Summary
awarding thirty percent of twelve million dollar settlement fund where thirty percent represented a negative multiplier of the lodestar
Summary of this case from Fogarazzo v. Lehman Brothers, Inc.Opinion
94 Civ. 7696 (RWS) 95 Civ. 6422 (RWS)
May 19, 2000
Richard Kilsheimer, Esq., Kaplan, Kilsheimer Fox; Michael J. Pucillo, Esq. and Wendy H. Zoberman, Esq., Burt Pucillo; Herbert T. Schwartz, Esq., Williams Bailey; Howard A. Tescher, Esq., Kipnis, Tescher, Lippman Valinsky, (of counsel), Attorneys for Plaintiff.
Mark G. Glasser, Esq., David L. Burgert, Esq. and Jeffrey R. Elkin, Esq., Porter Hedges; Martin D. Edel, Esq., Miller Wrubel, (of counsel), Attorneys for Defendants.
OPINION
Defendants Texas Biotechnology Corporation ("TBC"), John M. Pietruski, David B. McWilliams, Richard A. F. Dixon, Stephen L. Mueller, John R. Plachetka, Joseph M. Welch, and James T. Willerson (collectively, the "TBC Defendants") have moved, pursuant to Rule 54(b), Fed.R.Civ.P., for entry of final judgment severing and dismissing with prejudice the fraud claims against the TBC Defendants. Plaintiffs have moved for approval of a proposed settlement in this action as to the claims against the TBC Defendants, and for an award of attorneys' fees and reimbursement of litigation expenses. For the reasons set forth below, the motion to dismiss the fraud claims against the TBC Defendants and approval of the settlement will be granted, and attorneys' fees will be set at 30% of the settlement. In addition, expenses of $45,302.88 will be awarded.
Background and Prior Proceedings
The background and prior proceedings in these actions have been set forth in several opinions of this Court, familiarity with which is assumed. See, e.g., In re Blech Sec. Litig., 928 F. Supp. 1279 (S.D.N.Y. 1996); In re Blech Sec. Litig., Nos. 95 Civ. 4204, 4298, 4299, 6422, 7215 (RWS), 1997 WL 20832 (S.D.N Y Jan. 21, 1997); Weiss v. Blech, No. 95 Civ. 6422, 1997 WL 458678 (S.D.N.Y. Aug. 11, 1997); In re Blech Sec. Litig., 961 F. Supp. 569 (S.D.N.Y. 1997); In re Blech Sec. Litig., 187 F.R.D. 97 (S.D.N.Y. 1999). Background and proceedings relevant to the instant motions is set forth below.
The Weiss action was originally filed on November 21, 1994, in the United States District Court for the Southern District of Texas, by named plaintiffs Bernard Weiss and Richard Hunt. The action was brought as a class action asserting violations of Sections 11, 12(2), and 15 of the Securities Act of 1933. The action was brought on behalf of purchasers of TBC units (each unit consisting of one share of common stock and one warrant to purchase a share of common stock) in TBC's initial public offering dated December 15, 1993. The defendants named in the Complaint were David Blech, a founder of TBC, a director at the time of the offering, and the principal of D. Blech Co.; D. Blech Co., the sole underwriter of TBC's initial public offering; David B. McWilliams, President CEO and a director of TBC at the time of the offering; Richard A.F. Dixon, Vice President of Research and a director of TBC at the time of the offering; Stephen L. Mueller, Director of Finance, Treasurer and Assistant Secretary for TBC at the time of the offering; R. Plachetka, Vice President of Clinical Development at the time of the offering; Joseph M. Welch, Vice President of Business Development at the time of the offering; James T. Willerson, Chairman of the Scientific Advisory Board and a director at the time of the offering; and John M. Pietruski, Chairman of the Board of Directors of TBC at the time of the offering. Also named, but never served, was Isaac Blech, the brother of David Blech.
