McIntosh et al v. McAfee, et al

Filing 96

MOTION for REPORT AND RECOMMENDATIONS for Attorney Fees and Costs to Plaintiffs filed by Ping Chen, Steve Haeffele, Lebin Cheng, Vatsal Sonecha, Jonathan Wong, Larry McIntosh, Yangie Cheng. Motion Hearing set for 12/16/2008 10:00 AM in Courtroom 2, 5th Floor, San Jose. (Attachments: # 1 Declaration of Mark C. Molumphy In Support of # 2 Proposed Order)(Molumphy, Mark) (Filed on 10/31/2008) Modified on 11/4/2008 (cv, COURT STAFF).

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JOSEPH W. COTCHETT (#36324) [e-mail] MARK C. MOLUMPHY (#168009) [e-mail] COTCHETT, PITRE & McCARTHY 840 Malcolm Road, Suite 200 Burlingame, CA 94010 Telephone: [phone] Fax: [phone] Attorneys for Plaintiffs and Proposed Class

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

LARRY McINTOSH, YANGJIE CHENG, PING CHEN, STEVE HAEFFELE, LEBIN CHENG, VATSAL SONECHA, and JONATHAN WONG, individually and on behalf of all those similarly situated, Plaintiffs, v. McAFEE, INC., Defendant.

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Case No. C06-07694 JW DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS Date: December 16, 2008 Time: 10:00 a.m. Courtroom: 2 Honorable Howard R. Lloyd

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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I, MARK C. MOLUMPHY, declare: 1. I am an attorney at law duly licensed to practice in the State of California and

before this Court, and am a partner with the firm of Cotchett, Pitre & McCarthy ("Cotchett Pitre"), counsel for plaintiffs and the proposed Class. I have personal knowledge of the matters stated herein and if called as a witness, I could and would competently testify to the following. 2. I make this declaration in support of Plaintiffs' Motion for Report and

Recommendation to Award Attorneys Fees and Costs to Plaintiffs. Overview of Dispute 3. This is a class action brought by former employees of McAfee. On July 27, 2006,

following an investigation into possible stock option backdating, McAfee notified the SEC that it was unable to timely file its quarterly results and ceased issuing new shares under the Company's stock option plans pending the filing of corrected financials. This unilateral freeze, commonly referred to as a "blackout," effectively prevented McAfee employees from exercising their earned and vested stock options as of July 28, 2006. 4. Plaintiffs allege that, under McAfee's stock option agreements, former employees

were entitled to have 90 days following their termination to exercise their vested stock options. Plaintiffs allege that McAfee breached the agreements by not giving former employees 90 days to exercise their options and, instead, running the 90 day exercise period during the blackout ­ even though former employees could not exercise their options. Plaintiffs Tried To Resolve Their Dispute Before Filing This Lawsuit 5. Before retaining legal counsel, and incurring the expense of filing a lawsuit,

plaintiffs repeatedly tried to resolve their dispute with McAfee, asking for either (1) the opportunity to exercise their vested options immediately or (2) in the alternative, to defer the 90 day exercise period until after McAfee lifted its blackout. Unfortunately, McAfee rejected all of plaintiffs' requests and took the uniform position that the 90 day period to exercise options would continue to run during the blackout, even if that meant that plaintiffs would lose their options without an opportunity to exercise.

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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After Plaintiffs File Lawsuit, McAfee Changes Its Policy 6. On December 15, 2006, after McAfee confirmed that it would not allow former

employees to exercise their options, plaintiffs filed a class action complaint. Plaintiffs sued for breach of contract on behalf of a Class of McAfee's former employees who were unable to exercise their stock options due to the blackout imposed by McAfee as of July 28, 2006 (the "Class"). Plaintiffs also brought fraud claims for class members who left McAfee in reliance on McAfee's written representations that the exercise period would commence when the blackout was lifted. 7. On January 8, 2007, just three weeks after plaintiffs filed their complaint,

