Summary
approving a 3.96x enhancement for lead counsel who took on considerable risk and denying the three derivative action firms' requested 1.07x enhancement because they conferred no benefit to the class other than dropping a derivative action
Summary of this case from In re Initial Public Offering Securities LitigationOpinion
02 Civ. 6527(DLC) CLASS ACTION, 03 Civ. 1194 (DLC) DERIVATIVE ACTION.
October 26, 2004
Richard Schiffrin, Katharine M. Ryan, Kay E. Sickles, Schiffrin Barroway, LLP, Bala Cynwyd, PA, for Lead Plaintiff.
Roy L. Jacobs, Roy L. Jacobs Associates, New York, NY, for Derivative Action Plaintiff.
Laurence D. Paskowitz, Paskowitz Associates, New York, NY, for Derivative Action Plaintiff.
Lewis Clayton, Andrew Gordon, Paul Weiss Rifkind Wharton Garrison LLP, New York, NY, for The Interpublic Group of Companies, Inc. and Certain Directors in the Class Action Inside Directors in the Derivative Action.
Susan Shin, Arnold Porter, LLP, New York, NY, for Nominal Defendant IPG.
Stephen A. Radin, Weil Gotshal Manges, LLP, New York, NY, for Defendants Frank J. Borelli, Reginald K. Brack, Jill M. Considine, Richard A. Goldstein, H. John Greeniaus, Michael I. Roh, and J. Phillip Samper.
Robert D. Carroll, Debevoise Plimpton LLP, New York, NY, for Defendant PriceWaterhouseCoopers LLP.
OPINION ORDER
Plaintiffs petition for court approval of the settlement of this securities class action and the related plan of allocation, settlement of a derivative action, and awards of attorneys' fees and expenses to both lead plaintiff and derivative action plaintiff's counsel. For the reasons stated below, both settlements and the plan of allocation are approved, modified attorneys' fees and costs are awarded in the securities class action, and fees and costs are denied in the derivative action.
Background — The Class Action
On August 5, 2002, the Interpublic Group of Companies ("IPG") announced a delay in its release of financial results for the second quarter of 2002, causing the price of IPG common stock to drop 24 percent that day and an additional 11 percent the next day. Soon after, on August 13, IPG issued the first of three restatements of its financial results from 1997 through the first quarter of 2002, revealing that it had overstated its earnings by $68.5 million. In a press release and conference call that day, IPG attributed the errors mostly to improperly expensed charges in the European offices of one of its key subsidiaries, McCann Erickson World Group ("McCann").
Given that the August 13 restatement was less dramatic than analysts feared, the stock price rose by 8 percent on August 14 and by another 9 percent on August 15. IPG declared on October 16, however, that the restatement amount would instead be in the $120 million range. It also lowered its forecast for 2002 earnings. The stock price dropped 30 percent. The company then revised the total restatement again on November 13 to $181.3 million, causing the stock to drop by an insignificant amount in the circumstances, about 40 cents per share. In a November 19 press release, it explained that only $101.1 million of the restated financials concerned charges at McCann.
As a result of these events, twelve class actions were filed against IPG and several of its former and current executives, alleging violations of Sections 11 and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 77o; Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a); and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. The first of these actions was filed on August 15, 2002.
By an Order of November 15, 2002, all twelve of the class actions were consolidated. The November 15 Order also appointed Private Asset Management ("PAM") as lead plaintiff and named Schiffrin Barroway, L.L.P. as lead counsel and Bernstein Liebhard Lifshitz, L.L.P. as local counsel. PAM is a sophisticated investor. It was founded in 1992 and manages assets of over $500 million. It has estimated its losses from its IPG investment as amounting to over $1 million.
Lead plaintiff filed a consolidated class action complaint on January 10, 2003. This complaint alleges that with respect to all persons who purchased or otherwise acquired IPG common stock between October 28, 1997 and October 16, 2002, the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10(b)(5) by issuing "false and misleading press releases and other statements regarding IPG's financial condition" between August 13 and October 16, 2002. In addition, on behalf of those who acquired IPG stock in exchange for their shares of common stock of True North Communications, Inc. ("True North") in connection with IPG's stock-for-stock acquisition of True North on June 22, 2001, the complaint asserts that the defendants violated Sections 11 and 15 of the Securities Act.
The defendants' motion to dismiss addressed to this pleading was granted in part on May 29, 2003. The Opinion dismissed the claims against each of the individual defendants for alleged violations of Section 10(b) of the Exchange Act, but denied the remainder of the motion to dismiss. In re Interpub. Sec. Litig., No. 02 Civ. 6527 (DLC), 2003 WL 21250682 (S.D.N.Y. May 26, 2003).