On January 23, 1995, TBC Defendants moved to dismiss the Complaint. The matter was fully briefed in the United States District Court for the Southern District of Texas and on June 26, 1995, Magistrate Calvin Botley recommended that the motions be denied. By Order dated August 2, 1995, the Honorable Kenneth M. Hoyt adopted the Magistrate's Report and Recommendation. On August 21, 1995, by Order of the Judicial Panel on Multidistrict Litigation, this matter was transferred to this Court and consolidated with In re Blech Securities Litigation, Master File No. 94 Civ. 7696 (RWS).
On November 20, 1995, the TBC Defendants moved in this Court for reconsideration of Judge Hoyt's order denying the motions to dismiss. The matter was again briefed and argued. By Order dated June 6, 1996, this Court permitted reconsideration but denied the motions on the same grounds as set forth by the Texas Court.
Originally, the complaint in In re Blech Securities Litigation did not involve any claims against TBC. On June 7, 1995, however, an action was filed in this District entitled Kozloski v. Texas Biotechnology Corp., which was consolidated with the In re Blech Securities Litigation cases. A Notice of Voluntary Dismissal Without Prejudice was subsequently filed in the Kozloski action.
While this Court's Order of June 6, 1996 denied the Motions to Dismiss in their entirety as to the TBC claims, the Court granted the Motion to Dismiss for failure to plead fraud with particularity as to certain other claims in the consolidated complaint in In re Texas Biotechnology Corp. The Motion was granted with leave to replead. However, as to TBC, no fraud claims under Section 10(b) were asserted in any amended pleading. On July 26, 1996, the TBC Defendants answered the Complaint. Thereafter, a motion was filed seeking an interlocutory appeal of the denial of the Motion to Dismiss pursuant to 28 U.S.C. § 1292(b). That motion was denied.
On March 31, 1997, Plaintiff Weiss moved for class certification. Plaintiff Hunt had passed away, and Weiss remained the only plaintiff asserting claims against TBC and members of management of that company. Documents were produced by TBC throughout the fall of 1996 and early 1997. The depositions of defendants McWilliams and Mueller were noticed, and McWilliams' deposition was taken. Weiss's deposition was taken in September 1998, after which TBC Defendants agreed to certification of the class, which was granted by Order of this Court dated February 3, 1999.
In early 1999, Weiss also focused third party discovery on Citibank, the lender for D. Blech Co. and David Blech. Documents were produced by Citibank pursuant to subpoena and in the Bankruptcy Court. On March 15, 1999, plaintiff took the deposition of Rosemary Vrablic, the loan officer responsible for the Blech account.
After the Vrablic deposition, settlement discussions were pursued in earnest and a settlement in principle was reached in May 1999. Through the summer of 1999, the parties worked on settlement papers which were signed in September 1999. A further issue arose with regard to insurance matters which delayed the filing of the settlement papers until December 17, 1999.
On January 5, 2000, the Court preliminarily approved the settlement and directed that Notice be sent. Since the entry of the Order, more than 1,545 Notices have been sent to Class Members or brokers advising them of the pendency of this action and the proposed settlement and settlement hearing which was scheduled for April 5, 2000. The deadline for objections and requests for exclusion was March 20, 2000. As of April 5, 2000, no objections or requests for exclusion had been received, and no objections were raised at the April 5, 2000 settlement hearing.
Discussion
I. An Order Directing Entry of Final Judgment Will Issue with Respect to the Claims Against the TBC Defendants
The TBC Defendants' motion seeking an order directing the entry of a final judgment severing and dismissing with prejudice the fraud claims against the TBC Defendants in In re Blech Securities Litigation is unopposed by the plaintiffs in that action and will be granted.
II. The Settlement Will Be Approved
Fed.R.Civ.P. 23(e) provides that "[a] class action shall not be dismissed or compromised without the approval of the court." The decision to grant or deny such approval lies within the discretion of the trial court, see In re Ivan F. Boesky Sec. Litig., 948 F.2d 1358, 1368 (2d Cir. 1991); Newman v. Stein, 464 F.2d 689, 692 (2d Cir. 1972), and this discretion should be exercised in light of the general judicial policy favoring settlement. See Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982); In re Michael Milken Assoc. Sec. Litig., 150 F.R.D. 46, 53 (S.D.N.Y. 1993); Chatelain v. Prudential-Bache Sec., Inc., 805 F. Supp. 209, 212 (S.D.N.Y. 1992).
