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BOTTINI & BOTTINI, INC.
Francis A. Bottini, Jr. (175783)
Albert Y. Chang (296065)
Yury A. Kolesnikov (271173)
7817 Ivanhoe Avenue, Suite 102
La Jolla, California 92037
Telephone: (858) 914-2001
Facsimile: (858) 914-2002
E-mail: fbottini@bottinilaw.com
achang@bottinilaw.com
ykolesnikov@bottinilaw.com
Attorneys for Objector Norman Miller
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
STREAM SICAV, TODD MARX,
JOHN DORMAN, and LEE
KARLSON, individually and on behalf
of all others similarly
situated,
Plaintiffs,
vs.
RINO INTERNATIONAL
CORPORATION, DEJUN ZOU,
JIANPING QIU, YI JENNY LIU,
BEN WANG, KENNITH C.
JOHNSON, XIE QUAN, WEIGUO
ZHANG, LI YU, and
FRAZER FROST, LLP f/k/a
MOORE STEPHENS WURTH
FRAZER AND TORBET, LLP,
Defendants.
Case No. CV-10-8695-DDP (VBKx)
CLASS ACTION
OBJECTIONS OF NORMAN MILLER TO
THE PROPOSED SETTLEMENT
Date: February 1, 2016
Time: 11:00 a.m.
Judge: Hon. Dean D. Pregerson
Courtroom: 3
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Table of Contents
I. INTRODUCTION ................................................................................................................. 1
II. BACKGROUND .................................................................................................................... 2
A. Factual Background ..................................................................................................... 2
B. The California Action’s Procedural History ............................................................ 4
C. Previous Settlement with the RINO Defendants ................................................... 5
D. The Nevada Action’s Procedural History ................................................................ 6
E. The California Plaintiffs’ Settlement with Frazer Frost and Initial Refusal
to Exclude Any of the Nevada Plaintiffs’ Claims ................................................... 8
F. The Revised Settlement .............................................................................................. 9
III. LEGAL STANDARD .......................................................................................................... 10
IV. ARGUMENT ........................................................................................................................ 12
A. The Proposed Settlement Is Not Fair or Reasonable Because It Includes
an Overbroad Release that Purports to Release Claims that Could Not
Have Been Asserted in This Action, Including the Nevada Plaintiffs’
Direct, State-Law Claims that Are Currently Pending in the Nevada
Action .......................................................................................................................... 12
1. The Proposed Release Goes Far Beyond the Claims Asserted in This
Action by Attempting to Release “Holder” Claims that Are Not —
and Could Not Have Been — Asserted in This Action .......................... 12
2. The Proposed Release Improperly Attempts to Release the Nevada
Plaintiffs’ Direct, State-Law Claim for Aiding and Abetting Breaches
of Fiduciary Duties that Is Currently Pending in the Nevada Action ... 14
B. Conditional Class Certification for Settlement Purposes Is Not
Appropriate Because the California Plaintiffs Cannot Adequately
Represent the Nevada Plaintiffs and the Nevada Action Class as to Their
Direct, State-Law Claim for Aiding and Abetting Breaches of Fiduciary
Duties ........................................................................................................................... 17
C. The Amount of the Proposed Settlement Is Woefully Inadequate ................... 19
V. CONCLUSION..................................................................................................................... 21
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Table of Authorities
Cases
Amchem Prods., Inc. v. Windsor,
521 U.S. 591(1997) .................................................................................................................. 11, 17
Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723 (1975) ................................................................................................................... 1, 13
Dennis v. Kellogg Co.,
697 F.3d 858 (9th Cir. 2012) ........................................................................................... 10, 11, 12
Ferrington v. McAfee, Inc.,
No. 10-CV-1455-LHK,
2012 WL 1156399 (N.D. Cal. Apr. 6, 2012) ........................................................................ 13, 16
Halliburton Co. v. Erica P. John Fund, Inc.,
134 S. Ct. 2398 (2014) ................................................................................................................... 13
Hamilton v. Nozko,
Civ. A. No. 13014,
1994 WL 413299 (Del. Ch. July 27, 1994) ................................................................................. 15
Hanlon v. Chrysler Corp.,
150 F.3d 1011 (9th Cir. 1998) ................................................................................................ 11, 12
Hesse v. Sprint Corp.,
598 F.3d 581 (9th Cir. 2010) .................................................................................................. 17, 18
In re Bluetooth Headset Prods. Liab. Litig.,
654 F.3d 935 (9th Cir. 2011) ........................................................................................................ 10
In re Crazy Eddie Sec. Litig.,
824 F. Supp. 320 (E.D.N.Y. 1993) ............................................................................................. 20
Kakani v. Oracle Corp.,
No. C 06-06493 WHA,
2007 WL 1793774(N.D. Cal. June 19, 2007) ............................................................................. 10
Mazza v. Am. Honda Motor Co.,
666 F.3d 581 (9th Cir. 2012) ........................................................................................................ 11
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Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
547 U.S. 71 (2006) ......................................................................................................................... 13
Mirfashi v. Fleet Mortg. Corp.,
356 F.3d 781 (7th Cir. 2004) .................................................................................................. 13, 16
Officers for Justice v. Civil Serv. Comm’n of City & Cnty. of San Francisco,
688 F.2d 615 (9th Cir. 1982) ........................................................................................................ 11
Sobel v. Hertz Corp.,
No. 3:06-cv-0545-LRH-RAM,
2011 WL 2559565 (D. Nev. June 27, 2011) ........................................................................ 10, 11
Staton v. Boeing Co.,
327 F.3d 938 (9th Cir. 2003) .................................................................................................. 10, 11
Stokes v. Interline Brands, Inc.,
No. 12-cv-05527-JD,
2014 WL 5826335 (N.D. Cal. Nov. 10, 2014) .......................................................................... 10
Torrisi v. Tucson Elec. Power Co.,
8 F.3d 1370 (9th Cir. 1993) .......................................................................................................... 20
Rules and Statutes
FED. R. CIV. P. 23(e).................................................................................................................... 10, 11
FED. R. CIV. P. 23(e)(2) ..................................................................................................................... 10
Securities Exchange Act of 1934
§ 10(b) ............................................................................................................................... 4, 5, 12, 13
Securities Litigation Uniform Standards Act of 1998,
Pub. L. No. 105-353,
112 Stat. 3227 ................................................................................................................................... 8
Securities Litigation Uniform Standards Act of 1998,
Pub. L. No. 105-353,
112 Stat. 3227 ................................................................................................................................... 8
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Other Authorities
Denise N. Martin et al., National Economic Research Associates, Inc.,
Recent Trends IV: What Explains Filings and Settlements in Shareholder Class Actions,
5 STAN. J. L. BUS. & FIN. 121, 123 (1999) .................................................................................. 19
Ellen M. Ryan & Laura E. Simmons, Cornerstone Research,
Securities Class Action Settlements: 2010 Review and Analysis ......................................................... 20
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Norman Miller, a shareholder of RINO International Corporation (“RINO” or the
“Company”), respectfully submits this memorandum of points and authorities in support of
his objections to the proposed settlement memorialized in the Amended Stipulation of
Settlement dated October 12, 2015 (the “Stipulation”), Dkt. No 288.1
I. INTRODUCTION
The Court should deny final approval of the proposed settlement in this action
(“California Action”) for three reasons.
