By letter to the Court, dated June 7, 2011, counsel for Neville Seymour Davis ("Davis"), who purports to represent a class of investors in Thema International Fund plc ("Thema") in this consolidated securities fraud action, informed the Court that, on June 7, 2011, Davis had executed a Stipulation and Agreement of Partial Settlement ("Proposed Partial Settlement") with Defendants HSBC Institutional Trust Services (Ireland) Ltd. ("HTIE"), HSBC Securities Services (Ireland) Ltd. ("HSSI"), and HSBC Holdings PLC ("HH"), and with proposed defendant HSBC Bank USA, N.A. ("HSBC USA," and collectively, the "HSBC Defendants"), which could "resolve and release all [of Davis's] claims against the HSBC Defendants in exchange for a payment of $62.5 million."*fn1 (Davis's Ltr. to the Ct., dated June 7, 2011, at 1.)
The HSBC Defendants are alleged to have been the "administrator and custodian" of Thema, a fund incorporated in Ireland. (Davis Am. Compl. ¶¶ 16, 28; Davis's Proposed Second Am. Compl., dated Apr. 1, 2011, ¶¶ 15, 27, attached as Ex. G to Chang Decl.)
On June 21, 2011, Davis filed a motion for preliminary approval of the Proposed Partial Settlement, arguing, among other things, that the Proposed Partial Settlement -- "a product of over two years of litigation," reached following "a review and analysis of voluminous documents" and "a mediation facilitated by a respected retired judge [the Honorable Daniel Weinstein, formerly of the Superior Court of the State of California, County of San Francisco]" -- "provides Thema investors with the best vehicle to recover their losses from . . . Madoff's Ponzi scheme."*fn2 (Mem. of Law in Supp. of Davis's Mot. for Prelim. Approval, dated June 17, 2011 ("Davis Mem."), at 1, 6.) Davis also argues that the Proposed Partial Settlement eliminates various "risks" to recovery by Thema investors, including the possibility that this Court will dismiss Davis's claims against the HSBC Defendants on grounds of "forum non conveniens," "[l]ack of standing," and/or "[l]ack of privity"; and the risk that any benefit Thema investors might potentially receive from litigation currently being pursued by Thema itself against HTIE in the Irish High Court in Dublin ("HTIE Litigation") may be limited or delayed by Thema's "massive exposure" to fraudulent transfer (i.e., "claw-back") claims totaling $692 million (which have been brought against Thema by Irving H. Picard, Esq., the trustee appointed for the liquidation of BMIS ("Trustee")).*fn3 (Davis Mem. at 10, 13--14.) The Proposed Partial Settlement would "remove these hurdles" and enable Thema investors "to recover cash much sooner than they [otherwise] would." (Davis Mem. at 10, 13.) It should be noted that the HSBC Defendants neither joined in nor opposed Davis's motion for preliminary approval. (See Davis's Not. of Mot., dated June 17, 2011; Davis Mem.)
On June 30, 2011, certain of the non-settling Defendants (collectively, the "Objecting Defendants") filed an opposition to Davis's motion for preliminary approval of the Proposed Partial Settlement, contending, among other things, that the Proposed Partial Settlement "is a travesty and is a flagrant effort to sell-out the interests of Thema's shareholders and the rights of [non-settling D]efendants." (Obj. Mem. at 3.) The Objecting Defendants argue that (i) the Proposed Partial Settlement's irrevocable "assignment of absent class members' litigation rights to Davis" (see Proposed Partial Settlement ¶ 2.14) "would set up a de facto class action for the claims against the [n]on-[s]ettling Defendants" in another (likely foreign) court without complying with the requirements of Fed. R. Civ. P. 23 and without continued supervision by this Court; (ii) such assignment aims to "circumvent" the laws in most other countries, including Ireland, which do not recognize class actions, and the "[m]ore than 60 . . . shareholder suits [that have been filed] against HTIE in Ireland"; (iii) the Proposed Partial Settlement is "grossly inadequate" because, after the proposed deduction of legal fees -- which include a $10 million litigation fund for future foreign litigation against the non-Settling Defendants (see Proposed Partial Settlement ¶ 1.30), plus a fee for legal services in the instant case, "and a guaranty of more [legal] work [for Davis's counsel] in the form of [the] forced assignment [to Davis]" -- "Thema's shareholders would receive less than $38 million"; and (iv) another proposed assignment, to the HSBC Defendants, set forth in the Proposed Partial Settlement, i.e., of the rights of settling Thema investors to receive distributions from Thema as a result of the HTIE Litigation (see Proposed Partial Settlement ¶ 2.13), serves only to "facilitate the termination" of the HTIE Litigation, "over which this Court has no jurisdiction and over which Davis has no right to exercise control." (Obj. Mem. at 1--3, 6, 13--16 (internal quotation marks omitted)); see supra note 3.*fn4
On July 11, 2011, Davis and the HSBC Defendants filed separate reply briefs, arguing, among other things, that "non-settling defendants in a multiple-defendant litigation [generally] have no standing to object to the fairness or adequacy of [a] settlement by other defendants."
