("CSAM")), Emilio Bassini, Richard Watt, Daniel Sigg, Dr. Enrique R. Arzac, James J. Cattano, Peter A. Gordon, George M. Landau, and Martin M. Torino (collectively "The Defendants") in these actions. For the reasons set forth below, the motion is granted and settlement is approved, as well as the application for an award of attorneys' fees and compensation to Strougo.
In May 1997, Strougo commenced the first captioned action asserting six causes of action under the Investment Company Act of 1940, as amended (the "ICA"), and common law, including both direct and derivative claims arising from the Rights Offering (the "Bassini Action"). The procedural history and factual background of the Bassini Action are detailed in the Court's opinions reported at 1 F. Supp.2d 268 (S.D.N.Y. 1998); No. 97 Civ. 3579(RWS), 1999 WL 249719 (S.D.N.Y. Apr. 28, 199); and 112 F. Supp.2d 355 (S.D.N.Y. 2000), and the Court of Appeals' opinion reported at 282 F.3d 162 (2d Cir. 2002).
Strougo asserted both class and derivative claims against CSAM and certain of the Fund's directors and alleged that in approving the Rights Offering, the director defendants breached their fiduciary duties of loyalty and due care to the Fund's shareholders. The Bassini Action asserts derivative claims under ICA Section 36(b) against CSAM, ICA Section 36(a) claims against all defendants except the Fund, and class claims under ICA Section 48 against all defendants except the Fund, for breach of fiduciary duty.
On September 15, 1997, defendants moved to dismiss the Bassini Action. The Court granted the motion to dismiss with respect to all the class action claims and the Section 36(b) claim but denied the motion with respect to the remaining derivative claims. Following the Court's decision, the Fund appointed a special litigation committee (the "SLC") to determine whether the remaining claims should be pursued. On December 30, 1998, the SLC recommended that the litigation be discontinued and filed its own motion to dismiss. On September 15, 2002, the Court granted summary judgment and dismissed the remaining claims. By opinion dated February 28, 2002, the Court of Appeals vacated the earlier dismissal of Strougo's direct claims and remanded the Bassini Action to this Court for further proceedings. Strougo did not appeal from this Court's dismissal of his derivative claims.
In May 1998, Strougo commenced an action under the ICA against CSAM alleging, inter alia, that the advisory agreement between CSAM and the Fund was not negotiated at arms'-length (the "CSAM Action"). Strougo alleges that CSAM received improper fees because in negotiating the investment advisory with non-independent directors, CSAM violated its fiduciary duty pursuant to ICA Section 36(b) of the 1940 Act. The procedural history and factual background of the CSAM Action are detailed in the Court's opinions reported at Strougo v. BEA Assocs., No. 98 Civ. 3725(RWS), 1999 WL 147737 (S.D.N.Y. Mar.18, 1999); No. 98 Civ. 3725(RWS), 2000 WL 45714 (S.D.N.Y. Jan. 19, 2000); 199 F.R.D. 515 (S.D.N.Y. 2001); and 188 F. Supp.2d 373 (S.D.N.Y. 2002).
The original complaint in the CSAM Action was dismissed by the Court with leave to replead. Thereafter, CSAM moved to dismiss the amended complaint. The Court denied the motion subject to Strougo adding the Fund as a nominal defendant. After completion of discovery, defendants moved for summary judgment against the Second Amended Complaint. On March 1, 2002, this Court entered judgment granting defendants' motion for summary judgment, and Strougo filed a notice of appeal of such decision. The parties stipulated to withdraw Strougo's appeal in the CSAM Action in order to return jurisdiction over the CSAM Action to this Court.