McAfee announced that its Board would "amend" the stock option agreements to extend the exercise period for former employees until after the blackout was lifted. However, McAfee set a deadline of December 31, 2007, such that options still expired if the blackout was not lifted. Further, the exercise option was not offered to former employees whose options had already expired who were instead promised an undefined "cash" consideration. Finally, the amendment was not binding as a judgment, allowing the Board to change its mind yet again before any relief was provided. 8. On February 6, 2007, McAfee filed a motion to dismiss, asserting that (1)

plaintiffs' claims were preempted by federal securities law and (2) plaintiffs had no injury giving them standing based on McAfee's proposed remedial measures announced on January 8, 2007. 9. On September 28, 2007, the Court entered an order on McAfee's motion to

dismiss. While the Court held that the class claims for fraud were preempted, the breach of contract claim survived. The Court also rejected defendants' standing argument, holding that the application of McAfee's remedial actions to former employees' options failed to establish that plaintiffs lacked standing.

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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10.

On October 26, 2007, plaintiffs filed a First Amended Complaint against McAfee

asserting a breach of contract claim on behalf of the class of former McAfee employees, and fraud claims on behalf of themselves individually. The class was defined as follows: All persons who were employed at McAfee and who received stock options but were unable to exercise them due to the blackout imposed by McAfee as of July 28, 2006 (the "Class"). 11. On November 15, 2007, the Court entered its pre-trial Scheduling Order and

ordered that all discovery be completed by June 16, 2008. Plaintiffs subsequently served their initial disclosure pursuant to Rule 26. McAfee never served its initial disclosure. 12. On November 27, 2007, McAfee filed its Answer to the First Amended

Complaint. Notably, McAfee denied every allegation related to the breach of contract cause of action asserted by the Class. McAfee Offers Relief To Named Plaintiffs, But Refuses To Discuss Absent Class Members 13. On December 21, 2007, McAfee announced that it had filed restated financial

statements and amended reports with the SEC. At the same time, the named plaintiffs received letters from McAfee indicating that the blackout period would soon be lifted and that they would either receive a cash payment for their expired options or a 90 day extension to exercise their options. 14. McAfee's announcement was a very positive development. If all class members

were entitled to the relief sought by this action, the case could be dismissed. Accordingly, I contacted McAfee's counsel to determine whether McAfee intended to provide the same relief that it was offering to the seven named plaintiffs to all other class members and, if not, the basis for any exceptions. I even proposed that, if McAfee was willing to sign a declaration confirming that all class members were entitled to relief, formal discovery would not be required.

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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15.

McAfee refused to provide this information. Instead, McAfee took

the position that, until a class was certified, I was only entitled to information about the seven named plaintiffs and not entitled to know how absent class members were being treated. McAfee further asked me to dismiss the breach of contract cause of action asserted on behalf of the class. McAfee's position was very troubling. I reminded McAfee's counsel of my ethical duty under Rule 23 to protect the best interests of all class members, even before a class had been certified. Unpersuaded, McAfee's counsel refused to confirm whether absent class members would receive the same relief as the seven named plaintiffs. 16. On January 10, 2008, my firm served discovery on McAfee, trying in part to

verify whether relief would be offered to all class members, and if not, the basis for any exceptions ­ i.e., the same information that McAfee had refused to provide to that date informally. 17. On September 22, 2008, the Court conducted a hearing on Plaintiffs' Motion to

Dismiss, Plaintiffs' Motion for Attorney Fees, and Defendant's Motion for Summary Judgment. 18. On October 17, 2008, the Court entered an Order Granting Plaintiffs' Motion to

Dismiss; Denying Defendant's Motion for Summary Judgment; Granting Plaintiffs' Motion for Attorney Fees and Costs. The Court found that Plaintiffs are entitled to recover fees incurred until the point at which Defendant provided full relief to all former employees that are members of the putative class. Attached hereto as Exhibit A is a true and correct copy of the Court's October 17, 2008 Order. Date of Completion of Relief Plaintiffs have been unable to confirm the exact date on which McAfee completed provision of relief to all former employees. [Insert meet and confer efforts with Carter Ott]. Plaintiffs whose options expired during the blackout were issued settlement checks dated January 15, 2008. Attached hereto as Exhibit C are true and correct copies of settlement checks received by Yangjie Cheng, Ping Chen, Lebin Cheng, and Steve Haeffele and an example of the cover letter accompanying each check.