(Davis's Reply, dated July 11, 2011 ("Davis Reply"), at 2; see HSBC Defs.' Reply, dated July 11, 2011 ("HSBC Reply"), at 10.) "Assuming arguendo that the Objecting Defendants have standing," the Settling Parties also argue that "assigned claims[, e.g., to Davis] are routinely litigated in Europe despite the absence of a class action procedure"; that "the minority of investors who have brought claims in Ireland are free to opt out of the [Proposed Partial] Settlement"; and that "HSBC cannot be expected to both settle with the injured investors on whose behalf Thema purports to act, and separately pay Thema (assuming HTIE lost the [HTIEL]instigation), particularly since money paid to Thema would go not to investors but to the . . . Trustee" to satisfy his claw-back claims. (Davis Reply at 2, 6; HSBC Reply at 8, 10.)
At a conference held on July 21, 2011, the Court described the concern it has over the fact that the Proposed Partial Settlement is "conditional." (Tr. of Proceedings, dated July 21, 2011 ("July 21, 2011 Tr."), at 3:14-19 ("[W]hat I am principally concerned about, and the reason for my hesitation at this stage, are these conditions. And I want to hear directly from the parties to the settlement about fleshing these conditions out a little more and understanding them in better detail, and also understanding whether they are still viable and how important they are.").) The Proposed Partial Settlement is subject to several significant conditions, including, among others, (i) a condition that the Irish High Court will render a ruling "satisfactory" to the Settling Parties, following this Court's final approval of the Proposed Partial Settlement, concerning the "recognition, enforcement, implementation and/or application" of the Proposed Partial Settlement in Ireland (Proposed Partial Settlement ¶ 5.5); (ii) a condition that the Trustee is found by United States District Judge Jed S. Rakoff in Picard v. HSBC Bank PLC, No. 11 Civ. 763 (S.D.N.Y.), to lack standing to pursue certain related common law claims against the HSBC Defendants (see Proposed Partial Settlement ¶ 5.4); (iii) the condition, noted above, that a "Reserve Amount" of $10 million be carved out of the proposed $62.5 million settlement fund for legal fees which will be accrued in future litigation (presumably in Europe) by Davis against non-settling Defendants (and for the payment of the opposing side's legal fees in such litigation(s) in the event they are unsuccessful) (Proposed Partial Settlement ¶ 1.30); (iv) a condition that attorneys' fees and expenses (presumably also other fees and expenses) "be considered by th[is] Court separately from the Court's consideration of the fairness, reasonableness, and adequacy" of the Proposed Partial Settlement (Proposed Partial Settlement ¶ 7.5); and (v) the condition, also noted, that settling Thema class members who affirmatively elect to participate in the Proposed Partial Settlement by filing a combined (8-page) proof of claim, release, and assignment form ("Proposed Proof of Claim and Assignment") "irrevocably" assign to Davis their claims against non-settling Defendants (Proposed Partial Settlement ¶ 2.14; see also July 21, 2011 Tr. at 4--8).*fn5 At the July 21, 2011 conference, the Court also denied Davis's letter application, dated June 17, 2011, to file a so-called "blow provision" contained in the Proposed Partial Settlement under seal "because it contains the confidential agreement that allows the [HSBC D]efendants to terminate the settlement when the number of opt-out class members reaches a certain level." (Davis's Ltr. to the Ct., dated June 17, 2011, at 1; see July 21, 2011 Tr. at 5:4-10 ("[T]he sealing application is being denied . . . . [I]n this case the interest of the public's right to know and full disclosure overwhelms any interest in keeping the [blow] provision secret.").)*fn6
By joint letter, dated August 11, 2011, the Settling Parties advised the Court that they were prepared to make two revisions to the Proposed Partial Settlement "to make it less conditional." (Settling Parties' Ltr. to the Ct., dated Aug. 11, 2011 ("Settling Ltr."), at 1.) That is, they would (i) modify the Irish High Court condition such that "the HSBC Defendants will apply to the Irish High Court for rulings on the prospective enforceability and effect of the [Proposed Partial] Settlement . . . before this Court holds a fairness hearing and rules on final approval"; and (ii) "delete" from the Proposed Partial Settlement any condition based upon Judge Rakoff's ruling as to the Trustee's standing, "any appeal from [such] decision," or "any related rulings for example by [United States District] Judge [Colleen] McMahon in Picard v. JP Morgan Chase & Co., No. 11 Civ. 0913 [(S.D.N.Y.)]