The 10b-5 Daily

Monday Morning Settling (Another Look At Citigroup)

In settling a case, timing is important. Citigroup's settlement of the WorldCom litigation for $2.65 billion was the subject of a handshake agreement as of Thursday, May 6. According to press reports, Citigroup told analysts that the timing was influenced by the Second Circuit argument in the case scheduled for the following Monday.

At issue in that appeal was whether the district court had properly granted class certification for the claims against Citigroup based on analyst statements about WorldCom's securities. The district court had applied the fraud-on-the-market doctrine (i.e., reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market) to help establish that common issues predominated over individual ones for the class members. Citigroup argued on appeal that the fraud-on-the-market doctrine could not be applied to claims based on analyst statements. Meanwhile, the SEC submitted an amicus brief to the court opposing Citigroup's position. Citigroup, in discussing its decision to settle the case before the appeal was heard, stated "to have the SEC come out against that obviously worsened the odds against us." But, with the benefit of hindsight, were the odds better than they appeared?

Although the Second Circuit had agreed to hear Citigroup's appeal, as of May 6 (the date of the handshake agreement) it had not issued an opinion explaining its ruling. That would come the next day, May 7, and the opinion certainly suggested that Citigroup's arguments would be considered carefully.

In Hevesi v. Citigroup Inc., 2004 WL 1008439 (2d Cir. May 7, 2004), the court explained that it had agreed to hear the appeal because the certification order "implicates a legal question about which there is a compelling need for immediate resolution." The question was "whether a district court may certify a class in a suit against a research analyst and his employer, based on the fraud-on-the-market doctrine, without a finding that the analyst's opinions affected the market prices of the relevant securities." In discussing its decision to address that question, the court expressed skepticism about the lower court's ruling. Among other indications that it might be favorably disposed to Citigroup's position, the court: (1) discussed a Seventh Circuit case in which the court had declined to apply the fraud-on-the-market doctrine on class certification; (2) noted that "the application of the fraud-on-the-market doctrine to opinions expressed by research analysts would extend the potentially coercive effect of securities class actions to a new group of corporate and individual defendants - namely, to research analysts and their employers;" and (3) cited a prominent Columbia Law School professor on the point that analyst opinions should be treated differently from issuer statements.

If that were not enough, just five days later the Fourth Circuit issued an opinion establishing that a district court must make a factual finding that the fraud-on-the-market doctrine is applicable before it can be used to support class certification. In Gariety v. Grant Thornton, LLP, 2004 WL 1066331 (4th Cir. May 12, 2004), the court addressed whether a district court could accept "at face value the plaintiffs' allegations that the reliance element of their fraud claims could be presumed under a 'fraud-on-the-market' theory." At issue was whether the relevant securities had been traded on an efficient market (one of the requirements for the application of the theory). The court concluded that because "the district court concededly failed to look beyond the pleadings and conduct a rigorous analysis of whether Keystone's shares traded in an efficient market, we must remand the case to permit the district court to conduct the analysis and make the findings required by Rule 23(b)(3)."

While there are undoubtedly many other factors that go into a settlement (especially one of this magnitude), would the Citigroup settlement have looked different just a week later based on these judicial developments? Maybe not, but it's interesting to speculate.

Predicting The Future

The Associated Press has an article discussing whether the market should expect another set of corporate scandals in the future. Although human nature is unlikely to change, the article reviews the legal environment and concludes "[i]n sheer numbers, the legal activity of recent years - both government action and investor litigation - should be enough to give any would-be wrongdoer some immediate cause for pause."

Quote of note: "'I don't think there's a clear connection' between legal risks and improper behavior, said Bruce Carton, executive director for Securities Class Action Services at ISS. 'When the misdeeds are going on, people aren't thinking years down the road, 'Will this cost me in a class action suit?' My sense is that (the legal risk) generally won't deter the bad guys, but it may spur the bad guys' employers to put safeguards in place that may catch or deter somebody down the line.'"

