Opinion
Master File 02 Civ. 3288 (DLC).
February 9, 2005
Max W. Berger, John P. Coffey, Steven B. Singer, Chad Johnson, Beata Gocyk-Farber, John C. Browne David R. Hassel, Bernstein Litowitz Berger Grossman LLP New York, for Lead Plaintiff in the Securities Litigation
Leonard Barrack, Gerald J. Rodos, Jeffrey W. Golan, Mark R. Rosen, Jeffrey A. Barrack, Pearlette V. Toussant Regina M. Calcaterra, Chad A. Carter, Barrack, Rodos Bacine, Philadelphia, Pennsylvania, for Lead Plaintiff in the Securities Litigation.
Neil L. Selinger, New York, for Individual Action Plaintiffs:
R. David Kaufmann, M. Patrick McDowell, Brunini, Grantham, Grower Hewes, PLLC, Jackson, Mississippi, for Defendant Bernard J. Ebbers:
Paul C. Curnin, David Elbaum Helen Almeida, Simpson Thacher Bartlett LLP New York, for Director Defendants:
George E. Ridge, Cooper Ridge Lantinberg, P.A. Jacksonville, FL, for Defendant Bert C. Roberts, Jr.:
John W. Duchelle, Marc E. Rindner Ross, Dixon Bell, LLP, Washington, D.C., Richard A. Kissel, Charles Hyman, Kissel Pesce, LLP, Tarrytown, New York. Wayne E. Borgeest, Ann Marie Collins, Julianna Ryan, James T. De Silva, Kaufman Borgeest Ryan LLP, New York. Dan A. Bailey, Michael R. Goodstein, Bailey Cavalieri LLC, Columbus, Ohio. Alan J. Joaquin, Janet R. McFadden Drinker Biddle Reath LLP, Washington, D.C. Ronald H. Alenstein, Kenneth A. Sagat, D'Amato Lynch, New York, for Excess Insurers.
Eliot Lauer, Michael Moscato, Michael Hanin, Daniel Marcus, Aviva Wein, Curtis, Mallet-Prevost, Colt Mosle LLP New York, NY, for Defendant Arthur Andersen LLP.
Jay B. Kasner, Jay S. Berke, Susan L. Saltzstein, Cyrus Amir-Mokri, Scott D. Musoff, Steven J. Kolleeny, Skadden, Arps, Slate, Meagher Flom LLP New York, Thomas J. Nolan, Jason D. Russell, Los Angeles, California, for Underwriter Defendants
OPINION
On January 6, 2005, a settlement agreement in the WorldCom, Inc. ("WorldCom") consolidated securities class action was reached by the Lead Plaintiff, ten director defendants (the "Settling Director Defendants"), and seven insurers that provided excess directors and officers liability policies to WorldCom (the "Excess Insurers"). This Opinion addresses the objections of several nonsettling defendants to the judgment reduction formula ("Judgment Reduction Formula") of the requested bar order that the settling parties included in their revised Stipulation of Settlement of January 18, 2005 (the "Stipulation").
In light of the rapidly approaching class action trial date of February 28, 2005, this Court issued a brief Order rather than a full Opinion on February 2, announcing that it was denying the application by the Settling Director Defendants and Lead Plaintiff for approval of the Judgment Reduction Formula insofar as the "Contribution Credit" included in that Formula was adjusted to reflect any limitation on the financial capability of the Settling Director Defendants. The Order cited 15 U.S.C. § 78u-4(f)(7)(B)(i) as the basis for the denial and announced that the Court's reasoning would be explained in an Opinion to follow. This is that Opinion. Later on February 2, the Lead Plaintiff announced in a letter to the Court that it was withdrawing from the settlement because of the Court's determination.
I. Background
On June 25, 2002, WorldCom announced a massive restatement of its financial statements for 2001 and the first quarter of 2002. Less than a month later, the company entered bankruptcy. A raft of lawsuits have been filed based on the facts underlying these events, alleging, among other illegalities, violations of the federal securities laws stemming from the fraudulent capitalization of expenses and other accounting regularities.
The Judicial Panel on Multi-District Litigation has transferred all civil actions involving WorldCom that are pending in federal court to this Court, where the securities-based actions have been consolidated for pretrial purposes into the Securities Litigation. The Securities Litigation includes numerous class actions as well as actions filed by individual plaintiffs, generally large institutional investors such as public pension funds (the "Individual Actions"). The Individual Action plaintiffs are not parties to the Stipulation.
