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United States District Court, S.D. New York

December 2, 2004.


The opinion of the court was delivered by: WILLIAM PAULEY, District Judge


Plaintiffs in this securities fraud action move for court approval of their class action settlement, and plaintiffs' counsel applies for an award of attorneys' fees and expenses.

This action was filed on March 7, 2003, on behalf of purchasers of Alloy, Inc. ("Alloy") common stock against Alloy and three former officers and directors of the company. The initial complaint alleged that defendants made projections about Alloy's future revenue and earnings with the knowledge that those projections were unreasonable. After this Court approved the law firm of Schatz & Nobel, P.C. as lead counsel ("Lead Counsel"), plaintiffs conducted an extensive investigation and interviewed former Alloy employees. (Memorandum in Support of Final Approval of Class Action Settlement ("Pls. Mem.") at 5.) As a result, the August 2003 Consolidated Complaint alleged a much broader scope of fraudulent statements and misrepresentations.

  Defendants answered the Consolidated Complaint on September 26, 2003. Thereafter, the parties embarked on accelerated informal discovery in which plaintiffs reviewed tens of thousands of pages of Alloy documents and interviewed the individual defendants. (Pls. Mem. at 6-7.) Lead Counsel also conducted a series of meetings with defendants' counsel in which both sides engaged in candid discussions about this litigation. (Pls. Mem. at 7-9.) These meetings culminated in the parties' June 2004 agreement in principle and, ultimately, the Stipulation of Settlement (the "Settlement") dated July 12, 2004.

  The Settlement calls for, inter alia, defendants to deposit $6.75 million into a settlement fund (the "Settlement Fund"), of which Lead Counsel's fees would constitute no more than one-third. The proposed settlement class (the "Settlement Class") consists of all persons who purchased the common stock of Alloy between March 16, 2001 and January 23, 2003, excluding those who have opted out of the class. (Settlement ¶ 1.20.) The Settlement Class does not include "Defendants, all partners, officers and/or directors of any of Defendants or their subsidiaries, members of Defendants' immediate families, any entity in which any Defendant has a controlling interest, and the legal representatives, heirs, successors or assigns of any such excluded person." (Settlement ¶ 1.20.) Four potential class members have opted out of the Settlement Class.*fn1

  This Court preliminarily approved the Settlement and certified the Settlement Class on July 29, 2004. This Court conducted a fairness hearing on November 5, 2004.

  I. The Settlement

  A district court must approve any settlement or dismissal of a class action. Fed.R.Civ.P. 23(e). A court must "carefully scrutinize the settlement to ensure its fairness, adequacy and reasonableness, and that it was not a product of collusion." D'Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir. 2001) (citation omitted). In so doing, both the terms of the settlement and the negotiating process that produced it must be examined. D'Amato, 236 F.3d at 85; In re Excess Value Ins. Coverage Litig., No. M-21-84 RMB, MDL-1339, 2004 WL 1724980, at *9 (S.D.N.Y. July 30, 2004). A court must assure itself that the settlement resulted from "arm's-length negotiations" and that plaintiffs' counsel engaged in the discovery "necessary to effective representation of the class's interests." D'Amato, 236 F.3d at 85. In making this assessment, courts consider


(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 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 discovery, [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.
D'Amato, 236 F.3d at 86 (quoting City of Detroit v. Grinell Corp., 495 F.2d 448, 463 (2d Cir. 1974)).

  This action involves complex security fraud issues that were likely to be litigated aggressively, at substantial expense to all parties. Further, these issues present significant hurdles to plaintiffs' ability to prove defendants' liability, including difficulties in establishing defendants' "actual knowledge" of falsity, dueling interpretations of established accounting standards, and proving that defendants' reliance on the advice of two accounting firms was unreasonable. At an early stage, Lead Counsel undertook an extensive investigation of plaintiffs' claims and successfully negotiated a settlement. Such negotiations appear to have taken place in good faith and at arms-length. Given these factors and Alloy's dubious financial condition, the Settlement is a reasonable, fair and adequate means of resolving this action, and this Court approves it pursuant to Rule 23(e).

  II. Attorneys' Fees and Expenses

  Where, as here, a class action settlement creates a common fund, plaintiffs' counsel is entitled to "a reasonable fee — set by the court — to be taken from the fund." Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 47 (2d Cir. 2000); see 15 U.S.C. § 78u-4(a) (6) (capping attorney fees in securities actions at a "reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class"). In assessing the reasonableness of the fee award sought, the Court must consider (1) the time and labor expended by counsel, (2) the magnitude of the litigation, (3) the risk of the litigation, (4) the quality of representation, (5) the requested fee in relation to the settlement, and (6) public policy considerations. Goldberger, 209 F.3d at 50.

