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In re Merrill Lynch & Co.

December 20, 2007


The opinion of the court was delivered by: John F. Keenan, United States District Judge

No. 02 MDL 1484(JFK)


This Opinion considers the petition of the lead plaintiff for class certification and final approval of a proposed settlement and plan of allocation in a consolidated putative securities class action brought on behalf of shareholders of Merrill Lynch stock who claim to have incurred financial losses as a result of Merrill Lynch's issuance of allegedly fraudulent research reports. The Court also considers Lead Counsel's application for an award of attorneys' fees and reimbursement of litigation expenses. For the reasons that follow, the Court (i) grants class certification to the settling plaintiffs, (ii) approves the settlement and plan of allocation, (iii) awards attorneys' fees in the amount of 15% of the settlement fund, and (iv) awards reimbursement of litigation expenses to counsel.


This securities class action (the "Action") was among numerous lawsuits brought against Merrill Lynch in the wake of a highly publicized investigation by the Office of the New York Attorney General (the "NYAG") in which Merrill Lynch was alleged to have published fraudulent research reports on various Internet-based companies. Although the majority of the putative class actions were brought on behalf of classes of direct purchasers of stock in the companies that were the subject of allegedly false research reports, and on behalf of purchasers of Merrill Lynch's proprietary mutual funds that contained the stocks of the Internet-based companies, this Action differs in that it was asserted on behalf of purchasers of stock in Merrill Lynch itself.

The cases originally were assigned to the late Honorable Milton J. Pollack for pre-trial purposes, in In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 02 MDL 1484, pursuant to an order of the Judicial Panel on Multidistrict Litigation ("MDL") which consolidated before Judge Pollack numerous claims, alleging securities fraud against Merrill Lynch and other defendants. The cases were reassigned to me upon Judge Pollack's death. This is the third global settlement of the cases consolidated under this MDL. The first global settlement involved three consolidated cases, relating to claims brought on behalf of shareholders of three different Merrill Lynch proprietary mutual funds (the "Mutual Fund Cases"), and was approved by this Court on February 1, 2007. See In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 02 MDL 1484 (JFK), 2007 U.S. Dist. LEXIS 9450 (S.D.N.Y. Feb. 1, 2007) (the "MF Decision"). The second global settlement involved twenty consolidated cases, relating to claims brought on behalf of direct purchasers of stock in the Internet-based companies that were the subjects of Merrill Lynch's allegedly fraudulent reports (the "Internet Cases"), and was approved by the Court on September 5, 2007. See In re Merrill Lynch & Co. Research Reports Sec. Litig., 02 MDL, 1484, 2007 U.S. Dist. LEXIS 65372 (S.D.N.Y. Sept. 5, 2007) (the "Internet Cases Decision").

Lead Plaintiff in this Action has brought claims on behalf of investors who purchased Merrill Lynch stock from July 3, 1999 through April 8, 2002, held the stock until April 8, 2002 or afterward, and incurred financial losses as a result. Defendants are Merrill Lynch & Co., Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), Merrill Lynch's broker-dealer affiliate; and Henry Blodgett, a Merrill Lynch vice president and the primary research analyst for companies in the Internet sector. Plaintiff alleged that Merrill Lynch's research analysts gave materially misleading favorable ratings to a number of Internet-based stocks in order to generate business for Merrill Lynch's investment banking operation. Plaintiff asserted claims of securities fraud under sections 10(b) and 20(a) of the Exchange Act of 1934 and Rule 10b-5. The factual background of the Actions and the plaintiffs' claims are set forth in previous decisions and orders of Judge Pollack, including In re Merrill Lynch & Co. Research Reports Sec. Litig., 272 F. Supp. 2d 243 (S.D.N.Y. 2003) and In re Merrill Lynch & Co. Research Reports Sec. Litig., 289 F. Supp. 2d 429 (S.D.N.Y. 2003); in Judge Pollack's decision and order in a related class action case, In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351 (S.D.N.Y. 2003); in the MF Decision; and in the Internet Cases Decision. Familiarity with those decisions is assumed.

Procedural History

On April 8, 2002, the NYAG made public its investigation into the dissemination of allegedly fraudulent research reports on numerous internet securities by Merrill Lynch. In May 2002, Merrill Lynch entered into a widely publicized cash settlement with the NYAG, in which Merrill Lynch agreed to pay a fine of $100 million and reform its investment counseling practices. Soon after, over 150 actions were filed against Merrill Lynch nationwide on behalf of purchasers of approximately two dozen internet securities that had been the subject of allegedly false or misleading research reports and purchasers of Merrill Lynch's proprietary mutual funds that contained the Internet-based securities at issue.

