In Re Lucent Technologies, Inc. Securities Litigation

Citations: 221 F. Supp. 2d 472; 2001 U.S. Dist. LEXIS 24955; 2001 WL 406189Docket: 2:00CV00621

Court: District Court, D. New Jersey; April 19, 2001; Federal District Court

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In the case of In re Lucent Technologies, Inc. Securities Litigation, the United States District Court for the District of New Jersey addressed a consolidated action involving purchasers of Lucent Technologies, Inc. common stock. The plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, seeking damages. A consolidation order was entered on December 26, 2000, merging the original lawsuit with several others. Currently, there is a pending Motion to Vacate this consolidation order, as well as motions for lead plaintiff and lead counsel related to the newly filed actions. The court denied the Motion to Vacate while partially granting and partially denying the motions concerning lead plaintiffs and counsel.

Between January 7, 2000, and March 2, 2000, eighteen class action complaints were filed against Lucent Technologies and its executives, Richard A. McGinn and Donald K. Peterson, alleging that misleading press releases and statements made in the fall of 1999 inflated Lucent's stock price. The complaints claimed Lucent was aware of serious internal issues, including declining demand, rising costs, and declining profit margins, which it attempted to conceal through accounting manipulations and overly optimistic public communications. A proposed class was defined for those who purchased Lucent stock between October 27, 1999, and January 6, 2000. On April 27, 2000, the Employer-Teamsters Locals 175, 505 Pension Trust Fund was appointed as provisional lead plaintiff, and Milberg Weiss was designated as lead counsel. 

On November 3, 2000, the Pension Trust Fund filed a more detailed consolidated class action complaint, extending the class period to October 26, 1999, through January 6, 2000, and alleging improper revenue recognition in violation of Generally Accepted Accounting Principles. Following Lucent's November 21, 2000, press release admitting to improper revenue recognition of approximately $125 million, additional class action complaints were submitted, leading to further amendments of the class action complaints by the Pension Trust Fund, extending the class period multiple times. Notably, after Lucent's December 21, 2000, announcement of a $700 million revenue reduction, additional complaints were again filed. Ultimately, the Lucent II complaints were consolidated with the Lucent I actions on December 26, 2000.

On January 23, 2001, defendants Lucent, McGinn, and Peterson responded to the Fourth Amended and Consolidated Complaint. Following this, a conference on January 26, 2001, addressed the potential vacating of the December 26, 2000, Consolidation Order and invited parties to brief consolidation issues, culminating in oral arguments on March 9, 2001.

The Lucent I Plaintiffs advocate for a single consolidated action with unified leadership, emphasizing that their claims regarding improper revenue recognition for the entire fiscal year 2000 were articulated in the Fourth Amended and Consolidated Complaint before the Lucent II actions emerged. They argue that these claims are intertwined with previously alleged improprieties. They assert that the Private Securities Litigation Reform Act (PSLRA) does not necessitate new lead plaintiff applications due to the emergence of further allegations related to revenue recognition. The Lucent I Plaintiffs maintain that the class period was correctly extended without requiring additional notice, as the deceptive practices continued until December 2000. They argue against the need for a subclass for Lucent II Plaintiffs, suggesting any subclass should start no earlier than October 10, 2000; if Lucent II proceeds separately, its class period should also begin no earlier than that date.

Conversely, the Lucent II Plaintiffs claim a lack of significant connection to Lucent I, asserting their claims are stronger and would be diluted if combined with Lucent I. They propose that Lucent II be treated independently, with a class period from July 20, 2000, to December 20, 2000. They characterize Lucent I as focusing on projections and false statements regarding growth and production, rather than the improper revenue recognition central to Lucent II, which they argue pertains to misleading statements about the company's financial health and operational challenges.

Lucent II Plaintiffs argue that their case pertains exclusively to accounting improprieties from Lucent's fiscal 2000 fourth quarter and related false statements. They emphasize that Lucent I and Lucent II involve distinct allegations, class periods, and defendants, particularly noting that defendants Hopkins and Schacht were not part of Lucent I. As a result, they contend that the two actions should not be consolidated and propose the creation of a subclass starting on July 20, 2000, with a separate Lead Plaintiff and Lead Counsel for this subclass. They argue that allowing Milberg Weiss to extend the Lucent I class period would undermine investor protections under the PSLRA.

In contrast, Defendants assert that consolidation is appropriate due to similarities in allegations regarding improper revenue recognition, as disclosed in press releases. They argue that separate trials would complicate evidence overlaps and issue preclusion. Defendants claim that consolidation would expedite the trial process, asserting that existing notices and extensive media coverage ensure potential lead plaintiffs are aware of the case. They reject the necessity for subclasses, arguing that differing class periods do not inherently create conflicts and that allegations in Lucent I are not weaker than those in Lucent II. Defendants also suggest that creating a subclass would lead to inefficiencies.