Whose Job Is It?

In a feature article this past weekend, the Washington Post addressed the issue of investor restitution for securities fraud. The article discusses some of the recent enormous settlements with regulators (e.g. the $1.4 billion settlement with the New York Attorney General over biased research reports) and concludes that the "problems with investor restitution are simple -- there is never enough money to go around -- and complicated -- it can be difficult to determine who should get what little money there is." The article also touches on another difficult problem, how to reconcile the SEC's new powers to collect settlement funds for allocation to investors with private securities litigation. (See this post in The 10b-5 Daily from last June.)

Quote of note: "The SEC is asking Congress for the power to seize more assets from wrongdoers who otherwise might shelter them under the protection of state bankruptcy laws and for the ability to hire outside law firms to help it collect payments. A House bill [the Securities Fraud Deterrence and Investor Restitution Act] that would give the SEC that authority is pending before the Judiciary Committee. Former SEC staffer [Mercer E.] Bullard said the public shouldn't demand that the agency invest a substantial portion of its resources into collecting penalties from wrongdoers. He said that is a task better suited to plaintiff lawyers."

Settlement Roundup (i2 And Raytheon)

The Citigroup settlement may have gotten all of the headlines, but last week was bookended by two other significant settlements.

i2 Technologies, Inc. (OTC: ITWO), a Dallas-based provider of closed-loop supply chain management solutions, announced on Monday the preliminary settlement of the securities class actions (and related derivative lawsuits) pending against the company in the N.D. of Tex. The original suit, first filed in March 2001, alleges that the company made false and misleading statements concerning the characteristics and implementation of certain software products. A second set of class actions were filed starting in April 2003 relating to the company's 2003 financial restatement.

The settlement is for $84.85 million ($43 million from the company's insurance carriers and $41.85 million from the company). Interestingly, i2 also announced that to help fund its portion of the settlement, "the company has entered into definitive agreements providing for the issuance and sale by i2 of $22 million of common stock to certain individual defendants in the lawsuits."

Raytheon Company (NYSE: RTN), a Massachusetts-based leading defense contractor, announced on Thursday the preliminary settlement of the securities class action pending against the company in the D. of Mass. The suit, originally filed in 1999 and about to go to trial, alleges that Raytheon made false and misleading statements concerning its financial performance.

The settlement is valued at $410 million (a cash payment of $210 million and warrants for Raytheon stock with a stipulated value of $200 million). Although Raytheon apparently has yet to reach an agreement with its insurance carriers, the company stated that it "expects to receive insurance proceeds of $75 million in connection with the settlement."

Cornerstone And Stanford Release Report On Filings In 2003

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2003. The findings include:

(1) Securities class actions (not including IPO allocation, analyst research, or mutual fund trading practices cases) declined by 22% between 2002 and 2003, falling from 225 to 175 filings.

(2) Companies sued in 2003 lost more than $540 billion in market capitalization, down from $1.9 trillion in 2002.

(3) There were fewer huge cases. In 2003, there were 14 filings in which the defendant companies lost more than $10 billion in market capitalization. In 2002, there were 40 filings with this type of market capitalization loss.

(4) The top three circuits in number of filings in 2003 were the Second Circuit (37 filings), the Ninth Circuit (34 filings), and the Eleventh Circuit (21 filings).

(5) Insider trading by corporate defendants was alleged in 33% of the 2003 filings (as compared to 26% in 2002).

(6) Auditors and underwriters were named as defendants in a very small percentage of all filings both in 2002 and 2003.

The joint press release announcing the report can be found here.

"What Do You Have To Have? Pictures?"

The 11th Circuit (Florida, Georgia, Alabama) is a tough place to bring a successful securities class action. That appears to be the conclusion of a Miami Daily Business Review feature article (via law.com - regist. req'd) on the topic. The article notes that a recent NERA report (see this post) found that 10 percent of the securities class actions filed in the 11th Circuit since the passage of the PSLRA have been dismissed within two years - tied for second place among all circuits. The article also profiles some prominent cases.

