The opinion of the court was delivered by: NEAHER
This class action to recover damages from the defendant Whittaker Corporation was originally commenced on September 3, 1974, by the Independent Investors Protective League ("IIPLL"), an unincorporated membership association, for alleged violations by Whittaker of the securities laws, including § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and for common law fraud and deceit. The case has been the subject of extensive discovery by the class representatives and is now before the court for approval of a proposed settlement. For the reasons which follow, the court is of opinion that the proposed settlement is fair and in the best interests of the plaintiff class and should be approved.
The events which gave rise to the action are as follows. Whittaker, a diversified California corporation headquartered in Los Angeles, in late 1967, acquired as a wholly owned subsidiary the Crown Aluminum Industries Corporation ("Crown"), a manufacturer and distributor of aluminum siding with annual sales of about $18 million. Because of Crown's substantial size, annual audits of Crown were conducted between 1967 and 1972 by Whittaker's outside auditor, Arthur Andersen & Co. ("Andersen"), rather than Whittaker's own audit personnel.
In early 1972, Whittaker agreed to sell Crown to the Chamberlain Manufacturing Corporation ("Chamberlain"). Pursuant to the purchase agreement, independent auditors conducted an audit of Crown's assets, including physical inventory. In late April 1972, the audit - carried out jointly by Andersen and Price Waterhouse & Co. - revealed that Crown's stated inventory exceeded actual inventory by $6 million. Further investigation confirmed the shortage, and Whittaker, in the first week of May 1972, publicly announced the results of the audit and investigation.
Although Whittaker originally thought itself the victim of large-scale thefts, its ongoing investigation revealed that the apparent "shortage" was in fact the result of inflated inventory figures reported by Crown personnel beginning in 1969 and continuing through 1971. Whittaker's reconstruction of Crown's actual financial performance for this period required the following recomputations of Whittaker's previously reported earnings for fiscal years 1969, 1970 and 1971; (1) a $420,000 reduction in reported earnings of $31 million for fiscal 1969; (2) an increase in reported net loss for fiscal 1970 from $8.4 million to $10.8 million; and (3) a reduction in reported earnings for fiscal 1971 from $9.5 million to $7.2 million. It is the discrepancy between Whittaker's reported and actual net income for each of these years that forms the basis for this class action.
The original complaint named as defendants Whittaker, various of its officers and directors, and Arthur Andersen & Co., and contained four claims for relief. Count one charged the defendants with violations of §§ 11, 12(2), 17 and 32(b) of the Securities Act of 1933, arising from material inaccuracies of a registration statement and preliminary prospectus issued by Whittaker on January 31, 1972, caused not only by the Crown inventory shortage, but also by certain allegedly improper accounting methods employed by Whittaker with respect to its income from housing development and installment sales of property. Count two alleged violations of §§ 18 and 32(b) of the Securities Exchange Act of 1934, based on the incorporation in a 10-K report filed by Whittaker with the SEC on January 1, 1972, of the inaccuracies of the registration statement and prospectus complained of in count one. Counts three and four, the precursors of the present complaint, alleged violations of § 10(b) of the '34 Act and Rule 10b-5, and common law fraud and deceit, respectively, based on the same factual allegations.
In the intervening years, the complaint has been subjected to a series of amendments, which have refined both the scope of the action and the constituency of the plaintiff class. First, in March 1976, plaintiffs consented to the dismissal of IIPL as a party plaintiff, and agreed to the entry of summary judgment in favor of the defendants with respect to the first two counts of the complaint. Further winnowing of the action occurred in the wake of the Supreme Court's decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976): first, the claims against Andersen were dismissed, followed by plaintiffs' agreement to dismiss the claims against the individual Whittaker defendants and to limit their complaint to the Whittaker earnings misstatements attributable to the Crown inventory discrepancies. The complaint was again amended, this time adding the necessary allegation of "scienter" and expanding the description of the class to include all persons who had purchased Whittaker warrants, as well as common stock, between January 1, 1970, and December 31, 1973.
As the case now stands, the current, or fourth-amended, complaint contains two counts. The first charges that Whittaker between December 22, 1969 (the release date of Whittaker's fiscal 1969 year-end financial statement) and May 11, 1972 (3ne week following Whittaker's public disclosure of the Crown inventory shortage), made and published in its annual reports and various SEC filings materially false and misleading statements with respect to its financial condition. The second count for common law fraud and deceit relies upon the same factual allegations. The action is now brought on behalf of all persons who purchased Whittaker common stock or warrants between December 22, 1969, and May 11, 1972.
Pursuant to the stipulation of settlement entered into between the parties on December 14, 1977, which provided for the filing of a fourth amended complaint, Whittaker agreed to settle this action for $350,000, less the cost of providing notice to potential class members. The stipulation further provides that from this sum will be deducted an award of attorneys' fees, expenses and disbursements to the plaintiffs, and the costs of administering and distributing the fund.
As set forth in the fourth amended complaint and provisionally certified by the court on December 15, 1977, the class includes all persons (other than Whittaker officers and directors, and those who were officers or employees of Crown or partners or employees of Andersen between January 1, 1969, and May 11, 1972) who purchased Whittaker common stock or warrants expiring May 5, 1979, between December 22, 1969 (the press-release date of Whittaker's fiscal 1969 financial statement) and May 11, 1972 (one week following Whittaker's disclosure of the Crown inventory shortage), inclusive. For purposes of distributing the net proceeds of the proposed settlement fund, the class has been divided into six subclasses, reflecting the type of security purchased and the period during which purchases were made.
In accordance with the court's orders of December 15, 1977, and February 14, 1978, potential class members were notified individually by mail and by publication of the pendency of this action, the proposed settlement and its terms, their right to be heard with respect to the adequacy of the settlement at a hearing to be conducted for that purpose and to be represented by separately retained counsel, as well as the method for filing proofs of claim or requests for exclusion and the consequences of doing or failing to do so.
A hearing was conducted on March 20, 1978, so that the court might rule on the adequacy of the proposed settlement and determine a proper award of attorneys' fees and disbursements to counsel for the plaintiff class. Over 7,000 proofs of claim have been filed by class members, and some 200 recipients have indicated their desire to opt out of the class, but no potential class member or representative appeared at the hearing (other than counsel for the named plaintiffs who favor the settlement) or has filed any opposition to the proposed settlement.
The court is now called upon to determine whether the proposed settlement should be approved. See Rule 23(e), F.R.Civ.P. Although the more than 100,000 individual notices and publication notice elicited over 7,000 claims, but not a single objection, the court remains "responsible for the protection of the many class members whose interests are involved but who do not appear in the action." West Virginia v. Chas. Pfizer & Co., 314 F. Supp. 710, 740 (S.D.N.Y. 1970), aff'd, 440 F.2d 1079 (2 Cir.), cert. denied, 404 U.S. 871, 92 S. Ct. 81, 30 L. Ed. 2d 115 (1971). Accordingly, the court will grant its approval only ...