Following the Court of Appeals' decision, the parties engaged in settlement discussions. On September 12, 2002, the parties entered into the settlement stipulation. The settlement stipulation provides for two types of relief. First, it provides that the Fund is to be liquidated not later than 30 days after the effective date of the proposed settlement. Second, upon submission of the requisite proof of claim, all class members who did not exercise their rights and sold their shares prior to the close of business on February 15, 2002, are entitled to receive $1.00 per share. Those class members who exercised their rights and sold such shares prior to the close of business on February 15, 2002, are entitled to receive $0.25 per share. In addition, and following negotiations commenced after completion of negotiations for relief for the Fund shareholders and the class, CSAM agreed to pay Strougo attorneys' fees in the amount of $735,000 and expenses of up to $75,000, subject to Court approval. CSAM also agreed to pay Strougo a compensatory award of $15,000.
On September 17, 2002, the Court ordered that a hearing be held on January 22, 2003 (the "Hearing") to determine the fairness, reasonableness, and adequacy of the proposed settlement (the "Scheduling Order"). Pursuant to the Scheduling Order, a printed Notice of Pendency of Class and Derivative Actions, Settlement, and Hearing Thereon (the "Settlement Notice"), the form of which was approved by the Court, was mailed to all persons and entities who own shares of the Fund or who owned shares of the Fund during the period June 7, 1996 through July 17, 1996. A summary notice (the "Summary Notice"), also in a form approved by the Court, was published in the National Edition of The Wall Street Journal on October 23, 2002. No shareholder has elected to exclude themselves from the class.
The instant motion was heard on January 22, 2003. No objections to the form of the settlement were filed. One objector sought a reduction of counsel fees.
The Settlement Is Fair, Reasonable, And Adequate
The determination of the fairness of a proposed settlement is left to the sound discretion of the trial court. In re Ivan F. Boesky Secs. Litig., 948 F.2d 1358, 1368 (2d Cir. 1991); Newman v. Stein, 464 F.2d 689, 692 (2d Cir. 1972); In re Michael Milken & Assocs. Secs. Litig., 150 F.R.D. 46, 53 (S.D.N.Y. 1993). When exercising its discretion, the Court will review the proposed settlement in light of the strong judicial and public policies that favor settlements. Id.; In re Sumitomo Copper Litig., 189 F.R.D. 274, 280 (S.D.N.Y. 1999).
There is a strong initial presumption that a proposed settlement negotiated during the course of litigation is "fair and reasonable." In re Michael Milken & Assocs., 150 F.R.D. at 54. See also Chatelain v. Prudential-Bache Secs., Inc., 805 F. Supp. 209, 212 (S.D.N.Y. 1992) ("A strong initial presumption of fairness attaches to the proposed settlement when it is shown to be the result of this type of a negotiating process and when the number of objectors is small."). Indeed, "absent evidence of fraud or overreaching, [courts] consistently have refused to act as Monday morning quarterbacks in evaluating the judgment of counsel." Trief v. Dun & Bradstreet Corp., 840 F. Supp. 277, 281 (S.D.N.Y. 1993) (citation omitted). See also In re Warner Communications Sec. Litig., 798 F.2d 35, 37 (2d Cir. 1986) ("[I]t is not a district judge's job to dictate the terms of a class settlement.").
In determining whether a proposed settlement, taken as a whole, is fair, reasonable, and adequate, the Second Circuit has articulated the factors to consider, namely:
(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
Detroit v. Grinnell, 495 F.2d 448, 463 (2d Cir. 1974) (citations omitted); In re Blech Secs. Litig., No. 94 Civ. 7696(RWS), 2002 WL 31720381, at *1 (S.D.N.Y. Dec.4, 2002); In re Michael Milken & Assocs., 150 F.R.D. at 52; Chatelain, 805 F. Supp. at 213. The Grinnell factors support final approval of the proposed settlement here.
The Complexity, Expense, and Duration of Further Litigation
As described above, these actions involve complex issues regarding the responsibilities of directors in mutual funds. Here, although Strougo was successful in reversing dismissal of the direct claims against the defendants, there is certainly no assurance that he would be successful in appealing the dismissal of the CSAM Action.
These factors weigh in favor of the proposed settlement. As the district court concluded in Slomovics v. All for a Dollar, Inc., 906 F. Supp. 146, 149 (E.D.N.Y. 1995):
The potential for this litigation to result in great
expense and to continue for a long time suggest that
settlement is in the best interests of the Class.
