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IN RE AMERICAN BANK NOTE HOLOGRAPHICS

January 2, 2001

IN RE: AMERICAN BANK NOTE HOLOGRAPHICS, INC., SECURITIES LITIGATION IN RE: AMERICAN BANKNOTE CORPORATION SECURITIES LITIGATION THIS DOCUMENT RELATES TO: ALL CONSOLIDATED ACTIONS


The opinion of the court was delivered by: McMAHON, District Judge.

 
MEMORANDUM DECISION AND ORDER APPROVING CLASS ACTION SETTLEMENT AND AWARDING COUNSEL FEES AND EXPENSES

Pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, Plaintiffs in In re American Bank Note Holographics, Inc. Securities Litigation, 99 Civ. 0412(CM) (the "Holographics Action") and Plaintiffs in In re American Banknote Corporation Securities Litigation, 99 Civ. 0661(CM) (the "ABN Action"), on behalf of themselves and the Classes (as hereinafter defined) in each consolidated action (together, the "Actions") move for final approval of the proposed global settlement (the "Settlement") with Defendants American Bank Note Holographics, Inc., ("Holographics"), and American Banknote Corporation ("ABN"); NationsBanc Montgomery Securities LLC ("NationsBanc"), Lazard Freres & Co. LLC ("Lazard Freres"), Raymond James & Associates, Inc. ("Raymond James"), and Salomon Smith Barney Holdings, Inc. ("Smith Barney") (collectively, the "Underwriter Defendants"); Morris Weissman ("Weissman"), Joshua C. Cantor ("Cantor"), Richard P. Macchiarulo ("Macchiarulo"), John T. Gorman ("Gorman"), and Patrick J. Gentile ("Gentile") (collectively, the "Individual Defendants"); and Deloitte & Touche LLP ("Deloitte") (the foregoing parties collectively referred to hereinafter as the "Defendants"), under the terms set forth in the Global Stipulation and Agreement of Settlement (the "Stipulation") dated October 24, 2000. Plaintiffs' Counsel in the Actions have submitted the Settlement on behalf of: (1) all persons or entities who purchased Holographics common stock during the period from July 15, 1998 through and including February 1, 1999 (the "Holographics Class" and the "Holographics Class Period") for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77(k), 77(1)(a)(2), and 77(o), and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) and 78t(a) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5., and (2) all persons or entities who purchased ABN common stock during the period from May 2, 1996 through and including January 25, 1999 (the "ABN Class" and the "ABN Class Period"), (together with the Holographics Class, the "Classes"),*fn1 for alleged violations of Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. § 78j (b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.

Plaintiffs submit that the proposed Settlement of these Actions for $14,850,000.00 in cash, 1,460,000 shares of Holographics common stock, Common Stock Purchase Warrants to purchase 863,647 shares of Holographics common stock at an exercise price of $6.00 per share (the "Holographics Warrants"),*fn2 and certificates representing forty percent of the Equity Reserve as defined in Defendant ABN's Plan of Reorganization (the "Gross Settlement Fund") pursuant to the Global Stipulation and Agreement, is an excellent recovery for the Classes, thus warranting final approval by the Court.

Plaintiffs also move for approval of an award of attorneys' fees and reimbursement of expenses, consisting of 30% of the cash proceeds of the Settlement, or approximately $4.455 million, and 30% of the securities described below.

The standard for determining whether to approve the Settlement is whether the Settlement of these Actions is fair, reasonable, and adequate. Here, the Court finds that the value of the Settlement, considering the obstacles Plaintiffs and the Classes would have faced in collecting a substantially higher judgment, warrants confirmation.

