2 FAZIO MICHELETTI LLP - classaction.kccllc.netclassaction.kccllc.net/Documents/PWL0001/4-Motion for...

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Jeffrey L. Fazio (146043) ([email protected]) Dina E. Micheletti (184141) ([email protected]) FAZIO | MICHELETTI LLP 2410 Camino Ramon, Suite 315 San Ramon, CA 94583 T: 925.543.2555 F: 925.369.0344 Attorneys for Plaintiff Shechang Chen, derivatively on behalf of Nominal Defendant Pegasus Wireless Corporation

CALIFORNIA SUPERIOR COURT

COUNTY OF ALAMEDA

SHECHANG CHEN, derivatively, on behalf of Pegasus Wireless Corporation, Plaintiff, vs. JASPER KNABB, STEPHEN DURLAND, NICHOLAS PERATICOS, EDWARD CELANO, and DOES 1-100, inclusive, Defendants, and PEGASUS WIRELESS CORPORATION, Nominal Defendant.

No. RG 07310978

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION FOR PRELIMINARY APPROVAL OF DERIVATIVE SETTLEMENT

DATE: March 6, 2012 TIME: 3:00 p.m. DEPT: 17 TRIAL DATE: Not set

Hon. Steven A. Brick

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MPA ISO MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT (Case No. RG 07310978)

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TABLE OF CONTENTS PAGE

I. INTRODUCTION AND SUMMARY OF ARGUMENT...................................................... 1 II. BACKGROUND....................................................................................................................... 5 II. ARGUMENT........................................................................................................................... 10 A. The Criteria That Apply to Preliminary Approval of Derivative

Actions ........................................................................................................................ 10 B. The Proposed Settlement Meets The Criteria for Preliminary

Approval...................................................................................................................... 12 C. The Absence of Direct Benefits to Shareholders Does Not Render

the Proposed Settlement Inadequate or Unfair......................................................... 15 D. The Absence of Direct Benefits to Shareholders Does Not Inhibit

This Court’s Authority to Award of Attorney Fees and Litigation Expenses...................................................................................................................... 17

E. The Proposed Notice By Publication Satisfies Due Process................................... 19 F. The Parties Have Arranged for the Appointment of a Receiver............................. 23 IV. CONCLUSION........................................................................................................................ 25

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TABLE OF AUTHORITIES PAGE

Cases

7-Eleven Owners for Fair Franchising v. Southland Corp., 85 Cal. App. 4th 1135 (2000) ................................................................................... 10, 14 Alaniz v. California Processing, Inc., 73 F.R.D. 269 (C.D. Cal. 1976) ...................................................................................... 11 Arace v. Thompson, 2011 U.S. Dist. LEXIS 93105 (S.D.N.Y. Aug. 17, 2011) .............................................. 21 Beyerbach v. Juno Oil Co., 42 Cal.2d 11 (1954) ........................................................................................................ 18 City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974)............................................................................................ 15 Cotton v. Hinton,

559 F.2d 1326 (5th Cir. 1977) ........................................................................................ 12 Cziraki v. Thunder Cats, Inc., 111 Cal. App. 4th 552 (2003) ..................................................................................... 4, 17 DeBaun v. First Western Bank & Trust Co., 46 Cal. App. 3d 686 (1975) ............................................................................................ 18 Desaigoudar v. Meyercord, 108 Cal. App. 4th 173 (2003) ......................................................................................... 16 Elite of N.Y. Cars v. Zarbhanelian, 215 A.D.2d 429 (N.Y. App. Div. 1995) ..................................................................... 3, 18 Ellis v. Naval Air Rework Facility,

87 F.R.D. 15 (N.D. Cal. 1980)........................................................................................ 12 Fletcher v. A. J. Industries, Inc., 266 Cal. App. 2d 313 (1968) ...................................................................................... 4, 18 Fox v. The Hale & Norcross Silver Mining Co., 108 Cal. 475 (1895) ................................................................................................. passim Gatreaux v. Pierce,

690 F.2d 616 (7th Cir. 1982) .......................................................................................... 11 In re Activision, Inc., S’holder Derivative Litig., No. CV-06-04771-MRP (C.D. Cal. May 13, 2008)........................................................ 21 In re AOL Time Warner Shareholder Derivative Litigation, 2006 U.S. Dist. LEXIS 63260 (S.D.N.Y. September 6, 2006)....................................... 10 In re Austrian & German Bank Holocaust Litig., 80 F. Supp. 2d 165 (S.D.N.Y. 2000) ........................................................................ 11, 13

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In re Cadence Design Sys., 2011 U.S. Dist. LEXIS 96117 (N.D. Cal. Aug. 26, 2011).............................................. 10 In re Cendant Corp. Derivative Action Litig., 232 F. Supp. 2d 327 (D.N.J. 2002) ................................................................................. 15 In re Integrated Silicon S’holder Derivative Litig., No. C-06-04387 RMW (N.D. Cal. Mar. 31, 2009)......................................................... 21 In re Juniper Derivative Actions, No. 5:06-cv-03396-JW (N.D. Cal. Oct. 29, 2008).......................................................... 21 In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454 (9th Cir. 2000) .......................................................................................... 14 In re Microsoft I-V Cases, 135 Cal. App. 4th 706 (2006) ......................................................................................... 10 In re NVIDIA Corp. Derivative Litig., 2008 U.S. Dist. LEXIS 117351 (N.D. Cal. Dec. 19, 2008) ............................................ 10 In re Pacific Enters. Sec. Litig., 47 F.3d 373 (9th Cir. 1995) ........................................................................................ 1, 15 In re Pegasus Wireless Corp. Sec. Litig., 657 F. Supp. 2d 1320 (S.D. Fla. 2009) ........................................................................... 17 In re PMC-Sierra Deriv. Litig., 2010 U.S. Dist. LEXIS 581 (N.D. Cal. Jan. 26, 2010) ................................................... 21 In re Rambus Deriv. Litig., No. C-06-3513 JF (N.D. Cal. Oct. 30, 2008).................................................................. 21 In re The Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 450 (D.N.J. 1997), aff’d in part, vacated and remanded in part, 148 F.3d 283 (3d Cir. 1998)............................................................................................ 11 In re Traffic Executive Ass’n-E. R.R.,

627 F.2d 631, 634 (2d Cir. 1980).................................................................................... 12 In re Triarc Companies, Inc., 791 A.2d 872 (Del. Ch. 2001)................................................................................... 16, 17 Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93 (1969) ......................................................................................................... 17 Kramer v. Western Pacific Industries, Inc., 546 A.2d 348 (Del. 1988) ............................................................................................... 16 Oakland Raiders v. National Football League, 131 Cal. App. 4th 621 (2005) ......................................................................................... 16 Robbins v. Alibrandi, 127 Cal. App. 4th 438 (2005) ............................................................ 10, 17

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Schuster v. Gardner, 1 27 Cal. App. 4th 305 (2005) ........................................................................................... 16 Security Trust & Sav. Bank v. Carlsen, 205 Cal. 309 (1928) ........................................................................................................ 24 Shlensky v. Dorsey, 574 F.2d 131 (3d Cir. 1978)............................................................................................ 14 Stovall v. Marshall, et. al., No. 1:06CV076453 (Cal. Sup. Ct., Santa Clara County, Jul. 13, 2011)................... 21, 22 Tooley v. Donaldsonn, Lufkin & Jenrette, Inc., 845 A.2d 1031 (2004) ..................................................................................................... 16 Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224 (2001) ........................................................................................... 14

Statutes

Code Civ. Proc. § 386 ................................................................................................................. 23

Code Civ. Proc. § 564 ................................................................................................................. 24

Nev. R. Stat. § 78.300 ................................................................................................................. 13

Nev. Rev. St. § 78.138 ................................................................................................................ 13

Nev. Rev. St. § 78.288(2) ........................................................................................................... 13