With the decision on defendants' motion to dismiss, the automatic stay of discovery under the Private Securities Reform Act, 15 U.S.C. § 78u-4(b)(3)(B), was lifted, and discovery commenced. By a June 16, 2003 Scheduling Order, parties were directed to complete fact discovery by June 25, 2004, and expert discovery by October 15, 2004. Lead plaintiff filed its initial disclosures pursuant to Rule 26, Fed.R.Civ.P., on June 26, 2003, and defendants followed soon thereafter on July 11. In response to plaintiffs' initial document requests, the defendants began to produce approximately 800,000 pages of documents on August 8, 2003. With an additional production from IPG's auditor, Price Waterhouse Coopers ("PWC"), approximately 1 million documents were given to lead plaintiff.
On July 11, 2003, the lead plaintiff moved to certify two classes, one consisting of all persons who purchased or otherwise acquired IPG's common stock between October 28, 1997 and October 16, 2002 (the "Purchaser Class") and the other comprised of those who received shares of IPG's common stock pursuant to IPG's acquisition of True North (the "True North Class"). Although defendants did not oppose certification of a class, they argued that the class period should be shortened on the ground that IPG's August 13, 2002 press release gave the market ample notice of IPG's need to restate its financials and that those who purchased IPG stock after August 13 could not have relied on any of IPG's alleged misrepresentations in making their purchase. Rejecting defendants' attack on the definition of the class period, a November 3 Opinion certified the two classes and appointed PAM Class Representative for the Purchaser Class. In re Interpub. Sec. Litig., No. 02 Civ. 6527 (DLC), 2003 WL 22509414 (S.D.N.Y. Nov. 3, 2003). On November 20, Doyle McClain was appointed Class Representative for the True North Class.
Background — The Derivative Action
In addition to the above-described securities class action, plaintiff Henry Karpus brought a derivative suit against IPG's principal officers and directors, as well as PWC, alleging that their conduct relating to the restatements described above materially damaged IPG. Although Karpus originally brought his action in New York State Supreme Court on September 4, 2002, he voluntarily dismissed that action and filed a derivative complaint in this district on February 24, 2003. Karpus filed his first amended derivative complaint on May 1, 2003. On May 15, the Court granted a stay at defendants' request pending the resolution of motions to dismiss in a similar derivative action in the Delaware Court of Chancery.
After the Delaware plaintiffs voluntarily dismissed that case, the stay was lifted on June 16, and plaintiffs filed a second amended derivative complaint on July 11. The second amended complaint alleges that the individual defendants failed to establish an adequate internal accounting system and promulgated materially misleading information regarding IPG's financial results, thereby violating their fiduciary duties. The complaint further charges that defendants John Dooner, then-Chairman and CEO of IPG, and Sean Orr, then-Executive Vice President and CFO of IPG, are liable under Section 304 of the Sarbanes-Oxley Act ("Sarbanes-Oxley"), 15 U.S.C. § 7243, for all bonuses, incentive or equity-based compensation, and profits from the sale of IPG securities that they received within 12 months of the initial financial reporting for which accounting restatements were later made. Lastly, with respect to PWC, the complaint states that by ignoring or recklessly disregarding the individual defendants' accounting-related wrongdoing, PWC both violated its contract with IPG and committed professional negligence. On August 12, 2003, the derivative action defendants filed motions to dismiss which were sub judice when the parties notified the Court that they expected to reach a settlement.
Settlement Negotiations
Although a global settlement pertaining to both the securities and derivative actions was ultimately reached, settlement negotiations initially started on separate tracks. In the securities class action, settlement negotiations began on July 24, 2003, when the parties engaged in mediation at the Court's direction with Magistrate Judge Gabriel W. Gorenstein. The parties met again with Judge Gorenstein on October 17, 2003.
Before the October 17 meeting, lead plaintiff suggested a settlement based on a combination of IPG stock and cash. IPG's insurance coverage for the issues related to this litigation was a $30 million wasting policy, and IPG was resisting any cash settlement beyond its insurance coverage. At the same time, lead plaintiff was advised by an expert on financial valuation that it was appropriate to include IPG stock as consideration in the settlement. The expert opined in the Fall of 2003 that IPG's accounting disclosure failures would not adversely affect the future operations of IPG, that IPG had taken significant measures to strengthen its internal reporting and control functions, and that there was a generally positive outlook for IPG's stock.
At the October 17 conference, Judge Gorenstein gave counsel a cash and stock value figure — specifically $20 million in cash and $95 million in stock — as a proposed basis for settlement. Within the week following October 17, the parties accepted these figures as the basis for a settlement. They continued thereafter to negotiate the exact number of IPG shares that would be included in a settlement and the process by which such shares would be valued. Meanwhile, principally during the months of October through December 2003, lead plaintiff reviewed the documents produced by defendants and PWC.