As this Court noted in Trief, "[i]t is beyond cavil that continued litigation in this multidistrict securities class action would be complex, lengthy, and expensive, with no guarantee of recovery by the class members." 840 F. Supp. at 282.
In the circumstances here it is proper "to take the bird in the hand instead of the prospective flock in the bush." Oppenlander v. Standard Oil Co., 64 F.R.D. 597, 624 (D.Colo. 1974) (quoting West Virginia v. Chas. Pfizer & Co., 314 F. Supp. 710, 743 (S.D.N.Y. 1970), aff'd, 440 F.2d 1079 (2d Cir. 1971)); see also Stieberger v. Sullivan, 792 F. Supp. 1376, 1377 (S.D.N.Y.), modified, 801 F. Supp. 1079 (S.D.N.Y. 1992) (noting in approving settlement, that the "compromises represented therein constitute a reasonable balance, especially bearing in mind the length of time that would elapse, absent a settlement, before any concrete benefits could be delivered to any class member.").
The Reaction to the Proposed Settlement
An important factor to be considered in determining the fairness of the proposed settlement is the reaction by the Fund's shareholders and the members of the class. Shlensky v. Dorsey, 574 F.2d 131, 148 (3d Cir. 1978). It has repeatedly been held that "one indication of the fairness of a settlement is the lack of or small number of objections." Hammon v. Barry, 752 F. Supp. 1087, 1093 (D.D.C. 1990) (quoting 2 H. Newberg, Newberg on Class Actions § 11.47, at 463 (2d ed. 1985)). See also In re SmithKline Beckman Corp. Secs. Litig., 751 F. Supp. 525, 530 (E.D.Pa. 1990) ("[T]he utter absence of objections and the nominal number of shareholders who have exercised their right to opt out . . . militate strongly in favor of approval of the settlement").
No objection to the proposed settlement has been received. Therefore, those affected by the proposed settlement have overwhelmingly endorsed it as "fair and reasonable." Berman v. Entertainment Mktg., Inc., 901 F. Supp. 113, 117 (E.D.N.Y. 1995). See also Burger v. CPC Int'l, Inc., 76 F.R.D. 183, 186 (S.D.N.Y. 1977). No one has elected to exclude themselves from the proposed settlement.
The only objector, Phillip Goldstein ("Goldstein"), has objected not to the settlement but its valuation and the attorneys' fees in relation to his estimate of the value of the settlement. There are a number of ways to value the liquidation proposed by the settlement. One method is to take the Fund's current aggregate net asset value of $20,424,400 ($3.66 per share at December 31, 2002, times the 5,580,441 shares outstanding) by the current discount at which The Brazil Fund, Inc. is trading (15.8% at December 31, 2002), noting that the Fund's shares historically have traded at a discount higher than 15.8%, and higher than the discount at which shares of The Brazil Fund, Inc. trade. (By December 31, 2002, the Fund's share's discount had dropped to 8.0%, largely in anticipation of the Fund's liquidation). The result is $3,227,055.
The objector assumes that only 1,085,902 Fund shares were issued upon exercise of the right, but the SLC's Report stated that "[a]pproximately 1.9 million shares were issued." Accordingly, the holders of 1,357,763 Fund shares did not exercise (there were 4,634,005 Fund shares outstanding immediately prior to the Rights Offering). The maximum class damages are $1,357,763 (the 1,357,763 shares not exercising rights times $1.00 per share — Settlement Stipulation ¶ 6(a)), plus $475,000 (the approximately 1,900,000 shares issued in the Rights Offering times $.25 per share — Settlement Stipulation, ¶ 6(b)), or an aggregate of $1,832,763. Some potential class members will not have sold prior to "the close of business on February 15, 2002," as required for inclusion in the class, and some will not file claim forms. A valuation for the settlement of over $1.5 million is appropriate.