Quote of note: A plaintiffs' attorney in Florida contended "that the 11th Circuit's standard for inferring intent to defraud -- as set out in the 11th Circuit's 1999 decision Bryant v. Avado -- has 'heightened the pleading requirements beyond the intent of Congress. Motive and opportunity and damages are not enough [in the 11th Circuit],' [the plaintiffs' attorney] said. 'What do you have to have? Pictures? You almost need an insider to get to discovery.'"

Competing With Gusto

The Wall Street Journal has an article (subscrip. req'd) on the lead plaintiff hearing held last week in the mutual fund trading practices cases. (The 10b-5 Daily has posted about the cases frequently, most recently on speculation that the settlements could total $1 billion.)

Quote of note: "'Nobody should expect to get rich off this case,' said U.S. District Judge J. Frederick Motz in early April. 'If there is any recovery, the great bulk of the recovery should go to those who were injured, not to their lawyers, particularly in light of the fact that so much of the underlying investigative work has already been done by public authorities,' he added. 'Any of you who have expressed an interest as being appointed as plaintiffs' counsel are forewarned that we mean what we say. You may wish to reconsider your request for appointment in light of this observation.' The admonishment did little good. Six dozen lawyers showed up at last week's hearing to angle for a lead counsel spot."

Quote of note II: "Legislation passed by Congress in 1995 and affirmed in court rulings dictate that plaintiffs with the largest financial stake in a case should get lead-plaintiff status, which usually makes their lawyers lead counsel. But it isn't always clear which investor suffered most, especially when there are different ways of showing harm. In the mutual-fund cases, lawyers presented myriad formulas to make their clients look like the biggest losers."

Cornerstone Releases Report On Settlements

Cornerstone Research has released an updated report on post-Reform Act settlements of securities class actions through 2003. The findings include:

(1) Of the 96 settlements in 2003, almost 85% were for less than $20 million. Five cases settled for more than $100 million.

(2) 20% of post-Reform Act settlements have involved Section 11 or 12(a)(2) claims and median settlements as a percentage of "estimated damages" are significantly higher for these cases.

(3) Approximately 30% of post-Reform Act settlements have involved institutions serving as lead plaintiffs (as compared to approximately 15% before the Reform Act). After controlling for various factors, the report finds that settlement amounts are higher in these cases.

(4) Less than 15% of post-Reform Act cases have been accompanied by the filing of a derivative action.

Cornerstone's press release can be found here. The company also announced that its report on securities class action filings for 2003 (done jointly with Stanford Law School's Securities Class Action Clearinghouse) will be released shortly.

Addition: The New York Law Journal (via law.com - regist. req'd) has an article on the report.

More On The Citigroup Settlement

There is extensive press coverage today of Citigroup's $2.65 billion settlement in the WorldCom case. Some highlights:

Additional Settlements - The Wall Street Journal (subscrip. req'd) reports that the lead plaintiff has given the other defendant banks in the WorldCom litigation 45 days to settle under the same formula used by Citigroup. If the banks agree, they would pay about $2.8 billion to bond investors.

Allocation - The Associated Press reports that, according to the lead plaintiff in the case, Citibank's payment will be allocated with $1.45 billion to bondholders and $1.2 billion to shareholders.

Attorneys' Fees - The Wall Street Journal (subscrip. req'd) and the London Evening Standard report that the complex attorneys' fees arrangement in the case may result in fees of around $140 million for the plaintiffs' firms handling the litigation.

"We Want To Put The Entire Era Behind Us"

Citigroup Inc. (NYSE: C) has announced a settlement of the claims against the company in the WorldCom litigation. Citigroup will make a payment of $2.65 billion, or $1.64 billion after tax, to be allocated between class period purchasers of WorldCom stock and WorldCom bonds. According to the press release, the path to settlement became easier last Thursday when New York State Comptroller Alan Hevesi, who oversees the lead plaintiff in the case, agreed to face-to-face discussions. Citigroup also announced that after settling the WorldCom claims it will have a "litigation reserve" of $6.7 billion on a pre-tax basis to address other legal matters, including the Enron securities class action.