." (Settling Ltr. at 1--2 (emphasis in original).)*fn7 As to the other conditions, the Settling Parties refused to modify the Proposed Partial Settlement, asserting, for example, that "the [$10 million] Reserve Amount is necessary to address potential litigation" in Ireland should this case "be dismissed on forum non conveniens" grounds because of the "peculiar" Irish practices of "retain[ing] multiple levels of lawyers . . . on an hourly-fee basis" and of "having to reimburse [prevailing parties] for their legal fees and expenses"; "[t]he actual amount of fees sought will await further developments in this case," although "in no event" will it exceed 25% or $15.625 million of the $62.5 million settlement fund; and the assignment to Davis "is extremely valuable" to Thema investors "in the event they have to bring claims in jurisdictions outside the United States," i.e., in Ireland, "where they would have to commence individual actions absent this assignment." (Settling Ltr. at 1--3; see also Proposed Not. of Pendency & Partial Settlement of Class Action, filed June 21, 2011 ("Proposed Notice"), attached as Ex. A-1 to Davis Mem., § II.G ("At a future date and after further notice to the [s]ettlement [c]lass, [Davis's counsel] will seek approval from the Court for payment of attorneys' fees of not more than twenty five percent (25%) of the [g]ross [s]ettlement [f]und plus actual costs and expenses incurred.").)*fn8
During a telephone conference with the Settling Parties on August 12, 2011, the Court (again) expressed its concerns with the conditional aspects of the Proposed Partial Settlement, including "provisions . . . that ask [the Court] to approve and facilitate . . . [Davis's potential] future representations and . . . the assessment of [$10 million in] legal fees so that [Davis] can pursue [those] other litigations." (Tr. of Proceedings, dated Aug. 12, 2011 ("Aug. 12, 2011 Tr."), at 2:24--3:25 ("I don't see it as my role nor do I think it is appropriate to approve, even preliminarily, those provisions which relate to what I think are inappropriate . . . legal fees and other lawsuits in other jurisdictions."), 11:11--13:7 ("I have never had a situation where anybody has asked me . . . to help circumvent the rules of in this case Ireland by giving them a war chest to go sue in Ireland people that they have already told the Court it is appropriate to sue here in New York. . . . It is really the legal fees . . . which I am struggling with.").) And, by Order, dated August 12, 2011, the Court invited supplemental written submissions from the parties as to preliminary approval of the Revised Proposed Partial Settlement.
On August 18, 19, and 22, 2011, the HSBC Defendants, Davis, and the Objecting Defendants submitted to the Court supplemental letters, expanding upon their earlier arguments. (See HSBC Defs.' Ltr. to the Ct., dated Aug. 18, 2011 ("HSBC Supp. Ltr."); Davis's Ltr. to the Ct., dated Aug. 19, 2011 ("Davis Supp. Ltr."); Thema's Ltr. to the Ct., dated Aug. 19, 2011 ("Thema Ltr."); PricewaterhouseCoopers Ireland's Ltr. to the Ct., dated Aug. 19, 2011 ("PwC Ltr."); HSBC Defs.' Ltr. to the Ct., dated Aug. 22, 2011.)
On September 7, 2011, the Court heard additional oral argument from the Settling Parties as to Davis's motion for preliminary approval. (See Tr. of Proceedings, dated Sept. 7, 2011 ("Sept. 7, 2011 Tr."), at 3:10--19:6.) At the close of arguments, the Court respectfully denied the motion, concluding that the Revised Proposed Partial Settlement "is not fair, reasonable, or adequate even at this preliminary stage to members of the proposed class of investors in Thema." (Sept. 7, 2011 Tr. at 19:16--20:10 (citing In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1025 (2d Cir. 1992)); see also Decision & Order, dated Sept. 7, 2011 ("Sept. 7, 2011 Decision"), at 1.)*fn9
For the following reasons, Davis's motion for preliminary approval of the Revised Proposed Partial Settlement is respectfully denied.
"Preliminary approval of a Proposed Partial Settlement is appropriate where . . . there are no grounds to doubt its fairness and no other obvious deficiencies (such as unduly preferential treatment of class representatives . . . or excessive compensation for attorneys), and where the settlement appears to fall within the range of possible approval." In re Gilat Satellite Networks, Ltd., No. 02 Civ. 1510, Mem. Op. & Order ...