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In re AOL Time Warner

July 30, 2008


The opinion of the court was delivered by: Shirley Wohl Kram United States District Judge



On September 30, 2005, the Court certified a class (the "Class") for the settlement of securities fraud claims arising out of the merger of America Online, Inc. ("AOL") and Time Warner, Inc. into AOL Time Warner, Inc. At that time, the Court also preliminarily approved a settlement of the Class's claims (the "Settlement") and approved the distribution of notice (the "Notice") to Class members. The Court formally approved the Settlement in a final order signed April 19, 2006. In a submission received on October 11, 2007, Yigal Zakai ("Zakai"), a member of the Class, lodged a pro se objection to the method used by the settlement administrator, Gilardi & Co. ("Gilardi"), to determine the amount of Zakai's compensable loss pursuant to the Settlement's plan of allocation. For the reasons discussed below, the Court denies Zakai's objection and his request for reimbursement of litigation costs.


Familiarity with the general context of this litigation is presumed. See generally In re AOL Time Warner Sec. & "ERISA" Litig., 381 F. Supp. 2d 192 (S.D.N.Y. 2004) (partially granting motion to dismiss); In re AOL Time Warner, Inc. Sec. & ERISA Litig., MDL Docket No. 1500, 02 Cv. 5575 (SWK), 2006 WL 903236 (S.D.N.Y. Apr. 6, 2006) (approving settlement) (the "Settlement Approval Opinion"). The Court limits its discussion here to those facts and circumstances pertinent to the instant objection.

Following the Court's preliminary approval of the Settlement in this case, the Notice was distributed to approximately 4.7 million Class members. The Notice included the Settlement's proposed plan of allocation, which explained the methodology to be used in calculating each Class member's "Recognized Claim." (See Mot. for Prelim. Approval of Settlement, Declaration of Robert E. Forrest ("Forrest Decl.") Ex. 1.C (the "Plan of Allocation").) The Plan of Allocation provides each Class member with pro rata compensation for any loss suffered as a result of the alleged securities fraud, offset by any artificial inflation caused by that fraud. The Plan of Allocation outlined separate calculation methods to be used for purchasers of common stock, stock options, and bonds. The Court formally approved the Settlement, including the Plan of Allocation, in April 2006. See Settlement Approval Opinion, 2006 WL 903236, at *18.

In April 2007, in response to an inquiry from Zakai regarding the status of his claim, Gilardi informed Zakai that he would not recover any money under the Plan of Allocation, because Gilardi's calculation indicated that Zakai had actually enjoyed a gain from the alleged fraud instead of a loss. (Zakai's Objection 1-2.) For the next several months, Zakai's son corresponded with both Gilardi and counsel for the Class regarding this calculation, which he believed to be incorrect. After these attempts to resolve the dispute had failed, Zakai filed the objection currently under consideration. Minnesota State Board of Investment, the lead securities plaintiff ("Lead Plaintiff"), opposes the objection and maintains that Gilardi's calculation is correct.

The resolution of Zakai's objection requires the Court to determine first whether the objection, lodged some twenty-one months after the January 6, 2006 deadline for objecting to the Settlement (see Forrest Decl., Ex. 1.A ("Settlement Notice") 1), is untimely. Second, if Zakai's objection is not untimely, the Court must decide whether Gilardi's calculation of Zakai's claim is in accordance with the Plan's terms and is mathematically and economically sound. In Part II.A of this opinion, the Court concludes that, because the language of the Plan of Allocation contains a latent ambiguity, Zakai's objection is not time-barred. In Part II.B, the Court addresses the merits of Zakai's objection and holds that Gilardi's calculation of his claim was not inconsistent with the language of the Plan and more accurately reflects the economic realities underlying this class-action litigation than does Zakai's proposed, alternative methodology.


A. Zakai's Objection is Not Untimely

The instant dispute turns on the parties' contrasting interpretations of the term "Recognized Claim," as it is used in both the Notice and the Plan of Allocation.*fn1 In its approval of the Settlement, the Court held that the Notice and Plan contained sufficient detail to allow recipients to determine whether they were members of the putative class, and to apprise them of the Settlement's terms. See Settlement Approval Opinion, 2006 WL 903236, at *16-*17. Thus, as a general matter, objections received after the January 6, 2006 objection deadline specified in the Notice are untimely. As the following analysis demonstrates, however, the Notice and Plan of Allocation contained an ambiguity that only became apparent upon the calculation of individual claims. Therefore, the Court will entertain Zakai's objection.

Section II.C.2(a) of the Plan of Allocation sets forth the calculation methodology for AOL or AOLTW put options sold during the securities class period of January 27, 1999 through and including August 27, 2002, as follows:

(a) For put options which (1) were repurchased (covered) between January 27, 1999 and July 24, 2002; or (2) were exercised against the put writer between January 27, 1999 and July 24, 2002, the Recognized Claim shall be that number of options multiplied by the lesser of:

(i) The difference between Artificial Deflation per Option as determined by applying the Black-Scholes options pricing model on the date of sale and Artificial Deflation per Option ...

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