The opinion of the court was delivered by: BONSAL
After more than seven years of litigation in these consolidated actions, a Stipulation of Settlement dated May 23, 1979 between the class plaintiffs and three of the defendants, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), Peat, Marwick, Mitchell & Co. ("Peat, Marwick"), and Harris, Kerr, Forster & Co. ("Harris, Kerr") and a Plan for Distribution prepared by plaintiffs' attorneys pursuant to the Stipulation of Settlement have been submitted to this Court for approval. These actions were consolidated by orders of the Judicial Panel on Multidistrict Litigation under the caption In re Stirling Homex Securities Litigation (MDL-126).
The Stipulation of Settlement would settle all claims asserted by the class plaintiffs against Merrill Lynch; Peat, Marwick; and Harris, Kerr ("the settling defendants").
Stirling Homex Corporation ("Stirling Homex") was organized in 1968 and was engaged in the manufacture and installation of modular or factory-built houses. On February 19, 1970, it made a public offering consisting of 1,175,000 shares of common stock. On July 29, 1971, it made a second public offering consisting of 500,000 shares of $ 2.40 cumulative convertible preferred stock ("preferred stock"). On July 10, 1972, Stirling Homex filed a petition in bankruptcy. On March 11, 1977, certain of its directors and officers were convicted of securities and mail fraud in connection with the sale of stock of Stirling Homex.
The Consolidated Amended and Supplemental Complaint filed on June 2, 1976 ("Amended Complaint") contains three claims hereinafter discussed that would be affected by the proposed partial settlement. These claims are asserted on behalf of the class certified pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure. This class consists of purchasers of Stirling Homex common stock from March 16, 1971 through July 10, 1972 and purchasers of Stirling Homex preferred stock from July 29, 1971 through July 10, 1972.
The first claim in the Amended Complaint alleges that the settling defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5, by materially overstating the income and net worth of Stirling Homex in financial statements and other publications during the class period, causing the price of Stirling Homex stock to be artificially inflated.
Merrill Lynch is alleged to have been the investment banker for Stirling Homex and to have distributed the preliminary prospectus and the prospectus for the public offering of July 29, 1971, both of which allegedly contained false statements. During most of the class period, Merrill Lynch was the principal market maker for Stirling Homex securities. Following distribution of the preferred stock in 1971, Merrill Lynch is alleged to have prepared and made available to its salesmen a series of research reports which contained materially false and misleading information and recommendations about Stirling Homex stock. In addition, Merrill Lynch is alleged to have distributed a false and misleading article on Stirling Homex.
Peat, Marwick became the auditors for Stirling Homex, replacing Harris, Kerr, on February 24, 1971. Peat, Marwick is alleged to have certified false financial statements which were contained in the prospectus for the public offering of July 29, 1971 and in the Company's financial report for its fiscal year 1971. Also, Peat, Marwick is alleged to have reviewed accounting methods and interim financial statements of Stirling Homex up to the time of its bankruptcy.
Harris, Kerr were auditors of Stirling Homex from prior to October 7, 1970 to February 24, 1971, and were alleged to have certified false financial statements for the fiscal year ended July 31, 1970. These statements were included in a preliminary prospectus dated April 21, 1971 and in the registration statement and prospectus for the public offering of July 29, 1971.
The second claim alleges that Merrill Lynch violated Section 10(b) and Rule 10b-5 by conspiring with Chemical Bank and a director of Stirling Homex to falsely represent in a footnote to the registration statement and prospectus for the public offering of July 29, 1971 that U.S. Shelter Corporation, a subsidiary of Stirling Homex, had obtained a $ 15,000,000 line of unsecured credit. Merrill Lynch is alleged to have asked U.S. Shelter Corporation to obtain a letter from a bank indicating that U.S. Shelter Corporation had banking support and proper financing. Chemical Bank is alleged to have accommodated this request by furnishing a letter suggesting the existence of an unsecured line of credit, although the bank never established, nor intended to establish, such a credit.
The third claim alleges that Merrill Lynch, Peat, Marwick and three individual defendants violated Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, by materially overstating the income and net worth of Stirling Homex in the registration statement for the public offering of July 29, 1971. This claim is brought on behalf of class members who purchased Stirling Homex preferred stock.
THE PROPOSED PARTIAL SETTLEMENT
To compromise, settle and dismiss all claims asserted against them, the settling defendants have paid $ 10,525,000, which was deposited in escrow on April 11, 1979 and is earning interest in excess of ten percent, the interest to be added to the fund. No part of the settlement fund will revert to the settling defendants.
The settlement fund will be charged with certain expenses incurred by plaintiffs' attorneys and with fees and disbursements of plaintiffs' attorneys and accountant to the extent approved by this Court.
If the proposed partial settlement is approved, the settling defendants will be released from all claims arising from any matter set forth in the complaint asserted by plaintiffs and other settling defendants and plaintiffs agree to indemnify the settling defendants against ...