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IN RE STERLING FOSTER & CO.

December 11, 2002

IN RE STERLING FOSTER & CO., INC., SECURITIES LITIGATION THOMAS ROGERS, ET AL., PLAINTIFFS,
V.
STERLING FOSTER & CO., INC., ET AL., DEFENDANTS. LEO W. SMITH, ET AL., PLAINTIFFS, V. STERLING FOSTER & CO., INC., ET AL., DEFENDANTS. WILLIAM V. WRIGHT, ET AL., PLAINTIFFS, V. STERLING FOSTER & CO., INC., ET AL., DEFENDANTS. MICHAEL REYNOSA, ET AL., PLAINTIFFS, V. STERLING FOSTER & CO., INC., ET AL., DEFENDANTS. ANDREW PETIT, ET AL., PLAINTIFFS, V. STERLING FOSTER & CO., INC., ET AL., DEFENDANTS. THIS DOCUMENT RELATES TO: CONSOLIDATED WITH:



The opinion of the court was delivered by: Arthur D. Spatt, United States District Judge

MEMORANDUM OF DECISION AND ORDER

This class action involves allegations by the plaintiffs that the defendants made misstatements and omissions and were engaged in market manipulation with respect to six public offerings. Presently before the Court are motions for final approval of a partial settlement, plan allocation and the award of attorneys' fees and expenses.

I. BACKGROUND

The detailed factual background of this dispute is set forth in the Court's decision and order of June 27, 2002, In re Sterling Foster & Co. Sec. Litig., 222 F. Supp.2d 216 (E.D.N.Y. 2002). Familiarity with the decision is presumed and it is deemed incorporated in this decision. On July 25, 2001, the lead plaintiffs and defendants Hartley T. Bernstein, Steven F. Wasserman, Bernstein & Wasserman, LLP, Embryo Development Corp. ("Embryo"), and Michael Lulkin (collectively, the "settling defendants") executed a Stipulation and Agreement of Partial Settlement ("Partial Settlement Agreement"). On October 1, 2002, this Court entered an order certifying, for settlement purposes, the action as a class action for persons entities, and their heirs, successors and assigns, who are members of the following subclasses:

(1) The Advanced Voice Subclass consisting of all purchasers of Advanced Voice Technologies, Inc. ("Advanced Voice") unites (each unit consisting of one share of common stock and one Class A Redeemable Common Stock Purchase Warrant) during the period February 6, 1995 through October 8, 1996;
(2) The Com/Tech Subclass consisting of all purchasers of Com/Tech Communications Technologies, Inc. ("Com/Tech") common stock during the period August 23, 1995 through October 8, 1996;
(3) The Embryo Subclass consisting of all purchasers of Embryo Development Corporation common stock during the period November 17, 1995 through October 8, 1996;
(4) The Applewoods Subclass consisting of all purchasers of Applewoods, Inc. ("Applewoods") common stock during the period April 10, 1996 through October 8, 1996; and
(5) The ML Direct Subclass consisting of all purchasers of ML Direct, Inc. ("ML Direct") units (each unit consisting of two shares of common stock and one warrant) during the period September 3, 1996 through October 8, 1996.

Following the Court's approval, counsel for the plaintiffs ("counsel") mailed 9,576 notices to the class members. Only two class members requested to be excluded from the class, and there was one objection to the Partial Settlement Agreement by a non-settling defendant Michael Krasnoff ("Kransnoff") on the grounds that, (1) class action treatment is not superior to other available methods for the fair and efficient adjudication of the controversy; and (2) the bar order in the Partial Settlement Agreement improperly extinguishes his rights to indemnification, contribution, or other offset.

The Partial Settlement Agreement provides for a total cash settlement of $2,200,000 plus interest which will be paid for (i) the notice and administration costs, (ii) the attorneys' fee and expense award, and (iii) the remaining administration expenses. The remainder will be distributed to the qualified class members. Counsel request an attorneys' fee of 30% which amounts to $660,000 and seek reimbursement of the litigation expenses of $100,000.

II. CLASS CERTIFICATION

A. Class Certification

B. The Partial Settlement Agreement

Rule 23(e) of the Federal Rules of Civil Procedure requires that any settlement or dismissal of a class action be approved by the court. In determining whether to approve a class action settlement, the district court must determine whether the settlement is "fair, adequate, and reasonable, and not a product of collusion." Joel A. v. Giuliani, 218 F.3d 132, 138 (2d Cir. 2000). Furthermore, the court must "eschew any rubber stamp approval" yet "stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case." City of Detroit v. Grinnell Corp., 495 F.2d 448, 462 (2d Cir. 1974). Judicial discretion should be exercised in light of the general policy favoring settlement. See Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982).

To determine the fairness of a proposed settlement, the Second Circuit has identified nine factors (the "Grinnell factors") that courts should review: (1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; and (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation. Grinnell, 495 F.2d at 463.

In addition, courts should analyze the negotiating process in light of "the experience of counsel, the vigor with which the case was prosecuted, and the coercion or collusion that may have marred the negotiations themselves." Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983) (citations omitted). A strong presumption of fairness attaches to proposed settlements that have been negotiated at arms-length. See Chatelain v. Prudential-Bache Sec., 805 F. Supp. 209, 212 (S.D.N.Y. 1992).

The plaintiffs argue that the Grinnell factors weigh in favor of the settlement. In particular, the plaintiffs contends that: (1) the case, which has spanned five years, involves complex legal and factual issues and would require the involvement of expensive experts; (2) although no formal discovery was conducted prior to entering into the settlement agreement, counsel conducted a pre-trial investigation relating to the events and transactions underlying the plaintiffs' claims and were provided with information concerning the settling defendants' insurance coverages and ability to pay any potential judgment; (3) other than Lulkin and Bernstein, the settling defendants have vigorously asserted throughout this action that their statements were truthful and that they acted in good faith when making the statements; (4) the settling defendants' experts who would have been called at trial would vary substantially with the plaintiff's experts and the trial would therefore be reduced to a "battle of the experts" which would possibly cause a jury to minimize or eliminate the plaintiffs' losses; (5) there is some risk that the settling defendants may successfully defeat the class certification if the litigation is to proceed; (6) the settling defendants' precarious financial situation; (7) the plaintiffs' counsel obtained a settlement amount of $2.2 million through the settling defendants' insurers which could have been denied later by the insurers on the basis that criminal fraud was allegedly involved; (8) the range of the settlement is reasonable given the difficulties and uncertainties of litigating the case; and (9) the settlement is reasonable in light of the risks and uncertainties of litigation in this matter.

With respect to the reaction by the class to the settlement, the only objection to the settlement was made by Krasnoff, a non-settling defendant. Krasnoff argues that the Partial Settlement Agreement improperly extinguishes his rights to indemnification, contribution, or other offset. Krasnoff asserts that if he is held liable on any of the claims against him, he will seek contribution and/or indemnification from the settling defendants. Therefore, Krasnoff claims that, if approved, the proposed settlement agreement harms him because he will be barred from seeking such contribution.

Courts have upheld orders barring non-settling defendants' claims against settling defendants for indemnity, breach of fiduciary duty, fraud and negligence. See Eichenholtz v. Brennan, 52 F.3d 478, 484-85 (3d Cir. 1995); Franklin v. Kaypro Corp., 884 F.2d 1222, 1232 (9th Cir. 1989); In re: Rite Aid Corp. Sec. litig., 146 F. Supp.2d 706, 727-29 (E.D.Pa. 2001); In re Cendant Corp. Sec. Litig., 109 F. ...


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