Category Archives: Settlement

The proposed $500 million settlement to be paid by WorldCom to the SEC for distribution to the company�s injured shareholders raises questions about the role of private securities litigation in large corporate fraud cases.
The heart of the issue is the interaction between the Fair Funds for Investors provisions in the Sarbanes-Oxley Act of 2002 and securities class actions. Section 308 of Sarbanes-Oxley allows the SEC to combine civil penalties with the disgorgement obtained from a securities law violator into a fund for the benefit of the victims of the violation. Recent legislation proposed by Rep. Richard Baker (R-La.), the Securities Fraud Deterrence and Investor Restitution Act of 2003, would both increase the civil penalties the SEC could obtain and make it easier for the agency to disburse those funds to investors (the Corp Law Blog has an excellent summary of the proposed bill).
In the wake of Enron and other corporate scandals, Congress is clearly attempting to transfer some of the responsibility for the compensation of injured investors from private securities litigation to the SEC. As stated by Rep. Baker in his press release announcing the new legislation:

�If you’re the victim of a crime, you might get some satisfaction out of knowing that the car thief has been caught and thrown in the slammer and that your stolen property has been recovered. But to watch the sheriff and a bunch of lawyers, after the trial, pile into your car and drive away with it just isn�t justice and isn�t an outcome you�re likely to consider fair.�

The problem is that Sarbanes-Oxley and the Securities Fraud Deterrence Act address the �sheriff� (the SEC) but are silent on what to do about the �bunch of lawyers� (private securities litigation).
Which leaves the following question: If injured WorldCom investors receive $500 million from the SEC, what effect should this have on the pending securities class action? Thoughts and comments from readers are welcome.

The Associated Press reported on Friday that KPMG has agreed to a $125 million settlement in a securities class action in the E.D. of Pa. The case is based on KPMG’s role in the events leading to Rite-Aid Corp.’s 1999 restatement of earnings. According to one of the plaintiffs’ attorneys, it is the second-largest settlement by an accounting firm in a securities class action (after the Cendant case, in which Ernst & Young agreed to pay $335 million). U.S. District Judge Dalzell’s ruling on the settlement is expected next week.

Quote of note: An individual investor objected to the request by the plaintiffs’ law firms for 25% percent of the settlement in fees (or roughly $31 million). At the Friday hearing, however, Judge Dalzell seemed disinclined to find the proposed fees excessive, noting that it was a difficult case because “(KPMG) had the very obvious defense that they were victims too . . . It’s not a sure thing.”
Addition: Judge Dalzell approved the settlement.

Halliburton Company (NYSE: HAL), a Houston-based energy services company formerly run by Vice President Cheney, announced this morning that it has reached a memorandum of understanding to settle the pending securities class action and derivative suits against the company. The cases are based on Halliburton’s accounting for revenues associated with unapproved claims and change orders on construction projects. Halliburton did not disclose the financial terms of the settlement, but said the amount was insignificant.

Addition: Reuters is now reporting that the settlement is for $6 million.

Commtouch Software, Ltd., an Israeli anti-spam software maker, has announced the settlement of a securities class action against the company. The case was filed in the N .D. of California in 2001. The settlement consists of a payment of $15 million to members of the class, which will be fully funded by the company’s directors and officers insurance.

The Newark Star-Ledger reports in yesterday’s edition that the court has approved the settlement in the securities class action against Party City Corp. The case was filed in the U.S.D.C. of New Jersey in 1998, dismissed in 2001, scheduled to be heard on appeal to the Third Circuit in 2002, before finally settling prior to the appellate hearing for $3.8 million.

Quote of note: “Attorneys estimated the settlement works out to about 33 cents a share for members of the class, before deducting attorneys’ fees.”

Business Week Online has an analysis of the Hanover Compressor settlement and its possible impact on future securities class action settlements.

Quote of note: “Richard Bennett, a corporate-governance consultant in Portland, Me., agrees. ‘Hanover Compressor may not be a household name, but it’s completely unprecedented to have a publicly traded company acknowledge that board members ought to be accountable to their shareholders,’ he says. ‘I think you’re definitely going to see more [groundbreaking corporate-governance settlements] because shareholders are demanding it.'”

The big news today is the securities class action settlement by Hanover Compressor Co., a natural gas compression services company based in Houston, Texas. In addition to compensating investors with a combination of cash, stock, and debt (worth around $80 million according to press reports), Hanover agreed to a series of corporate governance reforms above and beyond anything required by Sarbanes-Oxley or other federal securities laws. Notably, Hanover will: (1) change its outside auditing firm every five years; (2) ensure that two-thirds of its board consists of independent directors; and (3) canvass shareholders holding more than 1% of the company’s stock for a list of nominees for two new independent director positions on its board.

The settlement still has to be approved by the U.S. District Court for the Southern District of Texas. Milberg Weiss is lead plaintiffs’ counsel and has issued a press release. Numerous wire services and newspapers have run articles, including Reuters, USA Today, and the Houston Chronicle.