News coverage can be found in Bloomberg, Reuters, and the New York Times.

Quote of note (Bloomberg): "Chief Executive Officer Charles Prince said Citigroup faced claims seeking $54 billion in the WorldCom lawsuit. 'We made a $1.64 billion insurance policy to avoid a roll of the dice in front of a jury,' Prince said on a conference call with investors. 'We want to put the entire era behind us.'"

Quote of note II (Bloomberg): "Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, said Prince and Citigroup Chairman Sanford Weill called him this morning and he told them 'I'm backing them all the way. If this was to go to court it would be so big, God help us,' Alwaleed said. 'The trend in the U.S. and New York is against corrupt practices. Look at Martha Stewart.'"

Ten Years Is A Long Time

According to a Reuters article, the CFO of Royal Ahold has told a Dutch newspaper that the U.S. securities class actions brought against the company in the aftermath of its recent accounting scandal could "'last long, even 10 years is possible.'" Complicating the situation, Royal Ahold's D&O; insurance carrier has served the company with a court summons in an attempt "to terminate the Directors, Officers and Corporate Liability policy of $100 million for Ahold's U.S. Foodservice subsidiary where much of the profit overstatements took place in 2002." (The 10b-5 Daily has posted about this case before, most recently concerning the court's discovery decision issued last March.)

TALX Settles

TALX, Corp. (Nasdaq: TALX), a St. Louis-based business process outsourcer of payroll data-centric services, has announced the preliminary settlement of the securities class action pending against the company in the E.D. of Mo. The case, originally filed in December 2001, alleges that TALX made misleading statements that did not properly account for certain software and inventory, did not reflect certain write-offs, and did not accurately disclose certain business prospects. The settlement is for $5.75 million and will be paid by TALX's insurance carriers.

Motion To Dismiss Denied In AOL Time Warner Case

The Washington Post reports that Judge Shirley Wohl Kram has denied most of the motion to dismiss in the AOL Time Warner securities class action pending in the S.D.N.Y. The complaint alleges that the defendants, both before and after the 2001 merger of AOL and Time Warner, improperly inflated results through 'round-trip' deals that in effect overpaid other companies for goods, services, or equity in exchange for advertising revenue. In 2002, AOL Time Warner restated $190 million in revenue.

Judge Kram threw out some of the plaintiffs' claims, including those against former AOL chairman Steve Case and various bondholder claims, but found that the allegations in the complaint "established sufficient circumstantial evidence of misbehavior or recklessness for the case to move forward" against the company and various current and former officials. (The 10b-5 Daily has posted frequently about the case, most recently about a discovery decision issued by the court last October.)

Group Pleading Takes Another Blow

The "group pleading" doctrine creates the presumption that the senior officers of a company are collectively responsible for misrepresentations or omissions contained in public statements made by the company (e.g., press releases, SEC filings). The U.S. Court of Appeals for the Fifth Circuit has recently held, in the first circuit court decision to address the issue, that the group pleading doctrine was abolished by the enactment of the PSLRA's heightened pleading standards.

That decision is beginning to have an impact outside of the Fifth Circuit. In In re Cross Media Marketing Corp. Sec. Litig. 2004 WL 842350 (S.D.N.Y. April 20, 2004), the court found that the PSLRA's "use of the singular 'defendant' counsels against group pleading in actions arising in securities fraud cases since the enactment of the [statute]." The court cited the Fifth Circuit decision and held that group pleading could not be used to establish that the individual defendants made misrepresentations or acted with scienter (i.e., fradulent intent).

Holding: Motion to dismiss granted with leave to replead.