  A court may use either the lodestar or percentage method to calculate a reasonable attorney fee award, though the latter is the preferred approach. In re Sumitomo Copper Litig., 74 F. Supp. 2d 393, 397 (S.D.N.Y. 1999). Whichever method is employed, the other is often used as a "cross-check." Goldberger, 209 F.3d at 50.

  Under the lodestar method, the court "scrutinizes the fee petition to ascertain the number of hours reasonably billed to the class and then multiplies that figure by an appropriate hourly rate" to calculate the "lodestar." Goldberger, 209 F.3d at 47. The court may then enhance the lodestar by a multiplier, taking into account such factors as "(i) the contingent nature of the expected compensation for services rendered; (ii) the consequent risk of non-payment viewed as of the time of filing the suit; (iii) the quality of the representation; and (iv) the results achieved." In re Boesky Sec. Litig., 888 F. Supp. 551, 562 (S.D.N.Y. 1995). Under the percentage method, the court calculates the fee award as a reasonable percentage of the settlement fund, which "relieves the court of the cumbersome, enervating, and often surrealistic process of evaluating fee petitions." Savoie v. Merchs. Bank, 166 F.3d 456, 460 (2d Cir. 1999) (internal quotation omitted). "[C]ourts typically decrease the percentage of the fee as the size of the fund increases." In re Interpublic Sec. Litig., No. 02 Civ. 6527 (DLC), 2004 WL 2397190, at *11 (S.D.N.Y. Oct. 26, 2004) (setting the fee award at 12% of $96.4 million where plaintiffs' counsel had sought 17%). Ultimately, the determination of a reasonable fee award is within the district court's sound discretion. Goldberger, 209 F.3d at 47.

  Lead Counsel represents that the aggregate lodestar for plaintiffs' counsel is $901,410.75. In its application, Lead Counsel sought $1,856,250 in attorneys' fees, which represents 27.5% of the Settlement Fund and applies a lodestar multiplier of 2.059. Lead Counsel also seeks reimbursement of $189,530.30 in expenses. Prior to Lead Counsel's application, two pension fund class members had objected to a fee award of one-third of the Settlement Fund. (Letter to the Court from Rosemarie C. Hewig, Assistant General Counsel of the New York State Teachers' Retirement System ("NYSTRS"), dated Oct. 5, 2004; Letter to the Court from Brad D. Goodsell, Deputy Attorney General of the State of Idaho, dated Oct. 12, 2004.) After negotiating with these objectors, Lead Counsel agreed to reduce its proposed fee award to $1,620,000, which is 24% of the Settlement Fund, or 1.797 times the lodestar. (Letter to the Court from Rosemarie C. Hewig, Assistant General Counsel of NYSTRS, dated Nov. 3, 2004.)

  As discussed above, this action involves complex legal and factual issues, and Lead Counsel assumed significant risks in representing plaintiffs on a contingent fee basis. Plaintiffs' counsel expended substantial resources to conduct a thorough investigation into the merits of plaintiffs' claims at the outset of this litigation and achieved a prompt settlement that is fair, adequate and reasonable. Plaintiffs' counsel has represented plaintiffs and the Settlement Class more than adequately, and the a fee award of 24% of the Settlement Fund is commensurate with counsel's efforts and the nature of this action. See, e.g., In re RJR Nabisco, Inc. Sec. Litig., MDL No. 818(MBM), No. 88 Civ. 7905(MBM), 1992 WL 210138 (S.D.N.Y. Aug. 24, 1992) (approving a fee award of 25% of the settlement fund, or 2.5 times the lodestar). Accordingly, this Court awards fees to plaintiffs' counsel in the amount of $1,620,000, plus $189,530.30 to reimburse expenses incurred by plaintiffs' counsel. CONCLUSION

  This Court approves the Settlement, and finds that the Settlement is, in all respects, fair, reasonable, and adequate to the Settlement Class. As described in the Final Judgment of Dismissal With Prejudice, dated December 2, 2004, this Court reserves and retains continuing jurisdiction over all matters relating to the implementation and enforcement of the Settlement.

  This Court awards attorneys' fees to plaintiffs' counsel in the amount of $1,620,000 and reimbursement of costs and expenses they incurred in the amount of $189,530.30, each to be paid out of the Settlement Fund. These amounts shall earn interest at the same rate as the Settlement Fund from the date the Settlement Fund was established until paid. The awarded attorneys' fees, costs and expenses shall be allocated among plaintiffs' counsel by Lead Counsel in a manner which, in the good faith judgment of Lead Counsel, reflects the attorneys' respective contributions to the institution, prosecution and settlement of this action.


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