Ultimately, on December 5, 2003, IPG issued a press release announcing that the parties had agreed upon a settlement. Their agreement as to the period for valuing the stock resulted in a share value of $14.50 to calculate the number of shares to be included in the settlement: 6,551,725. They also negotiated downside protection for the settlement fund in the event the price of IPG's stock fell below $8.70. The December 5 press release stated that the total value of the settlement was $115 million. Lead plaintiff deposed three IPG employees in April and May 2004. On June 11, the parties filed their Stipulation of Settlement.
In the derivative action, negotiations got underway after the defendants' motions to dismiss were fully submitted. On November 11, 2003, the parties informed the Court that settlement negotiations were ongoing and that there was the potential to achieve a global settlement encompassing both actions. After being informed that the derivative action had settled in principle, this Court deemed the motions to dismiss to be withdrawn on January 28, 2004. The Stipulation of Settlement in the derivative action was filed on June 28, 2004.
Settlement Terms and Plan of Allocation: Securities Class Action
The Stipulation of Settlement in the securities class action establishes a Gross Settlement Fund consisting of $20,000,000 in cash and 6,551,725 shares of IPG common stock. With respect to the stock component, the settlement provides downside protection for the plaintiffs. Should IPG stock reflect a market value of less than $8.70 per share, as determined by the average price of the stock over the ten days preceding the fairness hearing, IPG will either issue additional shares of IPG common stock or contribute additional cash so that the Gross Settlement Fund will at minimum have a value of $77,000,000 as of the date of the fairness hearing. If IPG trades above $8.70 per share, which it did as of the fairness hearing, the Gross Settlement Fund will be worth more than $77,000,000. In sum, while the Gross Settlement Fund has a floor, it has no ceiling. As of the date of the fairness hearing, IPG was trading at around $11.66, and the value of the Gross Settlement Fund is approximately $96.4 million.
In addition to paying claims to class members, the Gross Settlement Fund will be used to pay taxes; administrative costs in both the securities class action and the derivative action, including the costs of providing notice; and attorney's fees and expenses in both lawsuits. The resulting Net Settlement Fund will then be distributed to claimants according to the Plan of Allocation.
The Plan of Allocation is based on the estimation by lead counsel's economic consultant that the August 13 restatement affected IPG's stock price by $1.37. Using this figure, the Plan calculates each claimant's losses on the basis of how many IPG shares he or she acquired or purchased and when such shares were purchased/acquired and sold. Each claimant will ultimately receive an award that reflects the percentage of his losses to all claimants' losses. The Plan of Allocation does not provide any recovery for investors who sold their stock on or before August 2, 2002, because the first drop in stock value attributable to the issues raised by this litigation occurred thereafter. Similarly, those who purchased IPG stock on or before August 5, 2002, but sold their shares on or before October 16, 2002, will not receive any recovery since the IPG stock price fluctuated during this period for a variety of reasons, including events unrelated to this litigation.
Aside from its financial provisions, the securities settlement also contains a bar order that prohibits any participating class member from bringing any future claims relating not only to the allegedly wrongful conduct described in the complaint but also to "the purchase or acquisition of IPG common stock during the Class Period." Beyond encompassing claims against IPG and the settling individual defendants, the bar order also applies to PWC and a host of other parties, such as attorneys and insurers related to IPG, the individual defendants, and PWC.
Settlement Terms: Derivative Action
In contrast to the class action settlement, the derivative settlement consists of two modest changes in IPG's corporate governance. First, for five years, IPG will retain a third-party to act as an ombudsman. The ombudsman, who can be contacted via a 24-hour 800 number provided to employees, will collect information from employees regarding alleged financial irregularities or misconduct and will deliver information either to IPG's internal audit group or to the legal department for further investigation. Sarbanes-Oxley required companies such as IPG to establish a mechanism for employees to report financial irregularities confidentially. 15 U.S.C. § 78j-1(m)(4)(B). IPG had always intended to hire an independent ombudsman to fulfill this mandate. The only identifiable component that settlement negotiations added to IPG's plans is the commitment to keep this mechanism in place for five years.
Second, the derivative settlement prohibits IPG from repricing "out of the money" options currently held by defendants Dooner and Bell until IPG's stock reaches an average of $30 or more for a period of no fewer than ninety days. In fact, IPG has never repriced options, and under IPG's current options plan, IPG may not reprice options without shareholder approval.
Like the securities class action settlement, the derivative settlement extinguishes all claims relating to IPG's financial statements and restatements for the years 1997 through 2002, including suits regarding the director defendants' fiduciary duties to IPG. The original Stipulation of Settlement for the Derivative Action, dated June 11, 2004, extinguished all claims related to IPG's financial statements without any time limitation. When the Court pointed out the overbroad reach of the bar during the June 17 conference, the parties revised the Stipulation of Settlement so that it does not bar claims for the period following 2002.