Other Authorities

Alba Conte & Herbert Newberg, NEWBERG ON CLASS ACTIONS (2006 ed.)....................................................................... 11 Bernard E. Witkin, SUMMARY OF CALIFORNIA LAW, Corporations (10th ed. 2005 & 2011 Supp.).............. 17 BLACKS LAW DICTIONARY (7th ed. 1999) .................................................................................. 23 C. Hugh Friedman, CALIFORNIA PRACTICE GUIDE: CORPORATIONS (Rutter Group 2004) ............................ 16 MANUAL FOR COMPLEX LITIGATION (4th ed. 2004). .................................................................. 11

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I. INTRODUCTION AND SUMMARY OF ARGUMENT

After more than five years of hard-fought, hotly-contested litigation that involved a

multitude of obstacles—ranging from Defendants who refused to respond to service of process to

two bankruptcy petitions and criminal charges against nominal Defendant Pegasus Wireless

Corporation’s former CEO and CFO—the parties are pleased to announce that they have reached

a settlement of this lawsuit. Unlike the class actions and the other derivative action that were

based on the same sort of fraudulent conduct, corporate waste, and the failure to discharge

fiduciary duties to Pegasus, the present action survived all challenges and resulted in substantial,

tangible benefits for Pegasus: A cash settlement payment of $1,450,000 in addition to payment

of notice and settlement-administration costs of up to an additional $50,000. Because Pegasus is

no longer operational, the additional $50,000 will be used to, inter alia, retain and compensate a

third-party Receiver who will receive the Net Settlement Funds and determine how to distribute

them.1

A cash settlement that amounts to more than 20% of the total potential liability alleged in

the complaint is an excellent result—particularly in light of the fact that “derivative lawsuits are

rarely successful[.]” In re Pacific Enters. Sec. Litig., 47 F.3d 373, 377 & n. 4 (9th Cir. 1995)

(noting that less than one percent of derivative actions result in judgments for the plaintiff). The

result is even more substantial when considered in light of the fact that the litigation was

vigorously contested, that Nevada’s business-judgment rule imposes an extremely high bar to

overcome regarding liability in general, and that the Nevada statutes that provide for joint-and-

1 The Stpulation of Settlement is attached to the Declaration of Dina E. Micheletti in

Support of Motion for Preliminary Approval of Settlement of Derivative Action (“Micheletti Decl.”) as Exhibit 1. The settlement benefits are described at, inter alia, paragraph Nos. 2.1-2.2, 2.4-2.5 & 4.1. The settlement provides for a payment of $1.45 million to be used to reimburse Pegasus and to pay Plaintiff’s counsel’s attorneys fees (capped at $500,000, which is less than the amount incurred) plus litigation costs of $16,300 and an incentive award to Plaintiff Chen in the amount of $2,500 for having taken the initiative to initiate and assist with the prosecution of this litigation since 2007. See id., Micheletti Decl. ¶¶ 11-13, 81,124. “Net Settlement Funds” is defined in the Stipulation as the “funds remaining in the Settlement Fund after payment of attorneys’ fees and reimbursement of litigation expenses to Plaintiff’s Counsel and any incentive award to Plaintiff Chen.” See Micheletti Decl., Ex. 1 ¶ 1.12. Please see the Exhibit 1 at pages 4-7 for a list of other defined terms and their meaning. The definitions set forth therein shall apply to those words as they appear in this memorandum, unless otherwise noted.

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several liability (for unlawful distribution of corporate assets) have yet to be construed or applied

by any published decision for this purpose. And when measured against each Defendant’s

proportionate share of liability, the amount of the settlement fund is more than adequate, fair, and

reasonable. In short, the settlement easily meets the criteria for preliminary approval.

The standard for deciding whether to approve the settlement of a derivative action is

virtually identical to the standard that applies to class actions. In short, the Court must determine

whether negotiations occurred at arm’s length, whether sufficient discovery or investigation took

place, and whether the proponents of the settlement are experienced in similar litigation. Once

those determinations are made, the settlement is entitled to a presumption of adequacy and

fairness as a matter of law.

The present settlement is entitled to that presumption. The parties’ counsel are

experienced in complex litigation, and a substantial amount of discovery and independent

investigation occurred during the course of the litigation and in preparation for trial. In addition

to the discovery obtained from Defendants, Plaintiff’s counsel reviewed thousands of pages of

documents they obtained from the Securities and Exchange Commission and other third parties,

which provided an abundance of evidence that informed the parties’ assessment of the relative

strengths and weaknesses of their respective positions. Settlement negotiations were then

conducted at arms’ length by experienced counsel with the assistance of a mediator who has

presided over the mediation of hundreds of other securities actions. After an initial 10-hour

mediation session that was followed by multiple conferences between the parties’ counsel and,

periodically, the mediator over the course of two weeks, the mediator, the parties, and their

counsel, all agreed that the resolution they reached is fair, reasonable, and beneficial to Pegasus.

Nonetheless, Plaintiff is mindful of the concerns the Court expressed about the absence of

benefits that the settlement will confer directly on shareholders and, as the Court instructed, he

has addressed those concerns here. Put simply, Pegasus’s current financial condition is

unclear—although at least two judgments amounting to several million dollars have been entered

against it, there is also a possibility that Pegasus may possess assets (including subsidiary

corporations it may still own and patents) whose value may exceed its debts—but the adequacy

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of the settlement should not, and does not, turn on the fortuity of the condition of Pegasus’s

finances for two basic reasons. First, as the courts of this State established over 100 years ago,

derivative actions are intended to benefit the corporation, not individual shareholders. See, e.g.,

Fox v. The Hale & Norcross Silver Mining Co., 108 Cal. 475, 477 (1895) (“The action was not

prosecuted by the plaintiff in his own right or for his own exclusive benefit. He sued on behalf

of the corporation to recover a fund in which others were equally interested, and the judgment in

his favor was for the use and benefit of the corporation”). Second, as discussed above, the

benefits conferred by the settlement of the present action are real and substantial, regardless of

whether the funds are used to pay dividends or to pay creditors. See, e.g., Elite of N.Y. Cars v.

Zarbhanelian, 215 A.D.2d 429, 430 (N.Y. App. Div. 1995) (“As a result of the settlement of the

action herein, about $250,000 in corporate debt was forgiven. Therefore, the corporation

received a substantial benefit”).

Finally, Plaintiff’s counsel are entitled to an award of attorney fees and litigation

expenses pursuant to the common fund doctrine and/or the substantial benefit doctrine, which

require Pegasus to compensate counsel for the benefits received as a result of litigation.

California has long recognized that the common fund doctrine and the substantial benefit

doctrine provide counsel for plaintiffs with a right to the fees and costs they incur in connection

with the prosecution of a derivative action that produces a substantial benefit for the corporation

named as the nominal defendant. The common fund doctrine applies where a cash fund is

established by a settlement agreement, and attorney fees are paid out of that fund. The

substantial benefit doctrine applies to cases in which a significant benefit is conferred upon a

corporation by a settlement, regardless of whether the benefit is pecuniary in nature, and attorney

fees and costs are paid by the corporation that received that benefit. Both doctrines are equitable

in nature, based on the unfairness of allowing a corporation to benefit from litigation without

compensating the attorneys who were responsible for obtaining that benefit on the corporation’s

behalf. “And, to the extent that the substantial-benefit rule affirmatively encourages

stockholders to exercise their right to seek redress for corporate mismanagement, it serves

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important considerations of public policy.” Fletcher v. A. J. Industries, Inc., 266 Cal. App. 2d

313, 324 (1968).

During the case management conference that took place last November, the Court

observed that an objector might argue “that nothing of value has been done for the shareholders

and no attorney fees were warranted.” Micheletti Decl., Ex. 14 at 18:24-19:1. Such an objection

would be baseless. Again, applicable law makes clear that the beneficiary of a derivative action

is the nominal corporate defendant, not its shareholders. Indeed, “if corporate shareholders are

seeking to advance their individual interests, rather than the interests of the corporation

generally, no fees should be awarded on a common fund or substantial benefit theory.” Cziraki

v. Thunder Cats, Inc., 111 Cal. App. 4th 552, 560 (2003) (inner quotation marks and citation

omitted; emphasis added).