Press Coverage Of The Big Breakup

The Milberg Weiss split has generated press coverage, including articles in the New York Law Journal (via law.com - free regist. req'd), Reuters, Bloomberg, and the San Diego Union-Tribune.

Quote of note (Reuters): "[T]he two firms agreed on a structure in which lawyers already working on a case would continue to work on it, even if that meant having attorneys from both firms on a case. A committee has been set up to deal with any spats."

The Top 50

ISS's Securities Class Action Services ("SCAS") has issued a list of the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2003 in which the law firms served as lead or co-lead counsel.

The full report can be found here. Securities Litigation Watch, the blog authored by Bruce Carton of SCAS, also has a post summarizing the results.

The Splits Keep Coming

Not to be outdone, Cauley Geller Bowman & Rudman, another well-known plaintiffs' securities class action firm, also has announced a split. Cauley Bowman Carney & Williams PLLC is based in Little Rock and Geller Rudman PLLC is based in New York. Each new firm has around 15 attorneys.

Addition: The official press release was issued on May 6.

The Big Breakup Is Official

Initially announced last June, the breakup of Milberg Weiss Bershad Hynes & Lerach, widely recognized as the leading plaintiffs' securities class action firm, is finally complete. With little fanfare, the firm has split as of May 1 into Milberg Weiss Bershad & Schulman LLP (headquartered in New York) and Lerach Coughlin Stoia & Robbins LLP (headquartered in San Diego).

Although the split generally follows geographical lines, it will not stay that way for long. An article in today's Financial Times states that one of the name partners of Lerach Coughlin sees "the new firm growing to more than 150 lawyers by the end of the year and opening new offices in New York, Florida, Philadelphia and Washington, DC." Indeed, the websites already show both firms as having offices in Los Angeles and Washington, D.C. (but only Lerach Coughlin has attorneys listed in those locations).

Addition: The new firms have issued a joint statement. Of course, they also have separate thoughts on the matter (click here for Milberg Weiss' press release; click here for Lerach Coughlin's press release).

Making Applesauce

A few years ago, Senior Judge Milton Shadur of the N.D. of Ill. issued a lead plaintiff decision in the Comdisco securities litigation. See In re Comdisco Sec. Litig., 150 F. Supp. 2d 943 (N.D. Ill. 2001). The decision disqualified the Pennsylvania State Employees' Retirement Systems ("PASERS") from serving as lead plaintiff despite the fact that PASERS had the most claimed losses of any of the movants. The court reasoned:

It turns out that when the Class Period of January 25 through October 3, 2000 (which is the proper referent) is focused upon, PASERS' claim that it suffered some $2.4 million in losses in connection with its investment in Comdisco common stock is only a mirage created by PASERS' adoption of a FIFO (first-in-first-out) approach to its dealings in the stock. In fact PASERS was an active trader during the Class Period, with 15 separate sales that more than matched its purchases during that time frame: Its Class Period purchases of Comdisco common stock aggregated 213,800 shares, while its sales during the same period totaled 218,400 shares. And when those transactions are properly matched, rather than by the impermissible application of a FIFO methodology (which by definition brings into play PASERS' pre-Class-Period holdings as the purported measure of its claimed loss), PASERS' Class Period sales at inflated prices caused it to derive unwitting benefits rather than true losses from the alleged securities fraud--so much so that [another movant] demonstrates that PACERS derived a net gain of almost $300,000 (rather than any net loss at all) from its purchases and sales during the Class Period.

In essence, the court applied a "last-in, first out" (LIFO) methodology in examining PASERS' trades and determined that PASERS did not have any cognizable losses based on the alleged fraud.

A member of the plaintiffs' bar subsequently wrote an analysis of the case entitled Fee-Fi-Fo-Fum: Why The Rejection Of FIFO Is . . . Not Smart, 2 Class Action Litig. Report (BNA) 786 (2001). The article concluded that Judge Shadur's decision to use LIFO to determine PASERS' losses had the effect of improperly comparing green apples (pre-class-period shares) with red apples (class-period shares) because it brought "into play the sale of pre-class-period holdings." In the author's view, "it is only the inflated purchases that are relevant, because only those shares relate to the fraud."