It is well-established that courts' principal responsibility in approving class action settlements is to ensure that such settlements are fair, adequate, and reasonable. See, e.g., Weinberger, 698 F.2d at 73; In re PaineWebber Ltd. Partnerships Litig., 171 F.R.D. 104, 124 (S.D.N.Y. 1997).
This determination "involves consideration of two types of evidence." Weinberger, 698 F.2d at 73. The Court's primary concern is with "the substantive terms of the settlement compared to the likely result of a trial," Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983), and to that end "the trial judge must appraise himself of all the facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim[s] be litigated." Weinberger, 698 F.2d at 74. (internal citations omitted).
The Second Circuit has indicated nine factors to consider in determining the fairness of a proposed settlement:
(1) the complexity, expense and likely duration of the litigation, (2) the reaction of the class to the settlement, (3) the stage of the proceedings and the amount of discovery completed, (4) the risks of establishing liability, (5) the risks of establishing damages, (6) the risks of maintaining the class action through the trial, (7) the ability of the defendants to withstand a greater judgment, (8) the range of reasonableness of the settlement fund in light of the best possible recovery, (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.
City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974).
The Court's second concern is with the "negotiating process by which the settlement was reached," Weinberger, 698 F.2d at 74, which must be examined "in light of the experience of counsel, the vigor with which the case was prosecuted, and the coercion or collusion that may have marred the negotiations themselves." Malchman, 706 F.2d at 433 (citing Weinberger, 698 F.2d at 73). The court has a fiduciary duty to ensure that the settlement is not the product of collusion. See In re Warner Communications Sec. Litig., 798 F.2d 35, 37 (2d Cir. 1986). So long as the integrity of the arm's length negotiation process is preserved, however, a strong initial presumption of fairness attaches to the proposed settlement, see Chatelain, 805 F. Supp. at 212, and great weight is accorded to the recommendations of counsel, who are most closely acquainted with the facts of the underlying litigation. See id.
A. The Grinnell Factors Have Been Satisfied
As set forth below, analysis of the nine Grinnell factors establishes that the settlement is fair.
First, continued litigation in this action would be complex, costly, and of substantial duration. The action has already been pending for over five years. Significant discovery, trial preparation, and the trial itself still lie ahead. A judgment favorable to plaintiffs would likely be subject to post-trial motions and appeal, delaying any payment to the Class.
Second, no objections to the settlement have been raised.
Third, plaintiffs have engaged in sufficient discovery to evaluate fully the merits of their claims and obstacles to success. An analysis was done early in the case to set forth potential damages. Certain favorable facts were revealed in the course of discovery, as were certain defenses. Plaintiff's counsel is of the opinion that further discovery is not likely to provide plaintiffs with additional leverage to obtain a larger recovery.
Fourth, there were substantial risks of establishing liability in this action. While plaintiffs' counsel believes there is a strong case as to liability against TBC, the individual defendants had potential statutory defenses.
Fifth, plaintiffs faced substantial risks in proving damages. Plaintiffs' damage analysis estimated Section 12(2) damages at approximately $3.2 million, while the estimate for Section 11 damages ranged from $1,450,000 to $12,500,000. Defendants' numbers ranged from $300,000 to $3.7 million. The damage number was further complicated by the fact that David Blech, individually, was a purchaser of a substantial number of units in the period from December 1993 through April 1994, raising issues with respect to the number of open market purchases unaffiliated with David Blech.
The sixth factor tilts against approval: there were no serious risks of maintaining the Class through trial.
Seventh, it is questionable whether the defendants possess the ability to withstand a greater judgment. TBC is a start up company which has never had a profitable year. Sales for 1998 and 1999 barely exceeded $2 million. It is unclear whether the company could sustain a judgment at the level of damages in this case, absent a significant positive development in the company's business. The company is contributing $187,500 to the proposed settlement; the $612,500 balance is being paid by the directors' and officers' insurer. The aggregate limits of the insurance policy are $2 million, some of which has been spent on litigation costs. Since the policy is a wasting policy, continued litigation would deplete the resources available through the policy.