At bottom, if the settlement provides a substantial benefit to Pegasus (which it does),

Plaintiff’s counsel have a right to be compensated for their efforts and to be reimbursed for the

costs they incurred. Over the more than five years since this action was filed, Plaintiff’s counsel

have incurred well over $500,000 in fees, exclusive of costs, and they anticipate spending

significantly more time and effort on this matter until it is finally resolved. Moreover, the

complicated nature of the issues, the risks involved in the prosecution of the case, the contingent

nature of the recovery, and the ultimate outcome of the litigation are all factors that augur in

favor of applying a multiplier to Plaintiff’s counsel’s lodestar. Nonetheless, Plaintiff’s counsel

have decided to voluntarily limit their fee request to $500,000, which amounts to a negative

lodestar, and to seek reimbursement of a bare minimum of the expenses they incurred during the

prosecution of this action.

At bottom, the settlement that the parties have reached in this case provides benefits that

are not only adequate, but extraordinary in light of the circumstances that have surrounded this

case from the outset: Defendants who repeatedly ignored service of process; two attempts to

evade the consequences of litigation by filing bankruptcy petitions; the application of the

nation’s most stringent version of the business judgment rule, which significantly raises the bar

with respect to the proof necessary to establish each claim; Nevada statutes that provide the basis

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for one of the most fundamental claims in the case—unlawful distribution of corporate assets—

that have never been construed or applied in any reported decision; and a sudden revelation

before trial that the transaction that is at the very core of this case may never have been

considered or approved at all, and that the requisite quorum of board members needed to make

those decisions were never assembled in any event. In short, the basic theory of liability in this

case is quite simple and straightforward, but prosecuting the claims to a successful conclusion

most certainly was neither, all of which further underscores the reasonableness of the settlement.

Accordingly, Plaintiff respectfully requests that the Court grant this motion and

preliminarily approve the parties’ settlement agreement.

II. BACKGROUND2

Shortly after filing this lawsuit in February 2007, Plaintiff’s counsel discovered that each

of the Defendants resided outside of California, some resided abroad, and virtually all of them

simply ignored service of process—some repeatedly. Micheletti Decl. ¶¶ 17-20. Ultimately,

counsel had to hire a private investigator in an effort to track down Defendants’ current

addresses. Id. ¶ 20-21. Yet, as of October 2007—eight months after the case was filed—

Defendant Celano was the only Defendant to have responded to service. Id. ¶ 22.

Plaintiff’s counsel continued their efforts to locate and serve Defendants, the difficulties

of which are described in detail in the Micheletti Declaration. See id. ¶¶ 17-31. After Defendant

Celano was participating in the case, Plaintiff’s counsel made efforts to get discovery underway

and to coordinate discovery and other aspects of the litigation with another derivative action,

Keller v. Tsao, No. RG 06303398 (Alameda Cty. Super. Ct.), that had been filed in this Court a

few weeks before Plaintiff Chen had filed his complaint against most of the same Defendants.

Id. ¶¶ 32-34. Plaintiff’s counsel explained to the attorneys representing Plaintiff Keller that they

sought to coordinate the litigation on a voluntary, cooperative basis. Id. ¶ 34. After that offer

was rejected, Plaintiff’s counsel reached an agreement with Defendant Celano’s counsel to

2 A more detailed account of the procedural history of this litigation from inception

through settlement is set forth in the declaration Plaintiff’s counsel has submitted in support of this motion. See generally Micheletti Decl.

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obtain informal discovery, then moved for an order consolidating the Chen and Keller actions

and appointing a lead Plaintiff and lead Plaintiff’s counsel. Id.

That motion, which was to be heard by Judge Sabraw, was pending when the parties

received notice of an automatic stay that had been issued by the U.S. Bankruptcy Court in the

Southern District of Florida. Id. ¶ 36. Thus, by the end of February 2008, litigation activity had

ceased, with the exception of (a) a case management order that Judge Sabraw issued in May

2008 and (b) an order that this Court issued in July 2008 relating the Chen and Keller actions and

reassigning both actions to Department 17 for all purposes. Id. ¶¶ 36-38.

Plaintiff’s counsel notified the Court that the bankruptcy stay had lifted immediately after

learning that the first of two Pegasus bankruptcy petitions had been dismissed. Id. ¶¶ 39-40.

The parties attended a CMC several days later and discussed the manner in which the litigation

was expected to proceed, but by the time Plaintiff’s counsel had complied with the Court’s

instructions to draft a proposed order several days later, the bankruptcy court notified the parties

that it had vacated the dismissal order and allowed Pegasus to file a second bankruptcy petition,

thereby imposing another stay on this litigation. Id. ¶¶ 40-42.

Before the second stay order had issued, a CMC had been scheduled to occur in February

2009. Id. ¶ 43. Plaintiff’s counsel assumed the CMC had been cancelled, however, because the

bankruptcy stay remained in effect and they had not heard otherwise in response to their inquiry

about the matter to the Court. Id. ¶¶ 42-44. Plaintiff’s counsel were mistaken. The CMC

remained on calendar and Defendant Celano’s counsel was the only attorney who appeared. Id.

¶¶ 44-45. By the end of the CMC, the Court issued an Order to Show Cause why both derivative

actions (i.e., Chen and Keller) should not be dismissed for want of prosecution. Id. ¶ 45. The

OSC was scheduled for hearing on February 2010. Id.

By the time the hearing of the OSC took place in February 2010, the second bankruptcy

petition had been dismissed and Plaintiff’s counsel explained why they should be permitted to

resume prosecuting the Chen action, and why there was no valid basis for dismissing it. Id. ¶¶

46-48. Plaintiff Keller and his counsel did not submit a brief in response to the OSC or appear

for the hearing. Id. ¶ 48. But Defendant Celano did, despite the absence of any requirement that

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he do so, arguing that both cases should be dismissed for want of prosecution. Id. The Court

declined to dismiss the litigation, but did so without prejudice to Defendant Celano filing a

separate motion for dismissal on the same grounds. Id.

Shortly thereafter, Defendant Celano filed a motion to dismiss on the ground that both

groups of Plaintiff’s counsel purportedly failed to prosecute their claims. Id. ¶ 51. In response,

Plaintiff Chen’s counsel addressed a host of issues relating to the bankruptcy court’s jurisdiction,

the nature and scope of an automatic stay, the nature and scope of the bankruptcy proceedings

and the manner in which the trustee’s role in those proceedings did or did not affect Pegasus’s

ability to retain control over its own property, and the issues that give rise to a valid motion for

dismissal based on the ostensible lack of prosecution under California law. Once again, Plaintiff

Keller declined to respond (as he had when Defendant Peraticos moved to quash service on the

ground that he mistakenly accepted it, and when the Court issued the OSC that preceded the

motion to dismiss), choosing instead to dismiss his case voluntarily, leaving Chen as the only

case that was subject to the motion. Id. After extensive briefing and oral argument, the Court

denied Defendant Celano’s motion and Plaintiff Keller’s action was dismissed. Id.

Before the motion to dismiss was filed, Plaintiff Chen had served a set of document

requests on Defendant Celano, who responded by objecting to each and every request. Id. ¶¶ 49-

50. Before the parties completed meet-and-confer efforts, Defendant Celano moved for

judgment on the pleadings on demand-futility grounds, then sought a stay of discovery on the

ground that the case would be dismissed as a result of the demurrer. The Court granted the

motion with leave to amend (to allege the demand-futility allegations in greater detail), and

stayed discovery in the interim. Id. ¶ 52.

While drafting the First Amended Complaint (“FAC”), with the discovery stay order still

in place, Plaintiff’s counsel continued to pursue informal, third-party discovery, which provided

the basis for the detailed allegations set forth in the FAC. Id. ¶ 56. Defendant Celano responded

to the FAC with a demurrer that challenged not only the demand-futility allegations, but each

and every cause of action. Id. ¶ 59. The demurrer was sustained with leave to amend, with the

Court advising Plaintiff’s counsel that the complaint required an affirmative statement as to who

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remained on the Pegasus board, but that the case was headed for trial. Id. ¶ 60. At that point,

Plaintiff’s counsel requested that the discovery stay be lifted, which was granted over Defendant

Celano’s counsel’s objection. Id.