Finally, the settlement requires no contribution from PWC and provides PWC with a release. No party in either the class action or the derivative action had identified any evidence of misconduct by PWC.
Notice to the Class
Pursuant to two conferences with the Court on June 17 and July 8, 2004, the Joint Notice of Pendency and Proposed Settlement of Class Action and Derivative Action, and of Motion for Attorneys' Fees and Expenses (the "Joint Notice") was substantially revised. As revised, the Joint Notice provided descriptions of both actions and their respective settlements, detailed the reasoning behind the settlements, and outlined the Plan of Allocation in the class action. The Joint Notice also furnished instructions for class members regarding the submission of claims, opting out of the class action and objecting to the settlement, and attending the fairness hearing. With respect to attorneys' fees, lead counsel represented in the Joint Notice that it would seek no more than 20 percent of the Gross Settlement Fund as its award of attorneys' fees and reimbursement of no more than $375,000 in expenses. Derivative action counsel represented in the Joint Notice that it would request an award of $295,000 in fees and reimbursement of expenses of up to $20,000.
Lead counsel further disclosed in the Joint Notice that instead of requesting an all-cash award, it would "request fees equally out of the cash and stock components of the Gross Settlement Fund, so that it will bear the risk of the fluctuating stock price along with the Class."
On July 20, the Court issued an order that preliminarily approved the proposed settlements in the class action and the derivative action, directed that the Joint Notice be sent to all class members and current IPG shareholders, and scheduled a hearing on the fairness of the settlements and Plan of Allocation in the securities class action and the applications for attorneys' fees and costs. The order also directed that objections to either the class settlement or the derivative settlement must be mailed by no later than September 27, 2004.
Pursuant to the July 20 order, 333,470 Claim Packets were sent via first-class mail to potential class members and current IPG shareholders or their nominees. In addition, notice was published on a website and in the national edition of The Wall Street Journal on August 9, 2004.
The Reaction of the Class to the Joint Notice of Settlement
Nineteen requests for exclusion from the settlement have been received. Additionally, objections to the class action settlement have been filed by four class members: Carol Nicolay, Edward Ketron, Raymond Moy, and William Zorn. In sum, they object to the amount of the amount of the settlement as too small; they claim that the settlement will solely benefit the attorneys involved; they argue that the settlement is "inherently unfair" to senior citizens and those with diminished capacity; and they contend that the process of filing a claim is too difficult. Additionally, two of the objectors object to the fees sought by lead counsel. Mr. Ketron, for example, writes that "10% would be more than just." Mr. Zorn makes a related but different objection. In his view, PAM failed to negotiate a "reasonable retainer agreement" with lead counsel, resulting in an excessive attorneys' fees request by lead counsel that bears no reasonable relationship to the lodestar figure.
While two of the objectors, Ms. Nicolay and Mr. Moy, identify themselves as current IPG shareholders, neither of them has directly objected to the derivative settlement. Instead, Ms. Nicolay outlines some generalized complaints, such as her belief that "existing laws, rules, and regulations . . . should be enforced, rather than expensive litigation that benefits only lawyers." For his part, Mr. Moy argues that as the class action settlement will be paid by IPG, it essentially requires those who stand in the dual roles of class member and current shareholder to sue themselves. October 22 Fairness Hearing
The fairness hearing was held on October 22, 2004. All counsel spoke in favor of the settlement. No member of the class or shareholder attended the hearing. Lead counsel and all counsel in the derivative action who had applied for awards of attorneys' fees addressed the Court in support of their applications.
Judicial Approval of Class Action Settlements Under Rule 23(e)
Rule 23(e), Fed.R.Civ.P., mandates court approval of any settlement or dismissal of a class action. The standard to be applied in determining whether to approve a class action settlement is well established: the district court must "carefully scrutinize the settlement to ensure its fairness, adequacy and reasonableness, and that it was not a product of collusion." D'Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir. 2001) (citation omitted); see also Joel A. v. Giuliani, 218 F.3d 132, 138 (2d Cir. 2000). In so doing, the court must "eschew any rubber stamp approval" yet simultaneously "stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case." City of Detroit v. Grinnell Corp., 495 F.2d 448, 462 (2d Cir. 1974).
A district court determines a settlement's fairness "by examining the negotiating process leading up to the settlement as well as the settlement's substantive terms." D'Amato, 236 F.3d at 85. The court should analyze the negotiating process in light of "the experience of counsel, the vigor with which the case was prosecuted, and the coercion or collusion that may have marred the negotiations themselves." Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983) (citation omitted). A court must ensure that the settlement resulted from "arm's-length negotiations" and that plaintiffs' counsel engaged in the discovery "necessary to effective representation of the class's interests." D'Amato, 236 F.3d at 85.