The consolidated class action is brought on behalf of a class of all persons and entities, excluding defendants and certain others affiliated with them or with WorldCom, who were financially injured after they acquired publicly traded WorldCom securities between April 29, 1999 and June 25, 2002. The Lead Plaintiff filed the consolidated class action complaint on October 11, 2002, and the class was certified on October 24, 2003. See In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267 (2003). Among the defendants named in the Corrected First Amended Class Action Complaint of December 1, 2003 (the "Complaint") are former WorldCom CEO Bernard J. Ebbers ("Ebbers"); twelve other individuals who were directors of WorldCom during the class period (collectively, the "Director Defendants"); WorldCom's former auditor, Arthur Andersen LLP ("Andersen"); and a number of investment banks that had underwritten bond offerings for WorldCom in May 2000 ("2000 Offering") and May 2001 ("2001 Offering") (collectively, the "Underwriter Defendants"). Several WorldCom officers other than Ebbers are defendants in the class action also; their specific interests are not discussed in this Opinion because they did not object to the terms of the Stipulation.
Ebbers is currently on trial on criminal charges for the manipulation of WorldCom's financial statements. An Order of April 27, 2004 stayed all civil litigation against Ebbers until the final resolution of his criminal trial.
The Director Defendants are Clifford L. Alexander, Jr., James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Francesco Galesi, Stiles A. Kellett, Jr., Gordon S. Macklin, John A. Porter, Bert C. Roberts, John W. Sidgmore, and Lawrence C. Tucker.
The Underwriter Defendants consist of J.P. Morgan Chase Co., J.P. Morgan Securities, Ltd., J.P. Morgan Securities, Inc.; Banc of America Securities LLC; Chase Securities Inc.; Lehman Brothers Inc., Blaylock Partners, L.P.; Credit Suisse First Boston Corp.; Deutsche Bank Alex. Brown, Inc., now known as Deutsche Bank Securities, Inc.; Goldman, Sachs Co.; UBS Warburg LLC; ABN/AMNRO Inc.; Utendahl Capital; Tokyo-Mitsubishi International plc; Westdeutsche Landesbank Girozentrale; BNP Paribas Securities Corp.; Caboto Holding SIM S.p.A.; Fleet Securities Inc.; and Mizuho International plc. Some of the Underwriter Defendants participated in only one of the two bond offerings in question.
The Complaint also named Citigroup, Inc., Salomon Smith Barney, Inc., now d/b/a/ Citigroup Global Markets Inc., Salomon Brothers International Limited, now d/b/a Citigroup Global Markets Limited, and Jack B. Grubman (the "Citigroup Defendants"). The Citigroup Defendants settled the claims against them with the Lead Plaintiff in May 2004 for $2.65 billion. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 2591402 (S.D.N.Y. Nov. 12, 2004). Salomon Smith Barney, Inc. had been a lead underwriter on the 2000 and 2001 Offerings.
Many prior Opinions have detailed the alleged involvement of the various defendants in WorldCom's collapse. This Opinion assumes familiarity with those allegations. Only the facts necessary to evaluate the Judgment Reduction Formula are described here. To place the discussion that follows in context it is essential to understand the types of liability imposed by the securities statutes and the potential liability of the defendants under those statutes.
See, e.g., In re WorldCom, Inc. Sec. Litig., ___ F. Supp. 2d ___, No. 02 Civ. 3288 (DLC), 2005 WL 89395 (S.D.N.Y. Jan. 18, 2005) (Andersen's motion for summary judgment); In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004) (Underwriter Defendants' motion for summary judgment); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y. 2003) (deciding a number of defendants' motions to dismiss).
Prior Opinions issued in the Securities Litigation have extensive descriptions of the federal securities statutes. The summary that follows draws from those Opinions.
A. The Securities Act
The "primary innovation" of the Securities Act of 1933 (the "Securities Act") was the creation of duties in connection with public offerings, principally "registration and disclosure obligations." Gustafson v. Alloyd Co., 513 U.S. 561, 571 (1995). The Securities Act "was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing." Ernst Ernst v. Hochfelder, 425 U.S. 185, 195 (1976).