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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Request for Award Of Attorneys' Fees And Expenses 22. Several attorneys and other support staff worked on this case during the relevant

period, including myself, Joseph W. Cotchett, Sean E. Ponist, Kelly L. Sommerfeld, Barbara L. Lyons, Nirav Engineer, Donald D. Thornton, Sheilah Buack, Michelle L. Cooper, Patrick Skahan, and Kevin Allen. Attached hereto as Exhibit D is a resume and list of complex cases handled by Cotchett Pitre. 23. I am a partner with the firm and have practiced as an attorney since 1993. I

specialize in civil litigation with an emphasis on complex business disputes, securities, and class actions. I served as the lead partner on the case from inception on November 29, 2006, to present. I spent 417.80 hours on this case from inception to January 11, 2008. During the time I spent on this case, I coordinated all case activity, communications with clients and opposing counsel, and decisions relating to the strategy and direction of the case. I conferred with clients regarding the validity of the case and case management. I researched and drafted the initial complaint and the amended complaint. I researched case law and procedure regarding discovery motions and class certification. I spent a significant amount of time researching McAfee's historical practices and communications with employees regarding stock option exercise. I frequently conferred with opposing counsel regarding discovery, settlement communications, and efficient resolution to the case. I spent a significant amount of time reviewing, researching and drafting the opposition to defendants' motion to dismiss. 24. Joseph Cotchett, the founder and a partner of Cotchett Pitre, has been a practicing

attorney since 1965. During his 40-year legal career, he has tried more than 100 cases, and successfully headed hundreds of millions of dollars in antitrust, securities and major fraud cases. Mr. Cotchett worked on this case in December of 2006. Mr. Cotchett spent 2.60 hours on the investigation and drafting of the complaint and case strategy. Mr. Cotchett reviewed the complaint, and made edits and revisions to the applicable case law and causes of action. Mr. Cotchett was involved in the management of the case as well as the strategy and direction of the case.

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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25.

Barbara Lyons was an associate of the Cotchett firm. She was admitted to the

California State Bar in 1994, and has practiced extensive securities litigation in the last 14 years. Ms. Lyons worked on the current matter in February of 2007. Ms. Lyons spent 3.10 hours performing legal research regarding jurisdictional and damages issues, and researching theories of recovery pursuant to the catalyst theory. Ms. Lyons identified the catalyst theory as appropriate in our case. Ms. Lyons reviewed case law applicable to recover fees under the catalyst theory and related such case law to the current matter. 26. Sean Ponist is an associate at Cotchett Pitre where he focuses on antitrust,

securities, environmental and real estate litigation. Mr. Ponist has been a member of the bar since 1999. Mr. Ponist performed 42 hours on this case from February 16, 2007, to November 27, 2007. During that time, Mr. Ponist helped to research, draft review and finalize pleading papers throughout the life of the case. Mr. Ponist conferred with co-counsel regarding applicable issues and the necessary law and motion to effectively resolve this action. Mr. Ponist researched case law on, drafted, and finalized the opposition to Defendant's Motion to Dismiss. Mr. Ponist also drafted Plaintiffs' Case Management Conference Statements and performed research on McAfee's opposing arguments and relevant issues for the Rule 26 hearing. 27. Kelly Sommerfeld was admitted to the State Bar in 2004. As an associate at the

