Hu v. Cadence Design Systems, Inc et al

Filing 158

ORDER by Judge Samuel Conti deferring ruling on (149) Motion for Settlement; deferring ruling on (151) Motion for Settlement in case 3:08-cv-04966-SC; deferring ruling on (21) Motion for Settlement in case 3:10-cv-03607-SC; deferring ruling on (28) Motion for Settlement in case 3:10-cv-01849-SC; deferring ruling on (21) Motion for Settlement in case 3:10-cv-03627-SC (sclc1, COURT STAFF) (Filed on 8/26/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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In re CADENCE DESIGN SYSTEMS, INC. ) Case No. 08-4966 SC
SECURITIES LITIGATION
)
) ORDER RE: MOTIONS FOR
) SETTLEMENT
This Order Relates to:
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CASE NOS. 08-4966 SC, 08-5027 SC, )
08-5273 SC, 10-3627 SC, 10-1849
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SC, and 10-3607 SC.
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For the Northern District of California

United States District Court

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I.

INTRODUCTION
Before the Court are two unopposed motions for settlement of

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these related actions.

Alaska Electrical Pension Fund ("Alaska"),

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Lead Plaintiff in the consolidated putative class action, has filed

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a Motion for Preliminary Approval of Class Action Settlement.

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No. 149 ("Class Action Mot.").1

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("Shareholders") in the three related shareholder derivative

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actions have filed a Motion for Preliminary Approval of Derivative

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Settlement.

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reasons, the Court DEFERS ruling on these motions and invites

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Plaintiffs to amend their motions or file supplemental papers.

The Shareholder Plaintiffs

ECF No. 151 ("Deriv. Mot.").2

For the following

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ECF

All ECF numbers refer to the lead case, 08-4966 SC.

The Court refers to Alaska and Shareholders collectively as
"Plaintiffs."

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II.

BACKGROUND

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On October 29, 2008, Plaintiff Changhui Hu ("Hu") filed a

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Complaint alleging violation of federal securities laws by Cadence

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Design Systems, Inc. ("Cadence"), a publicly traded company, and

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its officers Michael J. Fister, William Porter, and Kevin S.

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Palatnik ("Individual Defendants") (collectively, "Defendants").

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ECF No. 1 ("Hu Compl.").

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misleading statements regarding Cadence's revenue in the first and

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second quarters of 2008, and he claimed that these statements

Hu alleged that Defendants made false and

United States District Court

For the Northern District of California

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artificially inflated Cadence's stock price, thus effecting fraud

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on the market.

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who purchased Cadence common stock during the relevant period.

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Id.

Hu sought to represent a class of all persons
Id.

Shortly thereafter, two similar actions were filed against

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Cadence and its officers by purchasers of Cadence stock.

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08-5027, 08-5273.

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three actions and appointed Alaska as lead plaintiff in the

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consolidated putative class action.

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2009, the Court granted Cadence's motion to dismiss the action,

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finding that the consolidated complaint had failed to allege facts

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supporting an inference that Defendants intentionally falsified

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Cadence's financial data.

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complaint.

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Cadence's second motion to dismiss, finding that Alaska had cured

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the pleading defects of the earlier complaint.

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Case Nos.

On March 4, 2009, the Court consolidated the

ECF No. 53.

ECF No. 36.

ECF No. 48.

On September 11,

Alaska filed an amended

On March 2, 2010, the Court denied

ECF No. 71.

During 2010, three shareholder derivative actions were filed

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against Cadence.

Case Nos. 10-3627, 10-1849, 10-3607.

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actions, Shareholders alleged, inter alia, that various Individual

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Defendants breached their fiduciary duty owed to Cadence and

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In these

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committed waste and professional negligence by falsely reporting

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Cadence's revenue during 2008.

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Court related the consolidated class action with these shareholder

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derivative actions and stayed litigation pending settlement

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discussions.

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Id.

On September 24, 2010, the

ECF No. 136.

On June 15, 2011, Alaska and Shareholders separately moved for

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settlement of the consolidated class action and the shareholder

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derivative actions.

See Mots.

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United States District Court

For the Northern District of California

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III. LEGAL STANDARDS

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A.

Preliminary Approval of a Class Action Settlement

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No class action may be settled without court approval.

Fed.

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R. Civ. P. 23(e).

When the parties to a putative class action

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reach a settlement agreement prior to class certification, "courts

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must peruse the proposed compromise to ratify both the propriety of

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the certification and the fairness of the settlement."

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Boeing Co., 327 F.3d 938, 952 (9th Cir. 2003).

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must assess whether a class exists.

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v. Windsor, 521 U.S. 591, 620 (1997)).

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determine whether the proposed settlement "is fundamentally fair,

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adequate, and reasonable."

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1011, 1026 (9th Cir. 1998).

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proposed form of notice to all class members who would be bound by

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the settlement constitutes "the best notice practicable under the

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circumstances."

Staton v.

First, the Court

Id. (citing Amchem Prods. Inc.
Second, the court must

Hanlon v. Chrysler Corp., 150 F.3d
The court must also ensure that the

Fed. R. Civ. P. 23(e)(1) & (c)(2).

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B.

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Rule 23.1(c) of the Federal Rules of Civil Procedure provides:

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Preliminary Approval of a Derivative Action Settlement

"A derivative action may be settled, voluntarily dismissed, or

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compromised only with the court's approval.

Notice of a proposed

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settlement, voluntary dismissal, or compromise must be given to

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shareholders or members in the manner that the court orders."

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Within the Ninth Circuit, Rule 23's requirements for approval of

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class action settlements apply to proposed settlements of

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derivative actions.

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373, 377 (9th Cir. 1995).