Liability under Section 11 of the Securities Act derives from the requirements for filing a registration statement. Under the provision, any signer, director of the issuer, preparing or certifying accountant, or underwriter may be liable if "any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." 15 U.S.C. § 77k(a). Section 11 "was designed to assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering." Herman MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983). It imposes joint and several liability upon all violators, 15 U.S.C. § 77k(f) (1), with the exception of outside directors. Under Section 21D(f) (2) of the Securities and Exchange Act of 1934 (the "Exchange Act"), a provision added by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), outside directors are subject to liability solely for the portion of a judgment for which the jury deems them responsible. 15 U.S.C. § 78u-4(f)(2)(B)(i). If an outside director is specifically found to be a "knowing" violator of the securities laws, however, he or she becomes subject to joint and several liability. Id. § 78u-4(f) (2) (A).
Section 21D(f) applies in its entirety to outside directors found liable under Section 11 of the Securities Act. See 15 U.S.C. § 77k(f) (2) (A); id. § 78u-4(f)(10)(C)(ii).
Liability under Securities Act Section 12 (a) (2) flows from the requirement to distribute prospectuses. The provision allows a purchaser of a security to bring a private action against a seller that "offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements . . . not misleading."Id. § 771(a) (2). Section 12(a)(2) "prescribes the remedy of rescission except where the plaintiff no longer owns the security." Randall v. Loftsgaarden, 478 U.S. 647, 655 (1986).
Securities Act Section 15 is a control-person liability provision. It imposes liability on "[e]very person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under section 11 or 12." 15 U.S.C. § 77o. Section 15 claims are "necessarily predicated on a primary violation of securities law" by the controlled person.Rombach v. Chang, 355 F.3d 164, 177-78 (2d Cir. 2004). The provision renders the controlling person liable "to the same extent as such controlled person." 15 U.S.C. § 77o. The controlling person is held jointly and severally liable with the controlled person for whatever liability the controlled person ultimately faces. Id.
B. The Exchange Act
In contrast to the Securities Act, the Exchange Act "for the most part regulates post-distribution trading." Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 171 (1994). It "was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges." Ernst Ernst, 425 U.S. at 195 (citing S. Rep. No. 792, 73d Cong., 2d Sess., 1-5 (1934)).
Courts have implied a private cause of action for securities fraud into Exchange Act Section 10(b) and Securities and Exchange Commission ("SEC") Rule 10b-5. See id. at 196. Section 10(b) creates civil liability for those who "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 17 U.S.C. § 78j. Rule 10b-5, promulgated by the SEC under the authority of Section 10(b), imposes liability on those who "employ any device, scheme, or artifice to defraud," "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading," or "engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5.
Like Section 15 of the Securities Act, Exchange Act Section 20(a) is a control-person liability provision. It imposes liability on "[e]very person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder." 15 U.S.C. § 78t(a). The controller is liable "jointly and severally with and to the same extent as such controlled person is liable." Id.
Under Section 21D(f) (2) (B), all Exchange Act claims result in proportionate liability for all defendants. Id. § 78u-4(f) (2) (B) (i). This proportionate liability scheme for Exchange Act claims was, like the proportionality rule for outside directors facing Section 11 claims, introduced by the PSLRA; prior to that legislation, violators faced joint and several liability. The exception to the proportionate liability rule applies when a defendant is specifically found to have "knowingly committed a violation of the securities laws." Id. § 78u-4(f)(2)(A). Knowing violators are jointly and severally liable. Id.
C. Potential Liabilities of the Class Action Defendants
1. The Director Defendants
The claims that survive against all Director Defendants are those arising under Sections 11 and 15 of the Securities Act and Section 20(a) of the Exchange Act. The Director Defendants face liability under Section 11 because they endorsed the registration statements for the 2000 and 2001 Offerings; the Section 15 and 20(a) claims would impose liability stemming from the directors' role in controlling the WorldCom corporate entity. In addition, a securities fraud claim under Exchange Act Section 10(b) survives against director Stiles A. Kellett, Jr. ("Kellett").
The Director Defendants' motions to dismiss were granted in part on May 19, 2003. See In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y. 2003).
Most, if not all, of the Director Defendants are subject only to proportionate liability for the Section 11 claims against them if they did not have actual knowledge of the accounting malfeasance afoot at WorldCom during the class period. The Director Defendants face joint and several liability for the Section 15 claims, however, as WorldCom itself would be jointly and severally liable for its underlying Section 11 violation. 15 U.S.C. § 77k(f)(1). For the Section 20(a) claims, the Director Defendants face the same liability as the controlled corporation or employee that is an underlying violator of the Exchange Act.Id. § 78t(a). This liability could be joint and several or proportionate, depending on whether the underlying violator acted knowingly. See id. § 78u-4(f)(2).