Cotchett Pitre, Sommerfeld had worked on numerous shareholder class actions. Ms. Sommerfeld dedicated 64 hours to this matter in February of 2007. Ms. Sommerfeld reviewed and analyzed defendant's motion to dismiss, and researched issues raised in McAfee's motion. Ms. Sommerfeld shepardized applicable case law, researched SLUSA requirements, and drafted Plaintiffs' Opposition to McAfee's Motion to Dismiss. Ms. Sommerfeld conferred with clients and all parties regarding the Alternative Dispute Resolution (ADR) Stipulation, and coordinated the ADR certifications. 28. Sheilah Buack was a paralegal on the antitrust and securities team at Cotchett

Pitre for about two years. She performed 20.20 hours of valuable work as the initial lead paralegal on the case in December of 2006. Ms. Buack's tasks included meeting with potential

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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clients regarding the case, investigating documentary evidence regarding stock option practices and dealings with plaintiffs, performing fact research related to McAfee's filings with the SEC and representations made to McAfee employees and prior blackout practices, and organizing the case file. 30. Patrick Skahan is a paralegal on the antitrust and securities litigation team at

Cotchett Pitre. Mr. Skahan has worked almost exclusively on securities and antitrust litigations since April of 2007. In May of 2007, Mr. Skahan spent .5 hours on case management and case status updates. 31. Michelle Cooper was a paralegal on the antitrust and securities team at Cotchett

Pitre. She worked almost exclusively on securities and antitrust litigations during the time she worked at the Cotchett firm. From January 16, 2007, through April 18, 2007, Ms. Cooper spent 4.7 hours corresponding with clients regarding the case, preparing the required Alternative Dispute Resolution (ADR) certifications, creating case management tools, and case status updates. 32. Kevin Allen was a law clerk with Cotchett Pitre through the winter of 2007.

During that time, Mr. Allen almost exclusively assisted the securities and antitrust litigation team. From October 17, 2007, to November 20, 2007, Mr. Allen spent 16.10 hours performing legal research related to McAfee's motion to dismiss, including motions to reconsider or clarify, as well as relating to damages. Mr. Allen shepardized relevant case law, evaluating case merit as it related to the motion to dismiss, and researched a stay in discovery as it would relate to a motion to dismiss. 33. Nirav Engineer has been a senior paralegal with Cotchett Pitre since March of

2005. Mr. Engineer has assisted on hundreds of cases conducting fact investigation and initiating actions. In December of 2006, Mr. Engineer spent 4.5 hours completing factual investigations relating to the McAfee's conduct and service requirements. 34. Don Thornton, was a senior paralegal and investigator with Cotchett Pitre for 13

years. In December of 2006, Mr Thornton spent 72.90 hours on this case coordinating all factual

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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investigation relating to the complaint and potential defendants and their roles at McAfee. Mr. Thornton located the defendants in this matter, researched the background of clients and potential class members, and researched factual provisions applied to the initiation of the case.

41.

In sum, the attorneys and support staff working on this case have extensive

experience in consumer class actions and public interest litigation. In prosecuting this action, my firm diligently represented the interests both of the seven named plaintiffs and the approximately 690 other proposed Class members. Based on the chronology of events, in which McAfee uniformly rejected every pre-lawsuit demand to allow former employees to exercise their vested options, and only agreed to provide the requested relief after a class action suit was filed, the lawsuit was plainly a catalyst for the relief provided. 42. Plaintiffs' counsel respectfully request approval of an award of attorneys' fees in

the amount of $686,122.50. The requested amount represents my firm's "lodestar" (hours multiplied by customary hourly rate) of $228,707.50 for all time spent in this litigation from the inception of the case to January 15, 2008, the last date by which members of the putative class received relief, with a multiplier of three. A detailed lodestar report for all employees at my firm is provided below: LODESTAR REPORT (From Inception through January 15, 2008)
N AME P O SIT IO N T O T A L HOURS HOURLY RATE T O T A L FEES

Cotchett, Joseph W. Molumphy, Mark C. SUB-TOTAL PARTNERS

Partner Partner

2.60 417.80 420.40

$550.00 $425.00

$1,430.00 $177,565.00 $ 178,995.00

Lyons, Barbara L. Ponist, Sean E. Sommerfield, Kelly L.