The Lucent II Plaintiffs seek to vacate the December 26, 2000, Consolidation Order under Rule 42(a) of the Federal Rules of Civil Procedure, which allows for the consolidation of actions with common legal or factual questions to avoid unnecessary costs or delays.

The PSLRA mandates consolidation of cases when multiple actions on behalf of a class assert substantially similar claims. The decision regarding consolidation involves considerations of judicial economy and discretion. Key factors include the risk of prejudice, potential confusion, the burden on parties and witnesses, the time required for multiple lawsuits versus a single one, and the relative costs. If no substantial basis for asserting confusion or prejudice exists, consolidation is generally deemed appropriate.

In the case of In re Olsten, consolidation was found suitable despite differences in the details of allegations across four complaints, all of which asserted violations of Sections 10(b) and 20(a) of the Exchange Act. Similar to the current matter, the actions involved common allegations regarding Olsten’s failure to disclose critical business practices. In the present situation, various complaints share common questions of fact and law, primarily alleging violations under the same Exchange Act sections. Although the Lucent II complaints differ in details from the Fourth Amended and Consolidated Complaint, they fundamentally assert similar claims regarding Lucent's fiscal fourth quarter 2000 results. Both sets of complaints claim that Lucent's guidance during the summer and fall of 2000 was misleading and that the truth was revealed in press releases on November 21 and December 21, 2000.

The Lucent II Plaintiffs argue against consolidation, claiming their case pertains to accounting improprieties in the fourth quarter, while Lucent I relates to misleading projections about growth and demand. However, both cases concern Lucent's projections for fiscal 2000 and subsequent adjustments to its financial results, suggesting overlapping issues that support consolidation. Lucent I Plaintiffs assert that Lucent misled the market on its fiscal 2000 prospects starting in October 1999, which could further intertwine the cases.

The Lucent II complaints allege misrepresentations regarding Lucent's projected fiscal 2000 results, claiming the misconduct began in July 2000, differing from the October 1999 start date in Lucent I. The allegations for the overlapping period from July 20, 2000, to December 21, 2000, are largely similar but not identical. Consolidating the Lucent I and Lucent II actions is deemed beneficial, as it mitigates the risks of prejudice and confusion, avoids inconsistent rulings on shared legal issues, and reduces the burden on parties and witnesses. Consolidation is expected to expedite pretrial proceedings and lower costs, although the decision may be reconsidered if substantial reasons arise against it.

The Lucent II Plaintiffs propose the creation of a subclass to address perceived conflicts between the two actions, arguing that their claims are stronger and that consolidation without a subclass could lead to confusion. They assert that many allegations in Lucent I, such as issues in optical networking and competitive pricing, have no relevance to Lucent II's core accounting fraud claims. Under Rule 23 of the Federal Rules of Civil Procedure, subclasses can be formed when significant conflicts exist, but the current conflict appears merely theoretical. The differences in class periods and the assertion that Lucent I claims are weaker do not suffice to establish a conflict. At this point, there is no substantial antagonism between the plaintiffs of Lucent I and II, indicating that a subclass is not necessary.

The document addresses the potential addition of lead plaintiffs and/or lead counsel in the ongoing litigation of Lucent I and Lucent II, noting that while conflicts are currently theoretical, the differing claims over varying periods suggest that more representation could be beneficial for the class. Under the PSLRA, the court is required to appoint the lead plaintiff who can best represent the class's interests, typically presumed to be the individual or group with the largest financial stake and who meets Rule 23 requirements. This presumption can be challenged if the proposed lead plaintiff cannot adequately protect the class's interests or faces unique defenses.

The PSLRA allows for a single lead plaintiff or a group acting as co-lead plaintiffs, with the appointment of multiple plaintiffs needing to balance diverse representation against the risk of diminished bargaining power. Courts generally appoint a small group of capable class members as co-lead plaintiffs to manage litigation effectively. 

In response to the Lucent II complaints, three motions for lead plaintiffs have been filed: Robert Seward (Seward Lead Plaintiff Motion), Joseph M. Tortell and Rajesh Garg (Tortell/Garg Lead Plaintiff Motion), and a group of institutional plaintiffs (Institutional Lead Plaintiff Motion). Seward has confirmed his willingness to serve, detailing his qualifications and lack of recent involvement in similar actions. Tortell and Garg have also expressed their readiness to serve, with Tortell reporting losses of $941,582.00 and Garg losses of $1,181,020.00 from July to December 2000. Each of the Institutional Plaintiffs has similarly indicated their willingness to act as lead plaintiffs in Lucent II.