The exception may be Bert C. Roberts, whose outside director status is disputed by the Lead Plaintiff. It is apparently undisputed that the remainder of the Director Defendants are outside directors.
2. Ebbers
Claims under Securities Act Sections 11 and 15 and Exchange Act Sections 10(b) and 20(a) have survived Ebbers' motion to dismiss.See WorldCom, 294 F. Supp. 2d at 416-18. Because he is not an outside director, both Securities Act claims expose Ebbers to joint and several liability. 15 U.S.C. § 77k(f)(1). The Exchange Act claims subject him to joint and several liability if his conduct was knowing; his proportion of liability would otherwise be determined by his percentage of fault. See id. § 78u-4(f)(2).
3. The Underwriter Defendants
Against the Underwriter Defendants, claims of Section 11 and Section 12(a) (2) liability stemming from their participation in the 2000 and 2001 Offerings have survived motions to dismiss and summary judgment. See WorldCom, 294 F. Supp. 2d at 423; In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 697-98 (S.D.N.Y. 2004). The Section 11 claim subjects the Underwriter Defendants to joint and several liability up to "the total price at which the securities underwritten by [a given underwriter] and distributed to the public were offered to the public" unless any particular underwriter received some benefit in which similarly situated underwriters did not share in proportion to their respective interests. 15 U.S.C. § 77k(e); id. § 77k(f)(1).
4. Andersen
Andersen's motions to dismiss and summary judgment motions were denied. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288(DLC), 2003 WL 21488087 (S.D.N.Y. June 25, 2003); In re WorldCom, Inc. Sec. Litig., ___ F. Supp. 2d ___, No. 02 Civ. 3288 (DLC), 2005 WL 89395 (S.D.N.Y. Jan. 18, 2005). Andersen has a Section 11 claim pending against it based on its 1999 and 2000 audits of WorldCom's financials, which were incorporated by reference into the registration statements for the 2000 and 2001 Offerings. The Section 11 claim would result in joint and several liability for Andersen. 15 U.S.C. § 77k(f)(1). In addition, Andersen faces a claim under Exchange Act Section 10(b) and Rule 10b-5 for its audits of WorldCom's 1999, 2000, and 2001 financial statements. Under Section 21D(f)(2)(A), whether this claim would render the auditor jointly and severally liable or proportionately liable depends on the jury's findings as to whether its conduct was "knowing." Id. § 78u-4(f)(2)(A).
D. The Stipulation
On January 18, 2005, the Lead Plaintiff in the class action executed the Stipulation together with the Excess Insurers and the Settling Director Defendants, who are Clifford L. Alexander, Jr., James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Kellett, Gordon S. Macklin, John A. Porter, the Estate of John W. Sidgmore, and Lawrence C. Tucker. Two Director Defendants, Francesco Galesi and Bert C. Roberts, are not parties to the Stipulation.
The Excess Insurers are Continental Casualty Company, SR International Business Insurance Company, Twin City Fire Insurance Company, Starr Excess Liability Insurance International Limited, Associated Electric Gas Insurance Services Limited, Gulf Insurance Company, and National Union Fire Insurance Company of Pittsburgh, Pennsylvania.
The January 6, 2005 settlement agreement contained various objectionable provisions which were the subject of a conference of January 11 and an Order of January 13. In response to those objections, the settling parties executed a revised Stipulation on January 18.
The settlement amount is $54 million, plus interest as provided in the Stipulation. The Settling Director Defendants are to pay personally $18 million, which represents over twenty percent of those directors' cumulative net worth, excluding their primary residences, retirement accounts, and jointly held assets. The Insurers are to provide the remaining $36 million.
The Stipulation includes a proposed bar order that incorporates the Judgment Reduction Formula. Because of its complexity, the Judgment Reduction Formula is reproduced in its entirety below:
The Judgment shall also provide, as a material condition of the Settlement, that the amount of any verdict or judgment entered against a Non-Settling Defendant in the Action shall be reduced by no more than the greater of the "Settlement Credit," the "Insurance Credit," or the "Contribution Credit." The "Settlement Credit" shall mean the total Settlement Amount paid by the Settling Director Defendants and the Insurers, as allocated to claims for which contribution would be sought. The "Insurance Credit" shall mean the amount of coverage, if any, the Court determines would have been available to such Non-Settling Defendant under the Insurance Policies but for the operation of the bar order in the Judgment. The "Contribution Credit" shall mean an amount equal to the value of the contribution claim, if any, that the Court determines such Non-Settling Defendant would be entitled to assert against one or more Settling Director Defendant but for operation of the Judgment, which shall be equal to the aggregate proportionate shares of liability, if any, of the Settling Director Defendants as determined by the Court at the time of entry of any judgment (based on the jury findings as and if required by law) against any Non-Settling Defendant, adjusted to reflect any limitation on the financial capability of the Settling Director Defendants to pay their respective proportionate shares of liability to the Non-Settling Defendant had the Non-Settling Defendant obtained a contribution or equitable indemnification judgment against them in such amount as of the date of entry of such judgment. Absent final Court approval of such a judgment credit provision relating to the Settling Director Defendant's ability to pay his or her proportionate share of liability to the Non-Settling Director Defendants, Lead Plaintiff shall be entitled to terminate the Settlement.