This action commenced in July 2002 with the filing of the first of several class action complaints in this Court, by putative class representative Doris Loder, on behalf of herself and other similarly situated shareholders of Merrill Lynch's stock. In December 2002, the related class actions were consolidated under the caption of the instant case. In February 2003, J. Marvin Brown was appointed Lead Plaintiff and the firm Berger & Montague was appointed Lead Counsel. In March 2003, Lead Plaintiff filed a consolidated amended class complaint. The complaint alleged, among other things, that Merrill Lynch's public statements filed with the SEC for the years 1999, 2000, and 2001 fraudulently failed to disclose that Merrill Lynch had issued falsely optimistic research reports for various internet companies in order to attract new investment banking business. As a result of Merrill Lynch's failure to disclose the falsely optimistic nature of its research, and the conflict of interest between Merrill Lynch's brokerage and investment banking divisions, Merrill Lynch's stock became artificially inflated. Plaintiff alleged that, as a result of the revelation to the public of the NYAG's investigation on April 8, 2002, Merrill Lynch's stock price declined, resulting in financial losses to shareholders of Merrill Lynch's stock.

On June 30, 2003, Judge Pollack dismissed with prejudice the complaints in two test cases*fn1 (the "Test Cases") brought on behalf of direct purchasers of Merrill Lynch-recommended securities on the grounds, inter alia, that the plaintiffs had failed adequately to plead loss causation; that the plaintiffs had failed to plead fraud with sufficient particularity; and that the complaints were untimely, because the plaintiffs had been put on inquiry notice more than one year before the commencement of the actions. See In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351 (S.D.N.Y. 2003). In October and November 2003, Judge Pollack dismissed additional consolidated actions brought on behalf of direct purchasers of stock in the Internet-based companies, on the ground of loss causation. Motions to dismiss other actions were then stayed pending the Second Circuit's adjudication of the appeals of the dismissals of the Test Cases.

On October 6, 2004, following Judge Pollack's death, the Judicial Panel for Multidistrict Litigation reassigned the cases consolidated in In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 02 MDL 1484, including this Action, to me.

On January 20, 2005, the Second Circuit issued its decision in the appeal of Judge Pollack's dismissal-with-prejudice of the Test Cases. In Lentell v. Merrill Lynch, 396 F.3d 161 (2d Cir. 2005), cert. denied, 126 S.Ct. 421 (2005), the Circuit affirmed Judge Pollack's dismissal on the ground of loss causation. Id. at 178. In addition, following the Lentell decision, the Second Circuit affirmed dismissals of what counsel in this Action characterize as "similar claims against brokerage firms." (Mem. of Law in Support of Lead Pl. Mot. for Final Approval of Class Action Settlement ("Pl. Mem. Settle."), at 4.). Specifically, the Second Circuit affirmed the dismissal of securities fraud claims in two cases, on the grounds that the action was barred by the statute of limitations, see Shah v. Meeker, 435 F.3d 244 (2d Cir. 2006)("Citigroup") and lack of sufficient pleading of scienter, see Albert Fadem Trust v. Citigroup, Inc., No. 4-5642-cv, 2006 US App. LEXIS 2997 (2d Cir. Feb. 6, 2006)("Morgan Stanley").

The Settlement

Settlement discussions in this case began in December 2005, nearly a year after the Circuit's decision in Lentell. According to Lead Counsel, the parties "conducted multiple meetings in person and telephonically. . . ." over the course of several weeks. (Pl. Mem. Settle. at 3.) The parties eventually reached a preliminary agreement on a settlement of $15 million, plus interest on that amount to accrue as of January 1, 2007 and to continue to accrue until the settlement is paid out to the class. The agreement also called for the defendants to pay all costs of notice and administration of the settlement.

After reaching their preliminary agreement, the parties negotiated terms of the Stipulation of Settlement ("Stipulation"). On June 5, 2007, the parties executed the Stipulation. On June 20, 2007, the Court issued a Preliminary Order in Connection with Settlement Proceedings ("Preliminary Order"), which among other things granted preliminary certification to the settlement class; set forth the deadlines for notice to potential class members and the filing of objections and requests for exclusion; set the date of a hearing to determine the fairness of the proposed settlement; appointed a claims administrator to administer settlement proceeds and disseminate notice of settlement to potential class members; and approved the form and substance of the proposed notice of settlement and the proof of claim and release form.

