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In re Refco

January 9, 2007

IN RE REFCO, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Gerard E. Lynch, District Judge

OPINION AND ORDER

Lead Plaintiffs Pacific Investment Management Company, LLC, and RH Capital LLC ("Lead Plaintiffs") move for preliminary approval of a settlement agreement with defendant BAWAG P.S.K. Bank fur Arbeit und Wirtschaft und Osterreichische Postsparkasse Aktiengesellschaft ("BAWAG") and related relief.*fn1 (Docs. # 309-311; Ltr from James J. Sabella to the Court, Nov. 28, 2006.)*fn2 This opinion addresses objections to the partial settlement by two groups of non-settling defendants. The motion for preliminary approval will be denied.

BACKGROUND

On October 5, 2006, an objection to the proposed settlement agreement was filed by a group of non-settling defendants collectively known as the "Underwriter Defendants."*fn3 (Doc. # 324.) Another objection was filed by defendant Grant Thornton LLP ("Grant Thornton"). (Doc. # 319.)

The proposed settlement agreement caused several disputes, only one of which remains for the Court to address. First, there was a dispute concerning the extent to which the settlement would bar actions for contribution against BAWAG by non-settling defendants.*fn4 In the wake of oral argument on November 13, 2006, the parties resolved this disagreement, including new language in the settlement agreement to clarify that the settlement bars all contribution claims. (Ltr. from James J. Sabella to the Court, Nov. 28, 2006.)

Second, the parties disagreed as to whether the law required that a judgment credit provision be included in the settlement, that is, whether the settlement agreement should clarify the extent to which, in the event of a later judgment against non-settling defendants, that judgment would be reduced to take account of the settlement with BAWAG.*fn5 This disagreement, too, has now been resolved, and an amended settlement agreement has been submitted to the Court containing a judgment credit provision. (Ltr. From James J. Sabella to the Court, Nov. 28, 2006.)

The amended agreement, however, has not satisfied the objectors. The new judgment credit provision reads as follows:

Any final verdict or judgment that may be obtained on behalf of the Class or a Class Member against a Non-Settling Defendant or Non-Settling Defendants shall be reduced in the aggregate by the greater of (i) an amount that corresponds to the percentage of responsibility of the Settling Defendants for the damages awarded to the Class or a Class Member on the claim on which Judgment is entered against any of the Non-Settling Defendants; or (ii) the amount paid by or on behalf of the Settling Defendants to the Class that is allocated to the claim (pursuant to the Allocation Plan) on which Judgment is entered against any of the Non-Settling Defendants. The Allocation Plan shall be proposed by Lead Plaintiffs and subject to approval by the Court.

(Ltr. from James J. Sabella to the Court, Nov. 28, 2006 (emphasis added)). The new language thus provides for a judgment reduction, but only for monies paid by or attributed to BAWAG that relate to claims that are adjudged to be common between BAWAG and the non-settling defendants. In other words, non-settling defendants will receive credit not for the entire amount of BAWAG's settlement or responsibility, but only for the amount allocated to common claims.

The parties' interests here are not complex: the non-settling defendants would prefer to receive credit for the entire amount of BAWAG's settlement or responsibility, while Lead Plaintiffs would prefer to be able to recover from both BAWAG and the non-settling defendants as long as the recovery sought can be traced to distinct legal claims.

Pursuant to a briefing schedule agreed upon by the parties, the Underwriter Defendants and Grant Thornton submitted papers objecting to the new judgment credit provision (Doc. # 350 ("Underwriter D. Mem."); Doc. # 351 ("Grant Thornton Mem.")), and on January 5, 2007, Lead Plaintiffs submitted their response (Doc. # 353 ("P. Mem.")). This matter is now fully briefed and ready for the Court's consideration.

DISCUSSION

I. Standards for Approval of Settlements and Judgment Credit Provisions

"Typically, settlement rests solely in the discretion of the parties, and the judicial system plays no role," but in class or derivative actions, judicial approval of settlements is required. In re Masters Mates & Pilots Pension Plan, 957 F.2d 1020, 1025 (2d Cir. 1992). Before approving a settlement in such cases, a district court must ensure that the terms of a settlement agreement are fair, reasonable, and adequate to all parties affected, including third parties. Id. "In other words, where the rights of one who is not a party to a ...


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