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IN RE INITIAL PUBLIC OFFERING

June 4, 2004.

IN RE: INITIAL PUBLIC OFFERING SECURITIES LITIGATION, This document relates to: AMY LIU, ROBERT TENNEY, ROBERT TATE, MARY GORTON, CARLA KELLY, HENRY CIESIELSKI, ED GRIER, FRANK TURK, JENNIE PAPUZZA, STANLEY WARREN, ELLEN DULBERGER, CRAIG MASON, SHARON BREWER and LLOYD HINN, Plaintiffs, -against- CREDIT SUISSE FIRST BOSTON CORP., CREDIT SUISSE FIRST BOSTON (USA), INC., CREDIT SUISSE FIRST BOSTON, CREDIT SUISSE GROUP, EFFICIENT NETWORKS, INC., eMACHINES, INC., LIGHTSPAN PARTNERSHIP, INC., TANNING TECHNOLOGY CORP., and TUMBLE WEED COMMUNICATIONS CORP., Defendants


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

SECOND AMENDED OPINION AND ORDER

I. INTRODUCTION

  Plaintiffs, a group of investors, allege that Defendants, comprising a number of companies and the investment bank Credit Suisse First Boston Corp. ("CSFBC"), engaged in a concerted scheme to defraud the market by publishing artificially deflated revenue projections for the companies in which Plaintiffs invested. This scheme allegedly created a market environment in which investors expected each company to exceed its revenue forecasts.*fn1 Plaintiffs now move for leave to amend their complaint, and Defendants oppose that motion on the ground that amendment would be futile. Plaintiffs also move to appoint Robert W. Tenney as lead plaintiff pursuant to the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(a)(3), and Defendants do not oppose that motion.

 II. BACKGROUND

  Plaintiff Amy Liu filed her original complaint (the "Initial Complaint") in the Southern District of Florida on February 28, 2003, alleging that she bought shares from a single issuer, Commerce One, Inc. ("Commerce One").*fn2 The Initial Complaint sought to bring an action on behalf of purchasers of 49 additional issuers from which Liu had not bought any securities, and alleged that those issuers conspired with CSFBC and various of its affiliates.*fn3 In June 2003, Plaintiffs filed a First Amended Complaint, adding named plaintiffs Antoine Kasprzak, who purchased shares of Airspan Networks, Inc. ("Airspan") and Robert Tenney, who purchased shares of Commerce One, and dropping 31 of the 50 original issuer defendants.*fn4 Plaintiffs' claims against Commerce One were dismissed by the Florida court on July 16, 2003, for lack of service, and Plaintiffs voluntarily dismissed their claims against Airspan on July 22, 2003.*fn5 "On August 12, 2003, when the MDL panel ordered the Liu action transferred to this Court [as part of In re Initial Public Offering Securities Litigation], only eight issuers remained in the action."*fn6 On October 2, 2003, Plaintiffs filed this motion, together with their proposed SAC. III. THE PROPOSED SECOND AMENDED COMPLAINT

  The following facts are alleged in the SAC, and are deemed true for the purposes of this motion.

  A. The Parties

  Plaintiffs allege that the following named plaintiffs purchased securities of various issuers in the open market during each relevant Subclass Period: Amy Liu purchased an undisclosed number of Commerce One securities; Antoine Kasprzak purchased 1,000 shares of Airspan securities; Robert Tenney purchased over 20,000 shares of Commerce One securities; Robert Tate purchased 10,000 shares of Bsquare Corp. ("Bsquare") securities; Mary Gorton purchased 5,350 shares of CacheFlow, Inc. ("CacheFlow") securities; Carla Kelly purchased 3,500 shares of Efficient Networks, Inc. ("Efficient Networks") securities; Henry Ciesielski purchased 200 shares of eMachines, Inc. ("eMachines") securities and 45 shares of McData Corp. ("McData") securities; Ed Grier purchased 7,900 shares of E.piphany, Inc. ("E.piphany") securities; Frank Turk purchased 200 shares of Handspring, Inc. ("Handspring") securities; Jennie Papuzza purchased 200 shares of InterNAP Network Services Corp. ("InterNAP") securities; Stanley Warren, as trustee for the Warren Family Trust, purchased 1,000 shares of Lightspan Partnership, Inc. ("Lightspan") securities; Ellen Dulberger purchased 1,000 shares of SupportSoft, Inc., formerly Support.com, Inc. ("SupportSoft") securities; Craig Mason purchased 500 shares of Tanning Technology Corp. ("Tanning") securities; Sharon Brewer purchased over 4,000 shares of Tumbleweed Communications Corp. ("Tumbleweed") securities; and Lloyd Hinn purchased 1,000 shares of Tumbleweed securities.*fn7

