United States District Court, S.D. New York
December 2, 2004.
IN RE ALLOY, INC. SECURITIES LITIGATION.
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
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.