Sr. Associate Sr. Associate Associate

3.10 42.00 64.00

$350.00 $350.00 $250.00

$1,085.00 $14,700.00 $16,000.00

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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SUB-TOTAL ASSOCIATES

109.10

$31,785.00

Engineer, Nirav
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Sr. Paralegal Sr. Paralegal Paralegal Paralegal Paralegal Law Clerk

4.50 72.90 20.20 4.70 0.50 16.10 118.90 648.40

$175.00 $175.00 $125.00 $125.00 $125.00 $75.00

$787.50 $12,757.50 $2,525.00 $587.50 $62.50 $1,207.50 $17,927.50 $228,707.50

Thornton, Donald D. Buack, Sheilah Cooper, Michelle L. Skahan, Patrick Allen, Kevin SUB-TOTAL ASSISTANTS GRAND TOTAL 43.

The requested lodestar multiplier of three is reasonable and consistent with the

factors considered under California law, including the novelty and difficulty of the issues involved, the skill displayed in resolving them, the fact that litigation precluded other employment, the contingent nature of the fee arrangements, and the results achieved. Before filing the case, McAfee refused to permit former employees to exercise their options or to extend their exercise period. McAfee changed its position in response to this class action suit. Even then, it continued to litigate the case, refused to confirm whether class members would receive the same relief, and moved to dismiss the claims based on SLUSA preemption and standing arguments, requiring additional legal analysis and briefing. My firm devoted substantial time and resources to litigating the case, which precluded time spent on other cases and other employment. Further, my firm represented the plaintiffs and class on a contingent basis, advancing all time and costs, without any assurance of payment from a favorable outcome. Finally, the result achieved ­ relief worth an estimated $23.5 million to approximately 700 class members, as discussed below ­ was substantial, particularly given McAfee's refusal to provide anything to its former employees before the case was filed.

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DECLARATION OF MARK C. MOLUMPHY IN SUPPORT OF PLAINTIFFS' MOTION FOR REPORT AND RECOMMENDATION TO AWARD ATTORNEYS FEES AND COSTS TO PLAINTIFFS

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46.

The requested fee, viewed as a percentage of the total recovery by former

employees, reinforces the reasonableness of the request. While McAfee refused to provide the precise figures in discovery, McAfee's most recent Form 10-Q filed on August 7, 2008 for the quarterly period ended June 30, 2008, disclosed that approximately 690 former employees received either a cash payment for their expired options or an extended 90-day period to exercise their options. McAfee disclosed that all options of terminated employees had been cash settled or exercised by March 31, 2008. As of March 31, 2008, the January 2007 and November 2007 modified options had been exercised, or had expired. Certain stock options held by terminated employees expired during the blackout period as they could not be exercised during the 90-day period subsequent to termination. In January 2007, McAfee determined it would settle these option in cash... All of these options were cash settled by March 31, 2008... (emphasis added). Former employees with expired options received cash payments totaling $5.2 million. A true and correct copy of the pertinent portions of McAfee's Form 10-Q is attached hereto as Exhibit D. 47. McAfee's most recent Form 10-K filed on February 27, 2008 disclosed that

McAfee recorded a compensation charge of $14.0 million (applied to 2007) and $4.3 million (applied to 2006), or a total of $18.3 million, for former employees allowed to exercise their unexpired options based on the value of the options. Former employees with expired options received cash payments totaling $5.2 million. Thus, the total relief provided to all former employees is at least $23.5 million. The requested fee of $686,122.50 represents approximately 2.9% of the estimated $23.5 million recovery by McAfee's former employees. Expenses 48. My firm requests to be reimbursed for expenses incurred and advanced on

the case during the relevant period, in the amount of $5,851.44. These costs were reasonable and necessary in order to litigate this matter. A specific breakdown of the expenses is as follows:

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COST REPORT (From Inception