First, the proposed settlement is not fair or reasonable because it contains an overly
broad release that, among other things, purports to release claims of RINO shareholders
who merely held RINO stock during the Class Period. This is inappropriate because the
federal securities laws only provide remedies for persons who purchase or sell securities based
on false or misleading statements or material omissions; they do not provide remedies for
“holders.” See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 738–40, 749 (1975).
Notably, the proposed settlement improperly attempts to release the direct, state-law
claim that is currently pending in the District of Nevada on behalf of shareholders who held
RINO stock after the delisting of RINO’s stock on December 8, 2010. See In re RINO Int’l
Corp. Derivative Action, Case No. 3:15-cv-00400-RCJ-VPC (D. Nev.) (“Nevada Action”).2 As
Mr. Miller and Richard Elipani (collectively, the “Nevada Plaintiffs”) previously advised the
Court, the question as to whether the Nevada Plaintiffs’ direct, state-law claim alleges an
untrue statement or omission of material fact in connection with a purchase or sale of
security is currently pending before the Honorable Robert C. Jones in the Nevada Action.
A hearing on that issue is currently scheduled for January 19, 2016. If Judge Jones
determines that the Nevada Plaintiffs’ direct, state-law claim does not allege an untrue
1 This memorandum adopts all of the defined terms in the Stipulation.
2 The Nevada Action was improperly removed from the First Judicial District Court
of the State of Nevada in and for Carson City, Case No. 10-OC-005291 B. A motion to
remand is currently pending and is scheduled to be heard on January 19, 2016.
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statement or omission of material fact in connection with a purchase or sale of security that
conclusion would, a fortiori, mean that the claim cannot be released in this action.
Accordingly, as a matter of comity, this Court should not finally approve the Stipulation
before Judge Jones rules on the Nevada Plaintiffs’ pending motion to remand as well as the
motion to dismiss filed by defendants Moore Stephens Wurth Frazer and Torbet, LLP
(“MSWFT”) and Frazer Frost, LLP (“Frazer Frost”) (collectively, “Auditor Defendants”).
Otherwise, the Auditor Defendants will obtain through the proposed settlement what they
could not obtain in the litigation — a “back door” dismissal of the direct, state-law claim in
the Nevada Action — all to the detriment of RINO shareholders.
Second, conditional class certification for settlement purposes is not appropriate
because, as relevant to the delisting of RINO stock, the plaintiffs in the California Action
cannot adequately represent the claims of the Nevada Plaintiffs and all other shareholders
of RINO who held RINO stock after the delisting of RINO stock on December 8, 2010,
because these shareholders suffered an additional and separate injury due to the delisting.
Third, the Court should deny final approval because the proposed settlement is
woefully inadequate. The proposed settlement offers RINO shareholders only $1,685,000,
which represents a mere 2.79% of the potential maximum damages (or 1.65%, once the
requested attorneys’ fees, expenses, and incentive awards are subtracted). This is
particularly inadequate in light of the fact that Frazer Frost has $15 million worth of
insurance policies providing coverage for the plaintiffs’ claims.
For all the foregoing reasons, the Court should deny final approval of the settlement
because it is not fair, reasonable, or adequate.
II. BACKGROUND
A. Factual Background
At the center of both the California Action and the Nevada Action is RINO, which is
a public holding company incorporated in Nevada and headquartered in the People’s
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Republic of China. ¶ 2.3 RINO operates as an environmental protection and remediation
company. ¶¶ 2, 33. During the relevant period, Zou Dejun served as RINO’s Chief
Executive Officer and his wife, Qiu Jianping, served as the Chairwoman of RINO’s board
of directors. ¶ 12. Zou and Qiu were founders and majority owners of RINO. Id.
MSWFT and Frazer Frost are accounting firms and served as RINO’s accountants during
the relevant period. ¶ 27. Frazer Frost is the successor entity of MSWFT. Id. MSWFT
audited RINO’s 2008 year-end financial results, whereas Frazer Frost audited RINO’s 2009
year-end financial results. Id.
In 2008 and 2009, the Auditor Defendants entered into engagement agreements to
provide audit and review services to RINO. ¶¶ 35, 39. The Auditor Defendants undertook
to audit RINO’s balance sheets, to review RINO’s annual Forms 10-K, and to review
RINO’s unaudited quarterly financial information for each of the corresponding quarters,
together with Forms 10-Q. ¶¶ 35–36, 39, 41. As part of the 2009 agreement, the Auditor
Defendants also undertook to audit the Company’s internal controls over financial
reporting. ¶ 40. Pursuant to their contracts with RINO, the Auditor Defendants were
required to express an opinion on the Company’s financial statements in accordance with
the Generally Accepted Accounting Principles (“GAAP”) and to conduct their review in
accordance with the standards established by the Public Company Accounting Oversight
Board (“PCAOB”). ¶¶ 37, 42. In exchange, the Auditor Defendants were compensated in
the amount equal to or exceeding $505,000.00. ¶¶ 38, 44, 48.