In evaluating the substantive fairness of a settlement, a district court should consider factors enumerated initially inGrinnell, including:
(1) the complexity, expense and likely duration of the litigation, (2) the reaction of the class to the settlement, (3) the stage of the proceedings and the amount of discovery completed, (4) the risks of establishing liability, (5) the risks of establishing damages, (6) the risks of maintaining the class action through the trial, (7) the ability of the defendants to withstand a greater judgment, (8) the range of reasonableness of the settlement fund in light of the best possible recovery, [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.D'Amato, 236 F.3d at 86 (citation omitted).
Finally, public policy favors settlement, especially in the case of class actions. "There are weighty justifications, such as the reduction of litigation and related expenses, for the general policy favoring the settlement of litigation." Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982).
With respect to the securities class action, the terms of the settlement are fair, adequate, and reasonable, and there is no evidence of collusion. The parties' settlement negotiations included two face-to-face meetings presided over by Judge Gorenstein, and their adoption of the settlement figure that he proposed. The settlement resulted from arm's-length negotiations among attorneys with experience in securities litigation. In addition, document discovery has been completed, and lead plaintiff took three significant depositions of IPG employees.
If the litigation were to continue, the costs of completing fact discovery, expert discovery, summary judgment practice, and a trial would be large and probably excessive in relation to any recovery lead plaintiff might reasonably expect. Furthermore, the risks to the class would be significant. Lead counsel concedes that the class would have had difficulty at trial establishing that defendants' alleged misconduct amounted to fraud as opposed to lax accounting at local offices in Europe, and that any diminution in IPG's stock price was directly traceable to the accounting issues. The fact that the accounting irregularities did not have any significant impact on IPG's financial reports until the months just prior to the restatements further weakens plaintiffs' case.
Moreover, even if the class could successfully prove liability, both parties believe that assessing the amount of damages at trial would be a complex, expensive, and unpredictable endeavor. Lead plaintiff, aided by economic consultants, has estimated damages that range from approximately $465 million to $909 million depending on how much of the drop in IPG's stock price over the Class Period is attributed to the alleged misrepresentations, as opposed to other factors. Defendants, on the other hand, contend that any damages in this case should be based solely on the $101 million portion of the final restatement attributable to improperly expensed charges within McCann's European units. They further assert that the role of the restatement in the movement of IPG's stock price is difficult to ascertain, given declining prices throughout the market generally and in the advertising sector in particular and the fact that the market was also or perhaps even principally reacting to the announcement that IPG was adjusting its earnings expectations.
According to the Joint Notice, the $909 million figure reflects the assumption that "the majority of the drop in the stock price over the Class Period can be attributed to fraud." The $465 million calculation, by contrast, is based on the rise of the stock price stemming from IPG's first and incomplete restatement on August 13. On a per share basis, lead counsel's consultant estimates that the August 13 restatement, adjusted for overall market activity, caused a $1.37 shift in IPG's price. Both calculations are aggressive. Neither estimate allows for the involvement of other factors, such as IPG's release of information unrelated to the improperly expensed charges within McCann's European units.
The size of the cash component of the settlement should be evaluated in light of the fact that, in connection with these matters, IPG only maintained a $30 million "wasting" insurance policy from which defense costs are subtracted. The issuance of IPG stock as a component of the settlement package is reasonable as the parties have assured the Court that the defendants' accounting irregularities have been addressed and do not pose any ongoing problems for IPG, they negotiated downside protection for the class against a drop in the stock price below $8.70, and IPG stock did increase in value for some substantial period after negotiation of the settlement. IPG's stock rose during the period from December 2003 to February 2004. Beginning in March it fluctuated until June 2004, when it returned to the level it was at in December 2003. Since June 2004, it has steadily declined only to begin a slight upward climb over the last month. Therefore, while the Gross Settlement Fund reflects only ten to twenty percent of lead plaintiff's aggressive damages estimate, the securities settlement sits comfortably within the range of reasonableness.
Finally, the objections, while strongly felt, do not prevent an approval of the class action settlement. Out of more than 300,000 potential class members, only four submitted objections of any sort and only nineteen have opted out. While the objectors have complained that the settlement is paltry, in light of the difficulties plaintiffs would encounter in further litigating this case, the Gross Settlement Fund is adequate. As for the objections that the settlement is unfair to the elderly and/or that the process of filing a claim is too burdensome, both the Court and the parties expended significant effort to create a minimally taxing claims process and a thorough yet intelligible Joint Notice. Having reviewed the claim form again, there is no basis to find that it needs to be modified. Overall, the objections raised to this settlement do not alter the conclusion that the amount of the class action settlement and its terms are entitled to approval.
The Plan of Allocation is also entitled to approval. "To warrant approval, the plan of allocation must also meet the standards by which the settlement was scrutinized — namely, it must be fair and adequate." Maley v. Del Global Tech. Corp., 186 F. Supp. 2d 358, 367 (S.D.N.Y. 2002) (citation omitted) (collecting cases). No one has objected to the Plan, which was described in the Joint Notice. The Plan makes reasonable judgments about potential injury to class members and attempts to isolate and compensate those who are most likely to have suffered damages from the accounting irregularities at issue here.