Stipulation ¶ 26 (emphasis supplied).
Various nonsettling defendants object to the Judgment Reduction Formula, which is described as a material condition of the settlement. Ebbers, the Underwriter Defendants, and Andersen object to the fact that the financial wherewithal of the Settling Director Defendants is taken into account in the "Contribution Credit" portion of the Judgment Reduction Formula. As support for their position, the objectors rely chiefly on Exchange Act Section 21D(f)(7)(B), 15 U.S.C. § 78u-4(f)(7)(B), which sets forth the terms of the judgment reduction that shall be applied to all settling parties covered by the Section. The objectors argue, in the alternative, that the structure of the Contribution Credit is impermissible under the common law rules of contribution.
Andersen did not submit a formal filing in opposition to the Stipulation but included a brief statement in a January 20, 2005 letter to the Court objecting to the Judgment Reduction Formula insofar as it applied to claims brought under the Exchange Act.
Several defendants have also raised objections to the proposed order barring persons from asserting claims for indemnity or contribution against the Excess Insurers, a confidentiality provision, and other aspects of the Stipulation. Because the settlement agreement was terminated directly after the Court issued its February 2 Order, those objections are not addressed in this Opinion.
II. The Legal Framework of Exchange Act Section 21D(f)
Section 21D(f) of the Exchange Act was added by the PSLRA, which was a legislative response to the perceived excesses of private lawsuits under the securities acts. See H.R. Conf. Rep. No. 104-369, at 31 (1995); Cal. Pub. Employees' Ret. Sys. v. WorldCom, Inc., 368 F.3d 86, 98 (2d Cir. 2004). In addition to creating a new safe harbor for forward-looking statements, 15 U.S.C. § 78u-5, and imposing a heightened pleading standard for Exchange Act claims alleging that a defendant made an untrue statement or omission of material fact, id. § 78u-4(b)(1), the PSLRA implemented the scheme of proportionate liability for all Exchange Act violators and for outside-director Section 11 violators (collectively, "Covered Persons") that was briefly described supra. The legislative history explicitly states the reasoning behind the PSLRA's special treatment of outside directors in the Section 11 context: "By relieving outside directors of the specter of joint and several liability under Section 11 for non-knowing conduct, [the provision] will reduce the pressure placed by meritless litigation on the willingness of capable outsiders to serve on corporate boards." H.R. Conf. Rep. No. 104-369, at 38.
Section 21D(f) defines "covered persons" as follows:
For purposes of this subsection, the term "covered person" means —
(i) a defendant in any private action arising under this chapter; or
(ii) a defendant in any private action arising under section 77k of this title, who is an outside director of the issuer of the securities that are the subject of the action. . . ."15 U.S.C. § 78u-4(f)(10)(C). Section 11 of the Securities Act is found at 15 U.S.C. § 77k.
Section 21D(f) provides that Covered Persons "shall be liable solely for the portion of the judgment that corresponds to the percentage of responsibility of that covered person," id. § 78u-4(f)(2)(B)(i), unless the Covered Person "knowingly committed a violation of the securities laws." id. § 78u-4(f)(2)(A);see also id. § 78u-4(f)(10)(a) (defining a knowing violation for purposes of the Section).
Under Section 21D(f), so that responsibility may be allocated among the various defendants, the court must instruct the jury to answer special interrogatories (or, in a bench trial, must make special findings) in regard to each Covered Person and "each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by the plaintiff," id. § 78u-4(f)(3)(A), a category that includes co-defendants and parties that have settled. The interrogatories are to concern "whether each person violated the securities laws," "the percentage of responsibility of such person, measured as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff," and "whether such person knowingly committed a violation of the securities laws." Id. § 78u-4(f)(3)(A)(i)-(iii) (emphasis supplied).