As subsequently disclosed, the Auditor Defendants failed to perform their obligations
as required by GAAP and PCAOB. ¶¶ 86–88. Instead, the Auditor Defendants’
professional negligence and accounting malpractice damaged RINO by allowing the insiders
3 All “¶ __” references are to the Third Amended Complaint (“TAC”) in the Nevada
Action, filed July 15, 2015, which is the operative complaint in that action. Declaration of
Francis A. Bottini, Jr. (“Bottini Decl.”), Ex. 3. Unless otherwise noted, all internal citations
and quotation marks have been omitted, and all emphasis has been added.
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to loot the Company. ¶ 89.
On November 10, 2010, Muddy Waters, a Hong Kong investment firm that analyzes
Chinese corporations, published a report alleging that RINO insiders had been improperly
inflating revenue, fabricating customer relationships, lying about RINO’s tax obligations,
and allowing themselves to use RINO’s funds illegally for personal use. ¶ 56; see also ¶¶ 58–
63, 69–71. Notably, the Muddy Waters’ report was based on publicly-available information,
which was equally available to the Auditor Defendants and should have been discovered by
them. ¶ 56; see also ¶¶ 58–59, 67–71, 81.
On November 17, 2010, NASDAQ suspended trading of RINO stock and requested
additional information from RINO’s management regarding allegations raised in the Muddy
Waters’ report. ¶ 76. RINO’s management, however, failed to provide the requested
information. Id. As a result, trading in RINO’s stock was halted on November 17, 2010. ¶
77. The Company’s stock was delisted from the NASDAQ on December 8, 2010. ¶ 90.
The Company was severely harmed by the RINO management’s self-dealing and
disloyal actions and the Auditor Defendants’ professional negligence. ¶¶ 83, 89–96. For
one, the Company was harmed when Zou and Qiu funneled $40 million to their privately-
held VIE as well as when they “borrowed” $3.5 million for their personal use. ¶¶ 69–71.
The Company was also harmed because the RINO management’s conduct caused RINO’s
stock to plummet from $20.74 in April 2010 to around five cents currently, resulting in a
loss of nearly $500 million in market capitalization. ¶ 90. The Company also had to expend
significant sums of money to defend itself from the resulting lawsuits as well as government
investigations. ¶ 91.
B. The California Action’s Procedural History
On November 12, 2010 and thereafter, several securities-fraud class actions were
filed in this Court against RINO and several of its officers and directors (“RINO
Defendants”) alleging violations of § 10(b) of the Securities Exchange Act of 1934 and Rule
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10b-5 promulgated thereunder. On February 16, 2011, these actions were consolidated.
On April 18, 2011, a consolidated amended complaint was filed in the California Action.
On July 6, 2012, the California Plaintiffs filed a second amended complaint, adding
Frazer Frost as a defendant and alleging violations of § 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder against Frazer Frost. Dkt. No. 197. The Fourth Amended
Complaint, which is the operative complaint in the California Action, was filed on January
31, 2014. Dk. No. 272. Frazer Frost is the only remaining defendant.
C. Previous Settlement with the RINO Defendants
Beginning in late 2011 and through early 2012, the parties in the California Action,
the Nevada Action, and several other actions engaged in mediation. Pursuant to that
mediation, the parties agreed to settle (1) the securities-fraud claims against RINO and its
officers and directors, and (2) the derivative claims against RINO’s officers and directors.
The settlement of the securities-fraud claims against the RINO Defendants was
presented to this Court, and the Court granted final approval to that settlement on
December 19, 2012. Among other things, the stipulation of settlement expressly excluded
“all claims brought in any of the Derivative Actions to the extent of the claims stated in the
Derivative Actions.” Dkt. No. 192 at 8 (¶ 1.31). The Nevada Action was one of the
derivative actions included in the definition of “Derivative Actions.” Id. at 6 (¶ 1.12)
(“‘Derivative Actions’ means, collectively, the following: (a) In re RINO International Corp.
Derivative Action, Case No. 10-OC-005291 B, Dept. No. I, in the First Judicial District Court
of the State of Nevada in and for Carson City (‘Nevada State Derivative Action’) … .”).
The settlement of the derivative claims against the RINO officers and directors was
presented to the U.S. District Court for the District of Nevada. On July 23, 2013, that court
granted final approval to the settlement. The stipulation of settlement expressly excluded
the following claims from the scope of the released claims: (1) the claims asserted in the
California Action; and (2) the claims asserted in the Nevada Action against MSWFT and
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Frazer Frost. See Bottini Decl., Ex. 2 at 10–11 (¶ 1.33) (“‘Plaintiffs’ Released Claims’
expressly excludes, however, all claims asserted in the related securities class action
captioned Stream SICAV v. RINO International Corp. et al., Case No. 2:10-cv08695-DDP-
VBK, pending in the U.S. District Court for the Central District of California, to the extent
of the claims stated in that action. Plaintiffs’ Release Claims also specifically does not
include the claims asserted by the Nevada State Plaintiffs against Moore Stephens Wurth
Frazer & Torbet LLP and Frazer Frost LLP.”).
Furthermore, the stipulation of settlement in the derivative actions expressly
provided that the Nevada Plaintiffs shall have the exclusive right to pursue any and all
claims against MSWFT and Frazer Frost and required RINO to assign its rights (and any
recovery) against MSWFT and Frazer Frost to the Nevada Plaintiffs upon their request:
The Nevada State Plaintiffs [and their counsel] shall have the exclusive and sole
ability to pursue any and all claims against the Auditor Defendants. Upon
election and notice by the Nevada State Plaintiffs [and their counsel] to the
Defendants, Nominal Defendant RINO shall assign any and all rights it has
against the Auditor Defendants to the Nevada State Plaintiffs. Such
assignment shall include the assignment by RINO of any and all recovery
obtained by the Nevada State Plaintiffs against the Auditor Defendants to the
Current RINO Shareholders.
Id., Ex. 2 at 13 (¶ 2.3).
As discussed below, the proposed settlement at issue in this case, while excluding the
Nevada Plaintiffs’ derivative claims from the proposed release, does not exclude (and, in
fact, purports to release) the Nevada Plaintiffs’ direct, state-law claim.