Institutional Plaintiffs have certified their commitment to the case, confirming they reviewed the complaint, did not acquire Lucent Stock at counsel's direction or to participate in the litigation, are willing to act as representatives and testify if required, have not previously served as representative parties in class actions under federal securities laws in the last three years, and will not accept payment for their role. The plaintiffs report losses from July 20, 2000, to December 21, 2000, totaling $452,370.00 for Louisiana, $646,817.89 for Anchorage, and $2,588,120.00 for Parnassus.

Regarding notification requirements, the initial notice in the Lucent II matter, published on November 22, 2000, suffices to inform potential plaintiffs of their rights, despite not fully adhering to all previous notice requirements. Additional notices were issued in early 2000 and a more detailed one in June 2000, indicating adequate notice has been provided without further delays. The motion for lead plaintiffs must be filed within sixty days of the notice publication; the Lead Plaintiffs Motions were timely submitted following the November 22, 2000 notice.

The Institutional Plaintiffs collectively assert a larger financial interest in the litigation, alleging approximately $3.7 million in losses, exceeding that of other plaintiffs. They claim to have the largest financial stake among any moving class member or plaintiff group. 

Lastly, the Proposed Lead Plaintiffs must meet Rule 23 criteria, which necessitate that the class is numerous, shares common legal or factual questions, has claims typical of the class, and that the representatives will protect the class's interests. A detailed analysis of these requirements is deemed inappropriate at this stage and should be reserved for class certification motions.

A preliminary inquiry under Rule 23 is essential to assess whether the proposed lead plaintiffs can adequately represent the interests of the class, with a focus on the "typicality requirement" in Rule 23(a)(3). This requirement evaluates if the class representatives share common legal and factual issues with the class members, ensuring adequate representation for those not present. The Proposed Lead Plaintiffs exhibited sufficient typicality, as they purchased Lucent stock during similar timeframes and their complaints contained similar allegations and legal claims. However, the adequacy of representation goes beyond these factors and necessitates consideration of any potential conflicts of interest between the lead plaintiffs and class members. To evaluate the capability of the proposed lead plaintiffs, detailed information about their group structure, member relationships, and communication plans with counsel is required. The Proposed Lead Plaintiffs, including Tortell, Garg, and Institutional Plaintiffs, failed to provide this necessary information, leading to the conclusion that their connections with lead counsel alone are insufficient. The expectation is that the lead plaintiff chooses counsel, contrary to the current situation where counsel appears to select the plaintiff.

Congress established the lead plaintiff provision to promote active participation by institutional investors in securities class action lawsuits, as they are generally more capable of monitoring attorney conduct than figurehead plaintiffs or the courts. In the current case, the Institutional Plaintiff Parnassus has reported higher alleged losses compared to other proposed lead plaintiffs, including Seward, Tortell, Garg, Anchorage, and Louisiana, suggesting it is better positioned to represent the class. There is no indication that the other proposed plaintiffs can provide superior management or counsel oversight. Appointing Parnassus as co-lead plaintiff alongside the Pension Trust Fund aligns with the objectives of the Private Securities Litigation Reform Act (PSLRA), which aims to enhance the role of institutional investors in class actions for the benefit of the class and the courts.

The Institutional Plaintiffs have not demonstrated an effective cooperative strategy or how they would manage counsel control with multiple lead plaintiffs, further supporting Parnassus's appointment. Parnassus's adequacy as co-lead plaintiff has not been challenged, allowing the presumption of adequacy to stand. Consequently, motions from Seward and the Tortell/Garg group were denied, while the motion for the Institutional Lead Plaintiff was granted in favor of Parnassus, who will serve alongside the Pension Trust Fund. Additionally, the legislative history of the PSLRA encourages discretion in selecting lead counsel, and in this instance, appointing multiple lead counsels may better serve the class’s interests due to potential conflicts in the claims asserted across different periods. The District Court retains discretion in approving the lead plaintiff's choice of counsel.

Proposed lead counsel is subject to court approval, which reflects Congress's intent under the PSLRA to allow discretion in selecting lead counsel to safeguard the interests of the plaintiff class. The court must conduct an independent evaluation of the proposed class counsel's effectiveness, rather than simply deferring to the lead plaintiff's choice. In the current case, Parnassus has not demonstrated the rationale behind its selection of lead counsel, lacking evidence of fee arrangements, discussions, or consideration of other counsel. The lead plaintiff has a fiduciary duty to secure the highest quality representation at the lowest cost, and a sealed bid auction was deemed necessary in previous cases to protect class interests. A thorough review of fee applications is mandated in class action settlements, and while results from a bidding process can inform fee awards, they do not replace the need for post-settlement analysis. Courts are not bound by the bidding results and must clearly articulate their reasoning for fee awards, as evidenced by precedent where vague or cursory fee opinions were vacated.

