Category Archives: Settlement

Two recent settlements of note:

(1) Diamond Foods, Inc. (NASDAQ: DMND), a packaged foods provider, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case originally was filed in 2012 and relates to a scandal that involved the improper accounting of payments to walnut farmers. The 10b-5 Daily recently posted about the class certification decision in the case.

The settlement is valued at $96 million, including $11 million in cash (largely from the company’s insurers) and 4.45 million shares of common stock. The company has the option “to privately place, or conduct a public offering of, the shares with the consent of the lead plaintiff and its counsel, prior to distribution of the Settlement Fund” and contribute the proceeds to the settlement in lieu of the shares.

(2) The Blackstone Group, L.P. (NYSE: BX), an investment banking company, has entered into a preliminary settlement of the securities class action pending against the company in the S.D. of New York. The case originally was filed in 2008 and relates to the company’s alleged failure to properly disclose the value of certain investments as part of its initial public offering. In 2011, The 10b-5 Daily posted about the Second Circuit’s reversal of the dismissal of the case.

The settlement is for $85 million. According to press reports, the case was scheduled to go to trial next month.

A court in the S.D.N.Y. has approved the settlement of a securities class action brought against Citigroup, but not without a fair amount of drama over the award of attorneys’ fees. In the case, the plaintiffs alleged that Citigroup misled investors, from 2007 to 2008, by understating the risks associated with assets backed by subprime mortgages and overstating the value of those assets. The case settled for $590 million and lead counsel submitted an attorneys’ fees request of $97.5 million or 16.5% of the common fund.

Both the Federal Rules of Civil Procedure and the PSLRA provide that plaintiffs’ counsel in a securities class action may be awarded a “reasonable” fee as determined by the court. Courts generally find that it is appropriate to cross-check a proposed percentage fee award using the lodestar method (i.e., by multiplying the reasonable hours expended by counsel by a reasonable hourly rate, and then adjusting that number with a multiplier to compensate for the risks the law firm assumed), but there is no uniformity as to the appropriate hours, rates, and multiplier to be used. In the Citigroup case, the lodestar used by lead counsel – $51.4 million (resulting in a multiplier of 1.9 to reach the $97.5 million request) – drew a strong objection from the Center for Class Action Fairness. The court largely agreed that the lodestar was improperly inflated.

In particular, the court made the following reductions:

(1) Lead plaintiff/lead counsel contest – Following the appointment of lead counsel, the firm decided to join forces with one of the firms who had unsuccessfully applied for the position. As part of the fees application, however, that second firm included the hours it spent attempting to become lead counsel as compensable time. The court disagreed and struck $4 million worth of time that the second firm claimed for pre‐complaint investigation, drafting its complaint, and participating in the lead counsel contest.

(2) Post-settlement discovery work – The court was sharply critical of lead counsel’s decision to engage in thousands of hours discovery-related tasks after the parties reached a settlement in principle of the case. The court concluded that that “a reasonable paying client would not have authorized or paid for these hours” and cut $7.5 million from the lodestar.

(3) Hourly rate for contract attorneys – The objector and lead counsel strongly disagreed over the proper way to account for contract attorneys. The objector argued that the market rate for contract attorneys was no more than $100 per hour and, in any event, contract attorneys are an expense that should not be included in the lodestar, while lead counsel submitted a blended rate of $462 per hour (which the court noted was higher than the blended associate rate). The court found that it was appropriate to include the contract attorneys in the fee request, but a more appropriate blended rate for those attorneys was $200 per hour, for a savings of $12 million.

(4) Waste and inefficiency – The court’s review revealed a number of instances of questionable billing, including hundreds of hours spent on reviewing depositions. The court decided to cut 10% ($2.8 million off the remaining $27.9 million) for waste and inefficiency.

In total, the court cut the lodestar in half, from $51.4 million to $25.1 million. However, the court also found that given the complexity and risks associated with the case (in addition to several other factors) a fairly large multiplier of 2.9 was appropriate. In the end, lead counsel was awarded attorneys’ fees of $70.8 million (down from $97.5 million) or 12% of the common fund.

Quote of note: “In a case of this magnitude, it is inevitable that attorneys will spend more hours than turn out to be necessary on some projects. But it is, or ought to be, far from inevitable that attorneys will attempt to charge those hours to their client. And some instances of waste and inefficiency are so egregious that their inclusion in a motion for fees casts a shadow over all of the hours submitted to the Court—just as the thirteenth stroke of a clock calls into doubt whether any previous stroke was accurate.”

Merck & Co., a New Jersey-based pharmaceutical manufacturer, has announced the preliminary settlement of the securities class action pending against the company in the D. of New Jersey. The case is actually two cases – against Merck and Schering-Plough Corp. – based on the companies’ failure to disclose the bad results of a clinical trial of the anti-cholesterol drug Vytorin (which the companies jointly sold). Merck and Schering-Plough merged in 2009. The cases were scheduled to go to trial next month.

The settlement is for $688 million, with the company paying $215 million to resolve the securities class action against the Merck defendants and $473 million to resolve the securities class action against the Schering-Plough defendants. (Note that this case is different than the Vioxx-related securities class action against Merck that led to a 2010 U.S. Supreme Court decision. The Vioxx-related case is still pending and class certification was granted last month.)

There is extensive press coverage of the settlement, including in the New York Times, Reuters, and Bloomberg.