D. The Nevada Action’s Procedural History
The Nevada Plaintiffs are current shareholders of RINO. ¶ 26. On December 3,
2010, the Nevada Plaintiffs commenced the Nevada Action as a shareholder derivative
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action on behalf of RINO and against certain officers and directors of RINO. On August
3, 2011 — nearly a year before Frazer Frost was added as a defendant in the California
Action — the Nevada Plaintiffs filed their first amended consolidated complaint, adding
MSWFT and Frazer Frost as defendants.
Following the settlement with the RINO defendants, the Nevada Plaintiffs dismissed
those defendants from the Nevada Action. Pursuant to the settlement, following the
dismissal of the other defendants, RINO assigned to the Nevada Plaintiffs all rights and
claims (and recovery) it possesses against MSWFT and Frazer Frost. ¶ 26.
On October 21, 2013, the Nevada Plaintiffs filed the second amended complaint as a
direct action against MSWFT and Frazer Frost to enforce the rights and claims assigned by
RINO. The second amended complaint alleged two claims, both of which were brought by
the Nevada Plaintiffs as assignees of RINO: (1) professional negligence and accounting
malpractice; and (2) breach of contract. MSWFT and Frazer Frost moved to dismiss. On
April 17, 2014, the state court denied the motion to dismiss.
On May 26, 2015, the Nevada Plaintiffs sought leave to file a third amended
complaint to add a direct class claim against MSWFT and Frazer Frost for aiding and
abetting the RINO insiders’ breaches of fiduciary duties. On July 6, 2015, the state court
granted the Nevada Plaintiffs’ motion. The TAC was filed on July 15, 2015.
The TAC retained the first and second causes of action, which the Nevada Plaintiffs
bring as assignees of RINO’s rights and claims and through which the Nevada Plaintiffs
seek to recover against MSWFT and Frazer Frost for the harm that was originally suffered
by RINO. ¶¶ 110–137.
The TAC also added a third cause of action under Nevada state law for aiding and
abetting breaches of fiduciary duties against MSWFT and Frazer Frost. ¶¶ 138–149. This
cause of action is brought as a class action on behalf of the Nevada Plaintiffs and all other
persons who held RINO stock after the delisting of RINO’s stock on December 8, 2010
(the “Nevada Action Class”). ¶ 97. The TAC alleges that as a result of the Auditor
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Defendants’ aiding and abetting of the RINO insiders’ wrongdoing, the Nevada Plaintiffs
and the Nevada Action Class were injured when RINO’s stock was delisted. ¶ 103. The
delisting caused direct harm to the Nevada Plaintiffs and the Nevada Action Class because
it eliminated the market for RINO’s shares, leaving them with a worthless security. Id.
Latching onto this direct class claim, MSWFT and Frazer Frost removed the Nevada
Action to federal court, arguing that the class claim was precluded under the Securities
Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (“SLUSA”).
On August 6, 2015, MSWFT and Frazer Frost filed a motion to dismiss the third cause of
action as precluded under SLUSA. Bottini Decl. ¶ 23. On August 24, 2015, Nevada
Plaintiffs filed a motion to remand the Nevada Action. Id. ¶ 24. Both motions are fully
briefed as of September 21, 2015. On December 9, 2015, the District of Nevada set a
hearing on both motions for January 19, 2016. Id. ¶ 26.
E. The California Plaintiffs’ Settlement with Frazer Frost and Initial Refusal to
Exclude Any of the Nevada Plaintiffs’ Claims
On August 27, 2015, the California Plaintiffs filed a motion for preliminary approval
of settlement with Frazer Frost, the only remaining defendant in the California Action
(“Preliminary Approval Motion”). Dkt. No. 278. At the same time, the California Plaintiffs
submitted a Stipulation of Settlement for the Court’s review. Dkt. No. 277.
Among other things, the initial stipulation included an extraordinarily broad release
clause, which defines the “Released Claims” as:
collectively, all claims (including ‘Unknown Claims [as separately defined]) of
every nature and description whatsoever, known or unknown, asserted or
that might have been asserted or that might be asserted, against Defendant,
… arising out of, based upon or related to (a) the purchase, acquisition, or
sale of RINO common stock, call options or put options during the Class
Period, or (b) the subject matter of the Action, or the facts, transactions,
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events, occurrences, acts, disclosures, statements, omissions or failures to
act which were or could have been alleged in the Action.
Dkt. No. 277 at 9 (¶ 1.30). Notably, unlike the stipulation of settlement with the RINO
Defendants, the initial stipulation did not exclude any of the state-law claims asserted by the
Nevada Plaintiffs in the Nevada Action.
On August 28, 2015, concerned that the language of the initial stipulation was
significantly broad to encompass the Nevada Plaintiffs’ state-law claims, counsel for the
Nevada Plaintiffs sought to meet and confer with counsel for the California Plaintiffs and
Frazer Frost (“Settling Parties”). The Nevada Plaintiffs requested that the Settling Parties
voluntarily revise the scope of the release to exclude any and all claims asserted in the
Nevada Action. The Settling Parties refused, forcing the Nevada Plaintiffs to file a motion
to intervene as well as an opposition to the motion for preliminary approval.
F. The Revised Settlement
The Court held a hearing on the initial preliminary approval motion on September
28, 2015. Following the hearing, the Settling Parties submitted an Amended Stipulation of
Settlement (“Stipulation”). Dkt. No. 288. Rather than cure the deficiencies in the initial
stipulation identified at the September 28, 2015 hearing, the Settling Parties actually made
the proposed settlement more unfair and objectionable by (1) increasing the scope of the
release; (2) amending the stipulation to release claims of RINO shareholders who merely
held RINO stock during the Class Period, even though federal securities laws do not
provide remedies for “holder” claims; and (3) attempting to release the Nevada Plaintiffs’
direct, state-law claim for aiding and abetting breaches of fiduciary duties.
The Nevada Plaintiffs opposed preliminary approval of the amended stipulation. On
October 26, 2015, the Court held a hearing on the Nevada Plaintiffs’ motion to intervene
and granted their motion. Dkt. No. 293. On October 27, 2015, without any further
hearing, the Court granted preliminary approval to the amended stipulation. Dkt. No. 294.