The statute mitigates the consequences the plaintiff will suffer from uncollectible judgments against proportionately liable defendants through the Uncollectible Share provision of Paragraph (4). Upon a motion made within six months of the final judgment in an action, the court may assign additional liability to proportionately liable defendants if it determines that all or part of a Covered Person's share may be collected against neither that Covered Person nor a jointly and severally liable Covered Person. Id. § 78u-4(f)(4). In that event, every other Covered Person becomes jointly and severally liable for the uncollectible share if the plaintiff can establish that he or she is an individual that meets certain criteria for net worth (net worth less than $200,000) and for the percentage his or her net worth was reduced by the loss (damages more than ten percent of net worth). Id. § 78u-4(f)(4)(i). If the plaintiff does not meet the specified criteria, the Covered Person is liable for up to 150 percent of his percentage of responsibility.Id. § 78u-4(f)(4)(ii).
Paragraph (4) reads in its entirety as follows:
(4) Uncollectible Share. —
(A) In General. —
Notwithstanding paragraph (2) (B), upon motion made not later than 6 months after the final judgment is entered in any private action, the court determines that all or part of the share of the judgment of the covered person is not collectible against that covered person, and is also not collectible against a covered person described in paragraph (2) (A), each covered person described in paragraph (2) (B) shall be liable for the uncollectible share as follows:
(i) Percentage of Net Worth. —
Each covered person shall be jointly and severally liable for the uncollectible share if the plaintiff establishes that —
(I) the plaintiff is an individual whose recoverable damages under the final judgment are equal to more than 10 percent of the net worth of the plaintiff; and
(II) the net worth of the plaintiff is equal to less than $200,000.
(ii) Other Plaintiffs. —
With respect to any plaintiff not described in subclauses (I) and (II) of clause (i), each covered person shall be liable for the uncollectible share in proportion to the percentage of responsibility of that covered person, except that the total liability of a covered person under this clause may not exceed 50 percent of the proportionate share of that covered person, as determined under paragraph (3) (B).
(iii) Net Worth. —
For purposes of this subparagraph, net worth shall be determined as of the date of the purchase or sale (as applicable) by the plaintiff of the security that is the subject of the action, and shall be equal to the fair market value of assets, minus liabilities, including the net value of the investments of the plaintiff in real and personal property (including personal residences).15 U.S.C. § 78u-4(f)(4)(A) (emphasis supplied).
Strictly speaking, the provision only requires that plaintiffs collect from jointly and severally liable Covered Persons — outside directors or Exchange Act defendants — before they resort to the Uncollectible Share provision. This seems to be an instance of imprecise drafting; Securities Act Section 11 plaintiffs would likewise seemingly have to collect from jointly and severally liable defendants who are not Covered Persons (that is, all Section 11 defendants who are not outside directors) before they could appeal to the Uncollectible Share provision to increase their recovery from outside directors with proportionate liability.
Although its primary innovation was installing a proportionality limit on the direct liability of Covered Persons to the plaintiff, the Section also codifies a proportionality rule for contribution claims by Covered Persons with joint and several liability (which, under Paragraph (1), may be imposed upon Covered Persons for knowing misconduct). Paragraph (8) provides:
A covered person who becomes jointly and severally liable for damages in any private action may recover contribution from any other person who, if joined in the original action, would have been liable for the same damages. A claim for contribution shall be determined based on the percentage of responsibility of the claimant and of each person against whom a claim for contribution is made.15 U.S.C. § 78u-4(f)(8).
Section 21D(f) also contains a settlement discharge provision that, because of its centrality to the Judgment Reduction Formula issue, is quoted here in its entirety:
(7) Settlement Discharge. —
(A) In General. —
A covered person who settles any private action at any time before final verdict or judgment shall be discharged from all claims for contribution brought by other persons. Upon entry of the settlement by the court, the court shall enter a bar order constituting the final discharge of all obligations to the plaintiff of the settling covered person arising out of the action. The order shall bar all future claims for contribution arising out of the action —
(i) by any person against the settling covered person; and
(ii) by the settling covered person against any person, other than a person whose liability has been extinguished by the settlement of the settling covered person.
(B) Reduction. —
If a covered person enters into a settlement with the plaintiff prior to final verdict or judgment, the verdict or judgment shall be reduced by the greater of —
(i) an amount that corresponds to the percentage of responsibility of that covered person; or
(ii) the amount paid to the plaintiff by that covered person.15 U.S.C. § 78u-4(f)(7) (emphasis supplied).