Judicial Approval of Derivative Actions
Just as Rule 23(e), Fed.R.Civ.P., mandates court approval of class actions, Rule 23.1 directs that derivative actions may not be "dismissed or compromised without the approval of the court." In the Second Circuit, a derivative settlement must be "fair to all and [may] not favor the named plaintiff-shareholders or their counsel." Blatt v. Dean Witter Reynolds Intercapital, Inc., 732 F.2d 304, 307 n. 1 (2d Cir. 1984). In evaluating proposed derivative settlements, district court must examine "whether the settlement `is so unfair on its face as to preclude judicial approval.'" Id. (citation omitted).
The Court shares defendants' evaluation that plaintiff's claims are "perilously weak." Defendants dispute, for example, whether plaintiff even has standing to bring a claim against defendants Dooner and Orr under the Sarbanes-Oxley Act, since, unlike other Sarbanes-Oxley provisions, Section 304 does not expressly provide a private right of action. In his Memorandum of Law, the plaintiff admits that federal courts have yet to define the "precise contours" of such a claim. See In re Cree, Inc. Sec. Litig., 333 F. Supp. 2d 461, 478 (M.D.N.C. 2004) (deferring ruling on whether Section 304 provides a private cause of action). Beyond plaintiff's single federal claim, however, "it is state law which is the font of corporate directors' powers," and the source of plaintiff's claims. Kamen v. Kemper Financial Servs., Inc., 500 U.S. 90, 98-99 (citation omitted). As IPG was incorporated in Delaware, Delaware law governs the remainder of plaintiff's claims.
Delaware law presents several obstacles to the derivative action. For example, where a derivative plaintiff does not make a demand on the board and alleges that demand was futile, as plaintiff did here, his complaint must meet the "heavy burden" of pleading "particularized allegations raising a reasonable doubt that either: (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." White v. Panic, 783 A.2d 543, 551 (Del. 2003) (citation omitted). Additionally, as authorized by Delaware corporate law, IPG's certificate of incorporation eliminates directors' personal liability for breaches of their fiduciary duties. Del. Code Ann. tit. 8, § 102 (b)(7) (2003). To overcome this protection, plaintiff must demonstrate that his claim against the director defendants falls outside of Section 102 (b)(7) by showing "bad faith, intentional misconduct, or [a] knowing violation of the law" on the part of the defendants. In re Baxter Int'l, Inc. Sec. Litig., 654 A.2d 1268, 1270 (Del.Ch. 1995). In his Memorandum of Law, plaintiff acknowledges that there is "scant evidence of conscious wrongdoing" by defendants.
Moreover, the settlement offers only two so-called "therapeutic" benefits: IPG's installation of an ombudsman for five years and its commitment not to reprice the options held by Dooner and Bell until the average share price reaches $30 or more for at least ninety days. For the reasons already discussed, these benefits "do not impress one as very significant." In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959, 970 (Del.Ch. 1996). The only facet of the ombudsman procedure that possibly could have been motivated by the settlement itself is the five-year duration of the specific mechanism chosen independently by IPG. The repricing of options was only a remote possibility since IPG may, in any event, only reprice options with shareholder approval, and it has never done so. In sum,
the relief here is so insubstantial that the Court is left with the nagging impression that, in an attempt to rid themselves of litigation that was going nowhere, the parties searched for a result that would have the least possible impact on the corporation but would still allow counsel a basis for arguing that they had conferred a benefit on the shareholders.Steiner v. Williams, No. 99 Civ. 10186 (JSM), 2001 WL 604035, at *5 (S.D.N.Y. May 31, 2001) (Martin, J.).
It is also noteworthy that the cost of furnishing notice in the derivative action, as well as any attorneys' fees and reimbursements given to derivative action counsel, will be borne by class members in the securities class action. Defendants' counsel has represented, however, that the additional cost of providing notice to current shareholders consumed only an approximate $25,000. Finally, to the extent that the Stipulation of Settlement releases PWC without requiring it to contribute anything to the settlement, it is entirely appropriate.
The defendants demanded a global settlement as a condition of settling the class action.
In sum, the derivative settlement does confer some minimal benefits on shareholders. Given the dubious merit of the derivative action, this is sufficient to find the derivative settlement worthy of approval. There is no unfairness in this settlement that would otherwise bar its approval. Attorneys' Fees and Reimbursements
It is well established that where an attorney creates a common fund from which members of a class are compensated for a common injury, the attorneys who created the fund are entitled to "a reasonable fee — set by the court — to be taken from the fund."Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 47 (2d Cir. 2000) (citing Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980)). Determination of "reasonableness" is within the discretion of the district court. Goldberger, 209 F.3d at 47. There are two methods by which the district court may calculate reasonable attorney's fees in a class action, the lodestar or percentage method. Under either method, attention should be paid to the following factors: the time and labor expended by counsel, the magnitude and complexities of the litigation, the risk of the litigation, the quality of representation, the requested fee in relation to the settlement, and public policy considerations.See id. at 50.