  Defendant CSFBC is a Massachusetts corporation doing business as an investment bank, and was at all relevant times a registered broker-dealer and member of the National Association of Securities Dealers, Inc. ("NASD").*fn8 CSFBC was a lead underwriter for the IPOs of each of the following issuers: Airspan, Bsquare, CacheFlow, Commerce One, eMachines, Efficient Networks, E.piphany, Handspring, InterNAP, Lante Corp. ("Lante"), Lightspan, McData, New Focus, Inc. ("New Focus"), SupportSoft, Tanning and Tumbleweed (collectively, the "Issuers").*fn9 CSFBC is a wholly-owned subsidiary of defendant Credit Suisse First Boston (USA), Inc. ("CSFB-USA"), a Delaware corporation, which is in turn a wholly-owned subsidiary of defendant Credit Suisse First Boston, Inc. ("CSFBI"), also a Delaware corporation.*fn10 CSFBI is jointly owned by defendant Swiss bank Credit Suisse First Boston ("CS") and defendant Swiss holding company Credit Suisse Group ("CSG").*fn11 CS is wholly owned by CSG.*fn12 On or about November 3, 2000, CS acquired an underwriter, Donaldson Lufkin & Jenrette, Inc. ("DLJ"), which subsequently became CSFB-USA.*fn13 "CSFB Defendants" comprises CSFBC, CSFBI, CSFB-USA, CS, and CSG.

  Plaintiffs name as defendants five of the sixteen Issuers (the "Issuer Defendants"), to wit: Efficient Networks, eMachines, Lightspan, Tanning, and Tumbleweed. Plaintiffs do not name as Issuer Defendants the other eleven Issuers managed by the CSFBC Defendants, specifically Airspan, Commerce One, Bsquare, CacheFlow, McData, E.piphany, Handspring, InterNAP, Lante, New Focus, and SupportSoft.*fn14 B. The Conspiracy

  Plaintiffs allege that various individuals affiliated with the Issuer Defendants who signed the registration statements associated with each company's IPO (the "Issuer Individuals")*fn15 "directly participated and [were] integrally involved in the management of the Issuer, [were] directly involved in the day to day operations of the Issuer and [were] privy to confidential proprietary information concerning the Issuer," and that, as such, those individuals are properly treated as a group for pleading purposes.*fn16 Plaintiffs further allege that each of the Defendants knowingly made misstatements and omissions on which they knew members of the Class were likely to rely, and thus are subject to joint and several liability under the PSLRA.*fn17 Plaintiffs allege that CSFBC's Technology Group (operated and managed by Frank Quattrone, George Boutros and William Brady), CSFBC and each of the Issuer Defendants "pursued a conspiracy, common enterprise, and/or common course of action and acted in concert with and conspired with one another, in furtherance of their common plan. . . ."*fn18 Quattrone, Boutros and Brady, together with the Technology Group and CSFBC, were the central actors in the conspiracy, creating separate but nearly identical schemes involving each of the Issuers, and developed the "system of fraud" alleged by Plaintiffs.*fn19 "Each Issuer Individual, because of his or her position of control and authority . . . was able to and did control the contents of the various quarterly and annual financial reports, research reports, revenue data, SEC filings, and press releases for the Issuer with which he or she was employed."*fn20 The central core of conspirators provided each Issuer Defendant "with copies of that Issuer's [allegedly fraudulent] reports, releases, and filings . . . prior to or shortly after their issuance and the Issuer Individuals had the ability and opportunity to prevent their issuance or to cause them to be corrected." The issuance of these reports "manipulated, misrepresented, and failed to disclose the true facts regarding Issuers' revenues, earnings, markets, business, management, financial condition, and future prospects."*fn21 Plaintiffs allege that each defendant acted either "knowingly or in such a reckless or grossly negligent manner as to constitute a fraud and deceit upon Issuer's shareholders."*fn22

  C. Notice of Fraud

  Plaintiffs allege that they were not put on notice of the alleged wrongdoing until counsel, while investigating the Initial Complaint, uncovered the scheme in February 2003.*fn23 Plaintiffs further allege that the alleged fraud had never been the subject of media attention before the Initial Complaint was filed, and further that CSFB and Quattrone affirmatively "undertook to conceal from Government regulators and the investing public the fraudulent scheme."*fn24 Plaintiffs contend that "many of the essential facts reflecting the fraudulent scheme were not discovered until March of 2003, when Plaintiffs' counsel received additional documents detailing the fraud."*fn25 Plaintiffs further contend that they did not discover Quattrone's and CSFBC's spoliation and concealment of evidence until after the Initial Complaint was filed.*fn26