Plaintiff’s counsel directed additional discovery to Defendant Celano and to Defendant

Peraticos, who (after some difficulty) had finally been located and hand-served with the

summons and complaint. Id. ¶ 61. At the same time, the parties began settlement negotiations,

which ultimately broke down when Defendants demurred to the Second Amended Complaint.

Id. ¶¶ 62-64. Plaintiff’s counsel continued to pursue discovery from Defendants, the Securities

and Exchange Commission and the U.S. Justice Department (both of which had brought

securities-fraud actions against Defendants Knabb and Durland) and numerous other third parties

while preparing the opposition to the demurrer and afterwards. Id. ¶¶ 58, 61-64. The demurrer

was overruled and the case was scheduled for trial (ultimately in December 2011). Id. ¶ 69.

During the course of the litigation, Plaintiff’s counsel drafted and submitted requests for

documents under the Freedom of Information Act to the SEC and DOJ pertaining to their

investigation of Knabb, Durland and Pegasus. Id. ¶¶ 58, 65-66. The FOIA requests were denied

and Plaintiff appealed. Id. The appeal of the SEC order was eventually resolved informally, and

Plaintiff’s counsel was given unusually broad access to the documents in the SEC’s files, which

counsel reviewed and analyzed. Id. ¶¶ 82-89. The appeal of the DOJ’s denial was pending when

the case settled. Id. ¶¶ 92-94.

In preparation for trial, Plaintiff’s counsel continued to review the documents made

available by Defendants, the SEC, and other third parties, and noticed the depositions of both

Defendants. Id. ¶¶ 95-100. In turn, Defendants noticed the deposition of Plaintiff Chen and

sought written discovery from him as well. Id. ¶ 81. Defendants also sought dismissal again, this

time by way of a motion for summary judgment. Id. ¶¶ 74-75, 89, 101.

In July 2011, the parties attended mediation before Jed Melnick of JAMS. Id. ¶ 72.

Although the litigation and preparation for trial continued, the parties were preparing for

mediation as well. Id. Each side submitted lengthy mediation briefs and attended a 10-hour

session before the mediator, but the session ended without an agreement. Id.

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The mediator continued to press both sides, however, and discussions eventually

resumed. Id. ¶¶ 73, 104. Plaintiff and his counsel felt quite strongly about the validity and

correctness of his claims, which was tempered somewhat by the fact that each claim was subject

to the Nevada business judgment rule (the strictest such rule in the entire nation) and the

statutory claim for unlawful distribution of corporate assets had yet to be tested in any reported

decision. And Plaintiff firmly believed that documents and testimonial evidence would provide

ample factual support his claims, all of which were based on the fact that the Pegasus board of

directors permitted Pegasus to pay Defendant Knabb roughly 800 percent more for the

repurchase of its own stock than it was actually worth. Nonetheless, Defendants Celano and

Peraticos suddenly announced that the Pegasus board meetings at the core of the case actually

never took place, and that a quorum of Pegasus board members had never approved Pegasus’s

repurchase of stock from Defendant Knabb in any event. Id. ¶¶ 73, 101. In short, both sides

firmly believed in their respective positions, but both face significant risks at trial.

The parties’ counsel continued to engage in discussions via the mediator. Id. ¶¶ 104-109.

The negotiations were intense, hotly contested, and often contentions. Id. ¶ 109; Declaration of

Jed D. Melnick in Support of Motion for Preliminary Approval of Settlement of Derivative

Action (“Melnick Decl.”) ¶ 12. In the end, the parties reached agreement, literally on the eve of

depositions that were to take place across the country. Micheletti Decl. ¶¶ 110-111.

The terms of the agreement were simple and straightforward: $1,450,000 in cash, out of

which Pegasus shall be reimbursed and Plaintiff’s counsel’s fees, litigation expenses, and an

incentive award would be paid, plus up to an additional $50,000 for notice and settlement

administration costs.

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III. ARGUMENT

A. THE CRITERIA THAT APPLY TO PRELIMINARY APPROVAL OF DERIVATIVE

ACTIONS It is well established that settlements are favored, particularly in class actions and

derivative suits in which substantial resources can be conserved by avoiding the time, cost, and

uncertainty of prolonged litigation. See, e.g., Officers for Justice v. Civil Serv. Comm’n, 688

F.2d 615, 625 (9th Cir. 1982), (“voluntary conciliation and settlement are the preferred means of

dispute resolution. This is especially true in complex class action litigation. . .”), cert. denied,

459 U.S. 1217 (1983); In re NVIDIA Corp. Derivative Litig., 2008 U.S. Dist. LEXIS 117351, *7

(N.D. Cal. Dec. 19, 2008) (“Because shareholder derivative actions are ‘notoriously difficult and

unpredictable . . . settlements are favored’”) (quoting In re AOL Time Warner Shareholder

Derivative Litigation, 2006 U.S. Dist. LEXIS 63260, *8 (S.D.N.Y. September 6, 2006)); 7-

Eleven Owners for Fair Franchising v. Southland Corp., 85 Cal. App. 4th 1135, 1151 (2000)

(same).

Although the class-action settlement procedures set forth in California Rule of Court

3.769 do not expressly include derivative actions, the standards for determining whether to

approve class actions are virtually identical to those that apply to the approval of derivative

actions. Compare, e.g., In re Microsoft I-V Cases, 135 Cal. App. 4th 706, 723 (2006) (class

action settlement criteria include, inter alia, the strength of plaintiffs’ case, the risk, expense,

complexity and duration of further litigation, amount of settlement offer, extent of discovery

completed, and experience and views of counsel) with Robbins v. Alibrandi, 127 Cal. App. 4th

438, 449 (2005) (same criteria used for court approval of derivative action settlement, to ensure

that settlement is fair and reasonable to the corporation and its shareholders and that settlement is

not a product of fraud, overreaching, or collusion by the settling parties); In re Cadence Design

Sys., 2011 U.S. Dist. LEXIS 96117, *5-6 (N.D. Cal. Aug. 26, 2011) (discussing standards

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applicable to preliminary approval of derivative-action settlements); Polk v. Good, 507 A.2d 531,

536 (Del. 1986) (same).3

At this stage of the approval process, the Court must “make a preliminary determination

on the fairness, reasonableness, and adequacy of the settlement terms and must direct the

preparation of notice of the . . . proposed settlement, and date of the final fairness hearing.”

MANUAL FOR COMPLEX LITIGATION § 21.632 (4th ed. 2004). In other words, at this stage the

Court merely decides whether to notify shareholders “of the proposed settlement and to proceed

with a fairness hearing.” Gatreaux v. Pierce, 690 F.2d 616, 621 n. 3 (7th Cir. 1982).

Preliminary approval should be granted where a settlement has no obvious deficiencies

and falls within the range of possible approval. See Alaniz v. California Processing, Inc., 73

F.R.D. 269, 273 (C.D. Cal. 1976); In re The Prudential Ins. Co. of Am. Sales Practices Litig.,

962 F. Supp. 450, 562 (D.N.J. 1997), aff’d in part, vacated and remanded in part, 148 F.3d 283

(3d Cir. 1998); MANUAL FOR COMPLEX LITIGATION § 21.632. In determining whether a

settlement falls within the range of possible approval, courts consider whether the negotiations

occurred at arm’s length, whether sufficient discovery or investigation took place, and whether

the proponents of the settlement are experienced in similar litigation. 2 Alba Conte & Herbert

Newberg, NEWBERG ON CLASS ACTIONS § 11.41 (2006 ed.).