Using the lodestar method, the court "scrutinizes the fee petition to ascertain the number of hours reasonably billed to the class and then multiplies that figure by an appropriate hourly rate." Id. at 47 (citations omitted). The final step is to consider whether an enhancement of the lodestar is warranted, taking into account such factors as:
(i) the contingent nature of the expected compensation for services rendered; (ii) the consequent risk of non-payment viewed as of the time of filing the suit; (iii) the quality of representation; and (iv) the results achieved.In re Boesky Sec. Litig., 888 F. Supp. 551, 562 (S.D.N.Y. 1995); see also Goldberger, 209 F.3d at 47; Savoie v. Merchants Bank, 166 F.3d 456, 460 (2d Cir. 1999) (applying the lodestar steps).
The second method is the much simpler percentage method, by which the fee award is simply some percentage of the fund created for the benefit of the class. See Savoie, 166 F.3d at 460. This method has been found to be a solution to some problems raised by the lodestar method. First, it "relieves the court of the cumbersome, enervating, and often surrealistic process of evaluating fee petitions." Id. at 461 n. 4 (citation omitted). Second, it decreases plaintiff lawyers' incentive to "run up the number of billable hours" for which they would be compensated by the lodestar method. Id. at 460-61. And finally, it decreases the incentive to delay settlement because the fee for the plaintiffs' attorneys does not increase with delay. See id. at 461. Nonetheless, the Second Circuit encourages courts using the percentage method to "requir[e] documentation of hours as a `cross-check' on the reasonableness of the requested percentage."Goldberger, 209 F.3d at 50.
To avoid "routine windfalls where the recovered fund runs into the multi-millions," id. at 52, courts typically decrease the percentage of the fee as the size of the fund increases. See In re Visa Check/Mastermoney Antitrust Litig., 297 F. Supp. 2d at 521 (collecting cases). In cases "where a class recovers more than $75-$200 million . . . fees in the range of 6-10 percent and even lower are common." In re Nasdag Market-Makers Antitrust Litig., 187 F.R.D. 465, 486 (S.D.N.Y. 1998).
In the instant cases, both lead counsel and derivative action counsel have submitted motions for awards of attorneys' fees and expenses. Apart from the general objections to the requested attorneys' fees discussed above, there has been no formal or more detailed opposition filed to these applications.
PAM had negotiated a 20 percent cap on attorneys' fees, and, in light of the amount recovered in settlement, lead counsel has agreed with PAM to a revised cap of 17 percent. As a result, lead counsel, for itself and local counsel, seeks an aggregate fee of 17 percent of the Gross Settlement Fund distributed in stock and cash so that they, like the class, will bear the risk that the IPG stock price will fluctuate. Using IPG's closing price on October 22, the date of the fairness hearing, this is estimated to be a fee of $16,386,829. In addition, they request $203,726.76 as reimbursement of out-of-pocket expenses. Lead counsel states that it has spent nearly 8,430 hours of work on this matter.
Using the hours-times-rates calculation, and without examining whether all of the hours reflected in its time records should be included in this calculation, lead counsel's lodestar fee amounts to roughly $2.9 million. Using the October 22, 2004 closing price of IPG stock of $11.66 to calculate the value of the Gross Settlement Fund, lead counsel's fee request equals 5.62 times the lodestar figure.
Lead counsel is entitled to be fairly compensated for its work in this litigation. The litigation was prompted by IPG's restatement announcements and the drops in the price of its stock. Lead plaintiff was further encouraged by information of misconduct in IPG's South America operations provided by a former IPG employee. At a fairly early point, however, it became clear that the informant's information had little or no relevance to the accounting irregularities in McCann's European offices and that there was no reason to believe that IPG had engaged in fraud. Indeed, the restatement was announced close in time to the point at which the accounting problems became significant. Acting responsibly in these circumstances, lead plaintiff engaged in early settlement discussions and contributed to the success of those discussions by endorsing the concept of a recovery of cash and stock. Judge Gorenstein has praised the professionalism, competence, and cooperation of lead counsel during the settlement process.
In pursuing this litigation lead plaintiff assumed considerable risk. This was not a case in which there was a government investigation that had resulted in disclosure of misconduct and was also driving a settlement. To the extent that there was any wrongdoing, lead plaintiff would have to uncover it, and do so at some expense. Any award of attorneys' fees therefore should recognize this risk and should not penalize counsel for settling at an early stage of the litigation when it appeared appropriate to do so.