The Stage of the Proceedings and the Amount of Discovery Completed
Given the extensive history of this litigation, Strougo was in a good position to make informed judgments as to the merits of the proposed settlement and had a "clear view of the strengths and weaknesses of their cases." In re Warner Communications Secs. Litig., 618 F. Supp. 735, 745 (S.D.N.Y. 1985), aff'd, 798 F.2d 35 (2d Cir. 1986). An analysis of this Grinnell factor militates in favor of approval of the proposed settlement.
The Risk of Establishing Liability, Damages, and Maintaining the Class through Trial
In addition to his risks in proving liability against defendants, Strougo also faced practical considerations in light of the Fund's performance and the economic concerns from continued investment in Brazil. In addition, even if it is assumed, arguendo, that Strougo successfully established liability, there are significant uncertainties as to both the fact and the quantum of damages. The issue of damages would have been hotly disputed, and would have been the subject of further "dispute between [the] experts [retained by the parties], a dispute whose outcome is impossible for [the Court] to predict." In re RJR Nabisco, Inc. Secs. Litig., MDL No. 818, No. 88 Civ. 7905(MBM), 1992 WL 210138, at *5 (S.D.N.Y. Aug. 24, 1992). As the Honorable John F. Keenan has observed:
Undoubtedly, expert testimony would be needed to fix
not only the amount, but the existence, of actual
damages. In this "battle of experts," it is virtually
impossible to predict with any certainty
which testimony would be credited, and ultimately,
which damages would be found to have been caused by
actionable, rather than the myriad nonactionable
factors such as general market conditions.
In re Warner, 618 F. Supp. at 744-45 (citations omitted).
A recoupment of at least a material portion of the class's damages fits well within the range of reasonableness.
The Ability of Defendants to Withstand a Greater Judgment and the Reasonableness of the Proposed Settlement in Light of the Risks of Litigation
In evaluating the proposed settlement, the Court is not required to engage in a trial on the merits to determine the prospects of success. In re Michael Milken & Assocs., 150 F.R.D. at 54. The determination of a "reasonable" settlement is not susceptible to a mathematical equation yielding a particularized sum. Rather, as Judge Friendly has explained, "in any case there is a range of reasonableness with respect to a settlement . . ." Newman v. Stein, 464 F.2d at 693. See also In re Rite Aid Corp. Sees. Litig., 146 F. Supp.2d 706, 715 (E.D. Pa. 2001) (noting that since 1995, class action settlements have typically recovered "between 5.5% and 6.2% of the class members' estimated losses") (citation omitted). in fact, a settlement can be approved even when it amounts to only a small percentage of the recovery sought. In re Michael Milken & Assocs., 150 F.R.D. at 64-65; In re Gulf Oil Cities Serv. Tender Offer Litig., 142 F.R.D. at 590-91 (S.D.N.Y. 1992).*fn1 In In re Terra-Drill Partnerships Sees. Litig., 733 F. Supp. 1127, 1129 (S.D.Tex. 1990), the court approved a settlement for $13.5 million, after a jury verdict had resulted in a judgment for more than $72 million for the class.
While issues of damages as well as liability might have resulted in less or no recovery after trial, even the possibility that the class "might have received more if the case had been fully litigated is no reason not to approve the settlement." Granada Invs., Inc. v. DWG Corp., 962 F.2d 1203, 1206 (6th Cir. 1992) (citation omitted). See also Republic Nat'l Life Ins. Co. v. Beasley, 73 F.R.D. 658, 668 (S.D.N.Y. 1977)("In evaluating the proposed settlement, the Court is not to compare its terms with a hypothetical or speculative measure of a recovery that might be achieved by prosecution of the litigation to a successful conclusion."). As the Honorable Charles L. Brieant aptly recognized,
[t]he dollar amount of the settlement by itself is
not decisive in the fairness determination. . . .
Dollar amounts are judged not in comparison with the
possible recovery in the best of all possible worlds,
but rather in light of the strengths and weaknesses
of plaintiffs' case.