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STULL v. BAKER

February 27, 1976

RICHARD J. STULL, Plaintiff,
v.
GEORGE P. BAKER, et al., Defendants. SALHA DARWISH and FAHMI PERESS, as Executors of the Estate of Saleh E. Darwish, Plaintiffs, v. GEORGE P. BAKER, et al., Defendants



The opinion of the court was delivered by: CONNER

CONNER, D.J.:

 Presently before the Court is an application pursuant to Rules 23(e) and 23.1 F.R.Civ.P., for an order approving the settlement and dismissal of the individual, class action, and derivative claims set forth in the above-captioned actions. Also before the Court is a joint application by Stull, Stull & Brody, Esq., plaintiff's counsel in the Stull action, and their counterparts in the Darwish action, Milberg & Weiss, Esqs., for the award of attorneys' fees.

 I.

 BACKGROUND

 The Stull Action

 The Stull action was filed on May 12, 1969 by Richard J. Stull, a purchaser of common stock in Lockheed Aircraft Corporation (Lockheed), as both a class action on behalf of other purchasers of Lockheed common stock and a derivative action on behalf of Lockheed. Defendants were charged with having violated Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § & 240.10b-5.

 In a Memorandum dated July 24, 1973, Judge Bryan declared the Stull action to be maintainable as a class action, but struck the Section 14(a) claims and limited the class to persons who had purchased Lockheed's common stock between September 30, 1965 and January 24, 1966 (the Stull Class). In the same Memorandum, Judge Bryan granted summary judgment in favor of Lockheed's independent public accountants, defendant Arthur Young & Company, on all claims against it except the Section 10(b) derivative claim.

 Both the derivative and class action claims asserted in the Stull complaint relate to the circumstances underlying Lockheed's contracting for, production of and ultimate catastrophic financial losses in connection with a huge military transport airplane commonly known as the C-5A. The award of the C-5A contract to Lockheed was publicly announced by the United States Department of Defense on September 30, 1965, which is the beginning date for the Stull Class. The terminal date for the Stull Class -- January 24, 1966 -- is the date upon which plaintiff purchased his stock.

 The gravamen of the charges of wrongdoing in the Stull complaint is that the individual defendants violated the federal securities laws by failing to disclose and/or misrepresenting facts concerning alleged losses and cost overruns incurred by Lockheed in connection with its production of the C-5A.

 The class action claims assert that these nondisclosures and/or misrepresentations caused the market price of Lockheed's common stock to be artificially inflated to the detriment of the members of the Stull Class, who purchased such stock before public disclosure of the relevant facts.

 The derivative claims, as now constituted, assert in substance the facially inconsistent claim that, by reason of the same alleged wrongdoing, Lockheed suffered damages as a purchaser or seller of securities in 1) the issuance by Lockheed of certain options for the purchase of its own stock, 2) the issuance by Lockheed of a public convertible bond issue in March 1967, and 3) an exchange of 100,000 shares of Lockheed common stock for all the shares of Aviquipo, Inc. in December 1969.

 All of the defendants named in the Stull action have filed answers which deny the material allegations of the Stull complaint and which assert various affirmative defenses.

 The Darwish Action

 Prior to his death in January 1974, Saleh E. Darwish attempted to intervene in the Stull action. The application was heard by Judge Bryan at the same time as the class action and summary judgment motions described above. Judge Bryan refused to allow the intervention. Thereafter, in August 1973, Mr. Darwish commenced the later of the above-captioned actions as a class action on behalf of all Lockheed security holders who purchased Lockheed securities "on and after March 3, 1967" and who either still held their Lockheed securities at the time of the commencement of the Darwish action or sold those securities at a loss "after the true facts came to the knowledge of the plaintiff and the public."

 After Darwish died, a protracted will contest delayed the appointment of an executor. When this fact was brought to Judge Metzner's attention, he struck the class allegations asserted in the Darwish complaint. Subsequently, executors were appointed and, by Order entered on June 18, 1975, the Executors of the Estate of Darwish were substituted as plaintiffs solely for the purposes of the then contemplated settlement of the action.

