The opinion of the court was delivered by: VINCENT L. BRODERICK
VINCENT L. BRODERICK, U.S.D.J.
This case involves a class action
brought under Section 10(b) of the Securities and Exchange Act of 1934 for the benefit of current and prior shareholders of Presidential Life
(the "Company") who had purchased its stock at a time when accounting methods utilized by the Company for high-risk bonds had been more favorable than permitted by applicable rules as interpreted by the United States Securities and Exchange Commission ("SEC"). The SEC initiated a cease and desist proceeding on September 22, 1992, stating that it was "the first proceeding instituted by the Commission charging a financial institution with improperly accounting for its investments in high yield, junk bonds."
The four class action shareholder suits involved here followed shortly thereafter and were consolidated under 92 Civ. 6898 by order dated February 10, 1993.
The consolidated amended class action complaint alleges that defendants concealed a material and other-than-temporary decline in the market value of the Company's investments in "junk bonds" leading to artificially inflated prices causing the class members to suffer losses as a result.
In March 1993 settlement was reached with the SEC, which entered a remedial order against the Company requiring modification of the Company's accounting practices.
This memorandum sets forth the grounds upon which I approved the settlement and the attorney's fee application in the amount of 25% of the common fund, or $ 418,750, plus expenses of $ 35,000,
at fairness hearing held under Fed.R.Civ.P. 23 on July 13, 1994. The principal problem presented in this litigation relates to the use of the Company's own assets to fund the settlement.
"The central question raised by the proposed settlement of a class action is whether the compromise is fair, reasonable and adequate." Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982), cert. denied sub nom Lowey v. Weinberger, 464 U.S. 818, 78 L. Ed. 2d 89, 104 S. Ct. 77 (1983). Scrutiny on this basis applies both to the negotiation process and to the resulting proposed settlement. The negotiations here appear to have been at arms-length and there is no indication of collusion. Id. at 74.
Guidelines for evaluating whether the settlement is fair and the class members' interests were adequately represented include the complexity, expense and likely duration of the litigation, the risks of litigation for all parties, comparison of the proposed settlement with the likely result of litigation, scope of discovery preceding settlement, the ability of the defendant to satisfy a greater judgment, and the reaction of the class to the settlement. See In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir. 1992), citing Weinberger, 698 F.2d at 73-74; City of Detroit v. Grinnell Corporation, 495 F.2d 448, 463 (2d Cir. 1974); In re Warner Communications Securities Litigation, 798 F.2d 35, 37 (2d Cir. 1986).
In the present case, the potential complexity of the litigation includes the presence of several novel accounting issues. The parties appear to have "a clear view of the strengths and weaknesses of their cases," In re Warner Communications Securities Litigation, 618 F. Supp. 735, 745 (S.D.N.Y. 1985), aff'd 798 F.2d 35 (2d Cir. 1986), based on limited but sufficient discovery, including interviewing of the defendant officer and director holding nearly one-third of the outstanding shares. The plaintiffs' claims present a number of difficult legal and factual problems, including the question of whether defendants acted with scienter and the matter of establishing damages.
The Stipulation and Agreement of Settlement (the "settlement agreement") provides that $ 1.675 million in funds derived from the Company
are to be used to pay estimated losses of both current and prior shareholders who purchased the stock during the period involved. The Company had no insurance policy from which payment could be made and the individual defendants would not agree to make such payments directly. The largest single shareholder, a director and officer of the Company, owns approximately 31% of the Company's shares; he is a defendant in this action and as such is excluded from the class. He has agreed to the settlement agreement through counsel.
Impact of the settlement on the Company's stock is likely to be minimized because the settlement amount was announced in the Company's SEC 10-K filing for fiscal 1992, dated as of December 31, 1992 and filed April 12, 1993, and according to plaintiffs' counsel, there has been no discernible effect on the stock price since the announcement.
Concern on my part that the settlement could have an adverse impact on current shareholders, see part IV below, led to inclusion of all present shareholders - not merely those who were also class members -in those required to be given notice and an opportunity to be heard at the fairness hearing with respect to the settlement and to the application by class plaintiffs' counsel for attorney's fees. See Fed.R.Civ.P. 23(c)(d); Rules for the Southern District of New York, Civil Rule 5(a).
Over 7,000 notices were mailed to class members and current holders. No objections to the proposed settlement of the case have been received.
Many of the Company's shareholders are sophisticated institutional investors.