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III. LEGAL STANDARD
Rule 23 of the Federal Rules of Civil Procedure mandates judicial review of any
settlement of the “claims, issues, or defenses of a certified class.” FED. R. CIV. P. 23(e). At
the final fairness hearing, the proponents of the settlement must demonstrate that the
settlement is “fair, reasonable, and adequate.” FED. R. CIV. P. 23(e)(2). Regardless of the
amount of opposition to the settlement agreement, the Court “must make an independent
analysis of the settlement terms and examine whether the interests of the class are better
served by the proposed settlement than by further litigation.” Sobel v. Hertz Corp., No. 3:06-
cv-0545-LRH-RAM, 2011 WL 2559565, a *5 (D. Nev. June 27, 2011). Moreover, where, as
here, “the parties reach a settlement agreement prior to class certification, courts must peruse
the proposed compromise to ratify both the propriety of the certification and the fairness of the
settlement.” Staton v. Boeing Co., 327 F.3d 938, 952 (9th Cir. 2003).
Settlement approval prior to class certification “requires a higher standard of fairness
and a more probing inquiry than may normally be required under Rule 23(e).” Dennis v.
Kellogg Co., 697 F.3d 858, 864 (9th Cir. 2012) o. The Court “must be particularly vigilant not
only for explicit collusion, but also for more subtle signs that class counsel have allowed
pursuit of their own self-interests and that of certain class members to infect the
negotiations.” In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 947 (9th Cir. 2011).
Notably, “a district court may not simply rubber stamp stipulated settlements,” but “must
be careful to make sure absent class members will be treated fairly.” Kakani v. Oracle Corp.,
No. C 06-06493 WHA, 2007 WL 1793774, at *1 (N.D. Cal. June 19, 2007).4
4 See also Stokes v. Interline Brands, Inc., No. 12-cv-05527-JD, 2014 WL 5826335, at *1
(N.D. Cal. Nov. 10, 2014) (“But the role of the Court is not to rubber-stamp proposed class
settlements simply because counsel for the parties say it is a good result. The Court is
required to review the proposed settlement to ensure that absent class members are being
treated fairly and reasonably, and are not victims of a deal between attorneys for the parties
to cut and run. That review is particularly critical when, as here, a proposed settlement has
been reached before a class has been certified.”).
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To determine whether the settlement is fair, adequate, and reasonable, the Court
considers several factors, including (1) the strength of plaintiffs’ case; (2) the risk, expense,
complexity, and likely duration of further litigation; (3) the risk of maintaining class action
status throughout the trial; (4) the amount offered in settlement; (5) the extent of discovery
completed, and the stage of the proceedings; (6) the experience and views of counsel; (7) the
presence of a governmental participant; and (8) the reaction of the class members to the
proposed settlement. Staton, 327 F.3d at 959. These factors are not exclusive, and some
may warrant more weight than others depending on the circumstances. Officers for Justice v.
Civil Serv. Comm’n of City & Cnty. of San Francisco, 688 F.2d 615, 625 (9th Cir. 1982).
The California Plaintiffs argue that a presumption of fairness should apply here
because “the settlement agreement was reached in arm’s length negotiations after relevant
discovery had taken place.” Dkt. No. 297-1 at 4. But the appropriateness of a presumption
of fairness is “undermine[d]” by “the fact that this settlement was negotiated prior to the
court certifying the class.” Sobel, 2011 WL 2559565, a *6. Indeed, settlement approval prior
to class certification “requires a higher standard of fairness and a more probing inquiry than may
normally be required under Rule 23(e).” Dennis, 697 F.3d at 864; see also Hanlon v. Chrysler
Corp., 150 F.3d 1011, 1026 (9th Cir. 1998) (same).
Moreover, before approval is granted, the Court must also ensure “the propriety of
the certification.” Staton, 327 F.3d at 952. The Court “must conduct a rigorous analysis to
determine whether the party seeking certification has met the prerequisites of Rule 23.”
Mazza v. Am. Honda Motor Co., 666 F.3d 581, 588 (9th Cir. 2012); see also Staton, 327 F.3d at
952 (the district court must “assess whether a class exists”). When “[c]onfronted with a
request for settlement-only class certification,” the Court must pay “undiluted, even
heightened, attention” to class-certification requirements. Amchem Prods., Inc. v. Windsor, 521
U.S. 591, 620 (1997). Indeed, such attention is of “vital importance,” because “a court
asked to certify a settlement class will lack the opportunity, present when a case is litigated,
to adjust the class, informed by the proceedings as they unfold.” Id.
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IV. ARGUMENT
As noted above, where the settlement has been reached prior to class certification, “a
higher standard of fairness” applies. Dennis, 697 F.3d at 864; Hanlon, 150 F.3d at 1026.
Here, three factors weigh heavily against granting the final approval to the proposed
settlement: (1) overbroad release; (2) California Plaintiffs’ inadequacy in representing the
Nevada Plaintiffs and the Nevada Action Class; and (3) inadequate amount recovered.
A. The Proposed Settlement Is Not Fair or Reasonable Because It Includes an
Overbroad Release that Purports to Release Claims that Could Not Have
Been Asserted in This Action, Including the Nevada Plaintiffs’ Direct, State-
Law Claims that Are Currently Pending in the Nevada Action
The release clause in the present case is impermissibly broad, purporting to release
“all claims … of every nature and description whatsoever, known or unknown, asserted or
that might have been asserted … arising out of, based upon or related to (a) the purchase,
acquisition, sale or ownership of RINO common stock, call options or put options during
the Class Period, or (b) the subject matter of the [a]ction, or the facts, transactions, events,
occurrences, acts, disclosures, statements, omissions or failures to act which were or could
have been alleged in the [a]ction.” Dkt. No. 288 at 9 (¶ 1.30).