 The charges of wrongdoing asserted in the Darwish action are, in substance, the same as those alleged in the Stull action's class claims. As in the Stull action, defendants have filed answers denying all the material allegations in the complaint and asserting affirmative defenses.

 Other Actions

 In addition to the Stull and Darwish actions, a purported class action, entitled Colonial Realty Corporation v. Lockheed Aircraft Corporation, Civil Action No. 2641-69, was filed in the United States District Court for the District of Columbia on behalf of purchasers and holders of certain convertible debentures issued by Lockheed pursuant to a March 21, 1967 registration statement. Class action certification was denied on January 28, 1971 and the action apparently was dropped.

 Yet another action, styled Richland v. May, was commenced on May 15, 1970 in New York State Supreme Court, New York County. The action, which alleged violations of the Securities Exchange Act of 1934, was removed to this Court (70 Civ. 2299 DNE) and ultimately transferred to the Central District of California, where it was abandoned.

 Proceedings Leading to Settlement

 The affidavits and memoranda before the Court, together with the Court's own docket sheet, attest to the fact that the consolidated actions have been vigorously litigated. Since shortly after the inception of the Stull action, counsel have engaged in extensive motion practice and discovery procedures.

 The discovery included the review and analysis of many thousands of documents, the propounding and answering of numerous interrogatories and the taking of several depositions. Plaintiffs' counsel have also analyzed various reports prepared by, and testimony given before, the Securities and Exchange Commission (SEC), the Subcommittee on Economy in Government of the Joint Economic Committee, the Congress of the United States and the Secretary of the Air Force. In addition, two books, one entitled "The C-5A Scandal" and the other, "High Priests of Waste," were analyzed and abstracted, as were reports concerning the market prices of Lockheed stock and the stocks of competitive aerospace companies during the relevant periods.

 Plaintiffs' counsel feel that the discovery revealed convincing evidence in support of their position on the class action claims. They have reached the opposite conclusion with respect to the derivative claims asserted in the Stull action.

 Defendants have steadfastly denied any wrongdoing at all and it has become increasingly clear that further preparation for trial would be a massive task involving additional discovery of hundreds of thousands of documents. The records which would ultimately be placed before the Court would not only be voluminous, but would be so complex and difficult to understand that they would surely be subject to different interpretations by various expert witnesses. As the SEC stated in its report:

 
"[It] must be recognized that the amount of documentation related to this project (C-5A) is tremendous, much of it unintelligible to a nonexpert and much of it extremely detailed." Report of Investigation in Re Lockheed Aircraft Corporation, Vol. I, HO-423 at 3 (SEC Report).

 Similarly, Judge Bryan had observed:

 
"This case is a complicated one and class action plaintiffs in suits of this nature are faced with substantial difficulties." Stull v. Baker, [1973] CCH Fed. Sec. L. Rep. P 94,227 (S.D.N.Y. July 27, 1973).

 Therefore, although counsel may feel they have a strong case, as in all actions of the size and complexity of this one (at pre-trial conferences it was estimated that the trial of the consolidated actions could conceivably take a year), the result could not be predicted with any reasonable degree of certainty.

 The Settlement Agreement

 Serious settlement negotiations commenced in mid-1974 and culminated a year later when the "Stipulation and Agreement of Settlement of Shareholder Class Action Claims and Dismissal of Derivative Action Claims" dated July 24, 1975 (the Settlement Agreement) was presented to the Court.

 For the purposes of the proposed settlement, the Stull Class was expanded to include all persons who (1) purchased shares of Lockheed common stock between September 30, 1965 and November 30, 1968, inclusive, and (2) beneficially owned such shares on November 30, 1968 (the Settlement Class). *fn1"

 The November 30, 1968 date was selected as the terminal date for the Settlement Class because, while the parties could not agree as to when public disclosure had first occurred with respect to losses and cost overruns in the production of the C-5A, they did agree that such public disclosure had occurred by November 30, 1968. September 30, 1965, the date the award to Lockheed of the C-5A contract was publicly announced, is the commencement date for ...


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