  D. The Class

  Plaintiffs bring this suit on behalf of themselves and the members of a putative class (the "Class") comprising all "persons and entities who purchased common stock of each Issuer" during the Class Period.*fn27 The Class Period is itself composed of sixteen Subclass Periods, which correspond to purchases made in the aftermarkets for each of the sixteen Issuers.*fn28 The Class excludes all purchasers who bought stock during the IPO of each Issuer, all Defendants and persons or entities controlled by them, any conspirators identified within the SAC but not sued, and all purchasers who sold their stock for a profit during the Class Period.*fn29 Each Issuer's securities were actively traded on the NASDAQ during each Subclass Period, and the Defendants conspired to manipulate the publicly available information regarding each issue to create false expectations of "upside surprise."*fn30 Plaintiffs allege that the members of the Class are so numerous that joinder would be impracticable, that the named plaintiffs' claims are typical of those of Class members as a whole, and that the named plaintiffs will adequately protect the interests of the class as a whole, and have retained counsel competent in class and securities litigation.*fn31

  E. The Alleged Fraud

  Plaintiffs allege that, while marketing its services to prospective Issuers, the Technology Group introduced a scheme called "Pop and Performance," which is referenced by name on a number of marketing slides used by the Technology Group.*fn32 The "Pop" — a strong rise in share price in the aftermarket immediately following an IPO — occurred because Defendants conducted each IPO at a deep discount compared to the actual expected value of the issue.*fn33 Defendants informed certain potential purchasers of this underpricing, and those individuals immediately bought large quantities of the new issue at deeply discounted prices, causing a large price increase immediately following the offering, which attracted other purchasers to the security.*fn34 Plaintiffs allege that the "Performance" in the Technology Group's formula refers to a system involving the dissemination of artificially low revenue forecasts with the knowledge that the actual revenue reports would exceed those forecasts, coupled with the dissemination of statements encouraging the public to buy each stock because of its strong revenue growth or potential for upside surprise.*fn35

  1. The CSFB Defendants

  Plaintiffs allege that CSFBC had both the opportunity and motive to commit fraud.*fn36 CS hired Quattrone and other investment bankers to form the Technology Group, and granted Quattrone "unusual autonomy" to structure the practice of the Technology Group.*fn37 Quattrone established a separate research department within the Technology Group (the "Technology Research Team"), which reported directly to Quattrone.*fn38 The Technology Research Team included a number of equity research analysts, including some members who enjoyed such good reputations that their public reports regularly influenced the prices of securities on which they reported.*fn39 The Technology Group used the reputation of these "All-Star" analysts "to lure potential clients to its IPO practice."*fn40 Quattrone and the other investment bankers in the Technology Group influenced the content of the reports produced by the Technology Research Team, for each of the companies brought public by the Technology Group.*fn41 The Technology Group participated only in IPOs for which CSFBC was either the lead manager or one of multiple "co-lead" managers.*fn42 CSFBC's leadership position in these offerings enabled it to dominate many aspects of the offering, including the conduct of due diligence regarding each Issuer, the review and dissemination of performance forecasts, and the final determination of the initial offering price of the stock.*fn43

  Plaintiffs allege that CSFBC, Quattrone and the members of the Technology Group each had direct incentives to maximize the number of offerings they administered and ensure that each issuer's stock price rose after its initial offering.*fn44 CSFBC and the Technology Group "benefitted from the fraud in the following ways: (1) payment of investment banking fees; (2) payment related to secondary offerings; (3) profits (actual and expected) from secret pre-IPO investments; (4) allocations of lucrative IPO shares; (5) increased commissions as a result of market making activity; and (6) other ancillary benefits, including bonuses, publicity and the like."*fn45 Plaintiffs further allege that CSFBC collected fees for conducting the IPOs for the Issuers in excess of $148,474,000.*fn46 Quattrone and the other members of the Technology Group also profited from increased business; they enjoyed a profit-sharing agreement with CSFBC which entitled them to a large proportion of the revenue generated by the Technology Group, a sum which may have been as large as $500,000,000 in 1999.*fn47 CSFBC also compensated its research analysts for investment business they helped generate, including a share of the fees collected by the Technology Group.*fn48 CSFBC, Quattrone and the Technology Group also benefitted by the increased demand both for the stocks they successfully promoted and for their investment services.*fn49 Quattrone maintained a list of clients within the Technology Group, and divided lucrative IPO allocations among those clients, which were referred to internally as the "Friends of Frank," a play on the more common "friends and family" plans whereby underwriters distribute limited numbers of IPO shares to preferred investors.*fn50 A number of hedge funds established by Quattrone and his associates were among the beneficiaries of these IPO allocations.*fn51 CSFBC also profited directly from Quattrone's investment activities by giving Quattrone $25,000,000 each year to invest on CSFBC's behalf in potential underwriting clients that were about to go public.*fn52