“If the Court finds that the Settlement is the product of arm’s length negotiations

conducted by experienced counsel knowledgeable in complex class litigation, the Settlement will

enjoy a presumption of fairness. Once the Settlement is presumed fair, ‘it is not for the Court to

substitute its judgment as to a proper settlement for that of such competent counsel . . . .’” In re

Austrian & German Bank Holocaust Litig., 80 F. Supp. 2d 165, 173-74 (S.D.N.Y. 2000) (citation

omitted; emphasis added). Accord Cellphone Termination Fee Cases, 180 Cal. App. 4th 1110,

1117-18 (2009) (discussing presumption of fairness and citing cases supporting same). See also

3 When there is no California case law directly on point, it is appropriate to apply the law

and procedures developed in federal courts. See e.g., Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224, 239-40 (2001).

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Ellis v. Naval Air Rework Facility, 87 F.R.D. 15, 18 (N.D. Cal. 1980) (according “considerable

weight” to settlement being reached after hard-fought negotiations by experienced counsel).

The inquiry at this stage of the settlement proceedings is properly confined to the Court’s

discretion, but “the trial judge, absent fraud, collusion, or the like, should be hesitant to substitute

its own judgment for that of counsel.” Cotton v. Hinton, 559 F.2d 1326, 1330 (5th Cir. 1977);

see also In re Traffic Executive Ass’n—E. R.R., 627 F.2d 631, 634 (2d Cir. 1980) (preliminary

approval “is at most a determination that there is what might be termed ‘probable cause’ to

submit the proposal to class members and hold a full-scale hearing as to its fairness”).

At the second stage of the approval process (i.e., the fairness hearing), the court considers

arguments for and in opposition to approval of the settlement, including comments submitted by

shareholders, if any. The fairness hearing, however, is not “a trial or rehearsal for trial on the

merits.” Officers for Justice, 688 F.3d at 625. “[T]he court’s intrusion upon what is otherwise a

private consensual agreement negotiated between the parties to a lawsuit must be limited to the

extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or

overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a

whole, is fair, reasonable and adequate to all concerned.” Id.

As Plaintiff will demonstrate at the fairness hearing, the proposed settlement meets all the

criteria for final approval. At this point, however, Plaintiff asks only that the Court take the first

step in the process and grant preliminary approval of the settlement.

B. THE PROPOSED SETTLEMENT MEETS THE CRITERIA FOR PRELIMINARY

APPROVAL

The settlement reached by the parties is presumptively fair because it was reached by

arm’s-length negotiations by experienced counsel, and there is nothing to even suggest collusion

between the parties. Micheletti Decl ¶¶ 104-111; Melnick Decl. ¶¶ 8-12. On the contrary, the

proposed settlement was reached only after multiple challenges to Plaintiff’s claims (with

another challenge pending, in the form of a summary judgment motion) and after engaging in

extensive discovery, which included the resolution of discovery disputes, preparation of written

party discovery, and preparation of document subpoenas to third parties, as well as notices of

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deposition of key witnesses, FOIA requests to the SEC and DOJ, the exchange and review of

thousands of pages of documents (most of which were produced by the SEC), and research,

analysis, and motion practice on the key legal issues in the case. See generally Micheletti Decl.

As a result, the parties were well informed about every issue in this case before they

engaged in intensive, arm’s-length settlement discussions. Each side was represented by

experienced counsel who are intimately familiar with the issues, and negotiations included a

formal mediation session presided over by Jed Melnick, an experienced, well-qualified and well

respected JAMS mediator. See Melnick Decl. ¶¶ 3-5, 8-12. The mediator received full briefing

from both parties, which analyzed the relevant legal and factual issues in this case and engaged

in multiple additional communications about these issues with counsel. See id. ¶¶ 6-11. Thus, he

was fully versed in the issues and strategic posture of the litigation, and he concluded that the

settlement produced an outcome that is exceptional. See id. ¶ 13 (“There is no question in my

mind that the settlement represents the considered judgment by plaintiff’s counsel, who took on a

risky and complicated case requiring substantial effort, and that the proposed settlement is an

excellent result . . .”). See also In re Austrian and German Bank Holocaust Litig., 80 F. Supp. 2d

at 174 (settlement is presumptively fair where discussions are overseen by mediator).

Defendants have denied, and continue to deny, the factual allegations in Plaintiff’s

Second Amended Complaint, as well as any legal liability arising from those claims and have

asserted numerous defenses on the merits—including a late-breaking contention by Defendants

Celano and Peraticos that the transaction at issue in this case was may never have been approved

by the Pegasus board and was never discussed when there was a quorum of board members in

any event. And although Plaintiff and his counsel firmly believe that the claims asserted in this

action have substantial merit, as evidenced by the fact that, inter alia, they survived multiple

challenges that were based on each of the defenses, Plaintiff has also accounted for the inherent

risks of litigation, such as those presented by the unusually broad protections afforded to

directors pursuant to Nev. Rev. St. § 78.138, and the fact that Plaintiff’s claim that Defendants

wrongfully distributed corporate assets, which provides for joint-and-several liability, is based on

statutes (Nev. Rev. St. §§ 78.288(2) and 78.300) that have yet to be construed or applied in any

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reported decision by a Nevada court or any other court. Moreover, if Plaintiff were unable to

establish joint-and-several liability, the total recovery against the individual Defendants would be

limited to their share of the total potential liability (i.e., the price Pegasus paid in excess of the

then-current $1-per-share market value of the stock that Pegasus repurchased from Defendant

Knabb for $6.96 million).

Under the circumstances, a settlement that has yielded $1.45 million in cash plus up to

$50,000 in notice and settlement-administration costs is quite clearly adequate, fair, and

reasonable.4 See, e.g., Wershba, 91 Cal. App. 4th at 250 (“the test is not the maximum amount

plaintiffs might have obtained at trial on the complaint, but rather whether the settlement is

reasonable under all of the circumstances”); 7-Eleven Owners, 85 Cal. App. 4th at 1150 (“the

merits of the underlying class claims are not a basis for upsetting the settlement of a class action;

the operative word is ‘settlement’”); In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 459 (9th

Cir. 2000) (observing in derivative action: “It is well-settled law that a cash settlement

amounting to only a fraction of the potential recovery does not per se render the settlement

inadequate or unfair. Even assuming that Nadler’s methodology was more sound, the Settlement

amount of almost $2 million was roughly one-sixth of the potential recovery, which, given the

difficulties in proving the case, is fair and adequate”) (inner quotation marks and citations

omitted); Shlensky v. Dorsey, 574 F.2d 131, 147-48 (3d Cir. 1978) (observing in derivative

4 In exchange for these benefits, upon final approval, the settlement will fully, finally, and

forever release all Defendants, their insurers and related parties from liability for the derivative claims that are the subject of this lawsuit. See Micheletti Decl., Ex. 1 ¶¶_1.3, 1.8, 1.20-1.22. The release extends to those Defendants who did not contribute to the settlement fund, including Defendants Knabb, Durland, Horn and Eaton. Id. The agreement to release all Defendants, even those who did not contribute to the settlement, was a necessary prerequisite to any settlement of this action. Counsel for Defendants Celano and Peraticos represented and the mediator conveyed to Plaintiff’s counsel that, based on his communications with the parties and the insurance carrier, his familiarity with D&O insurers generally, and his experience in other litigation, “it would not have been possible to convince the defendants and the D&O insurer to agree to such a settlement, much less a settlement involving a payment of up to $1.5 million, unless there was a global resolution of all claims that could have been asserted by Pegasus (or on its behalf) against any of its officers, directors and employees.” Melnick Decl., ¶ 13; see also, Micheletti Decl., Ex. 15 at 7-8. Notably, the release extends only to derivative claims that could have been brought in this lawsuit and specifically preserves all non-derivative claims any Person may have against any Released Persons. Id. ¶ 1.21.

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action: “This figure, which is approximately 15% of the maximum amount of unlawfully

disbursed corporate funds alleged to be involved in the suit, can hardly be said to provide a

grossly inadequate benefit to Gulf in view of the uncertainties of this litigation”); City of Detroit

v. Grinnell Corp., 495 F.2d 448, 455 (2d Cir. 1974) (“The fact that a proposed settlement may

only amount to a fraction of the potential recovery does not, in and of itself, mean that the

proposed settlement is grossly inadequate and should be disapproved”); In re Cendant Corp.

Derivative Action Litig., 232 F. Supp. 2d 327, 336 (D.N.J. 2002) (“The settlement of $54 million

represents less than two percent of that amount, a small percentage. This amount may be

justifiable, however, given the fact that the Settling Defendants appear to have significant

defenses that increase the risks of litigation”).5

Plaintiff and his counsel also recognize the substantial amounts of time and expense that

would be involved with taking this action to trial and through appeal. The parties’ decision to

submit the proposed settlement for Court approval reflects their consideration of the very real

benefits conferred by the settlement agreement against the risks and uncertainty of continuing to

litigate the case. Based upon their evaluation of these issues, Plaintiff’s counsel, who have

substantial experience in complex litigation and the facts and legal theories underlying this case,

have determined that the settlement is in best interest of Pegasus.

C. THE ABSENCE OF DIRECT BENEFITS TO SHAREHOLDERS DOES NOT RENDER THE PROPOSED SETTLEMENT INADEQUATE OR UNFAIR

The proposed settlement provides for $1.45 million to settle the claims brought

derivatively on Pegasus’s behalf. The settlement does not purport to resolve or settle claims

belonging to shareholders, and thus none of the recovery goes directly to shareholders. That is

the law in both California and Delaware. Indeed, under both California and Delaware law, a

“derivative suit is … brought on behalf of the corporation,” and thus “the recovery, if any, must

5 As the mediator has testified in his declaration, “many derivative settlements involve little or no consideration, whereas this one involves a cash payment of $1.45 million (plus an agreement to reimburse reasonable notice and administration costs of up to an additional $50,000).” Melnick Decl. ¶ 13. Case law confirms the mediator’s experience. As discussed above, the Ninth Circuit has observed that “derivative lawsuits are rarely successful” and noted that less than one percent of derivative actions result in judgments for the plaintiff. In re Pacific Enters. Sec. Litig., 47 F.3d at 377 & n. 4.

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go to the corporation.” Tooley v. Donaldsonn, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036

(2004) (emphasis added). See also Fox, 108 Cal. at 477 (observing that a derivative action

serves to recover for harms done to corporation, and the judgment in favor of the plaintiff-

shareholder “was for the use and benefit of the corporation”); Schuster v. Gardner, 127 Cal.

App. 4th 305, 312-13 (2005) (in a derivative case, the corporation “is the real party in interest to

which any recovery usually belongs’”) (citing C. Hugh Friedman, CALIFORNIA PRACTICE GUIDE:

CORPORATIONS ¶ 6:602 (Rutter Group 2004)); Desaigoudar v. Meyercord, 108 Cal.App.4th 173,

183 (2003) (“The ‘derivative’ action is so called because the rights of the plaintiff shareholders

derive from the primary corporate right to redress the wrongs against it”).

The requirement that the corporation—and not its shareholders—be the beneficiary of

any derivative settlement follows from the fundamental nature of derivative claims. As the

Delaware Supreme Court has explained, in a derivative suit “the shareholder sues on behalf of

the corporation for harm done to it. Ordinarily, therefore, any damages recovered in the suit are

paid to the corporation.” Kramer v. Western Pacific Industries, Inc., 546 A.2d 348, 351 (Del.

1988) (emphasis in original). California courts agree: Shareholders are only entitled to recovery

in direct actions (as opposed to derivative actions), where the “‘stockholder’s claimed direct

injury [is] independent of any alleged injury to the corporation.” Schuster, 127 Cal. App. 4th at

316 (citing Tooley, 845 A.2d at 1033) (emphasis in original). In fact, “‛the two actions are

mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders

(direct action) or the corporation (derivative action).’” Oakland Raiders v. National Football

League, 131 Cal. App. 4th 621, 650-51 (2005)) (inner quotation marks and citation omitted). See

also Bader v. Anderson, 179 Cal. App. 4th 775, 793 (2009) (same).

No direct claims are at issue here, inasmuch as the injuries alleged—that is, damages

caused by allegedly causing Pegasus to repurchase its shares from Knabb at an inflated price—

were suffered by Pegasus. In re Triarc Companies, Inc., 791 A.2d 872, 878 (Del. Ch. 2001)

(“‘where the substantive nature of the alleged injury is such that it falls directly on the

corporation as a whole and collectively, but only secondarily, upon its stockholders as a function

of and in proportion to their pro rata investment in the corporation, the claim is derivative in

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nature and may be maintained only on behalf of the corporation’”) (citation omitted); Jones v.

H.F. Ahmanson & Co., 1 Cal. 3d 93, 106 (1969) (a claim is derivative where it “seeks to recover

assets for the corporation or to prevent the dissipation of its assets”).6

Consequently, governing law requires that Pegasus—and Pegasus alone—be the recipient

of any recovery for the derivative claims in this action. As the Court of Appeal said in Schuster,

“this is a derivative suit. [The company] suffered the alleged harm, and it should receive the

benefit of any recovery, rather than individual stockholders.” 127 Cal. App. 4th at 317.7

Accordingly, the fact that all of the recovery in this case is for the benefit of Pegasus—rather

than individual shareholders—is both proper and necessary. Thus, the fact that the settlement

funds will presumptively be used by Pegasus to pay creditors rather than be distributed to

shareholders does not detract from the substantial nature of the settlement.

D. THE ABSENCE OF DIRECT BENEFITS TO SHAREHOLDERS DOES NOT INHIBIT THIS COURT’S AUTHORITY TO AWARD OF ATTORNEY FEES, LITIGATION EXPENSES, OR AN INCENTIVE TO PLAINTIFF CHEN

The absence of a direct benefit to shareholders does not in any way diminish the authority

of the Court to award attorney fees and costs. Where, as here, a settlement has resulted in the

creation of a common fund or has created some other substantial benefit for the corporation, the

settlement entitles plaintiff’s counsel to fees and costs, regardless of whether the benefit is

pecuniary. 9 Bernard E. Witkin, SUMMARY OF CALIFORNIA LAW, Corporations, § 197 (10th ed.

2005 & 2011 Supp.) (citing Robbins, 127 Cal. App. 4th at 452); Cziraki v. Thunder Cats, Inc.,

6 By contrast to the present derivative case, class action litigation asserting direct claims

on behalf of Pegasus shareholders—and seeking direct recovery on behalf of shareholders—was filed in federal court in Florida, and was dismissed as a result of a dispositive motion. See In re Pegasus Wireless Corp. Sec. Litig., 657 F. Supp. 2d 1320, 1322-23, 1326 (S.D. Fla. 2009).

7 Significantly, in Triarc, the Delaware Chancery Court approved a global settlement of both derivative claims and separate individual shareholder claims even though all of the recovery went to the company. That case involved allegations that the company’s directors had breached their fiduciary duties by bestowing improper benefits on executives. Triarc, 791 A.2d at 874. In addition to the obvious derivative claims, there were alleged direct class claims based on the theory that shareholder approval was improperly obtained. Id. at 879. Noting that the individual class claims were unlikely to support direct recovery of damages by shareholders, the Court found that receipt of consideration by the company was sufficient to justify release of both the derivative and direct claims. Id. Here, unlike Triarc, the Settlement Agreement does not purport to affect or impair any direct claims Pegasus shareholders might claim to have; it releases only derivative claims.

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111 Cal. App. 4th at 560. See also Beyerbach v. Juno Oil Co., 42 Cal.2d 11, 19-20 (1954)

(“Since counsel fees for maintaining the action in such a situation are measured in a material part

by the benefits recovered on behalf of the corporation, and both costs and counsel fees are

charged against the corporation and may be made payable out of or a lien against the fund

recovered, there is little likelihood that a plaintiff might successfully maintain the action and yet

be unable to collect an award for his expenses”); Fletcher, 266 Cal. App. 2d at 321 (“The

California decisions are substantially uniform to the effect that a plaintiff who has successfully

maintained a representative action is entitled to an award of attorneys’ fees from a common

fund”) (footnote omitted).

Moreover, the courts have recognized that the right to attorney fees and costs is not

dependent on whether the settlement confers a direct benefit on shareholders. See, e.g., Fox, 108

Cal. at 477 (plaintiff’s counsel “clearly was entitled to an allowance out of the moneys collected

of his reasonable expenses, including counsel fees. This right to his expenses was sufficiently

shown by the allegations of the complaint, and the prayer for general relief authorized the court

to make proper provision for their payment”); DeBaun v. First Western Bank & Trust Co., 46

Cal. App. 3d 686, 694-95, 699 (1975) (remanding action for determination of amount of

additional fees due to plaintiff’s counsel, notwithstanding that corporation was insolvent and

defunct at time of settlement and fees and costs had already been awarded); See, e.g.,

Zarbhanelian, 215 A.D.2d at 430 (“As a result of the settlement of the action herein, about

$250,000 in corporate debt was forgiven. Therefore, the corporation received a substantial

benefit”).

The result should be no different in the present case. Plaintiff’s counsel have vigorously

prosecuted this action for more than five years, and their efforts not only prevented this action

from suffering the same fate that each of the related class actions and the other derivative suit

have suffered, they resulted in the recovery of a substantial sum of money that goes directly to

Pegasus. The fortuity of the existence of substantial debts—which may or may not exceed

Pegasus’s assets, see Micheletti Decl. ¶ 122—simply has no bearing on the intrinsic value of the

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benefits conferred by the settlement or on counsel’s right to be compensated for the time and

expenses they incurred in obtaining those benefits.

The same is true of an incentive award for Plaintiff Chen, who not only prosecuted the

claims on behalf of Pegasus and stayed apprised of developments in the case, but assisted

counsel with the case and accommodated all requests to respond to discovery and travel across

the country for deposition (which was canceled shortly before it was scheduled to begin as a

result of the parties reaching a settlement). See Micheletti Decl. ¶ 81. Accordingly, Plaintiff’s

counsel propose that Mr. Chen be awarded $2,500 from the settlement fund.

E. THE PROPOSED NOTICE BY PUBLICATION SATISFIES DUE PROCESS

Pegasus appears to have ceased doing business when it abruptly shut down its Bahamian

headquarters in July 2007 and ceased filing reports with the SEC in November 2007. Micheletti

Decl. ¶ 119 & Exs. 9-10. In January 2008, the company filed the first of two bankruptcy

petitions, which were eventually dismissed on the grounds that they were filed in bad faith. Id.

¶¶ 36, 119. And although Plaintiff and other investors continue to hold Pegasus stock, the stock

is not actively traded and does not appear to have a market price. See, e.g., id., Exs. 5, 12-13.8

Comparing the list of shareholders maintained by the stock transfer agent as of January

2008 (when Pegasus declared bankruptcy) to the list as of February 14, 2012, demonstrates that

there have been very few direct transactions with the transfer agent in the past four years. See

Micheletti Decl. ¶¶ 120-23. And, while Pegasus’s stock transfer agent maintains a list of

shareholders who own actual stock certificates, the parties have been advised that most of the

stock in this once publicly-traded company is held in street name in clearing houses and

brokerage houses across the country. See id. ¶ 122; see also Declaration of Charles E. Ferrara.

The Settlement Administrator estimates that there could be between 40,000-100,000 such

shareholders, but readily concedes that the actual number is unknown; there could be far fewer,

there could be more. See Ferrara Decl. ¶ 7. Indeed, another settlement administrator speculated

8 The SEC revoked registration of all classes of Pegasus stock in 2009 and the Depository

Trust Company suspended all services except custody services for Pegasus in 2011. See id., Exs. 12-13.

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that there may be between 5,000-10,000 current shareholders, but advised Plaintiff’s counsel that

the data is so subjective the administrator would not submit a declaration to that effect. See

Micheletti Decl. ¶ 117. The SEC has also advised Plaintiff’s counsel that it does not know how

many current shareholders may exist. Id. ¶ 118.

While the actual number of current Pegasus shareholders may ultimately be knowable,

the effort involved to obtain that information takes time and is costly, even before factoring the

cost of actually mailing notice to individual shareholders who are ultimately identified through

this process. See Ferrara Decl. ¶¶ 7-10. The Settlement Administrator estimates that it would

cost between $30,000 and $63,000 just to mail notice to between 40,000-100,000 shareholders,

id.—money that would largely have to be paid from the Net Settlement Fund, thereby greatly

diminishing the amount available to distribute to Pegasus. The parties submit that such notice is

neither practicable nor warranted.

In light of the nature of this case (a derivative action), the length of time since Pegasus

ceased doing business, and the desire to preserve the settlement funds for the benefit of Pegasus,

the parties propose an alternative method of notifying shareholders of the pendency of this

action, which is fully consistent with due process: that notice of this settlement will be

disseminated to Pegasus shareholders by publication in a variety of venues. Summary notice

explaining the nature of the case, the date of the Settlement Hearing, the right to object, the

URLs for websites that contain additional information and documents, and other pertinent

information (see [Proposed] Order Granting Preliminary Approval of Derivative Action, Ex. A)

will be published once in the Investor’s Business Daily (“IBD”) and substantially the same

information will also be issued via a press release. See Ferrara Decl. ¶ 3c. A short text ad or

similar insert announcing the settlement and providing a link to the Settlement Administrator’s

website will also be posted on an internet investor website, which maintains a forum specifically

dedicated to Pegasus (www.investorvillage.com) and where it appears as though a small group of

shareholders regularly “meet” to discuss issues concerning Pegasus. See Micheletti Decl. ¶¶ 112-

116, Exs. 6-8.

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Additionally, the Settlement Administrator will maintain a settlement website which will

contain the long-form notice, the Stipulation, and other case documents, including the motion for

final approval and the fee petition. See Ferrara Decl. ¶ 3. Plaintiff’s counsel will also post the

long-form notice and the Stipulation to their website. See id.

The notice plan in this case more than satisfies due process and is consistent with

California law with respect to derivative suits, in which publication notice of a proposed

settlement is routinely used in the process of approving settlements. See, e.g., Arace v.

Thompson, 2011 U.S. Dist. LEXIS 93105, *10-11 (S.D.N.Y. Aug. 17, 2011) (Publication in IBD

alone sufficient: “In a derivative action, a court may determine that notice of proposed

settlement by publication is appropriate under the circumstances”).9

As noted by Judge Kleinberg (of the Complex Litigation Department in Santa Clara

County) in granting preliminary approval to a derivative settlement in Stovall, publication notice

of the type proposed here “meet[s] the requirements of California law and due process, and

provide[s] the best notice practicable under the circumstances.” Stovall, slip op. at 2.10 Thus, in

Arace, the court specifically approved publication notice in “Investor’s Business Daily—‘a

nationally-circulated business-oriented publication catering to investors’”—and held that it

“sufficiently apprised … shareholders of the nature of the proposed [derivative] settlement, the

9 See also In re PMC-Sierra Deriv. Litig., 2010 U.S. Dist. LEXIS 5818, *4 (N.D. Cal.

Jan. 26, 2010) (stipulation filed with SEC, notice published in IBD and on company’s website); Stovall v. Marshall, et. al., No. 1:06CV076453 slip op. 2-3 (Cal. Sup. Ct., Santa Clara County, Jul. 13, 2011) (notice published via press release and IBD and posted on websites maintained by company and by Plaintiff’s counsel); In re Juniper Derivative Actions, No. 5:06-cv-03396-JW, slip op. at 2-3 (N.D. Cal. Oct. 29, 2008) (notice filed with SEC and published in IBD and on company’s website); In re Activision, Inc., S’holder Derivative Litig., No. CV-06-04771-MRP, slip op. at 2 (C.D. Cal. May 13, 2008) (notice filed with SEC, published on company website, and published in IBD); In re Integrated Silicon S’holder Derivative Litig., No. C-06-04387 RMW, slip op at 1-2 (N.D. Cal. Mar. 31, 2009) (notice filed with SEC and published via press release and on company website); In re Rambus Deriv. Litig., No. C-06-3513 JF, slip op. 3 (N.D. Cal. Oct. 30, 2008) (notice issued via press release, filed with SEC, posted to company’s website). (Copies of these opinions are attached to the accompanying Appendix of Non-California and Unreported Authorities.)

