied). 16 In fact, GDC's own website boasts:
When your back is against the wall, THERE IS ALWAYS A WAY OUT. You are never cornered. You are never trapped. You are simply in a position where it is absolutely essential to think in new ways - and find the less obvious path to success. For more than 115 years, one law firm has achieved its greatest success when the challenges were the most formidable. From high stakes litigation to capital strategies to the protection of vital intellectual property, we are the partner you can rely on. (emphasis in original). Rosen Dccl., Ex. B.
Finally, even if the Court were inclined to seriously entertain defendants' Rule 11 motion - which for all of the reasons set forth above, plaintiffs respectfully suggest it should not - the motion is, at best, premature. The PSLRA specifically directs the Court to consider every party's compliance with Rule 11 after there has been a "final adjudication." 15 U.S.C. § 78u-4(c)(1), which under the plain meanmg of the statute, is made "upon a terminating decision in district court, such as verdict, summary judgment, or dismissal with prejudice without leave to amend." DeMarco v Depotech Corp., 131 F.Supp.2d 1185, 1187 (S.D. Cal. 2001) (internal quotations omitted). Moreover, early consideration of defendants' motion could intrude upon protected work product. O'Neil v. Ret. Plan for Salaried Employees of RICO Gen., Inc., 1992 U.S. Dist. LEXIS 237, *12 13 (S.D.N.Y. Jan. 7, 1992). . Accordingly, no purpose would be sewed by entertaining defendants' sanctions motion now unless the Court were to summarily reject it. See also Chambers v. NASdO, Inc., 501 U.S. 32, 56, 111
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motion is not the vehicle to cure all that [defendants] think is wrong with class
action practice." New Motor Vehicles Canadian Exp. Antitrust Litig., 244 F.R.D.
at 74; see Zaldivar v. City of Los Angeles, 780 F.2d 823, 829-30 (9th Cir. 1986)
("Rule 11 is not a panacea intended to remedy all manner of attorney misconduct
occurring before or during the trial of civil cases"). Unfortunately, defendants'
actions suggest that they and their counsel have and will continue to pursue a
radically different agenda.
Between plaintiffs' opposition to defendants' motion to dismiss and their
submissions here, plaintiffs have clearly and conclusively demonstrated that their
claims are legally warranted and that their factual contentions have evidentiary
support. Under these circumstances, this Court is justified in not only rejecting
defendants' motions but granting plaintiffs appropriate relief, including awarding
Plaintiffs' Lead Counsel all fees and expenses incurred without requiring service
of a cross motion by respondent under Rule 11. See, e.g., Advisory Com. Notes
on 1993 Amend. to Rule 11; Browne v. N.A.S.D., Inc., 2006 U.S. Dist. LEXIS
35507 (ND. Tex. May 31, 2006).
Respectfully submitted,
BARRACK, RODOS & BACINE STEPHEN R. BASSER JOHN L. HAEUSSLER 402 West Broadway, Suite 850 San Diego, CA 92101 Telephone: 619/230-0800 Facsimile: 619/230-1874
S.Ct. 2123, 115 L.Ed:2d 27 (1991) (interrupting proceedings on the merits to conduct sanctions hearing may only serve to reward party seeking delay).
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IDATED: June 26, 2008 BARRACK, RODOS & BACINE LEONARD BARRACK DANIEL E. BACINE MARK R. ROSEN CHAD A. CARDER
Is! Mark R. Rosen
MARK R. ROSEN
3300 Two Commerce Square 2091 Market Street Philadelphia, PA 19103 Telephone: (215) 963-0600 Facsimile: (215) 963-0838
Attorneys for the Laborers' International Union of North America National (Industrial) Pension Fund and LIUNA Staff & Affiliate Pension Fund, Lead Counsel for Plaintiffs and the Class
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1 CERTIFICATE OF SERVICE
WALDREP v. VALUECLICK, INC. Case No.: 2:07-cv-0541 1-DDP-AJW
I, the undersigned, state that I am employed in the City Philadelphia, State
of Pennsylvania; that I am over the age of eighteen (18) years and not a party to
the within action; that I am employed at Barrack, Rodos & Bacine, 2001 Market
Street, Philadelphia, PA 19103; and that on June 26, 2008, I sewed a true copy of
the attached:
PLAINTIFFS' OPPOSITION TO DEFENDANTS' RULE 11 MOTION
to the parties listed on the attached Service List by the following means of service:
BY E-FILE: I electronically filed the foregoing with the Clerk of the Court using the CIVI/ECF system which will send notification of such filing to the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have mailed the foregoing document or paper via the United States Postal Service to the non-CIVI/ECF participants indicated on the attached Service List. BY E-MAIL: I c-mailed a true copy addressed as indicated in the attached Service List, on the above-mentioned date. BY MAIL: I placed a true copy in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List, on the above-mentioned date. I am familiar with the firm's practice of collection and processing correspondence for mailing. It is deposited with the U.S. Postal Service on that same day in the ordinary course of business and there is a regular communication by mail between the place of mailing and the place so addressed. BY UPS: I placed a true copy in a sealed envelope and addressed to the parties listed on the attached Service List, on the above-mentioned date.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 26th day of June, 2008.
Is! Sheila D. Davis SHEILA D. DAVIS
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