Prior Proceedings Relating to the Settlement

On October 25, 2000, this Court entered an Order preliminary approving the Settlement and directing that a hearing be held on December 15, 2000 to determine the fairness, reasonableness, and adequacy of the proposed Settlement. Pursuant to the Order, more than 5,000 Notices of Pendency of Class Action, Hearings on Proposed Settlement and Attorneys' Fee Petition and Right to Share in Settlement Fund (the "Notice") were mailed to potential members of the Classes and their nominees. Moreover, a summary notice was published*fn3 on November 9, 2000 in The New York Times. See Affidavit of Cheryl Washington, ¶¶ 5, 6, sworn to December 8, 2000 and filed herewith (the "Washington Aff."). The Notice contained a detailed description of the history of the Actions and the Settlement, a statement of the maximum attorneys' fees and costs to be sought, a description of the claims that will be released, the deadlines for filing proofs of claim, and the time and place of the Settlement Fairness Hearing (the "Hearing"). The Notice further advised members of the Classes of their right to object to the Settlement by filing and serving a written objection by December 8, 2000, and of their right to exclude themselves from participating in the Settlement by properly submitting a request for exclusion by December 8, 2000.

As discussed more fully below, no objections to the proposed Settlement have been received to date. Washington Aff. ¶ 7.

Negotiations Leading to the Settlement

The proposed Settlement was reached only after a comprehensive assessment of the results of Plaintiffs' Counsels' investigation into the facts. Plaintiffs' Counsel represent to the Court, without contradiction, that they have carefully reviewed and analyzed thousands of pages of documents produced by Defendants and certain non-parties and have conducted numerous substantive interviews of certain non-parties with knowledge of the events underlying the Actions. They further represent that the proposed Settlement was reached only after extensive, arm's-length negotiations with highly experienced and formidable counsel for Defendants and counsel for their insurer, as well as ABN's bankruptcy counsel and other counsel involved in the bankruptcy proceedings, and after extensive discussions regarding the strengths and weaknesses of the parties' respective positions.

This Settlement was reached against the backdrop of ABN's pending bankruptcy and pending investigations by both the U.S. Attorney's Office and the Securities and Exchange Commission. All of these proceedings had the potential to jeopardize Plaintiffs' ability to recover on behalf of the class. While Plaintiffs' Counsel believed that they had constructed a strong liability case against Defendants, they realized and this Court realizes that the potential for a larger recovery was threatened by, inter alia, ABN's bankruptcy and Holographics' weakened financial condition. With that in mind, the Settlement, containing a significant cash component, is particularly impressive.

Plaintiffs also move for approval of their request for attorneys' fees in the amount of 30% of the cash recovery, or approximately $3.45 million, and 30% of the securities described above. While the Court agrees that plaintiffs' counsel are deserving of a significant fee award for their diligent efforts in the face of significant obstacles, I find that a 30% award is on the high side. Moreover, because it guarantees plaintiff's counsel that their hourly fees and then some will be paid in cash, which means that counsel will not be required to take the same risk with respect to the securities portion of the settlement that their clients will face, I do not believe is appropriate. The Court will award fees in the amount of 25% of the total recovery, together with $280,830.17 for out-of-pocket expenses.

History of the Litigation

Beginning in early 1999, a series of class actions was filed against Holographics, ABN, Weissman, Cantor, Macciarulo, and the Underwriter Defendants alleging violations of the Securities Act and the Exchange Act based upon Defendants' false and misleading statements concerning Holographics' business and financial condition. Subsequently, separate class actions were filed against ABN, Weissman, Gorman, and Gentile alleging violations of the Exchange Act based upon these Defendants' false and misleading statements concerning ABN's financial condition. On April 9, 1999, the Court consolidated the ABN class actions for pretrial purposes and consolidated the Holographics class actions for pretrial purposes.

On April 6, 2000, the Court issued a Memorandum Order and Decision granting Defendant ABN's motion to dismiss Plaintiffs' claim under Section 11 of the Securities Act, but otherwise denying Defendants' motions. The Court's April 6, 2000 Order denying Defendants' motions to dismiss both Actions lifted the stay of discovery mandated by the Private Securities Litigation Reform Act during the pendency of a motion to dismiss. Plaintiffs in both Actions then immediately sought Defendants' compliance with Plaintiffs' discovery demands and sought additional discovery from certain non-parties.

