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LASALA v. NEEDHAM & COMPANY

August 30, 2005.

JOSEPH P. LASALA, as assignee of Fatbrain.com, Inc., Plaintiffs,
v.
NEEDHAM & COMPANY, INC., J.P. MORGAN SECURITIES, INC., and MORGAN STANLEY, Defendants.



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

OPINION AND ORDER

I. BACKGROUND

  A. Background of the IPO Litigation

  This case, and the fifty-four other cases governed by this Opinion by stipulation of the parties, is an offshoot of the hundreds of actions brought by investors against numerous underwriters and issuers of stock, coordinated in this court as In re Initial Public Offering Securities Litigation ("the IPO Litigation").*fn1 In those actions, plaintiffs seek recovery for securities fraud pursuant to the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act").

  The alleged scheme is described at length in my February 19, 2003 Opinion denying defendants' motion to dismiss.*fn2 Familiarity with that Opinion is assumed. In short, plaintiffs allege that defendants fraudulently inflated the share prices of 310 technology stocks during and after their initial public offerings ("IPOs") through an elaborate scheme characterized by tie-in agreements, undisclosed compensation and analyst conflicts. According to plaintiffs, the investment banks (the "Underwriters") required investors seeking allocations in the IPOs to participate in the alleged laddering scheme. The companies going public (the "Issuers") allegedly profited from the scheme by taking advantage of the artificially inflated stock resulting from the laddering to raise capital, enter into stock-based transactions, or sell their individual holdings at high prices. Plaintiffs allege that the value of their holdings plummeted when this artificial inflation dissipated.

  After extensive negotiations, plaintiffs agreed to a settlement with the Issuers (but not the Underwriters) in 298 of the cases coordinated in the IPO Litigation. This Court preliminarily approved the settlement in February 2005.*fn3 As part of this settlement, which is awaiting final approval from this Court, the Issuers agreed to assign their interest in all claims against the Underwriters for "Excess Compensation" to a Litigation Trust, to be created upon final approval of the settlement and to be represented by plaintiffs' counsel.*fn4 These claims are hereinafter referred to as the "Assigned Claims." The Issuers retain their claims against the Underwriters for underpricing, contribution, indemnification, or antitrust violations, but agree that they will not assert such claims except in certain defined circumstances.*fn5

  B. The "LaSala Actions"

  Of the fifty-five Underwriters named as defendants in the IPO litigation, all but a handful have entered into agreements with the plaintiffs which toll the applicable statute of limitations for the Assigned Claims until the Issuers Settlement is approved by this court.*fn6 The Underwriters who have not consented to such a tolling agreement are J.P. Morgan Securities, Inc., Needham & Company, Inc., Morgan Stanley, Allen & Company, Inc., E*Trade Securities, and Prudential Equity Group, LLC (the "Non-Tolling Underwriters").

  In order to ensure that the statute of limitations on the Assigned Claims does not expire,*fn7 the plaintiffs and the Issuers have arranged to assign each Issuer's Assigned Claims against the Non-Tolling Underwriters to Joseph LaSala, a New Jersey resident who (subject to court approval) will become the Litigation Trustee once the Issuers Settlement is approved.*fn8 But these assignments are conditional and for an extremely limited purpose. Specifically, these assignments give LaSala the power to do only two things: 1) file a separate action for each Issuer who has assigned claims to him; and 2) immediately seek a stay of that action.*fn9 Moreover, on the occurrence of any one of five specified events, his assignment automatically reverts to the assignor-Issuer, or to the Litigation Trust after approval of the IPO Issuers Settlement.*fn10

  In accordance with his conditional assignments, LaSala has filed numerous actions in this Court ("LaSala Actions").*fn11 Each action is the result of a conditional assignment of claims from a different Issuer, and each action names as defendants one or more of the Non-Tolling Underwriters. In order to avoid expiration of the statute of limitations, LaSala has filed each action shortly before the six-year anniversary of the IPO of the Issuer-assignor for that action.*fn12

  The parties have collectively filed three motions in each LaSala Action. First, LaSala filed a complaint together with a motion to stay the action he had just initiated. Then, the defendants in each case filed a motion to dismiss for lack of subject-matter jurisdiction, as well as for failure to state a claim upon which relief can be granted.*fn13 Finally, in responding to the motion to dismiss, LaSala filed a cross-motion to consolidate each LaSala Action with the IPO Litigation.*fn14 This Opinion relates only to LaSala's request for a stay of his action.

  While each LaSala Action involves the IPO of a different Issuer, and different combinations of Non-Tolling Underwriters, the pending motions in each LaSala Action involve identical legal issues. Accordingly, the parties stipulated that the resolution of the pending motions in LaSala (as assignee for Fatbrain.com) v. Needham & Co., 04 Civ. 9237, would govern the disposition of the identical motions in all of the pending LaSala Actions, and any future LaSala Actions that raise the same issues.*fn15 Therefore, this Opinion will resolve the Motion to Stay now pending in all LaSala Actions covered by the Stipulation.*fn16

  C. Background of the "Fatbrain.com" LaSala Action

  Joseph LaSala is a New Jersey resident, who had no connection to the events giving rise to the Complaint's allegations prior to receiving his assignment of the claims.*fn17 The assignor of these claims, Fatbrain.com ("Fatbrain"), was at the time of its IPO "an online retailer of information resources focused on the technical professional."*fn18 Although LaSala's complaint does ...


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