Apparently, plaintiffs' counsel in the Comdisco case (which is still pending) recently brought the article to Judge Shadur's attention. The judge was not amused. In an unusual memorandum opinion issued this week, Judge Shadur decided to clarify his earlier statements on the topic. See In re Comdisco Sec. Litig., 2004 U.S. Dist. LEXIS 7230 (N.D. Ill. April 26, 2004). The court noted that "one possible consequence of working with apples may be the production of applesauce -- as Webster's Third New Int'l Dictionary (unabridged) 104 defines that product: 'an insincere expression of opinion: an assertion that is patently absurd and usu. phrased in exaggerated terms: BUNK, BALONEY (I know applesauce when I hear it -- Ring Lardner).'" The court found that this was the case here, because any real-world analysis of losses required the use of LIFO.

"Simply put, the article's attempted criticism of the use of LIFO in determining the identity of the 'most adequate plaintiff' under the [PSLRA] impermissibly ignores the obvious fact that with every securities class action having to identify a class period, the focal point of the inquiry must begin (for standing purposes and otherwise) with purchases or sales -- or both -- during that class period. And in turn that focus calls for a primary concentration on class period transactions, with is consistent with LIFO rather than FIFO treatment. Regrettably the cited article, like the source from which it drew its Fee-Fi-Fo-Fum title, is no better than a fairy tale."

Astute readers will note that this debate is closely related to the larger debate over what is necessary to adequately plead loss causation in securities class actions. (See this post for an overview.)

Addition: Both decisions referenced in this post can be found at this website under case number 1 01-CV-2110.

$1 Billion In Settlements?

The Rocky Mountain News has an article on the mutual fund trading practices cases. (The 10b-5 Daily recently posted about the opening hearing in the cases, which have been consolidated in the D. of Md.) The article quotes an expert speculating that the settlements of the cases could total $1 billion.

Quote of note: "'It's hard to figure what a judge may grant in compensation, and that leaves a pretty dark cloud over the entire industry,' [a Morningstar equity analyst] said. 'What will happen in the class-action lawsuits is going to be a problem for any company involved in market timing and late trading.'"

More Coverage Of Terayon Case

The lead plaintiff/lead counsel controversy in the Terayon securities litigation in the N.D. of Cal. continues to receive press coverage. (The 10b-5 Daily has posted about the the case here and here.) The May 3 edition of Fortune has a column on Judge Patel's order and subsequent developments.

Quote of note: "Accordingly, Judge Patel is probably still months away from deciding what to do next. Her options include kicking the firm off the case, fining it, or deciding that it did nothing wrong after all, and allowing it to continue as co-lead counsel."

Everything You Ever Wanted To Know (And A Little Bit More)

For readers interested in the practices and policies of The 10b-5 Daily, a Frequently Asked Questions section has been added.

Mixed Opinions

The Economist has an interesting article (subscrip. req'd) on the recent court decisions in the research analyst cases. For non-subscribers, the article can be found in the Finance & Economics section of the April 24 edition.

Quote of note: "So far, Merrill Lynch seems to have hit the jackpot. All the litigation against it has been consolidated in New York under Milton Pollack, a federal judge who believes that there is no case to answer. Others have been less lucky: Lehman Brothers suffered a nasty setback last month when another federal judge in the same judicial district in lower Manhattan, Jed Rakoff, allowed litigation against it to proceed. These are, of course, early days; but because the stakes are so high, defendants on the end of adverse rulings are under great pressure to settle. It may well be that none of the civil cases lasts long enough to be decided by a jury."

Disclosure: The author of The 10b-5 Daily is quoted in the article.

Who's In Charge Here?