During the course of the litigation, Defendants provided several thousand pages of documents which were thoroughly reviewed by Plaintiffs' Counsel. These documents included, inter alia: various Holographics and ABN corporate and financial documents, documents submitted in connection with ABN's bankruptcy, work papers for the relevant fiscal periods prepared by Holographics' and ABN's auditors, documents prepared by the special investigative committees convened by ABN's and Holographics' respective Boards of Directors to investigate the improprieties alleged in the Actions, and documents submitted by third parties, including MasterCard and Crown Roll Leaf, Inc.

As set forth in further detail in the Affidavit of Vincent R. Capucci, Esq., Plaintiffs' Counsels' efforts also included detailed responses by certain Plaintiffs to certain Defendants' discovery requests and the defense of depositions regarding class certification. Counsel further expended considerable effort in connection with proceedings before the Bankruptcy Court relating to ABN's Plan of Reorganization, which resulted in the allocation of 40% of ABN's Equity Reserve (as defined in ABN's Plan of Reorganization) to the funds constituting the proposed Settlement. This discovery informed the negotiations over the terms of the settlement.

At a time when the parties had almost agreed to the settlement of these Actions, Deloitte moved for leave to amend its answer and to assert cross-claims against certain Defendants. This jeopardized settlement prospects. Eventually, Deloitte decided to participate in the Settlement, which permitted the approval process to proceed.

The Standards For Judicial Approval of a Settlement Under Rule 23(e)

"The law favors settlements of class actions no less than of other cases." In re Gulf Oil/Cities Serv. Tender Offer Litig., 142 F.R.D. 588, 590 (S.D.N.Y. 1992) (citing Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982)); see, also In re Blech Sec. Litig., No. 94 CIV. 7696, 2000 WL 661680, *1 (S.D.N.Y. May 19, 2000) (Exhibit 1)*fn4; Adair v. Bristol Technology Systems, Inc., No. 97 CIV. 5874, 1999 WL 1037878, *1 (S.D.N.Y. Nov. 16, 1999) (Exhibit 2). The proposed Settlement more than satisfies the criteria for final approval set forth by the Second Circuit. See In re Warner Communications Securities Litigation, 618 F. Supp. 735, 740-41 (S.D.N.Y. 1985), aff'd, 798 F.2d 35 (2d Cir. 1986); City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974).

Approval of the Settlement is within the Court's broad discretion. See In re PaineWebber Ltd. Partnerships Litig., 171 F.R.D. 104, 124 (S.D.N.Y. 1997), aff'd, 117 West Page 424 F.3d 721 (2d Cir. 1997). See also Blech, 2000 WL 661680, at *3. In its exercise of that discretion, the Court must engage in a careful balancing act: "The Court must eschew any rubber stamp approval in favor of an independent evaluation, yet, at the same time, it must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case." Grinnell, 495 F.2d at 462. Grinnell also instructs:

It is not necessary in order to determine whether an agreement of settlement and compromise shall be approved that the court try the case which is before it for settlement. . . . Such procedure would emasculate the very purpose for which settlements are made. The court is only called upon to consider and weigh the nature of the claim, the possible defenses, the situation of the parties, and the exercise of business judgment in determining whether the proposed settlement is reasonable.

Id. (citing Neuwirth v. Allen, 338 F.2d 2 (2d Cir. 1964)). See also Parker v. Anderson, 667 F.2d 1204, 1209 (5th Cir. 1982) (The "court does not adjudicate the dispute").

Evaluation of The Settlement Demonstrates that it is Fair, Reasonable And Adequate

The factors that the Court should consider in reviewing the Settlement are:

a) the complexity, expense and likely duration of the litigation;
b) the reaction of the class (or classes) to the Settlement;
c) the stage of the proceedings and the amount of ...

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