Citigroup Inc. (NYSE: C), a leading global bank, has agreed to settle a securities class action pending against the company in the S.D.N.Y. The case, which was originally filed in 2008, alleges that Citibank misrepresented its exposure to collaterialized debt obligations. The court preliminarily approved the settlement on August 29, 2012, and has scheduled a hearing for final approval on January 13, 2013.
The settlement is for $590 million, which the company says will be covered by existing legal reserves. It is the third-largest settlement of a credit crisis case, trailing only Wachovia ($627 million) and Countrywide ($624 million). Bloomberg and Reuters have articles on the settlement.

Former executives of Bear Stearns Cos. (now owned by J.P. Morgan Chase) have agreed to a preliminary settlement of the securities class action pending against them in the S.D.N.Y. The case, originally filed in 2008, accuses the executives of misleading investors about the firm’s business and financial well-being in the run-up to the credit crisis. The settlement comes after the denial of the defendants’ motion to dismiss, but before class certification.

The settlement is for $275 million, making it one of the top 40 largest securities class action settlements since 1995 (as stated in the court filing). According to the Wall Street Journal (subscrip. req’d), however, the executives will not have to make any personal payments. Instead, the settlement amount will come from a $9 billion fund created by J.P. Morgan Chase to cover Bear Stearns-related litigation and other expenses.

Medtronic, Inc. (NYSE: MDT), a Minneapolis-based medical technology company, has announced the preliminary settlement of the securities class action pending against the company in the D. of Minnesota. The case, originally filed in 2008, stems from allegations that the company and certain of its officers made materially false statements regarding the extent to which revenue from one of its products, the Infuse bone graft, depended on applications not approved by the FDA (i.e., “off-label” uses).

The settlement is for $85 million. Reuters has an article. The 10b-5 Daily previously has posted about the court’s decision to certify the proposed class over the defendants’ objection that the plaintiffs could not adequately represent the class “because of alleged misrepresentations counsel made in the Amended Complaint regarding the testimony of the confidential witnesses.”

CIT Group, Inc. (NYSE: CIT), a New York-based bank holding company that provides commercial financing and leasing products and other services to small and middle market businesses, has agreed to settle the securities class action pending against the company in the S.D. of New York. The case, originally filed in 2008, stems from allegations that CIT and certain of its directors and officers made materially false statements and omissions regarding CIT’s subprime home loans and certain non-guaranteed, private student loans. The settlement is for $75 million. Reuters has an article.

As the 2011 fiscal year comes to a close, there have been a series of settlement announcements. Some of the more significant are:

(1) Arthrocare Corp. (NADAQ: ARTC), an Austin-based corporation that develops and manufactures surgical devices, instruments and implants, has announced the preliminary settlement of the securities class action pending against the company in the W.D. of Texas. The case, originally filed in 2008, stems from allegations that Arthrocare and certain of its officers and directors issued materially false financial statements. The settlement is for $74 million. Reuters has an article on the settlement.

(2) Wachovia Corporation, a financial services company now wholly owned by Wells Fargo & Co. (NYSE: WFC), has agreed to settle the securities class action pending against the company in the S.D. of New York. The case, originally filed in 2008, stems from allegations that Wachovia misled its equity investors about its underwriting practices and the quality of its mortgage portfolio. Interestingly, the district court had dismissed the settled claims, although the case was on appeal. The settlement is for $75 million. Reuters has an article on the settlement.

(3) Apollo Group, Inc. (NASDAQ: APOL), a Phoenix-based provider of private education, has agreed to settle the securities class action pending against the company in the D. of Arizona. The case, originally filed in 2004, stems from allegations that Apollo and certain of its officers failed to disclose that the company’s financial results were materially inflated by the improper practice of tying recruiter’s compensation directly to enrollments. The settlement is for $145 million. The case has a long history, including a jury verdict for the plaintiffs, a post-trial reversal, the reinstatement of the jury verdict on appeal, and the denial of defendants’ cert petition.

(4) Over forty underwriters have agreed to settle the securities class action pending against them and against Lehman Brothers Holding, Inc., a now-defunct financial services firm, in the S.D. of New York. The case, originally filed in 2008, stems from allegations that, prior to Lehman’s June 9, 2008 disclosure of a $2.8 billion second quarter loss, the company misled investors about its financial health. The complaint alleged that the underwriters contributed to the fraud by failing to investigate the truth of statements made by Lehman in financial statements and securities offerings. The settlement with the underwriters is for $417 million. Lehman’s former directors had previously settled for $90 million, bringing the total settlement amount to $507 million. Reuters has an article on the settlement.

There were two major settlements of subprime-related cases this week.

(1) Wachovia Corp. (NYSE:WB), a Charlotte-based financial services company now owned by Wells Fargo & Co., has announced the preliminary settlement of the securities class action pending against the company in the S.D. of New York. The case, originally filed in January 2009 in a California state court, stems from allegations that Wachovia and certain of its officers and directors made materially false statements in registration statements and prospectuses regarding the quality of the company’s loan portfolios. The settlement is for $627 million, of which Wachovia will pay $590 million and KMPG, who audited the company’s financial statements, will pay $37 million. Reuters has an article on the settlement.

(2) National City Corp. (NYSE:NCC), a Cleveland-based financial holding company now owned by PNC Financial Services Group Inc., has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Ohio. The case, originally filed in January 2008, stems from allegations that National City and certain of its officers and directors made materially false statements about the company’s mortgage-related exposure. The settlement is for $168 million.