III. Permissibility of the Judgment Reduction Formula Under Section 21D(f)
As previously noted, Ebbers, the Underwriter Defendants, and Andersen argue that the Judgment Reduction Formula of the Stipulation is invalid because Paragraph (7)(B) of Section 21D(f) unambiguously lays out the formula that is to be applied to reduce the final judgment to account for the value of claims settled by the plaintiff against any Covered Person. The Paragraph (7)(B) formula reduces the judgment by the greater of the actual settlement amount or the "amount that corresponds to the percentage of responsibility of that covered person." 15 U.S.C. § 78u-4(f)(7)(B). The Underwriter Defendants argue that this provision "shifts to plaintiffs certain risks associated with partial settlements because a decision to settle is entirely within plaintiffs' control. . . . [T]he plaintiffs, rather than the non-settling defendants who have no input in the settlement, bear the risk of settling too cheaply. . . ."
In contrast, the "Contribution Credit" in the Judgment Reduction Formula of the Stipulation takes the aggregate proportionate responsibility of the Settling Director Defendants as its baseline but then "adjusts" the value "to reflect any limitation on the financial capability of the Settling Director Defendants to pay their proportionate shares of liability" had a nonsettling defendant obtained a contribution or equitable indemnification judgment against them. Stipulation ¶ 26. The reduction in the judgment is then determined by the greater of the Contribution Credit, the "Settlement Credit," which is the actual settlement amount, or the "Insurance Credit," which is the amount of insurance coverage the Court determines would have been available to cover claims against the Settling Director Defendants. Id.
The Underwriter Defendants find confirmation of their analysis in another provision of Section 21D(f). They note that Congress took into account a defendant's ability to pay after a judgment in the Uncollectible Share provision of Paragraph (4), but that Congress did not set up a similar uncollectible share scheme in connection with the settlement discharge provisions of Paragraph (7) (B).
It is clear why the objectors oppose the Judgment Reduction Formula, and in turn, why the Lead Plaintiff made its approval a material condition of its participation in the settlement; taking the Settling Director Defendants' financial ability into account in the Contribution Credit could make an enormous difference in the amount collectible from a nonsettling jointly and severally liable defendant. If, for example, the jury allocated thirty percent of the responsibility for the Section 11 violations to the Settling Director Defendants, under the unelaborated judgment reduction provision of Paragraph (7)(B), the amount of the final judgment would be reduced by thirty percent (if the Settling Director Defendants' proportionate amount of damages was greater than the settlement amount). The defendants found liable at trial would have to pay only the remaining seventy percent. If, however, the Judgment Reduction Formula of the Stipulation were in force, the final judgment would be reduced by the greater of the actual settlement amount (that is, $54 million), the amount of insurance coverage the Court determines would have been available (at most, $85 million, the sum of the policy limits), or the Settling Director Defendants' assessed proportion of the judgment — reduced to the amount those individuals would actually be capable of paying. Given that the requested Section 11 damages for the 2000 and 2001 Offerings alone total approximately $17 billion, the difference between the percentage of damages for which the Settling Director Defendants are deemed responsible and the amount they could actually pay could be immense.
If, hypothetically, damages totaled $10 billion, the Settling Director Defendants were assessed thirty percent responsibility (corresponding to $3 billion), and those individuals were only capable of paying $100 million, then under the Judgment Reduction Formula, the $100 million — not the $3 billion — would be the figure subtracted from the judgment to account for the settlement proceeds. The nonsettling jointly and severally liable defendants would have to pay $2,900,000,000 they would not be responsible for under the plain terms of the judgment reduction provision of Paragraph (7)(B).
As noted supra, an underwriter is only liable for damages in excess of the total price at which the securities it underwrote were offered to the public. 15 U.S.C. § 77k(e).
The issue of whether the judgment reduction specified in Paragraph (7)(B) must be applied to partial settlements of Section 11 claims by outside directors appears to be one of first impression. There is no case law directly on point. Courts that have mentioned in dicta the related issue of whether the contribution bar of Paragraph (7)(A) applies to outside director settlements have either assumed that it does or have not taken issue with such an interpretation. See Neuberger v. Shapiro, 110 F. Supp. 373, 382 (E.D. Pa. 2000) (rejecting the contribution bar's application to a defendant because it was neither an Exchange Act defendant nor an outside director defendant); In re Cendant Corp. Sec. Litig., 139 F. Supp. 2d 585, 593 n. 6 (D.N.J. 2001) (applying a bar to Section 11 claims against a settling defendant where the settling defendant was a Covered Person under the Exchange Act but not under Section 11).
