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Harshly criticized by California Northern District Chief Judge Marilyn Hall Patel for its conduct in a stock drop suit, Milberg Weiss Bershad Hynes & Lerach fired back recently and told Patel she had been misled by the defendants in the case. In an order dated Feb. 23, Patel ripped Milberg, suggesting the firm was an inappropriate choice for lead counsel in a stock fraud suit filed against Terayon Communication Systems Inc. Among her concerns: Milberg’s client had a game plan to drive down Terayon’s stock, Milberg appears to have hidden its client’s short selling, and the firm may have been planning litigation before the company’s stock plunged. In Milberg’s reply, the firm denied wrongdoing and said its client had done nothing nefarious. “It is evident that some of the contentions advanced by defendants are manifestly wrong, and led the court to express concern that this action might be the product of improper conduct, when in fact there was no improper conduct,” Milberg stated in a March 24 filing. Milberg represents Cardinal Partners, a Texas-based investment firm. It filed a class action against Santa Clara-based Terayon on April 13, 2000 — one day after the company’s stock plunged 26 percent. The complaint alleged that Terayon, which sells cable modems, had fraudulently tried to convince investors that its technology had been certified by CableLabs, a consortium that sets industry standards for cable modem technologies. Last August, Terayon asked Patel to disqualify Cardinal Partners as lead plaintiffs. Patel did so, finding that they don’t adequately represent the class. But Patel went further in her order, questioning whether Milberg is a suitable lead counsel. The issues raised in the case “leave the court to speculate whether counsel for plaintiffs actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon’s stock price,” Patel wrote. “The court finds that it is probable that there is a conflict not only between lead plaintiffs and the class but also between lead counsel and the remainder of the class.” The order notes that during the three months prior to filing suit, Cardinal Partners encouraged CableLabs to make a statement critical of Terayon and sent letters to the Securities and Exchange Commission, the National Association of Securities Dealers, and the Assistant U.S. Attorney for the Southern District of New York alleging that Terayon was lying about the status of its technology. In its response, Milberg portrayed its client as something of a white knight, seeking to inform other investors that they were at risk from Terayon’s allegedly false statements about its technology. Milberg partner Jeffrey Lawrence said the firm’s filings spoke for themselves. “There is no doubt that Cardinal, and the people for whom it traded,” he wrote, “clearly stood to make money if the price of Terayon stock declined.” But, he said, “this did not make improper Cardinal’s attempts to disseminate truthful, albeit negative, information. … Every day that truth remained concealed from the market additional purchasers were damaged by paying artificially inflated prices for the stock.” Terayon attorney Jordan Eth, a partner at Morrison & Foerster, dismissed the notion that Cardinal had exposed wrongdoing by Terayon. “There has never been any merit to the case,” Eth said. “The market was fully aware of exactly what was happening all along.” Based in Dallas, Cardinal Partners is an investment company founded by Edward “Rusty” Rose, known for his close ties to President Bush. One of the president’s major financial backers, Rose joined Bush and other investors in purchasing the Texas Rangers. Miffed at “the lack of candor by plaintiffs and lead counsel,” Patel asked Milberg to provide the dates that the firm was contacted by Cardinal Partners, the number of cases it has handled for the company and its officers and affiliates, and its fee arrangements with Cardinal. Milberg said its first communication with Cardinal about the matter was an unsolicited fax that Cardinal sent to the firm on Feb. 16, 2000. There had been earlier conversations about another matter, Milberg wrote, providing information about communications from April 1999 through April 2000. During that one-year period, the firm counseled Cardinal or its clients on two other matters. In one of the cases, Fields v. Biomatrix, 00-3541, the plaintiff — a Cardinal client — had shorted Biomatrix stock prior to filing a securities action against the company. Patel referred to the case in her order, saying it showed Cardinal had a pattern of waging campaigns to lower the price of a company’s stock. Milberg also answered Patel’s query about its extension of the class period back to Nov. 15, 1999 from Feb. 2, 2000, two days after the court approved Cardinal Partners as lead plaintiff. The firm said the date was changed not to hide Cardinal’s short position in Terayon, but based upon evidence dating to November 1999 of the company’s fraudulent conduct. The firm also asked to have another hearing before Patel to further defend its actions in In re Terayon Communications Systems Inc. Securities Litigation, 00-01967. Patel has yet to decide if she’ll schedule another hearing. “I have been practicing before this court for many years, both as an assistant United States attorney and a private lawyer,” Lawrence wrote in a declaration. “I have never misled this court or any other and would never do so. I respectfully request that the court grant Milberg Weiss a hearing so that I can show this court that is still the case.”

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