Section 20(a) of the '34 Act creates a cause of action against defendants alleged to have been "control persons" of those who engaged in securities fraud. In the absence of a scienter pleading requirement for control person liability (a disputed question in the Second Circuit - see this post), all plaintiffs need to show at the pleading stage is: (a) there was a primary violation by a controlled person; and (b) control of the primary violator by the defendant. An unresolved issue is what is necessary to adequately plead the element of control if both the primary violator and the defendant are corporations.

In Schnall v. Annuity and Life Re (Holdings), Ltd., 2004 WL 515150 (D. Conn. March 9, 2004), the court's answer was: not too much. XL Capital Ltd. had founded Annuity and Life Re (Holdings), Ltd. ("ANR"), the primary corporate defendant in the case, and two of XL Capital's officers/directors served as ANR directors. In addition, during the class period XL Capital owned between 11% and 12.9% of ANR's common stock. Based on these facts, the court found "it may reasonably be inferred that defendant XL Capital was in a position to influence and direct the activities of ANR" and therefore the plaintiffs' Section 20(a) claim against XL Capital could go forward.

Holding: Motion to dismiss denied.

ESI Settles

Electro Scientific Industries, Inc. (Nasdaq: ESIO), a Portland-based manufacturing equipment supplier, has announced the settlement of the securities class action (and a related derivative suit) pending against the company in the D. of Oregon. The suit, originally filed in March 2003, is based on misrepresentations related to the company's restatment of its financials for the 2002 fiscal year and two subsequent quarters. The settlement is for $9.25 million, of which approximately $3.8 million will be paid by ESI and approximately $5.45 million will be paid by its insurance carrier.

The Goldilocks Problem

How can a court determine what amount of attorneys' fees is "just right"? DPL, Inc. and their former accountants, PricewaterhouseCooopers, settled the securities class action against them in the S.D. of Ohio (as well as related state court derivative actions) for $145.5 million. (See this post on the announcement of the preliminary settlement.) The class action portion of the settlement was $110 million and plaintiffs' counsel requested that the court award them 35%, or $38.5 million, in attorney's fees and costs.

In a decision issued last month (but only recently appearing online), the court rejected this fees request after members of the class objected. See In re DPL, Inc. Sec. Litig., 2004 WL 473472 (S.D. Ohio March 8, 2004). The court found that plaintiffs' counsel had achieved an "outstanding" result in the case. According to an affidavit of an economist submitted by plaintiffs' counsel, $110 million represented "between about 62% and 145% of the losses suffered by the members of the class." The court also noted that "a review of the Defendants' motions seeking dismissal of the litigation, motions which were not ruled upon due to the settlement, reveals that it is by no means certain that the claims of the Plaintiffs and the class they represent would have survived rulings on such." Under these circumstances, the court found that the percentage of fund method for calculating the attorneys' fees, with its emphasis on rewarding good results, was more appropriate than the lodestar method (which is based on the number of hours reasonably expended, at a reasonable hourly rate, adjusted by a multiplier).

When it came to the actual percentage to award, however, the court balked at 35%. The court determined that plaintiffs' counsel had done relatively little work to obtain the settlement (primarily briefing the motion to dismiss) and that "an attorney compensated at the hourly rate of $350, an overly generous rate for this part of the world, would have to work 110,000 hours to generate such a fee." The court then concluded that a reasonable award was 20% of the common fund, or $22 million. Notably, the court offered no rationale for selecting 20% as the right amount, as compared to 19%, 21%, or any other percentage below what was requested.

Holding: Sustaining in part and overruling in part the application for attorneys' fees.

Service Corp. Int'l Settles

Service Corp. Int'l (NYSE: SRV), a Houston-based funeral and cemetary company, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of Tex. The suit, originally filed in January 1999, alleges that the company made misrepresentations concerning its prearranged funeral business and other financial matters. The settlement is for $65 million, with $30 million of the payment being provided by the company's insurance carriers.