Factors relevant to fee awards under the percentage-of-recovery method in common-fund class actions include: 1) the size of the fund and the number of beneficiaries; 2) objections from class members regarding settlement terms or fees; 3) the skill and efficiency of the attorneys; 4) the complexity and duration of the litigation; 5) the risk of nonpayment; 6) the time invested by plaintiffs' counsel; and 7) awards in similar cases. While these factors mainly pertain to fee applications, they also apply to the bidding process for lead counsel, particularly concerning objections to lead counsel appointments, the skill of the proposed counsel, case complexity, and associated risks.

The Milberg Weiss firm was chosen as lead counsel after a sealed bid auction designed to prevent collusion and maintain confidentiality. The fee proposals for all firms, whether successful or not, remain unsealed. A fee structure allowing for escalating fees during litigation but declining fees as class recovery increases is established to maximize returns for both class members and attorneys, discouraging lead counsel from compromising the class's interests.

Law firms wishing to submit proposals for the co-lead counsel position must do so by May 18, 2001, at 4:00 p.m., filing their bids ex parte and under seal. Joint proposals will not be accepted. Each proposal must detail: 1) the firm's experience in securities class action litigation; 2) qualifications for representation, including potential completion bonds; 3) malpractice insurance coverage; 4) a thorough case evaluation with recovery probabilities; and 5) a detailed fee structure specifying dollar amounts and percentages for various stages of litigation.

Bids must specify dollar amounts and percentages for net recovery to the class after fees and costs across various recovery thresholds, including amounts from $500,000 to over $25,000,000. Bids will be submitted under seal to prevent collusion and protect attorney work product, though the fee proposals and data from both successful and unsuccessful firms will remain unsealed. Notices published since January 2000, including a detailed notice in the Wall Street Journal in June 2000, fulfill the PSLRA's requirement to inform potential plaintiffs about seeking lead plaintiff status. Consequently, no further notice is deemed necessary.

The Motion to Vacate is denied, and all unrelated complaints against Lucent will be consolidated with the current action. Parnassus, along with the Pension Trust Fund, is appointed as co-lead plaintiffs. A sealed bid auction will determine an additional lead counsel to work alongside Milberg Weiss. The court orders the consolidation of multiple listed cases with the current action, denies the Seward and Tortell/Garg Lead Plaintiff Motions, partially grants the Institutional Lead Plaintiff Motion to appoint Parnassus as co-lead counsel with the previously appointed Employer-Teamsters Locals 175.

The Institutional Lead Plaintiff Motion is denied concerning the appointment of Anchorage and Louisiana. Lead Counsel Motions are also denied, with a sealed-bid auction to be held instead. Any law firm, including those not currently involved in the litigation, may submit proposals to serve as co-class counsel alongside Milberg Weiss Bershad Hynes Lerach LLP by 4:00 p.m. on May 18, 2000. Proposals must be submitted ex parte under seal and joint submissions will not be accepted. 

The document references a Motion to Vacate made through letters dated January 4, 2001, from attorneys representing plaintiffs from both Lucent I and Lucent II cases, seeking to vacate a Consolidation Order made on December 26, 2000. Lucent I complaints were filed between January 7, 2000, and March 2, 2000, while Lucent II complaints followed a press release on November 21, 2000. The parties are categorized into three groups: Lucent I Plaintiffs, Lucent II Plaintiffs, and Defendants. 

The Lucent II Plaintiffs submitted multiple briefs in support of their Motion to Vacate, while Lucent I Plaintiffs and Defendants submitted briefs in opposition. Lucent's first public statement about its fourth-quarter results occurred on October 10, 2000. The Lucent II Plaintiffs argue their class period begins on July 20, 2000, which coincided with the announcement of expected financial results and a subsequent revenue recognition issue disclosed to the SEC.

The Second Amended and Consolidated Complaint extended the class period to October 10, 2000, and was submitted as a "proposed" document prior to the November 21, 2000 Press Release and the filing of the Lucent II complaints. Several complaints against Lucent were excluded from the December 26, 2000 Consolidation Order, but will be consolidated with the current action. Future subclass creation is permitted if necessary to protect specific plaintiffs' interests, with the possibility of addressing subclass issues later according to Rule 23. The litigation has attracted significant media attention, and defendants may not contest the adequacy or typicality of proposed lead plaintiffs at this preliminary stage; however, they can challenge class certification later. Various plaintiffs have submitted briefs supporting their lead plaintiff motions, and while some have detailed their alleged losses, Seward did not specify his. Parnassus has proposed Bernstein Litowitz and Cohen, Milstein as lead counsel. The percentage-of-recovery method is preferred for awarding fees from a common fund, which allows reimbursement for litigation expenses when a lawsuit benefits a shared interest fund. The court has discretion over negotiated fees, typically involving a sliding scale that decreases with larger recoveries, recognizing that larger recoveries may not directly correlate with counsel's efforts.