The opinion of the court was delivered by: LOWE
This action represents the consolidation of many class actions which in turn represent but one part of a complex of securities fraud cases. By memorandum opinion and order, of even date herewith, we approved the settlement of these consolidated class actions for approximately $20 million.* In approving the settlement of fair, reasonable and adequate pursuant to Fed. R. Civ. P. 23(e) we reserved judgment on the Plan of Distribution ("Plan") of the class settlement fund insofar as it would distribute the fund to class members rather than the current holders of the debentures in question. Presently before the Court are the objections of two such debenture holders. For the reasons stated below we deny their objections and approve the Plan in its entirety as submitted by class plaintiffs' lead counsel.
The consolidated class actions are part of the litigation following the collapse of Saxon Industries Inc. ("Saxon").*1 Until the Spring of 1982 Saxon, from all outward appearances, was a financially healthy corporate giant engaged in three principal lines of business: (1) a paper and paper products manufacturing group; (2) a business products group, which manufactured, sold and leased photocopiers and related equipment and supplies; and (3) an advertising specialty group, which made calendars, playing cards and commercial gift items.
On March 30, 1982 Saxon reported an estimated pre-tax loss of $47 million for the fourth quarter of fiscal 1981, and indicated that it might incur, an additional $40-$50 million charge against earnings. On April 8, 1982, Saxon announced that it was in default of certain debt obligations. One week later, Saxon filed a petition for relief under Chapter 11 of the Bankruptcy Code. The bankruptcy was widely publicized. Numerous actions were soon filed alleging, inter alia that Saxon's books and records had been falsified, and its public financial statements and other reports were materially misleading.
The class actions consolidated under the caption In Re Saxon Securities Litigation, 82 Civ. 3103 (MJL), were brought on behalf of purchasers of Saxon's securities during the period March 31, 1976 through April 15, 1982 (the "Class Period"). The Court certified a class pursuant to Fed. R. Civ. P. 23 consisting of all purchasers of Saxon securities (including debentures) during the class period.*2 The Second Consolidated Amended Complaint alleged that Saxon's former officers, directors and independent auditors, Fox & Company ("Fox"), violated § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 and the common law by dissemination of materially false and misleading financial statements and other documents.
As part of the global settlement of all Saxon related litigation $18,150,000 plus accrued interest was allocated to the claims of class members. The class settlements were presented to the court for approval pursuant to Fed. R. Civ. P. 23(e). Over 100,000 notices were mailed to class members. Notice was also published twice each in The Wall Street Journal, The International Herald Tribune, and The London Financial Times.*3 The Court held a hearing on September 20, 1985. No objections were made to the fairness, reasonableness or adequacy of the settlement itself, however, two objections** were made to the Plan of Distribution.
The objectors, Anthony Walsh ("Walsh") and Arnold Weber ("Weber") purchased bonds on the market after Saxon's petition in bankruptcy--i.e. after the class period ended. While clearly not members of the class, Walsh and Weber claims that by purchasing bonds from class members they became assignees of the class members' chose in action--the right to recover in this action. They argue that the Plan of Distribution should be amended so that they and other Post-Petition Debenture Purchasers (also collectively referred to hereinafter as the "PPDP's" or "objectors") receive that portion of the settlement apportioned to the class members who sold their bonds after the petition in bankruptcy. It is the PPDP's objection that is presently before the Court.
The objectors' arguments break down into four distinct claims: (1) that the purchaser and seller of the bonds intended that the rights to any future recovery be assigned to the purchaser; (2) that federal common law dictates on the sale of the bond, the automatic assignment of all rights; (3) that New York State law dictates automatic assignment of rights; and (4) that the underlying policy of the federal securities laws dictates automatic assignment of rights. Counsel for the class plaintiffs strongly oppose the PPDP's objections.
We begin by observing that the objectors do not claim that they were victims of the alleged frauds at Saxon. Indeed they could not. The PPDP's, by definition, purchased their bonds after the petition in bankruptcy and therefore after widespread public disclosure of the alleged frauds.
During the class period the debentures in question*4 sold on the market at prices ranging from approximately $500 to $700**1 per debenture ($1000 face value, due 1987-1990). After the petition in bankruptcy and the public disclosure of the alleged fraud on April 15, 1982, the debentures were traded between approximately $200 and $300 per debenture.*** The market for the debentures did not disappear even after the disclosure and the bankruptcy because of an obvious perception that the bonds continued to have value. the PPDP's argue that the perception of continuing value was based on the belief that reorganization in bankruptcy or litigation might produce a return on the investment. The class plaintiffs, however, argue that the post-petition market for the debentures simply reflected the belief that the bondholders would receive a significant return solely from the bankruptcy reorganization.
Pursuant to the plan of reorganization of Saxon in the Bankruptcy Court (annexed as Exhibit "A" to the affidavit of Roy Carlin) the PPDP's received cash and securities valued at $333.33 per debenture--one third of the face amount. Thus a PPDP who purchased at the average price of $250 received an $88 profit for his investment. At oral argument counsel for the PPDP's argued that the PPDP's paid a substantial "opportunity cost" for the bonds, thus the purchase price was not $250, but rather $250 plus two years lost interest income. While this argument has surface appeal it does little to advance their case. Using the $250 average purchase figure and adding two years*5 simple annual interest at 10% the PPDP's profit becomes clear. The total cost of the bonds, including lost opportunity, is $302.50. The PPDP's therefore received an average premium over market return of $31. On the other hand if the average cost of $250 is subtracted from the bankruptcy recovery of $333.33 the PPDP's obtained a 35.2% profit for a two year investment. The PPDP's may argue that such a return was lower than they might have received for other investments of such a speculative nature, especially with the prevailing high interest rates of 1982-83. The short answer to that argument is simply that the investment market necessarily involves risk-taking and the securities laws were not designed to guaranty maximum profit.
Was an Assignment Intended?
The next argument made by the PPDP's is that there was some unspoken intent between the buyer and seller of the bonds that the right to recovery in any future class action was assigned to the buyer. At oral argument counsel alleged:
What Mr. Walsh's affidavit states further is his intent. I think that this is most important, because it is uncontradicted. Mr. Walsh, who has sworn that he is a professional investor with some experience, purchased two precise things, putting it in the context of this proceeding. One is the right to claim, the right to claim in bankruptcy, and the second is the right to the proceeds of the class action claim if and when they should be derived.
Transcript of the hearing of September 20, 1985 ("Tr.") at 20.
Objectors begin with the proposition that judgments are assignable--a proposition with which no one argues. From that they argue that the PPDP's formed an intent to purchase the rights to some future judgment, and therefore there was an implied assignment of those rights.
This argument has little merit. Even if we assume that the PPDP's could reasonably form some intent to purchase the rights to recover a future judgment there is no indication that the sellers intended to sell such rights. Mr. Walsh may not use his personal subjective intent to infer that the sellers had an intent to transfer their rights. Absent a showing that there was an intent to ...