It is not uncommon for an institutional investor in securities litigation to set a cap on fees that changes with the size of recovery and the stage in the case at which a settlement is reached. In such cases, the larger the settlement, the smaller the percentage awarded to counsel. Conversely, the later in the history of the litigation that settlement occurs, the larger the percentage awarded to counsel. Graduated fee scales recognize both the benefit to the class and the investment of effort by counsel. Here, the settlement was reached in the midst of fact discovery and has resulted in a recovery to the class of about $96.4 million. An award of 10 percent of the recovery would result in a multiplier of the unexamined lodestar of about 3.3. An award of 12 percent would reflect a multiplier of 3.96. Either award would be reasonable in light of theGoldberger factors. See also In re Sumitomo Copper Litig., 74 F. Supp. 2d 393, 399 (S.D.N.Y. 1999) ("In recent years multipliers of between 3 and 4.5 have been common in federal securities cases." (citation omitted)). Because lead counsel acted responsibly in connection with settlement discussions, and to encourage early settlements when they are warranted by the circumstances of the case, lead counsel is awarded 12 percent of the Gross Settlement Fund in attorneys' fees plus $203,726.76 in expenses.
For instance, in In re WorldCom Securities Litigation, a settlement of $100 million or less reached on or before the completion of fact discovery results in a negotiated cap on any fee request of 12 percent of the recovery. This is increased to 14 percent if the case settles 15 days before trial or any time thereafter. In contrast, the negotiated cap decreases with each tier of recovery over $100 million. For instance, a settlement of $100-250 million reached before the conclusion of fact discovery results in a fee cap of 12 percent for the first $100 million of recovery plus 11 percent of any amount in the $100-250 million range. See Letter from Leonard Barrack, Barrack, Rodos Bacine, Max W. Berger, Bernstein Litowitz Berger Grossman LLP, to Alan P. Lebowitz, General Counsel, Office of the State Comptroller (July 30, 2003) (setting forth terms of fee agreement between New York State Common Retirement Fund and class counsel in the WorldCom securities litigation), available at www.worldcomlitigation.com.
Derivative action counsel seeks attorneys' fees of $240,000, which represents a multiplier of 1.07 over its lodestar figure. This fee request reflects work done not only by Paskowitz Associates and Roy Jacobs Associates, but also work done by the Law Offices of Brian M. Felgoise, P.C. Together, these three firms also claim expenses of $3,423.87.
Mr. Felgoise had filed a state court derivative lawsuit against IPG, which he voluntarily dismissed. It is asserted that he assisted in drafting the federal derivative complaint and attended the depositions of IPG employees taken in the class action in the Spring of 2004.
As the Second Circuit has noted, "an award of counsel fees is only justified where the derivative action results in a substantial non-monetary benefit to a corporation." Kaplan v. Rand, 192 F.3d 60, 69 (2d Cir. 1999). Such benefit must be "something more than technical in its consequence and one that accomplishes a result which corrects or prevents an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder's interest." Mills v. Electric-Auto Lite Co., 396 U.S. 375, 396 (1970) (citation omitted).
Even without deciding the motions to dismiss the derivative action, it is clear that this lawsuit had little chance of success. A review of the counsel's time records and their submissions to the Court over the course of the litigation reveal that they have done little or no work deserving compensation. Counsel in the derivative action simply "piled on," hoping to ride the coattails of the class action. The corporate governance changes provided by the derivative settlement do not justify an award of attorneys' fees. These two changes are so limited as to suggest that the defendants knew that they were not giving up "anything of value." Steiner, 2001 WL 604035, at *6.
As or more significantly, derivative action counsel executed a Stipulation of Settlement that would have barred any derivative action based on IPG financial statements years beyond the restatements at issue in this litigation. If the issue had not been raised by the Court, and corrected by the parties, IPG shareholders would have been prejudiced by the settlement instead of marginally benefitted by it.
Finally, any award of fees and costs to derivative action counsel will come out of the pool of funds available to pay the class and be in addition to the $25,000 already taken from the Gross Settlement Fund to provide notice in the derivative action. Derivative action counsel has not shown that they have performed any service, other than the service of simply dropping their lawsuit and saving IPG additional defense costs, that would entitle them to any payment that will reduce recovery to the class. See Kaplan, 192 F.3d at 72 (refusing to award attorney's fees in derivative action). Therefore, I decline to award any fees or reimburse any costs to plaintiff's counsel in the derivative action.
Conclusion
The class action settlement and plan of allocation is approved, as is the derivative action settlement. Lead counsel in the securities class action is awarded 12 percent of the Gross Settlement Fund as attorneys' fees and $203,726.76 in expenses. The request by derivative action counsel for fees and expenses is denied.
SO ORDERED.