B of A II – Return to Rakoff

OK, is it just me, or didn’t Judge Rakoff in the SEC v. B of A action just tell everyone (in an opinion the Washington Post charitably called “a scathing critique“)  that the earlier proposed settlement “is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct.”

That was at $33 million.  So 2009 Judge.  Now the new proposal is to do the same thing at $150 million?  Huh?  Doesn’t that just make it 5 times worse?  Oh Boy.  If I know Judge Rakoff, and I don’t — but my co-counsel and former colleague Dave Brower and I did split the oral argument in the In re Merrill Lynch Deriv. Litig. action in front of him last year — so I know exactly how serious he can be.

Columbia’s John Coffee told the New York Law Journal that “the difference might be that the judge’s concern about ‘accountability will now be addressed by someone else’ — the state’s attorney general,” who brought his own lawsuit today.  That hardly seems reason to approve the settlement if you ask me.

All I can say is maybe an “Unopposed Agreed Joint Pretty Please With A Cherry On Top We Really Need to Do This Motion to Approve the Proposed Settlement” is in order.

Reimbursement Denied

Now this is entertainment (at least to me it is). And if you’re a securities class action lawyer that’s a word that might not enter your daily routine all that often. In the Motorola securities class action, Dr. Antonio Pagnamenta (Professor of Physics, emeritus at UIC), wrote a letter to the court which says (along with my annotations in Nugget green italics below of course):

Your Honorable Wise, and Most Hopefully Generous Judge Pallmeyer:

[A]s a member of the Class, I have carefully considered the entire situation so please don’t waste your time repeating my extensive work, and then agreed to be a witness out of conviction that this was the right thing to do. I never expected any award for this as I am only concerned about others.

Only now, can you believe it, I have heard that you have awarded some money to the Class member witnesses for their efforts and, well, it’s a lot so….

I am pleasantly surprised to say the least, but now please allow me to draw your attention, pardon the legalese, to my special situation:

I was travelling by CTA, because these professor salaries stink let me tell you, to my first interview at Fay Clayton’s law office. I passed out and had a Fall so big that I capitalized it on the CTA station which I readily admit is the only part of this story that readers should feel compassion about.

In this I suffered considerable injuries to the right side of my face. Specifically, three teeth on my right side needed to get root canal work, in the amount of approx. $6000 and I knew I should have listened to mother and became an endodontist.

Medicare essentially covered my emergency and medical cost which is fortunate in light of my ridiculously low professor salary and pension. However, my dental work was referred to my dental insurance, which only covered $2000. These are approx, numbers, the exact amounts will be documented.

As I suffered these injuries because of my willingness to testify, I would not have had the accident if I had not gone to the law office which I am sure you will agree is a classic but-for situation. The doctors found no basic reason for this sudden fainting spell. I would appreciate it very much if the court could consider to reimburse me for my own out-of-pocket expenses of approx $4000, which are clearly the fault of the defendants in this class action.

The accident, the injuries, the expenses, all can be documented as soon as I am back in Chicago, within 10 days and if I pass out and hit my head while on the flight I would appreciate being reimbursed for that too, since if I hadn’t agreed to testify I wouldn’t have wrote this letter, and therefore wouldn’t have left for the airport at the same time (see, e.g., A Sound of Thunder), and therefore it is also the direct fault of the defendants.

Respectfully submitted,
Antonio Pagnamenta
Professor of Physics, emeritus, and Professor of Confusing Cause and Effect

So I bet you’re wondering, what did Judge Pallmeyer say? Well, she wrote back that “I am sorry to hear about your accident. Unfortunately, the court has no funds available to reimburse you for the expenses resulting from that accident.”

You can read the letters, both dated August 10, 2007, right here.

Nugget: The only other sentence in the Judge’s response letter, and we at the Nugget, despite our jesting, wholeheartedly agree: “Best wishes for your complete recovery.”

The Case that Just Won’t Die

So let’s see, back in 1999, the Judge approved the settlement of the In re Paracelus securities class action, and entered final judgment.So why in the world are we reading a Memorandum Opinion issued in the case eight years later, you might ask? Well, it seems the settlement distribution process “took years,” with “lost checks,” and trying to “find claimants who were no longer at the addresses that had been provided.”So finally, “at the end of this process,” and after “approximately 1,400 claimants had received and cashed settlement funds,” a whopping $30,547.06 remained unclaimed.