In re Pacific Enterprises Sec. Litig., 47 F.3d

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IV.

DISCUSSION

United States District Court

For the Northern District of California

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A.

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Under the proposed class action settlement, Cadence would pay

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$38 million into an escrow account to establish a settlement fund.

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Class Action Mot. at 1-2.

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class members after settlement administration costs, attorneys'

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fees and expenses, and taxes are paid.

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silent on the amount of attorneys' fees and expenses Alaska will

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seek, but the proposed notice filed in support of the motion states

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that Alaska will ask the Court for an award of twenty-five percent

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of the settlement fund ($9.5 million) and up to $800,000 in

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expenses.

ECF No. 148 ("Class Action Stip.") Ex. A-1 ("Prop.

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Notice").

The motion is also silent on the amount of taxes and

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administration costs to be deducted from the settlement.

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Preliminary Approval of Class Action Settlement

This amount would be distributed to

Id. at 5.

The motion is

No class has been certified in this putative class action, and

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thus Alaska seeks both preliminary approval of the class action

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settlement and certification of the class.

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discussion of Federal Rule of Civil Procedure 23's requirements for

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class certification in Alaska's Motion.

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attempted to estimate the size of the proposed class or the value

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However, there is no

Alaska has not even

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of the settlement to the average class member.

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preliminarily approve a settlement and certify a class until it is

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convinced Rule 23's requirements are satisfied.

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the minimal information provided about the class and the proposed

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settlement, the Court cannot even preliminarily conclude that the

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proposed settlement is "fair, adequate, and reasonable" to the

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class.

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The Court will not

Similarly, given

Additionally, given the minimal discussion of the proposed
notice program in Alaska's motion, the Court cannot conclude that

United States District Court

For the Northern District of California

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the proposed notice program is adequate.

Alaska provides that the

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notice of proposed settlement will be "disseminated to all persons

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who fall within the definition of the Class and whose names and

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addresses can be identified from Cadence's transfer records."

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Class Action Mot. at 9.

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names and addresses are known, or whether this contact information

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is current.

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delivered, or how claim and release forms will be disseminated.

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The settlement also provides for the proposed claims administrator,

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Gilardi & Co. LLC ("Gilardi") to "send[] out letters to entities

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which commonly hold securities in 'street name' as nominees for the

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benefit of their customers who are the beneficial purchasers of the

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securities."

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these "letters" to be sent, nor does it estimate how many members

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of the class do not hold securities in their own name.

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settlement provides that a summary notice will be published as an

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advertisement in Investor's Business Daily.

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information from which the Court could conclude that publishing of

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summary notice will adequately reach a portion of the class.

It does not attempt to estimate how many

It does not describe how this notice will be

Id.

Alaska does not provide an example of one of

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The

Alaska provides no

In sum, Alaska's motion is woefully inadequate.

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While a

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detailed cataloging of its deficiencies is beyond the purview of

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the Court, the Court considers Alaska's failure to properly discuss

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notice to be its most egregious.

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Federal Judicial Center's Class Action Notice and Claims Process

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Checklist and Plain Language Guide, available through the Federal

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Judicial Center web site, for additional guidance.

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refers Alaska to recent orders the Court has issued in other class

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actions to show the level of scrutiny it applies in deciding

The Court directs Alaska to the

The Court also

E.g., Walter v. Hughes Comm'ns, Inc., No. 09-

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For the Northern District of California

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settlement motions.

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2136, 2011 WL 3650711 (N.D. Cal. July 6, 2011); Pokorny v. Quixtar

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Inc., No. 07-0201 (N.D. Cal. Dec. 28, 2010 and July 20, 2011); Song

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v. KLM Group, Inc., No. 10-3583 (N.D. Cal. June 23, 2011); see also

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Arellano v. T-Mobile USA, Inc., No 10-5663, 2011 U.S. Dist. LEXIS

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21441 (N.D. Cal. Mar. 3, 2011) (providing factors that will

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typically be considered in determining whether to grant preliminary

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approval of a class settlement).

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B.

Preliminary Approval of Derivative Action Settlement

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Under the proposed derivative action settlement, Cadence would

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alter its corporate governance practices in a manner Shareholders

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argue would strengthen Cadence's internal controls.

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payment of $1,750,000 in attorneys' fees by Cadence to Plaintiff's

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counsel and service awards of $2,500 to each Shareholder.

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3-4.

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in the motion, although in a section entitled "Proposed Schedule of

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Events," the parties propose "[n]otice published in Investor's

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Business Daily" and "Filing of Notice via Form 8-K with the SEC"

Deriv. Mot. at

The only economic recovery contemplated in the settlement is a

Id. at

The proposed form of notice to shareholders is not discussed

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five days after the Court grants preliminary approval.

Id. at 19.

The Court finds that Shareholders' motion suffers from similar

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defects as Alaska's motion.

As such, the Court cannot determine,

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at this juncture, if the proposed derivative settlement is fair and

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reasonable and if the proposed notice is adequate.

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V.

CONCLUSION
For the above reasons, the Court finds it lacks the

information required to preliminarily approve the proposed class

United States District Court

For the Northern District of California

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action and derivative settlements.

Accordingly, it DEFERS ruling

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on Plaintiffs' Motion for Preliminary Approval of Class Action

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Settlement and Plaintiffs' Motion for Preliminary Approval of

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Derivative Settlement, and it invites Plaintiffs to file

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supplemental briefing or amended motions addressing the above

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issues.

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papers in support of their motions is thirty (30) days from the

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date of this Order.

Plaintiffs' deadline to file amended motions or additional

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IT IS SO ORDERED.

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Dated: August 26, 2011
UNITED STATES DISTRICT JUDGE

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