Eighth and ninth, the settlement is within the range of reasonableness. While additional years of litigation might well have resulted in a higher settlement or verdict at trial, continued litigation could also have reduced the amount of insurance coverage available and not necessarily resulted in a greater recovery.
On the whole, the Grinnell factors weigh in favor of approval of the settlement, a strong indication that the settlement is fair.
B. The Settlements Were Achieved in Good Faith and at Arm's Length
A fair settlement should be the result of good faith, arm's length bargaining undertaken by experienced counsel. See Weinberger, 698 F.2d at 74; Grinnell, 495 F.2d at 463-66.
As demonstrated by the previous motions to dismiss described above, the parties strenuously litigated the issue of the adequacy of the complaint.
The process by which the parties reached the proposed settlement was arms-length and hard fought by skilled advocates and negotiators, and has been presented to the Court after the completion of significant discovery.
For the reasons set forth above, the settlement merits the approval of the Court.
III. Attorney's Fees of 30% Will Be Awarded
Plaintiffs seek an award of attorney's fees of 30% of the settlement.
This Court has previously approved a percentage of the fund method for calculation of attorney's fees. See Adair v. Bristol Technology Sys., No. 97 Civ. 5874, 1999 WL 1037878 (S.D.N.Y. Nov. 16, 1999); In re NASDAQ Market-Makers Antitrust Litig., No. 94 Civ. 3996, 1998 WL 782020, at *15 (S.D.N.Y. Nov. 9, 1999). The NASDAQ opinion noted that while the Second Circuit had previously given its express approval to the lodestar method of determining fees, but not to the percentage of the fund method, the "judicial tide" was changing, and many district courts in the circuit had utilized the percentage method. See id. Since the NASDAQ opinion, the Circuit has acknowledged more explicitly the trend towards utilizing the percentage of the fund method. See Savoie v. Merchants Bank, 166 F.3d 456, 460-61 (2d Cir. 1999); see also Polar Int'l Brokerage Corp. v. Reeve, 187 F.R.D. 108, 120 (S.D.N.Y. 1999). This Court, for all the reasons previously given in the NASDAQ opinion, continues to find that the percentage of the fund method is more appropriate than the lodestar method for determining attorney's fees in common fund cases. See Adair, 1999 WL 1037878, at *3.
Plaintiffs' counsel has requested a fee of 30% of the Settlement Fund. Courts in this District have previously awarded fees exceeding this level on numerous occasions. See, e.g., Adair, 1999 WL 1037878, at *4 (33%); Berchin v. General Dynamics Corp., 1996 WL 465752, at *2 (S.D.N.Y. Aug. 14, 1996) (33% of first $3,000,000); Vladimir v. Deloitte Touche, LLP, 95 Civ. 10319 (S.D.N.Y. Aug 14, 1996) (33%).
As the previous discussion regarding the fairness of the settlement indicates, this Court has carefully considered the efforts of Plaintiffs' counsel in this action. For the reasons aforementioned, Plaintiffs' request for fees of 30% is reasonable and fair. This conclusion is reinforced by evidence that the percentage fee would represent a negative multiplier of the lodestar, had that approach been used; under a lodestar calculation, Plaintiff's counsel would receive at least another $150,000 in fees.
Costs of $45,302.88 are reasonable given the length of this litigation to date, and will be awarded as well.
Finally, an award of $5,000 to Mr. Weiss is appropriate, given his involvement in the case, including production of documents and submitting to a deposition.
Conclusion
For the reasons set forth above, the settlement of $800,000 is approved. Plaintiffs' counsel will be awarded 30% of the settlement fund, in addition to $45,302.88 in costs. Plaintiff Weiss will be awarded $5,000.
An order will issue dismissing the fraud claims in In re Blech Securities Litigation as against the TBC Defendants.
It is so ordered.