So no big deal, right?Well, Lead Counsel proposed that the money be distributed to two designated charities, the Methodist Hospital Foundation and the Houston Volunteer Lawyers Program, invoking cy pres.Oh, but it’s not going to be that easy.The Judge said that “neither of the two designated charities was related to the class or its members,” and to make matters worse, “one charity was connected to the district judge, who promptly recused.”After reassignment, and a whole new round of briefing, along with a hearing, Judge Lee H. Rosenthal (S.D. Tex.) finally ordered that the money go to the “Institute of Law and Economic Policy, which will spend the money in a way that may indirectly and prospectively benefit the class members in the aggregate.”

Sheesh.

You can read In re Paracelus, issued February 6, 2006 at 2007 U.S. Dist. LEXIS 8316.

Nugget: “In the class action context the reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scot-free because of the infeasibility of distributing the proceeds of the settlement (or the judgment, in the rare case in which a class action goes to trial) to the class members.”

Objectors Rebuffed

So after “four years of vigorous litigation and two weeks of jury trial, the parties in” the AT&T securities class action settled the case for $ 100 million.” Sounds pretty darn good, right? Not to certain objectors. But it looks like they pushed Judge Garrett E. Brown, Jr. (D. N.J.) to the end of his rope, as he found that “Objectors’ Counsel fail to show that they improved the Class’s recovery in any way,” and that “the objections and the subsequent appeal were without merit and failed to improve the Class’s recovery in any manner.”

In fact, he said that “the Objectors’ actions appear to have impeded the Class’s recovery — their objections and subsequent appeal resulted in wasteful litigation and delayed the distribution of funds to the Class. To date, those funds have not yet been distributed.“

Looks like that’s that. Finally.

You can read In re AT&T, issued September 25, 2006, at 2006 U.S. Dist. LEXIS 69086.

Nugget: “As a preliminary matter, the Court notes that Defendants suggest, in their opposition brief, that Objectors’ Counsel should be made to pay expenses and attorneys’ fees pursuant to 28 U.S.C. § 1927. (Defs.’ Br. at 12-14.) Defendants have not, however, filed a motion seeking such relief, and the Court will therefore consider only the application for fees filed by counsel for Objectors’ Counsel.”

Judge Ponders PayDay

OK, the Nugget has been AWOL for a bit, but that’s nothing compared to how long the Cabletron securities class action has been pending. You see, as Judge William E. Smith (D. R.I.) explains, “the case, approaching its tenth year in the judicial system, has traveled from New Hampshire to Rhode Island, through various district judges’ chambers, to the Court of Appeals and back, finally landing with this writer in late 2002.”

And it looks like – it’s finally over, and if you’re looking for an extensive, academic, and real-world analysis of attorney fee awards in securities class actions, this is your opinion. Want a taste? How about, “the Court is persuaded, based on… the emerging trend in district courts nationwide, that the better approach to awarding attorneys’ fees is the Percentage of Fund method.” That’s because “a lodestar cross-check may also be useful; however, it is unclear to this Court where the precise lines of “reasonableness” would be drawn if the lodestar cross-check was mandatory (Is .5 too low? Is 2.5 too high?).” “This Court is not required to decide whether the cross-check is an ethical imperative, nor to define the parameters of lodestar reasonableness; rather, it is sufficient to conclude that when the lodestar cross-check is applied to the fee award in this case, it raises no reasonableness concerns.”

Check out the opinion for more fee talk. You’ll likely be surprised at the conclusion.

You can read In re Cabletron, issued October 12, 2006, at 2006 U.S. Dist. LEXIS 76278.

Nugget: “The Court challenged numerous expenses contained in Plaintiffs’ original submission. As a result, Plaintiffs modified their reimbursement request to reflect the removal of various questionable items such as multiple filing fees and premiums on administrative expenses. The amount described in this Order is the amended request.”

Net Gainers, Do Not Pass Go, Do Not Collect $2 Million

Now who would’ve thunk that we’d be reading an opinion issued in the Cendant case in 2006? I mean seriously, this thing settled in like 1972, didn’t it? Well, June 2000 actually, but even that’s an awfully long time ago. So what could possibly generate an opinion now you ask? Well, how about some sizeable shareholders who submitted claims in the settlement but were rejected by the administrator because it found their claims“did not merit compensation under the Plan because the profits they made by selling stock at artificially inflated prices cancelled out any losses they suffered on stock held after the irregularities were disclosed.”

So you can read the Court’s lengthy analysis if you’re fascinated by plans of allocation, but if you’re not (perhaps because you are normal), you will be satisfied to know that the Third Circuit, led by Judge Thomas L. Ambro, affirmed the denial of payment to these shareholders because they “reaped a net gain rather than a net loss.” As Johnny might have put it, if you came out ahead, your claim is dead. Dead indeed.

You can read In re Cendant, issued July 18, 2006 right here.

Nugget: “The bottom line: SKAT’s profit far outweighs its loss amount. Thus, it is not entitled to any payout.”

Eagle Eye on Expenses

The $31.5 million settlement’s done and the 25% fee has been awarded. Now we’ll just be needin’ our out-of-pockets reimbursed and we’ll be on our way. Yep, we’ll make like a tree — and get outta here. You won’t find us hangin’ around, no sir. Well, it’s not going to be that easy my friend, not if you are in Senior Judge William T. Hart‘s (N.D. Ill.) courtroom in the Van Kampen action. You see, Judge Hart observed “two problems with the reimbursement request for expert fees.”

“The first is that some of the fees that Lead Counsel has labeled as expert fees are actually payments for work more properly characterized as work that should be charged as attorney fees.” For example, “Lead Counsel seek reimbursement for fees paid to Joel Seligman, the then-dean of the Washington University School of Law whom Lead Counsel describe as ‘among the nation’s foremost experts on securities law.’ An expert on the law is an attorney. Had this case gone to trial, the court would have instructed the jury as to securities law and no witness, expert or otherwise, would have been permitted to testify as to the state of applicable securities law. The advice received from Seligman, as helpful as it may have been to counsel, is properly characterized as legal fee work. Lead Counsel will not be separately reimbursed for fees charged by Seligman.”

“A second issue is the rates charged by the experts. Allen charged $ 375.00 per hour for most work and $ 625.00 per hour for deposition testimony. Michael Barclay, Ph.D., a professor of finance at the Simon School of Business Administration at the University of Rochester, charged $ 450.00 per hour. He was plaintiffs’ damages expert.” “Lead Counsel have not established that the requested reimbursements are based on customary and reasonable hourly rates. The reimbursements will be based on $ 350.00 per hour for all work of Allen and Barclay, including deposition testimony.”

Oh, and here’s the best one (all-right, all-right, the Nugget below is better): “$350.00 for pro hac vice fees will not be reimbursed. It is the attorney’s choice as to where to seek admission and where to practice. For $100.00, the attorney could be permanently admitted to this court instead of paying $ 50.00 per case. A client should not be charged for the cost of the attorney being admitted to practice.”

You can read Abrams v. Van Kampen Funds, issued February 21, 2006, at 2006 U.S. Dist. LEXIS 6778.

Nugget: “It is noted, though, that charges for accessing this court’s electronic filing system (CM/ECF) might properly be categorized as unreimbursable firm overhead. However, the charge will be allowed because it is only $16.29.”

Tenth Circuit Rules on Notice Requirements

How much advance warning is enough for shareholders to be informed of their right to opt-out or object to a securities class action settlement? Well, in the Sprint case, a Panel of the Tenth Circuit evaluated a situation where certain shareholders “received notice of a class settlement two weeks after the deadline for filing objections to the settlement and on the same day as the final fairness hearing on the settlement.” The shareholders, who “held their shares in ‘street name’ (meaning that they held only beneficial title to the shares while legal title was vested in their broker’s name),” in the $50 million settlement argued that “the thirty-two-day period between the initial mailing of the settlement notice and the deadline for objections did not sufficiently account for the delays involved in forwarding notice packets to beneficial stock owners.”

In affirming the District Court’s rejection of the street name objectors’ claims that their Due Process and Rule 23 rights had been violated, the Panel held that the focus should be not upon “actual notice rates,” but instead “upon whether the district court gave the best notice practicable under the circumstances including individual notice to all members who can be identified through reasonable effort.” In concluding that the time period was fair, the Panel concluded that “in the instant case, particularly given the absence of any evidence that anyone other than Appellants received their notice after the deadline for objections or the settlement hearing, the initial and secondary rounds of mailings were sufficient to flush out any objections that might arise to the fairness of the settlement.”

You can read Dejulius v. New England Health Care Employees Pension Fund, issued October 28, 2005, here or at 2005 U.S. App. LEXIS 23353.

Nugget: “Many controversies have raged about the cryptic and abstract words of the Due Process Clause but there can be no doubt that at a minimum they require that deprivation of life, liberty or property by adjudication be preceded by notice and opportunity for hearing appropriate to the case.”

Second Circuit Allows Privately Held Stock To Share in Settlement

Here’s a tip for the next time you find yourself drifting off while you’re crafting that settlement agreement. Make sure you define who the investors are. Think saying “purchasers of common stock” is enough? Well, if you do, you had better listen to this if you want to keep out of hot water.

After the Olsten litigation settled, a guy named Riedinger, who happens to be the nephew of Olsten’s founder, sent in a claim form for his class B common stock (that is not traded on a public market). Why not? The Panel noted that “the Settlement Agreement drew no distinction between Olsten’s two classes of common stock: Common Stock and Class B Common Stock.” Uh-oh, Spaghettios, this isn’t going to be good. The Second Circuit, in reversing the District Court, said “Looking only at the face of the contract, as we must, we perceive no ambiguity in the term ‘common stock.’ The Agreement states that ‘persons and entities that purchased shares of common stock of Olsten Corporation’ during the Class Period are class members. We further note that the drafters of the Settlement Agreement could have, but did not, draw distinctions among common stockholders. Given that equity issuers frequently divide common stock into classes, and given the Trustee’s conceded awareness that Olsten had more than one class of common stockholders, it would have been easy to specify in the Agreement which classes of common stockholders, if any, were meant to be excluded.”

So will the other class members’ (including the lead plaintiff), claims be diluted by this? Not clear yet, but it’s certainly seems possible, as the Second Circuit said Riedinger’s stock (which was “worth more than $ 7 million at the time of closing”) will have to be valued by “the district court and Claims Administrator.”

Bet you’re awake now.

You can read Waldman v. Reidinger, issued September 12, 2005, at 2005 U.S. App. LEXIS 19590.

Nugget: “Moreover, the Trustee’s act of sending Riedinger notice of the settlement and a blank proof of claim is inconsistent with the Trustee’s contention that Class B Common Stock shareholders were never intended to be class members.”

Potential Minefield Awaits When Similar Securities Class Actions Settle

What’s a lead plaintiff to do when two potentially overlapping securities class actions are pending at the same time, and the other one settles? Who knows, but in the Citigroup/Global Crossing litigation we can see how one plaintiff’s choice turned out. In the action that settled, Plaintiffs alleged “that the Citigroup defendants participated in defrauding them by, among other things, issuing analytic reports on Global Crossing and Asia Global Crossing that misrepresented the defendants’ true views of the prospects of those companies.” In the other action, investors who had accounts with Salomon (n/k/a Citigroup) allege they received similar recommendations that were tainted by conflicts of interest that were undisclosed.

So when Citigroup settled with plaintiffs in the first action, the lead plaintiff in the other action objected, arguing that the release could be construed to apply to his claims against some of the same defendants. Well, that wasn’t good enough for Judge Gerard E. Lynch (S.D.N.Y.), who denied the objection, holding that if the objector “seeks, in the separate action, damages attributable to trading losses in Global Crossing securities, such damages result directly from the same alleged misconduct at issue in this case.” “The losses were incurred as a result of the same investment decision, as a result of the same alleged misconduct, resulting in the same loss to the same plaintiff. If [the objectors] have a different legal theory of liability based on these facts, which they believe is stronger, and therefore more likely to yield a larger recovery or a better settlement, than the theories being advanced by Lead Plaintiffs, they were free to opt out of the present class and pursue recovery based on that theory.” The objectors “are not free, however, to remain a part of the instant class, partake of an award of damages under the present settlement, and then pursue further damages in a separate action based on the same losses arising from the same investment decision as a result of the same misconduct. Any such result would be substantively unfair, as well as frustrating to class action settlements.”

You can read the decision, issued July 12, 2005, at 2005 U.S. Dist. LEXIS 14245.

Nugget: “A defendant can hardly be expected to settle an action based on claims of a particular wrong, pay damages to plaintiffs under that settlement, and then have to continue to defend claims by some of the same plaintiffs for further compensation based on the same harm.”

Nugget: “That is a question that can only be resolved as the facts and legal theories in his lawsuit are developed and litigated.”