The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge
THIS DOCUMENT RELATES TO ALL ACTIONS
Plaintiffs have renewed their motion to certify a class consisting of all persons or entities that purchased or otherwise acquired Baan Company N.V. ("Baan") securities between January 28, 1997 and October 12, 1998. Plaintiffs have limited members of the putative class to those persons or entities that (1) are current residents of the United States; (2) were residents of the United States when they acquired Baan securities; or (3) purchased such securities within the United States. *fn1 Defendants Baan, Amal M. Johnson, Tom C. Tinsely, N.M. Wagenaar, William O. Grabe, David C. Hodgson, Vanenburg Ventures B.V. ("Vanenburg"), Jan Baan, and J.G. Paul Baan oppose class certification on two grounds. First, defendants contend that the five proposed class representatives are not adequate, in violation of Fed. R. Civ. P. 23(a)(4) and the Private Securities Litigation Reform Act of 1995 ("PSLRA" or the "Reform Act"), 15 U.S.C. §§ 78u-4, 78u-5. Second, defendants argue that the proposed class is overbroad and conflicted, and therefore it cannot be certified as currently defined. Based on consideration of the pleadings and the entire record, the Court concludes that plaintiffs have yet to sustain their burden under the PSLRA, and because this securities class action cannot proceed until the requirements of that statute are satisfied, plaintiffs' motion for class certification must, at this time, be denied without prejudice.
This is a consolidation of seven purported class action suits that were brought against Baan after the company, a provider of enterprise business software solutions, announced on October 12, 1998 that it would suffer a substantial loss during the third quarter of that year. *fn2 All of these cases were assigned to the undersigned on June 7, 2001, after the retirement of the Honorable Joyce Green, who had presided over these matters since their inception. The procedural road to this point has been arduous and lengthy. However, before addressing the problems that have beset this case, this action must be considered within the broader context of the PSLRA and Congress' efforts to regulate securities class actions.
The PSLRA was enacted by Congress in 1995 to respond to "perceived abuses in . . . private securities class actions." In re Network Assocs. Securities Litigation, 76 F. Supp. 2d 1017, 1018 (N.D. Cal. 1999). As Judge Green noted in an earlier opinion in this action, the primary purpose of the PSLRA is to ensure that clients, rather than lawyers, drive securities class actions. "Congress, in the PSLRA, altered the procedures for bringing class actions under the federal securities laws. Congress' principal focus, as reflected in the legislative history, was that plaintiff investors, and not their counsel, make the ultimate strategic decisions in litigation. In re Baan Company Securities Litigation, 186 F.R.D. 214, 215 (D.D.C. 1999) [hereinafter Baan I].
To achieve this goal, the PSLRA created the position of "lead plaintiff." 15 U.S.C. § 78u- 4(a)(3). As Judge Green explained,
The PSLRA directs the Court to "appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of the class." The Act creates a "rebuttable presumption that the most adequate plaintiff is the person or group of persons that (aa) has either filed the complaint or made a motion in response to a notice; (bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and (cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure. The presumption may be rebutted "only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff - (aa) will not fairly and adequately represent the interests of the class; or (bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.
Finally, the PSLRA states that "the most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class."
Baan I, 186 F.R.D. at 216 (internal citations omitted). "From a legal perspective, however, the actual duties of the lead plaintiff are largely unspecified. All that is made clear by the PSLRA is that the most adequate plaintiff 'shall . . . select and retain counsel to represent the class . . . .'" (Pl. Reply, Ex. 6, John C. Coffee, Jr., "What Should A Lead Plaintiff Do?" New York Law Journal, Jan. 17, 2002, at 1.
Under the statute, the court appoints the lead plaintiff, 15 U.S.C. § 78u-4(a)(3)(B)(i), and must approve the lead counsel who is chosen by the lead plaintiff. Id. § 78u-4(a)(3)(B)(v). The court is also empowered to review these appointments sua sponte. In re Waste Management, Inc. Securities Litigation, 128 F. Supp. 2d 401, 410 (S.D. Tex. 2000); Takeda v. Turbodyne Technologies, Inc., 67 F. Supp. 2d 1129, 1138 (C.D. Cal. 1999).
Founded by defendant Jan Baan in 1978, Baan is an international provider of enterprise business management software, with dual executive and corporate headquarters located in Virginia and Holland. (Amended Complaint ¶¶ 14-15.) Baan serves over 6,300 customers at more than 12,000 sites worldwide. (Def. Opp. at 5.) The five proposed class representatives - Ralf Hirschmann, Frances and Charles Cipriano, Terry Herron, and Daniel DeJongh - each acquired shares of Baan stock during the relevant time period and suffered financial losses as a result.
The amended complaint alleges eight defendants in addition to Baan. According to the complaint, defendant Jan Baan served as the chief executive officer of Baan until July 1998 and as managing director at all relevant times. *fn3 (Amended Complaint ¶ 15.) Defendant Tinsley joined Baan in November 1995 as managing director, president, and chief operating officer, became chair of the board of managing directors in April 1998, and replaced Jan Baan as CEO in July 1998. (Id. ¶ 16.
Defendant Wagenaar became the senior vice president and chief financial officer of Baan in August 1997, and replaced Tinsley as chief operating officer in April 1998. (Id. ¶ 17.) Defendant Paul Baan, who is Jan Baan's brother, joined Baan in 1982 and was named chief operating officer in 1994. He was appointed vice chairman and managing director in January 1995 and president in October 1995, but resigned from those positions in April 1996, when he became chairman of the supervisory board, an office he held until December 1997. (Id. ¶ 18.