The Stipulation provided for a cash payment in the amount of $15 million, plus interest imputed monthly on the amount of $15 million, beginning on January 1, 2007 and to continue accruing until the settlement is paid to the class, at the three-month London Offered Interbank Rate ("LIBOR") listed in the Wall Street Journal at the close of each month ("Settlement Fund").*fn2 The Settlement Class consists of persons who acquired Merrill Lynch stock between July 3, 1999 and April 8, 2002 (the date the NYAG's investigation became public) and suffered damages as a result. In addition to payment of the Settlement Fund, the defendants, pursuant to the Stipulation, are required to pay for the cost of providing notice of the settlement and with the cost of administering the settlement.*fn3

Pursuant to the Stipulation, the Settlement Fund will be used to pay taxes and tax expenses, attorneys' fees, and litigation expenses. The remaining amount of the Settlement Fund ("Net Settlement Fund") then will be distributed to valid claimants pursuant to the Plan of Allocation. The Stipulation also contains a release and waiver, barring any participating Class Members from bringing against the defendants any future claims, known or unknown, that arise out of or relate to this Action.

Notice to Class

On July 9, 2007, pursuant to the Preliminary Order, counsel, through the Court-approved claims administrator, Heffler, Radetich & Saitta, L.L.P. ("HR&S") began the process of mailing notice of the settlement to identifiable class members. Through October 19, 2007, HR&S mailed a total of 522,832 notices. In addition, on July 20, 2007, summary notices describing the settlement were published in The Wall Street Journal and electronically via the PR News wire. HR&S also posted downloadable copies of the Notice and proof of claim form on its website ( (last visited December 10, 2007).

The Notice provided a background of the Actions, described the circumstances leading up to the Settlement, supplied the details of the Settlement, gave notice of the Fairness Hearing, and provided instructions for Class Members regarding submissions of claims, exclusion from the Settlement, objection to the terms of Settlement and/or the application for attorneys' fees and reimbursement of expenses, and attendance at the Fairness Hearing. The Notice also stated that Lead Counsel would apply for attorneys' fees not to exceed 22.5% of the Settlement Fund, and reimbursement of attorneys' costs and expenses incurred in connection with the litigation of the Actions not to exceed $125,000.

Plan of Allocation

The Notice included the proposed Plan of Allocation. The Notice explained that, under the Plan of Allocation, the Net Settlement Fund will be distributed on a pro rata basis to Class Members based on their relative applicable losses in Merrill Lynch's stock, who submit timely, valid Proof of Claim forms. Class Members who purchased Merrill Lynch's stock between July 3, 1999 and April 8, 2002 above the price of $50.02 per share and who held the stock at least through the end of the Class Period are eligible to share in the recovery. According to Lead Plaintiff's damages expert, Dr. Steven Feinstein of the Michael Shaked Group, the estimated recovery per share is $0.545, which represents between 2.15% and 4.07% of the estimated damages.

Reaction of Class to the Notice of Proposed Settlement

The response of the classes to the proposed settlement has been highly favorable. After mailing over 522,000 Notices to potential Class Members, as of October 18, 2007, HR&S received only 59 requests for exclusion. As of November 5, 2007, the date of the Fairness Hearing, only six individual investors and no institutional investors had filed objections to either the settlement or the request for an award of attorneys' fees and reimbursement of expenses. As discussed below, those objections are meritless.

Fairness Hearing

Lead Counsel and Liaison Counsel*fn4 have submitted a Motion in Support of Final Approval of Class Action Settlement, a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses, and accompanying memoranda and exhibits. The defendants have not submitted any memoranda. A Fairness Hearing was held on November 5, 2007. Lead Counsel addressed the Court in support of the fairness of the proposed Settlement and Plan of Allocation, and in support of the application for attorneys' fees of 22.5% of the Settlement Fund. Counsel for Merrill Lynch appeared at the Hearing, spoke briefly in favor of approval of the proposed Settlement as fair and reasonable, but took no position on Lead Counsel's application for attorneys' fees. No Objectors attended the Hearing.


(i) Certification of the Settlement Class

The Stipulation contemplates certification of the settlement class. "Before certification is proper for any purpose--settlement, litigation, or otherwise--a court must ensure that the requirements of Rule 23(a) and (b) have been met." Denny v. Deutsche Bank, A.G., 443 F.3d 253, 270 (2d Cir. 2006). Rule 23(a) imposes four threshold requirements on putative class actions: numerosity, commonality, typicality, and adequacy of representation. Id. at 267. In addition, Rule 23(b)(3) imposes the following two requirements: "Common questions must 'predominate over any questions affecting only individual members'; and class resolution must be 'superior to other available methods for the fair and efficient adjudication of the controversy.'" Id. (quoting Fed. R. Civ. P. 23(b)(3)). The Court considers each requirement in turn.