1. The Proposed Release Goes Far Beyond the Claims Asserted in This
Action by Attempting to Release “Holder” Claims that Are Not — and
Could Not Have Been — Asserted in This Action
The proposed release goes far beyond the federal securities-fraud claims asserted in
the complaint. As stated in the operative complaint, “[t]his is a federal securities class action
against Frazer Frost, LLP … on behalf of a class consisting of all persons and entities …
who purchased the publicly traded common stock and call options and who sold put
options of RINO [during the applicable period], seeking to recover damages caused by
Frazer’s violations of federal securities laws.” Dkt. No. 272 at 9 (¶ 3). The complaint alleges
violations of § 10(b) of the Exchange Act and Rule 10b-5, which “prohibit making any
material misstatement or omission in connection with the purchase or sale of any security.”
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Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2407 (2014).
The proposed release, however, is significantly broader than the claims asserted
because it also attempts to release any and all claims “arising out of, based upon or related to
… ownership of RINO common stock … during the Class Period.” Dkt. No. 288 at 9
(¶ 1.30). But the federal securities law does not provide remedies for mere “holders” of
securities. See Blue Chip Stamps, 421 U.S. at 738–40, 749; see also Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Dabit, 547 U.S. 71, 79–80 (2006) (observing that due to “policy considerations,”
the Supreme Court in Blue Chip Stamps chose to limit the private remedy available under
Rule 10b-5 “to plaintiffs who were themselves purchases or sellers”). In other words, under
Blue Chip Stamps, a company’s fraudulent misrepresentation regarding its financial condition
must induce the plaintiff to either purchase or sell that company’s securities in order for the
plaintiff to have standing to sue under federal securities law. An individual lacks standing is
he or she merely foregoes purchasing or selling and/or decides to continue holding the
shares in connection with the company’s fraudulent misrepresentation.
Because the California Plaintiffs do not assert — and could not have asserted — the
“holder” claims in this litigation, they have no standing to bring those claims or to release them
through the overly broad release in the Stipulation, particularly where these claims are
pending in a different lawsuit and no separate consideration is being provided for the
release of these claims. See Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 783 (7th Cir. 2004)
(reversing final approval of a class-action settlement where the settlement released without
consideration the claims of a subclass that were the subject of another action); Ferrington v.
McAfee, Inc., No. 10-CV-1455-LHK, 2012 WL 1156399, at **8–10 (N.D. Cal. Apr. 6, 2012)
(denying final approval of a class-action settlement where the settlement released without
consideration the claims of a subclass that were the subject of another action).
/ / /
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2. The Proposed Release Improperly Attempts to Release the Nevada
Plaintiffs’ Direct, State-Law Claim for Aiding and Abetting Breaches of
Fiduciary Duties that Is Currently Pending in the Nevada Action
The proposed release is even broader than the subject matter of this action,
purporting to release not just the federal securities law claims, but also state-law claims that
have nothing to do with “any material misstatement or omission in connection with the
purchase or sale of any security.” Dkt. No. 288 at 9 (¶ 1.30). In particular, this would
include the Nevada Plaintiffs’ meritorious direct, state-law claim for aiding and abetting
breaches of fiduciary duties that is currently pending in the Nevada Action. In fact,
following the September 28, 2015 hearing (where they were advised that the initial
stipulation was deficient because it purported to release all of the Nevada Plaintiffs’ state-
law claims), the Settling Parties amended the stipulation by expressly excluding the Nevada
Plaintiffs’ derivative, state-law claims from the scope of the released claims. See Dkt. No.
288 at 9–10 (¶ 1.30) (“Released Claims specifically excludes the derivative/assigned claims
which purport to pursue RINO’s rights and claims against Defendant (as defined in the
First Cause of Action for ‘Professional Negligence and Accounting Malpractice’ and the
Second Cause of Action for ‘Breach of Contract’) asserted in the [Nevada Action]”). The
same amendment, however, also broadened the scope of the release by including the Nevada
Plaintiffs’ direct, state-law claim within the scope of the released claims. See id. (“Released
Claims specifically includes the direct claims (as defined in the Third Cause of Action for
‘Aiding and Abetting Breached of Fiduciary Duty’) in the Nevada Action complaint on
behalf of purchasers of RINO stock during the Class Period … .”). The Settling Parties’
inclusion of the Nevada Plaintiffs’ direct, state-law claim for aiding and abetting within the
Stipulation’s broad release is improper.
The direct claim asserted in the Nevada Action is brought under Nevada state law
and alleges that MSWFT and Frazer Frost aided and abetted the breaches of fiduciary duties
by the RINO insiders. See ¶¶ 138–149. This cause of action does not purport to recover for
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violations of any federal securities laws, nor does it allege or involve any material
misstatement or omission in connection with the purchase or sale of any security, or even
the “holding” of RINO stock based on any false or misleading statements or omissions by
the Auditor Defendants. Rather, it is a garden-variety state-law claim against the Company’s
auditors for aiding and abetting the officers’ and directors’ breaches of fiduciary duties.
The gravamen of the Nevada Plaintiffs’ direct claim is that MSWFT and Frazer Frost
negligently performed their audits of RINO’s financial statements, which allowed the
insiders to loot the company, ultimately leading to the delisting of RINO’s stock. ¶¶ 103–
109. Although the direct claim is brought on behalf of all persons who held RINO stock
on December 8, 2010, when the stock was delisted from the NASDAQ, the harm asserted
is not any devaluation of the RINO stock. Rather, the harm is the actual act of delisting of
RINO’s shares, which “caused direct and immediate harm to shareholders who held the
stock as of the date of the delisting because such shareholders are not able to sell their stock
and thus are left with a worthless security.” ¶ 103.
Although a claim for aiding and abetting breaches of fiduciary duties is typically a
derivative claim, there are unique facts in this case that give rise to a direct claim. Namely,
when the NASDAQ delisted RINO’s stock as of December 8, 2010, followed by the halting
of trading in RINO’s shares on the OTC bulletin board by the U.S. Securities and Exchange
Commission on April 11, 2011, those RINO shareholders who still owned RINO stock as
of such date were directly harmed by being deprived of a market for the sale of their stock.
See ¶¶ 103–109. Courts have recognized that the delisting of a company’s stock is a unique
event that gives rise to direct claims by shareholders who are directly harmed by the
delisting. See, e.g., Hamilton v. Nozko, Civ. A. No. 13014, 1994 WL 413299, at **6–7 (Del.
Ch. July 27, 1994) (upholding a direct claim based on delisting).
But even though the Nevada Plaintiffs’ direct claim has nothing to do with the
federal securities laws, it is nonetheless being released in the proposed settlement in this
action. Notably, there has been no showing that the class members have been
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independently compensated for the release of their valuable state-law claims against Frazer
Frost for aiding and abetting the RINO insiders’ breaches of fiduciary duties. Courts have
frequently rejected attempts to release unrelated claims where there has been no showing
that any compensation was provided for such a release. See, e.g., Mirfasihi, 356 F.3d at 783;
Ferrington, 2012 WL 1156399, at **8–10.
The Settling Parties’ purported release of the Nevada Plaintiffs’ direct, state-law claim
through the proposed settlement represents an impermissible attempt to achieve a “back
door” dismissal of that claim in the Nevada Action. But, as discussed above, this precise
issue is currently pending before Judge Jones in the District of Nevada, who will hear
argument on the issue on January 19, 2016. At issue in that hearing will be whether the
Nevada Plaintiffs’ direct, state-law claim alleges a material misstatement or omission in
connection with the purchase or sale of a security. If it does not, then, a fortiori, the Nevada
Plaintiffs’ direct, state-law claim would fall outside the scope of this lawsuit and, thus, its
release would be improper.
Finally, all this could have been easily avoided if the Settling Parties would have
included the same “exclusion” language as was included in the prior settlement with the
RINO defendants, which expressly excluded all claims asserted in the Nevada Action. See
Dkt. No. 192 at 8 (¶ 1.31) (the stipulation of settlement expressly excluded “all claims
brought in any of the Derivative Actions to the extent of the claims stated in the Derivative
Actions”). Accordingly, the Court should deny final approval of the settlement and should
instead, consistent with the prior settlement, require the Settling Parties to expressly exclude
from the Stipulation’s broad release “all claims brought in [the Nevada Action] to the extent
of the claims stated in the [Nevada Action].” See id.
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B. Conditional Class Certification for Settlement Purposes Is Not Appropriate
Because the California Plaintiffs Cannot Adequately Represent the Nevada
Plaintiffs and the Nevada Action Class as to Their Direct, State-Law Claim for
Aiding and Abetting Breaches of Fiduciary Duties
As noted above, when conditionally certifying a class for settlement purposes, the
Court must pay “undiluted, even heightened, attention” to class-certification requirements.
Amchem, 521 U.S. at 620. Such attention is of “vital importance,” because “a court asked to
certify a settlement class will lack the opportunity, present when a case is litigated, to adjust
the class, informed by the proceedings as they unfold.” Id. Here, the same considerations
as outlined supra in Part IV.A also weigh against granting conditional class certification.
Before the proposed settlement in the California Action can release the Nevada
Plaintiffs’ direct, state-law claim for aiding and abetting breaches of fiduciary duty asserted
in the Nevada Action, there must be adequate representation of the “Nevada Action”
subclass. See Hesse v. Sprint Corp., 598 F.3d 581, 588 (9th Cir. 2010). “Class representation is
inadequate if the named plaintiff fails to prosecute the action vigorously on behalf of the
entire class or has an insurmountable conflict of interest with other class members.” Id. at
589. “Conflicts of interest may arise when one group within a larger class possesses a claim
that is neither typical of the rest of the class nor shared by the class representative.” Id.
For example, in Hesse, the plaintiffs brought class actions in Washington state court
alleging that Sprint violated Washington’s business & occupation tax statute by unlawfully
passing the tax imposed by the statute directly to the consumers. Id. at 584–85. Following
removal, the district court granted Sprint’s motion for summary judgment, finding plaintiffs’
claims to be barred by a class settlement between Sprint and its customers approved by a
Kansas state court in 2006. Id. at 585. The Kansas settlement involved Sprint’s surcharges
to recoup federal regulatory fees. Id.
The Ninth Circuit reversed. The court observed that it was “not disputed that the
named plaintiffs in the case before [the court] were members of the [Kansas] class and that
they did not opt out.” Id. Moreover, the Kansas settlement included a broad release of
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liability for all “claims … that … could have been … asserted … in another court or
proceeding which related … to allegations that … Sprint failed properly to disclose or
otherwise improperly charged for surcharges, regulatory fees or excise taxes.” Id. at 587.
Nonetheless, the Ninth Circuit concluded that the release could not preclude the
Washington plaintiffs’ claims because (1) the Kansas class plaintiff “did not adequately
represent” the Washington plaintiffs and (2) the Washington plaintiffs’ claims “[were] based
on a set of facts different from those underlying the claims settled” in Kansas. Id.
Specifically, the court held that “the [Kansas] [p]laintiff’s interest in settling his federal
[r]egulatory [f]ee claims, even at the cost of a broad release of other claims he did not
possess, was in conflict with the Washington [p]laintiffs’ unrepresented interest in
prosecuting their [Washington state-law] claims.” Id. at 589. In sum, the Kansas plaintiff’s
representation of the Washington plaintiffs was “inadequate” as to the Washington state-
law claims. Id.
The same is true here. To the extent the Nevada Plaintiffs and the Nevada Action
Class purchased RINO shares during the Class Period, they are class members in this
action. But the Nevada Plaintiffs and the Nevada Action Class also have separate claims
available to them under Nevada law for MSWFT and Frazer Frost’s aiding and abetting of
RINO insiders’ breaches of fiduciary duties that have nothing to do with violations of
federal securities laws and do not attempt to recover for any devaluation of RINO stock.
Because the plaintiffs in this case have no standing to assert “holder” claims in federal
court, they cannot and do not have standing to adequately represent the Nevada Plaintiffs’
state-law claims. To paraphrase Hesse, “the [California Plaintiffs’] interest in settling [their]
federal [securities law] claims [is] in conflict with the [Nevada Plaintiffs’] unrepresented
interest in prosecuting their [Nevada state-law] claims.” See id. at 589. Thus, just like in
Hesse, the California Plaintiffs’ representation of the Nevada Plaintiffs is “inadequate” as to
the Nevada state-law class claim for aiding and abetting. See id.
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C. The Amount of the Proposed Settlement Is Woefully Inadequate
The proposed settlement provides for a recovery of $1,685,000 before the deduction
of attorneys’ fees and expenses and incentive awards. On the other hand, the California
Plaintiffs acknowledge that the damages in the entire case were $157,900,000. See Dkt. No.
297-1 at 10. After deducting the previous $7 million settlement with the RINO defendants,
the damages are currently $150,900,000. The California Plaintiffs further estimate that
under the PSLRA, Frazer Frost’s proportionate liability for the total amount of damages “is
likely in the range of 10% to 40%.” Id. Accordingly, based on the assumptions provided by
the California Plaintiffs themselves, the total amount provided for by the proposed
settlement constitutes a mere 2.79% of the maximum damages (measured by 40% of total
damages).5 Once the attorneys’ fees, expenses, and incentive awards are deducted, the total
amount recovered drops to a paltry 1.65% of the maximum recoverable damages.6
The proposed amount (whether 2.67% or the actual 1.58%) is clearly inadequate
when compared to average damages recovered across securities class actions. See Denise N.
Martin et al., National Economic Research Associates, Inc., Recent Trends IV: What Explains
Filings and Settlements in Shareholder Class Actions, 5 STAN. J. L. BUS. & FIN. 121, 123 (1999)
(“The average proportion of settlement amount to plaintiffs’ claimed damages is 14
percent. The average proportion of settlement amount to investor losses is about 9
percent.”); id. at 140 (analyzing 46 shareholder class actions using “the plaintiffs’ claimed
damages,” i.e., where “actual estimates of damages [were] made by plaintiffs’ experts,” and
observing that the “average settlement was 13.7 percent of plaintiffs’ claimed damages,
5 $157,900,000 minus $7,000,000 previously recovered equals $150,900,000. 40% of
$150,900,000 is $60,360,000. $1,685,000 divided by $60,360,000 equals 0.0279 or 2.79%.
6 The California Plaintiffs seek an award of $421,250 in attorneys’ fees, $257,457.67
in expenses, and $10,000 in incentive awards. See Dkt. No. 298-1 at 1, 18–19. Subtracting
this amount from $1,685,000 yields $996,292.33. $996,292.33 divided by $60,360,000 equals
0.0165 or 1.65%.
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while the median was 11.9 percent of damages”); see also In re Crazy Eddie Sec. Litig., 824 F.
Supp. 320, 324 (E.D.N.Y. 1993) (approving settlement that recovered 10% of the total
damages, or 6% after attorneys’ fees and expenses are subtracted).7
Arguing the contrary, the California Plaintiffs conclusory assert that “pragmatic
considerations” support the woefully-low settlement amount because “it is uncertain
whether Defendant has the assets necessary to withstand a judgment in excess of the
proceeds remaining from its insurance policy.” Dkt. No. 297-1 at 9. According to the
California Plaintiffs, “Defendant’s $10 million in available insurance has been significantly
depleted by defense costs in connection with this [a]ction.” Id. But what the California
Plaintiffs fail to mention, however, is that Frazer Frost has a total of $15 million worth of
insurance policies providing coverage for the plaintiffs’ claims, including $10 million in
primary coverage and a $5 million excess policy. Bottini Decl. ¶ 39. Nor do the California
Plaintiffs provide any documentation as to how much coverage remained on the primary
policy at the time the settlement with Frazer Frost was reached. Moreover, Frazer Frost
(the only remaining defendant) continues to be a thriving accounting firm. Thus, this is not
a case where the defendant is in bankruptcy and/or the insurance proceeds are so depleted
as to make it uncertain whether the defendant can withstand a judgment.8
7 This is confirmed by the sources cited by the California Plaintiffs. See, e.g., Ellen M.
Ryan & Laura E. Simmons, Cornerstone Research, Securities Class Action Settlements: 2010
Review and Analysis at 5, available at http://securities.stanford.edu/research-reports/1996-
2010/Settlements-Through-12-2010.pdf (between 1996 and 2009, securities class actions
where plaintiff-style damages did not exceed $249 million settled in the range between 3.6%
and 10.7%, with the percentage increasing as the total damages decreased).
8 In this regard, the California Plaintiffs’ citation to Torrisi v. Tucson Elec. Power Co., 8
F.3d 1370 (9th Cir. 1993), is clearly inapposite. In Torrisi, the Ninth Circuit observed that
the defendant’s financial condition” “predominate[d]” over the other factors where, “[a]t
the time of the settlement[, the company] was involved in negotiations with its creditors to
restructure its debt and had had an involuntary bankruptcy petition recently filed against it,”
“[i]t had declared a payment moratorium on its debts, and was attempting to obtain
regulatory permission to raise its rates to permit it to continue operating.” Id. at 1376.
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V. CONCLUSION
For the foregoing reasons, because the proposed settlement is not fair, reasonable, or
adequate, and because the requirements for conditional class certification are not met, the
Court should deny the motion for final approval of class action settlement.
Dated: December 21, 2015 Respectfully submitted,
BOTTINI & BOTTINI, INC.
Francis A. Bottini, Jr.
Albert Y. Chang
Yury A. Kolesnikov
s/ Francis A. Bottini, Jr.
Francis A. Bottini, Jr.
7817 Ivanhoe Avenue, Suite 102
La Jolla, California 92037
Telephone: (858) 914-2001
Facsimile: (858) 914-2002
Counsel for Norman Miller
Case 2:10-cv-08695-DDP-VBK Document 299 Filed 12/21/15 Page 26 of 27 Page ID
#:7940
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Certificate of Service
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CERTIFICATE OF SERVICE
I certify that, on December 21, 2015, I caused the foregoing document to be
electronically filed with the Clerk of the Court by using the CM/ECF system, which will
send notification of such filing to the attorneys of record at their listed email addresses.
Additionally, copies were served via overnight mail to the addresses below:
Laurence M. Rosen
The Rosen Law Firm, P.A.
355 South Grand Avenue, Suite 2450
Los Angeles, California 90071
Heather Rosing
Klinedinst, P.C.
501 West Broadway, Suite 600
San Diego, California 92101
s/ Francis A. Bottini, Jr.
Francis A. Bottini, Jr.
Case 2:10-cv-08695-DDP-VBK Document 299 Filed 12/21/15 Page 27 of 27 Page ID
#:7941