The other four defendants are tied to Baan through its shareholders and subsidiaries. Defendants Grabe and Hodgson are managing directors of General Atlantic Partners ("GAP"), which was a Baan shareholder, and became supervisory directors of Baan in May 1995, with Grabe serving as chairman of Baan's board of supervisory directors until April 1996. (Id. ¶¶ 19-20.) Defendant Johnson became president of the Baan subsidiary Baan U.S.A., Inc. in 1994, and took over as managing director and "executive vice president, Baan Affiliates & Marketing" in January 1997. (Id. ¶ 21.) Plaintiffs allege that Grabe, Hodgson, and Johnson all sold Baan securities while in possession of material inside information. (Id. ¶¶ 19-21.) The final defendant is Vanenburg, an entity controlled by Jan and Paul Baan. Vanenburg is alleged to have owned 25% of the common shares of Baan and 85% of Baan Midmarket Solutions ("BMS"), a company formed by Vanenburg and Baan in 1997. Plaintiffs allege that Baan perpetrated fraud through BMS and other related parties. (Id. ¶ 23.
B. Baan During the Class Period
At all times relevant to this action, Baan stock traded primarily on the Amsterdam Stock Exchange, as well as on the Frankfurt Stock Exchange, and since May 1995, on the NASDAQ National Market System. (Id. ¶ 14.) The price of Baan stock fluctuated dramatically during the class period: the NASDAQ price rose from $17½ to $40½ between January and July 1997, then dropped by more than 25% in two months, falling to $29 7/8 on September 16, 1997. The stock rose and declined similarly through the end of 1997 and early 1998, reaching its peak of $54 1/8 on April 20, 1998, and then dropping to $25 5/8 by September 30 and $17 7/8 by October 11 of that year. (Def. Opp. at 6.
The cause of Baan's stock drop is a matter of dispute. Defendants attribute its erratic behavior to the fact that it was a technology company, and thus its stock prices are "known to be volatile." Baan I, 186 F.R.D. at 218. They note that the stock prices of Baan's competitors exhibited a similarly mercurial pricing pattern during the relevant period of 1997 and 1998. (Declaration of Daniel J. Leffell ("Leffell Decl."), Ex. 1.
Conversely, plaintiffs allege that throughout the class period, defendants made material misrepresentations about Baan's financial health, including its profitability, business growth, success over its competitors, and compliance with accounting practices. Specifically, plaintiffs contend that defendants recognized tens of millions of dollars in revenue in connection with sales which, unbeknownst to investors, were nothing more than shipments of merchandise to Baan-related parties on consignment. According to plaintiffs, Baan's revenue for 1997 was exaggerated by 100% by virtue of this fraudulent practice alone. (Amended Complaint ¶ 2.) This, in turn, caused the artificial inflation of Baan's stock price, while also violating United States generally accepted accounting principles ("GAAP"). (Id. ¶¶ 4, 6.
Plaintiffs assert that Jan and Paul Baan, through defendant Vannenberg, used a substantial amount of Baan common stock as security to obtain approximately $500 million in loans. These loans were funneled to Baan as working capital through informal cost sharing arrangements and payments made in connection with purported sales by Baan to Vannenberg. (Amended Complaint ¶ 7; Pl. Mem. at 6.) Plaintiffs contend that Vannenberg's creditors ultimately forced it to sell 18 million of the Baan shares that it had secretly pledged in connection with this loan. (Pl. Mem. at 6-7.
During the class period, plaintiffs allege that defendants took advantage of inside information about the inflated price of Baan stock to sell more than 130,000 shares for over $5.6 million. (Amended Complaint ¶ 7.) Entities controlled by two of the defendants sold 559,959 Baan shares for $25 million, and other senior Baan executives sold more than 224,000 Baan American Depository Receipts ("ADRs") for more than $6 million.
On October 12, 1998 - the last day of the class period - Baan announced that it would suffer a loss during the third fiscal quarter of 1998, after thirteen consecutive quarters of market gains. (Id. ¶ 8; Def. Opp. at 6.) The Company revealed that, instead of earning $0.15 as it had forecast, Baan would lose up to $0.16 per share for the third quarter, and it warned that the fourth quarter would be even worse. (Amended Complaint ¶ 9.) Baan attributed the loss to three factors - global economic conditions, market volatility, and a reallocation of customers' technology budgets to Y2K issues. (Def. Opp. at 6.) That day, the price of Baan stock on NASDAQ dropped from $17 7/8 to $13½. (Amended Complaint ¶ 9.) The price of Baan stock also fell in Europe, dropping 28% on the Amsterdam and German exchanges. (Id.
Within days of the Company's announcement, six law firms commenced four proposed class actions against Baan and others. By mid-December 1998, ten law firms had filed seven putative class actions related to the drop in Baan's stock price. Six of the complaints purported to be on behalf of purchasers of Baan securities between January 30, 1998 and October 12, 1998. The seventh covered purchasers of Baan stock for an additional year - from January 28, 1997 to October 12, 1998.
In an Order dated February 16, 1999, Judge Green consolidated the seven cases into the instant action. The consolidated complaint, which was filed on April 22, 1999, alleges securities fraud under both Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated ...