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In re Merrill Lynch Tyco Research Securities Litigation

April 16, 2008


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


This Opinion considers the petition of the lead plaintiffs for class certification and final approval of a proposed settlement and plan of allocation in this securities class action. The putative class members are direct purchasers of common stock in Tyco, who alleged that Merrill Lynch, through its star analyst, Phua Young, issued fraudulent research reports in which the defendants knowingly overvalued Tyco's worth and issued ill-advised "buy" or "hold" recommendations. As a result of the issuance of fraudulent research reports, the plaintiffs alleged that investors purchased shares of Tyco at an artificially inflated price and suffered financial losses when Merrill Lynch's misconduct was made public. The Court also considers counsels' 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 22.5% of the settlement fund, and (iv) awards reimbursement of litigation expenses to counsel.


On January 22, 2002 (the first day of the Class Period), Tyco announced that it was breaking up into four independent, publically-traded companies, retiring $11 billion in debt, and selling off its subsidiary, CIT Group. Subsequently, Defendant Phua Young ("Young"), a well-known and very widely read Merrill Lynch research analyst who covered Tyco, issued a series of research reports in which Young "positively portrayed the restructuring of Tyco, including the CIT-spin-off, while not disclosing that Young believed the asset valuations were inflated and questioned whether a sale of CIT would occur." (Declaration of Deborah Gross ("Gross Decl.") ¶ 16.) Despite his private misgivings about Tyco's actual asset value and the prospects for the CIT sale, Young recommended that investors either hold or purchase Tyco stock. On June 6, 2002 (the last day of the Class Period), Merrill Lynch, through a different research analyst, issued a report disclosing negative information about Tyco and advising investors to reduce their holdings in Tyco. After this disclosure, Tyco's share price fell from $17.30 to $14.60. As counsel note, a number of other events that occurred around the same time also could have contributed to the decline in Tyco's share price. Those events included the announcements that Tyco's CEO, Dennis Kozlowski, had resigned for "personal reasons"; that Tyco planned to take a $6 billion loss for its ultimate failure to sell off its CIT Group; and that a governmental investigation had been launched into Kozlowski's allegedly improper personal use of Tyco's funds.

In April 2002, the Office of the New York Attorney General (the "NYAG") announced that it had been conducting an extensive investigation into Merrill Lynch's issuance of allegedly false research reports. In May 2002, the NYAG announced that Merrill had agreed to a civil settlement of $100 million. The Tyco Action was among numerous lawsuits brought against Merrill Lynch in the wake of the NYAG's highly publicized investigation of and settlement with Merrill Lynch.

The bulk of the actions against Merrill Lynch 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. I have presided over three global settlements of the cases consolidated under the MDL (the "MDL Cases"). 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 "Mutual Fund 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"). The third global settlement involved one consolidated case, relating to claims brought on behalf of direct purchasers of Merrill Lynch's stock, who 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, and that the share value of Merrill Lynch's stock declined when the fraud was exposed (the "ML Shareholders Case"). That settlement was approved by the Court on December 20, 2007. See In re Merrill Lynch & Co. Research Reports Sec. Litig., 02 MDL 1484, 2007 U.S. Dist. LEXIS 93423 (S.D.N.Y. Dec. 20, 2007) (the "ML Shareholders Decision"). Although the Tyco Action is not part of the multi-district litigation and thus has proceeded separately from the MDL Cases, the procedural posture and factual and legal bases for the claims in this case share much in common with the MDL Cases, and the similarities are important in determining the propriety of class certification and final approval of the settlement, as well as the proper award of attorneys' fees.

Procedural History

This action commenced in June 2003 with the filing in the Southern District of New York of six putative class action complaints against Merrill Lynch and Young. By Order dated August 26, 2003, the related class actions were consolidated under the caption of the instant case and assigned to Judge Pollack. By the same Order, Ronald and Deborah Gutzwiller were named Lead Plaintiffs and the Law Offices of Bernard M. Gross, P.C. was appointed as Lead Counsel. On September 25, 2003, Lead Plaintiffs filed a consolidated amended complaint (the "Complaint") on behalf of individuals who purchased Tyco's common stock between January 22, 2002 and June 6, 2002, asserting claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, against Merrill Lynch, its broker-affiliate (Merrill Lynch Pierce Fenner & Smith, Inc.), and Young. The Complaint alleged, among other things, that the defendants wrote and published purportedly "independent" research reports on Tyco during the Class Period when, in fact, (i) the defendants had no reasonable basis for their opinions about Tyco's projected share price; (ii) the defendants were not independent in making their recommendations; (iii) the defendants failed to disclose that they actually held views about Tyco stock that were contrary to the opinions expressed in the research reports; and (iv) the defendants failed to disclose that the falsely positive research reports were issued in order to benefit Tyco, retain Tyco as a corporate client, and generate future underwriting business with Tyco. Plaintiffs claimed that the defendants' misconduct caused Tyco's stock to become artificially inflated, resulting in Plaintiff's financial losses when the defendants' fraudulent conduct was revealed.

In November 2003, the defendants filed a motion to dismiss the complaint, arguing that the plaintiffs had failed adequately to plead loss causation, failed to plead fraud with sufficient particularity, and failed to support a strong inference of scienter regarding Young's and Merrill Lynch's relationship with Tyco. In February 2004, Judge Polack granted the motion to dismiss with prejudice, holding that the complaint failed adequately to plead loss causation and failed to plead fraud with sufficient particularity. In March 2004, Plaintiffs filed a timely notice of appeal. In May 2004, the defendants moved to stay the appeal pending the Second Circuit's resolution of the appeal of Judge Pollack's dismissal-with-prejudice of the complaints in two "test cases" that had proceeded in the MDL Cases. Plaintiffs opposed the stay, and the Second Circuit denied Defendants' motion to stay the appeal. The parties briefed the appeal and oral argument was scheduled for February 2005. Shortly thereafter, the Second Circuit granted Defendants' request to adjourn oral argument until after the Second Circuit had adjudicated the "test cases." On January 20, 2005, the Second Circuit issued its opinion in Lentell v. Merrill Lynch, 396 F.3d 161 (2d Cir. 2005), affirming Judge Pollack's dismissal-with-prejudice of the "test cases" on loss causation grounds.

The Settlement

Settlement discussions in this case began in the summer of 2005, several months after the issuance of the Court of Appeals decision in Lentell. In 2006, the parties filed a stipulation with the Second Circuit withdrawing the pending appeal from active consideration while the parties continued settlement negotiations.

On June 19, 2007, the parties filed a proposed Settlement Stipulation ("Stipulation"). On August 7, 2007, the Court granted preliminary approval of the Stipulation ("Preliminary Order"), which among other things granted preliminary certification to the settlement class and to the Lead Plaintiffs as class representatives; set forth the deadlines for notice to potential class members and the filing of objections and requests for exclusion; set the date of a fairness hearing; appointed Valley Forge Administrative Services ("VFAS") as 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 form.

The Stipulation provides for a cash payment in the amount of $4.9 million, plus interest ("Settlement Fund").*fn1 The Settlement Class consists of persons who acquired Tyco common stock between January 22, 2002 and June 6, 2002, inclusively, and retained the stock at least until June 6, 2002 and suffered financial losses. Plaintiffs' counsel request 25% of the Settlement Fund in attorneys' fees, amounting to approximately $1,225,000, plus interest. Counsel also request $38,139.88 (as of January 9, 2008) as reimbursement for litigation expenses.

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

In August 2007, pursuant to the Preliminary Order, the court-approved claims administrator, VFAS, began mailing notice of the proposed settlement and proof of claim forms to potential class members. As of December 12, 2007, VFAS mailed a total of 604,687 notices. In addition, also pursuant to the Preliminary Order, summary notices describing the settlement were published in the USA Today and, electronically, on the PR Newswire, on October 31, 2007. VFAS also established a website that provided potential class members with downloadable versions of the notice and proof of claim forms, as well as information regarding class members' rights under the proposed settlement.

Plan of Allocation

The Plan of Allocation calls for the Settlement Fund, after payment of attorneys' fees and litigation costs, notification costs, and claims administration costs, to be distributed to class members who have submitted valid and timely proof of claims on a pro rata basis. The amount of distribution to each class member will depend on the number of Tyco shares purchased by that member and the timing of the purchase and sale of those shares. Each class member's recovery will depend upon that claimant's percentage of the total recognized claims of all class members who submitted timely and valid proof of claims.

Reaction of Class to the Notice of Proposed Settlement

The class has reacted favorably to the proposed settlement. As of the date of the Fairness Hearing, only twelve potential class members requested exclusion and only two objections to the proposed settlement were received.*fn2

Fairness Hearing

Lead Counsel has submitted a Motion for Final Approval of Class Action Settlement. Class Counsel*fn3 have submitted a Motion on Class Counsel's Joint Application for Award of Counsel Fees and Reimbursement of Expenses, and accompanying memoranda and exhibits. Defendant has not submitted any papers.

A Fairness Hearing was held on January 8, 2008. Plaintiffs' 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 25% of the Settlement Fund. Counsel for Merrill Lynch also appeared at the Fairness Hearing but did not address argument to the Court. 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, VFAS identified more than 604,000 potential class members. At the Fairness Hearing, Lead Counsel informed the Court that, as of January 9, 2008, approximately 83,000 claims had been filed. The settlement class in this Action clearly is so large that individual actions by all potential plaintiffs would not be possible. The numerosity requirement therefore is easily 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). The Tyco Action raises questions of law and fact that are common to each class member. Plaintiffs are suing under the same federal securities laws, alleging identical misrepresentations and/or omissions of material statements by the defendants regarding Tyco's stock, and alleging that the misrepresentations artificially inflated the price of Tyco's stock, thereby resulting in the plaintiffs' financial losses when the alleged fraud was revealed. 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 plaintiffs differ in any respect from the claims of the rest of the putative class members, apart from the amount of damages allegedly suffered by each member of the class. "Differences in the damages sustained by individual class members does not preclude a showing of typicality, nor defeat class certification." In re Playmobil Antitrust Litig., 35 F. Supp. at 242. 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: first, whether the lead plaintiffs' interests are antagonistic to the interests of other members of the class, and second, 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 plaintiffs' claims conflict in any way with the claims of other class members. As stated above, the claims of the named plaintiffs appear to be typical of the claims of the remainder of the class. The second prong also is satisfied. It is clear from the firm resumes submitted to the Court that counsel have ample experience in the field of class securities litigation, and from the record of this case it is evident that counsel represented the class adequately and zealously for more than four years, and enabled the class 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 ...

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