  Plaintiffs further allege that CSFBC had actual knowledge of its wrongdoing.*fn53 The Technology Group highlighted its success in creating "Pop and Performance" in its presentations to prospective clients.*fn54 The Technology Group knowingly set its IPO prices below the issue's expected value, and communicated this price depression to CSFBC's sales staff, which in turn used this information to create interest in each Issuer's IPO.*fn55 The Technology Group conducted detailed valuation analyses to form its opinions of the correct value of each Issuer's company and to determine a corresponding projected stock price, and referred to its purposeful understating of that estimate, in various internal memos, as the "IPO Discount."*fn56 The Technology Group presented the underpricing scheme to each Issuer, describing the purpose and effect of understating the price for the IPO, and Issuers subsequently adopted the discounted financial projections into the forecast information they disseminated before their IPOs.*fn57 CSFBC's sales force then instructed the public that each Issuer would likely enjoy strong revenue growth.*fn58 Moreover, after the required quiet period following each IPO, the Technology Research Team's analysts published research reports incorporating the discounted financial projections, and recommending each issue as either a "Buy" or a "Strong Buy," as well as highlighting each issue's potential for future upside surprise.*fn59

  In July of 1998, CS agreed to establish a venture capital fund (the "Venture Fund") managed by Quattrone, Boutros and Brady, contributing 99% of the fund's equity through Merchant Capital, a CS subsidiary, and claiming 80% of the profits of the fund.*fn60 Quattrone, Boutros and Brady, doing business as QBB Management I LLC ("QBB Management"), contributed 1% of the equity for the Venture Fund and reaped 20% of its profits.*fn61 Merchant capital loaned QBB Management the 1% it needed to establish the Venture Fund.*fn62 Beginning in the fall of 1999, Technology Group employees had the opportunity to share in the investments of the Venture Fund through a series of corporations created for the sole purpose of holding securities in issuers that the Technology Group was about to take public.*fn63 Eventually, Merchant Capital established two more funds with participation from CS and CSFBC employees.*fn64

  2. The Issuer Defendants

  Despite the initial underpricing of their IPOs, the Issuer Defendants profited from the success of Defendants' scheme.*fn65 Large price gains in early trading increased publicity regarding the Issuers, and sustained price growth increased each Issuer's bargaining power in future merger or acquisition negotiations, as well as increasing the profitability of any future public offerings.*fn66 The Issuer Individuals also profited from stock price increases because higher stock prices increased the value of their own substantial stock holdings.*fn67 The Technology Group and CSFBC further enticed each Issuer Defendant with the prospect of "piggyback" offerings taking advantage of the artificially high prices in the aftermarket.*fn68 These "piggyback" offerings also allowed various Issuer Individuals to package some of their stock with stock from the Issuer Defendants in offerings as soon as ninety days after the initial offering, circumventing the usual six month waiting period before which insiders would not have been permitted to sell their stock in the market.*fn69 Each Issuer Defendant was presented with the opportunity to defraud the public when CSFBC presented them with the unusual structure of the Technology Group, which allowed investment bankers to exert direct influence over the reports of associated analysts.*fn70

  Plaintiffs allege that each Issuer Defendant had actual knowledge of its fraudulently understated prices because it had engaged in detailed discussions with the Technology Group regarding IPO pricing, including the advantages of pricing an IPO artificially low.*fn71 Each Issuer Defendant was similarly aware of the discounting of revenue forecasts "because the Technology Group had explained to each Issuer . . . the purpose and strategy of discounting forecasted revenues in conjunction with the IPO."*fn72 Each Issuer Defendant had delivered to the Technology Group's investment bankers the Issuer's projected income statement, and was aware that the predictions issuing from the Technology Group's analyst wing substantially differed from those internally generated forecasts.*fn73

  3. The Sales Memo

  Plaintiffs allege that the Technology Group's standard practice was to communicate the actual value of an issue and the discounted proposed offering price to CSFBC's sales staff using two documents, an internal "Equity Sales Book" and a "Sales Points Broadcast" (collectively referred to as the "Sales Memo").*fn74 The Sales Memo, which provided "the basis for sales pitches to potential buyers of Issuers' stock," failed to describe the discounting of each Issuer's offering price.*fn75 Plaintiffs allege that this omission made CSFBC's statements regarding the offering price of each issue misleading.*fn76 The Sales Memo also contained statements reflecting the revenue forecast for each Issuer, which plaintiffs contend was fraudulently understated.*fn77 Plaintiffs allege ...


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