10 In considering the proper notice, courts must be mindful of the fact that that a derivative action (brought on behalf of a corporation) is fundamentally different from a class action. See, e.g., Bader v. Anderson, 179 Cal. App. 4th 775, 793 (2009). Settlement of a derivative settlement does not discharge or bar any individual claims shareholders might have. See id.

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upcoming public hearing on the matter, and the opportunity to object.” Arace, 2011 WL

3627716, *4 (citation omitted). Similarly, in PMC-Sierra, the court approved notice similar to

the one proposed here – publication in Investors’ Business Daily and posting on the company’s

website – and found that it met the requirements of due process and the Federal Rules of Civil

Procedure, and was “the best notice practicable under the circumstances.” PMC-Sierra, 2010

U.S. Dist. LEXIS 5818, *4.11

Moreover, the Delaware Chancery Court—which regularly oversees shareholder

derivative suits—also recognizes that this form of notice provides an appropriate mechanism for

advising shareholders of a proposed settlement. In fact, Delaware Chancery Rule 23.1, which

governs the procedures for derivative actions, expressly contemplates publication as an

acceptable form of notice to shareholders in connection with the approval of proposed derivative

settlements. Del. Ch. Rule 23.1 (requiring that in shareholder derivative actions, “notice by mail,

publication or otherwise of the proposed dismissal or compromise shall be given to shareholders

or members in such manner as the Court directs”) (emphasis added).

Notice by publication is especially appropriate here for the reasons discussed above.

Moreover, the proposed notice plan is significantly more expeditious because most of the

information is already available. Once the Court gives preliminary approval, the notice can be

published in the proposed media almost immediately, and the process of finalizing the

settlement—and securing the agreed-upon benefits—can move forward much more quickly.12

In sum, as decisions in other derivative actions illustrate, publication notice is well

recognized as proper in derivative actions, and satisfies the requirements of due process.

Moreover, in the present case, the parties have gone beyond the kind of published notice

11 In each of the aforementioned derivative case, the courts held that publication notice

was “the best notice practicable under the circumstances, and shall constitute due and sufficient notice to all Persons entitled thereto.” See Activision, slip op. at 2; see also Stovall, slip op. at 2; Juniper, slip op. at 2; Integrated Silicon, slip op. at 1; F5 Networks, slip op. at 2; Rambus, slip op. at 3.

12 By contrast, the process of identifying and compiling contact information for each individual shareholder holder and then mailing individual notice can take months. Ferrara Decl., ¶ 10.

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accepted in other cases by specifically targeting a website frequented by at least some Pegasus

shareholders. The parties respectfully submit that the proposed notice plan in this case is vastly

more efficient and sensible than trying to provide individualized notice to all current

shareholders under these circumstances and, therefore, constitutes the best notice practicable

under the circumstances.

F. THE PARTIES HAVE ARRANGED FOR THE APPOINTMENT OF A RECEIVER

The settlement of this action requires Defendants Celano and Peraticos and their

insurance carrier to pay the Net Settlement Funds to Pegasus. Because Pegasus is no longer in

operation and does not have a board of directors, employees, or apparently anyone else to act on

its behalf, the parties have proposed appointing a Receiver for the specific and limited purpose of

receiving the Net Settlement Funds, and to make reasonable efforts to identify potential

claimants, evaluate their respective claims, and make recommendations to the Court regarding a

plan to distribute the Net Settlement Funds. See, Micheletti Decl., Ex. 1 at ¶¶1.19, 2.4, Ex. 16.

As the Court is aware, one creditor has filed a lien against any judgment in this case. Plaintiff’s

counsel is also aware that the SEC has obtained a default judgment against Pegasus in the

amount of $5 million, plus interest. See Micheletti Decl., Ex. 15.13

During the parties’ November 30, 2011 CMC, the Court asked the parties to consider the

remedy of interpleader as an alternative to appointing a receiver to receive the Net Settlement

Funds. See id., Ex. 14 at 13-15. “Interpleader” is defined by Black’s Law Dictionary as a “suit

to determine a right to property held by a disinterested third party (called a stakeholder) who is

in doubt about ownership and who therefore deposits the property with the court to permit

interested parties to litigate ownership.” BLACKS LAW DICTIONARY 823 (7th ed. 1999).

California law is essentially the same. See Code Civ. Proc. § 386.14

13 Plaintiff did not prosecute this action for his own benefit, thus he is not entitled to

receive the funds for Pegasus or decide how Pegasus should spend those funds. See, e.g., Fox, 108 Cal. at 477.

14 The court also asked whether a Receiver could discharge his or her duties for the amount set forth in the Stipulation. See Micheletti Decl., Ex. 14 at 15-17. The parties’ proposed Receiver has indicated that he believes he easilly can do so. See id., Ex. 16.

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Here, the Defendants do not have the right to invoke the remedy of interpleader because

the settlement agreement obligates them to pay the Net Settlement Funds to Pegasus, thus, there

is no dispute over or doubt as to the ownership of the Net Settlement Funds—those funds belong

to Pegasus in the first instance, who may ultimately owe them to third-party creditors. See. e,g

Security Trust & Sav. Bank v. Carlsen, 205 Cal. 309, 314-315 (1928) (a ground for denying the

remedy of interpleader would be where complainant in interpleader had assumed a definite and

independent liability to one of the claimants to the funds in question).

While the remedy of interpleader is not available under these circumstances, this Court

does have the statutory power to appoint a receiver after judgment to take charge of property for

a specific purpose or to carry its judgment into effect, and/or where necessary to preserve the

property or rights of any party. See Code Civ. Proc. § 564(b)(3),(4), (9); see also, Fox, 108 Cal.

at 476-77 (explaining that court has power to appoint receiver to carry its judgment into effect).

Indeed, the California Supreme Court addressed a situation similar to this one over 115

years ago. In that case, the plaintiff brought a derivative action on behalf of a corporation and

sought appointment of a receiver to receive and disburse the settlement funds, and the court held

there was “no doubt” that

the case was one in which the court had power to appoint a receiver to carry its judgment into effect. The action was not prosecuted by the plaintiff in his own right or for his own exclusive benefit. He sued in behalf of the corporation to recover a fund in which others were equally interested, and the judgment in his favor was for the use and benefit of the corporation. He was, therefore, not entitled to receive the amount of the judgment himself, but clearly was entitled to an allowance out of the moneys collected of his reasonable expenses, including counsel fees. This right to his expenses was sufficiently shown by the allegations of the complaint, and the prayer for general relief authorized the court to make proper provision for their payment.

The appointment of a receiver to apportion the fund and pay it over to the parties, according to their respective rights, and subject to the direction of the court, was a proper provision.

Fox, 108 Cal. at 477.

Fox is still good law, and so is the resolution it describes. The current status of Pegasus

precludes the possibility of simply turning over the proceeds of the settlement to Pegasus

management because it is not clear who, aside from Defendant Durland (who was recently

sentenced to serve time in federal prison), if anyone, actually serves as a Pegasus officer or

1 director. Under the circumstances, appointing a receiver IS a practical, efficient way to

2 administer the settlement funds.

3 IV. CONCLUSION

4 The settlement of this action easily meets the criteria for preliminary approvaL

5 Accordingly, Plaintiff respectfully requests that the Court grant this motion and preliminarily

6 approve the settlement and authorize Notice, so that the parties may proceed with the next steps

7 in the settlement process.

8 DATED: February 22,2012

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FAZIO IMICHELETTI LLP

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-25MPA ISO MOTION FOR PRELIMINARY ApPROVAL OF SElTLEMENT

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