Rule 23(a)(1) requires that the putative class be "so numerous that joinder of all class members is impracticable." Fed. R. Civ. P. 23(a)(1). While no minimum number of plaintiffs is required for a suit to be maintained as a class action, "[g]enerally, courts will find a class sufficiently numerous when it comprises 40 or more members." DeMarco v. Nat'l Collector's Mint, Inc., 229 F.R.D. 73, 80 (S.D.N.Y. 2005) (citation and internal quotations omitted). Here, HR&S identified more than 522,000 potential Class Members. At the Fairness Hearing, Lead Counsel informed the Court that, as of November 5, 2007, approximately 89,000 claims had been filed. The settlement class in this Action is clearly so large that it would not be possible for individual investors to bring their claims separately. The numerosity requirement therefore is satisfied.


Under Rule 23(a)(2), class certification is appropriate where "there are questions of law or fact common to the class." Fed. R. Civ. P. 23(a)(2). The commonality requirement of Rule 23(a)(2) is satisfied if "all class members are in a substantially identical factual situation and the questions of law raised by the plaintiff[s] are applicable to each class member." In re Playmobil Antitrust Litig., 35 F. Supp. 2d 231, 240 (E.D.N.Y. 1998). The rule does not require that every question of law or fact be common to each class member. Id. "The commonality requirement has been applied permissively in the context of securities fraud litigation." In re Veeco Instruments, Inc., Sec. Litig., 235 F.R.D. 220, 238 (S.D.N.Y. 2006). Here, the Action raises questions of law and fact that are common to each class member. Plaintiffs are suing under the same federal securities laws, alleging the same misrepresentations and/or omissions of material statements in the Merrill Lynch research reports, and alleging that the misrepresentations resulted ultimately in the decline in value of their shares of Merrill Lynch stock. Thus, "the success of each plaintiff's claim turns on establishing the existence, nature and significance of the same alleged misrepresentations and omissions." Id. The commonality requirement is satisfied.


Rule 23(a)(3) is satisfied if "the claims or defenses of the representative parties are typical of the claims or defenses of the class." Fed. R. Civ. P. 23(a)(3). The "typicality" requirement is met where "the claims of the named plaintiffs arise from the same practice or course of conduct that gives rise to the claims of the proposed class members." Schwab v. Philip Morris USA, Inc., 449 F. Supp. 2d 992, 1104 (E.D.N.Y. 2006) (internal quotations and citation omitted). Here, there is no indication that the claims of the Lead Plaintiff differ in any respect from the claims of the rest of the putative Class Members. Thus, the typicality requirement is satisfied.

Adequacy of Representation

Rule 23(a)(4) requires that "the representative parties will fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a)(4). This necessitates a two-part inquiry:

(1) whether the lead plaintiffs' interests are antagonistic to the interests of other members of the class, and (2) whether plaintiffs' attorneys are qualified, experienced and able to conduct the litigation. Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 60 (2d Cir. 2000). Regarding the first prong, there is no indication that the Lead Plaintiff's claims are potentially at odds in any way with the claims of unnamed Class Members. As stated above, the claims of the Lead Plaintiff appear to be typical of the claims of the remainder of the class. The second prong also is satisfied. As the resumes submitted by Lead Counsel and Liaison Counsel clearly demonstrate, counsel have wide experience in the field of securities class litigation. Further, as discussed below and as is clear from the record of this litigation, counsels' able representation enabled the Class Members to obtain a favorable and certain cash recovery. Thus, the final requirement of Rule 23(a) has been met.

Rule 23(b)(3): Predomination and Superiority

Rule 23(b)(3) requires "[1] that common questions of law or fact predominate over individual questions and [2] that a class action is superior to other methods of adjudication." In re Veeco Instruments, Inc., 235 F.R.D. at 240. "In determining whether common questions of fact predominate, a court's inquiry is directed primarily toward whether the issue of liability is common to members of the class." In re Blech Sec. Litig., 187 F.R.D. 97, 107 (S.D.N.Y. 1999). Common questions also predominate where "even if each Class member were to bring an individual action, each would be required to prove the existence of the alleged activities of the defendants in order to prove liability." Id. Here, only the issue of damages will be different for each Class Member, depending upon the number of Merrill Lynch shares for which the Class Member can claim a loss. Further, as discussed above, the Class Members' claims ...

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