Although enforcing the terms of Paragraph (7)(B) of Section 21D(f) will make it extraordinarily difficult for outside directors to settle Section 11 claims before all deep-pocket defendants facing joint and several liability have done so, the Judgment Reduction Formula of the Stipulation must be rejected as inconsistent with the plain language of the statute as it applies to settlement of both Exchange Act claims and Section 11 claims involving outside directors. Thus, perhaps perversely, the statute does not protect the interests of outside directors to the extent that may have been intended by the drafters.
The role of the Court is "to interpret the language of the statute enacted by Congress." Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 461 (2002). Such statutory interpretation must "begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose." Engine Mfrs. Ass'n v. S. Coast Air Quality Mgmt. Dist., 124 S. Ct. 1756, 1761 (2004) (citation omitted). Statutory construction starts with "the plain text, and, where the statutory language provides a clear answer, it ends there as well." Raila v. United States, No. 03-6057, 2004 WL 60263, at *2 (2d Cir. Jan. 14, 2004) (citing Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999)). Whether the meaning of the statute is plain or ambiguous "is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). A court must "give effect, if possible, to every clause and word of a statute." State St. Bank Trust Co. v. Salovaara, 326 F.3d 130, 139 (2d Cir. 2003) (citation omitted); see also Auburn Housing Auth. v. Martinez, 277 F.3d 138, 144 (2d Cir. 2002).
All Exchange Act defendants are clearly Covered Persons under Section 21D(f)(10)(C)(i), which lists as one definition of that term "a defendant in any private action arising under this title" — that is, the Exchange Act. 15 U.S.C. § 78u-4(f)(10)(C)(i). The judgment reduction provision of Paragraph (7)(B) applies to settlements by Covered Persons. Id. § 78u-4(f)(7)(B). The Judgment Reduction Formula of the Stipulation, however, makes no distinction between Exchange Act claims and Securities Act claims. In its initial Memorandum of Law, the Lead Plaintiff did not address the consequences of the Judgment Reduction Formula for defendants such as Andersen and Ebbers who face Exchange Act claims. But in Footnote 1 of its Reply Memorandum, the Lead Plaintiff appears to concede that the Judgment Reduction Formula would have to be revised to conform to the requirements of Paragraph 7(B) insofar as the Reduction would be applied to Exchange Act claims. For this reason, the remainder of the analysis in this opinion centers around the issue of whether Paragraph 7(B) applies to the settlement of Section 11 claims against the Settling Director Defendants.
Outside directors are also Covered Persons under the entirety of Section 21D(f). 15 U.S.C. § 77k(f)(2)(A) ("The liability of an outside director [under Section 11] shall be determined in accordance with section 78u-4(f) of this title.");id. § 78u-4(f)(10)(C)(ii) (listing as one definition of "covered person" for purposes of Section 21D(f) a Section 11 private-action defendant who is an outside director of the issuer of the securities that are the subject of the action). On its face, the judgment reduction of Paragraph (7)(B) applies to all settlements by Covered Persons, regardless of whether the nonsettling co-defendants are Covered Persons under Section 21D(f). Id. § 78u-4(f)(7)(B). That no distinction can be drawn between Section 11 actions and Exchange Act actions for purposes of this provision is further reiterated by the language of Paragraph (7)(A), which applies to "any private action." Id. § 78u-4(f)(4)(A). Elsewhere, the statute specifies "any private action arising under this title" when a provision is confined to Exchange Act claims. See id. § 78u-4(f)(C)(i). Because the applicable provisions are unambiguous, to exempt a judgment reduction for outside directors facing Section 11 claims from the general rule of Paragraph (7)(B) would require more than a mildly strained reading of the statutory language; it would require wholesale innovation on the part of the Court.
Furthermore, in Paragraph (7)(B)(i)'s settlement discharge specification of "an amount that corresponds to the percentage of responsibility of that covered person," the phrase "percentage of responsibility" is unambiguous whether read by itself or in the context of Section 21D(f) as a whole. "[I]dentical words used in different parts of the same act are intended to have the same meaning." Gustafson v. Alloyd Co. Inc., 513 U.S. 561, 570 (1995). The statute directs that the "percentage of responsibility" is to be "measured [by the factfinder] as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff." Id. § 78u-4(f)(3)(A)(i). The statute then uses the phrase "percentage of responsibility" repeatedly to allocate damages. For example, it adds that a Covered Person is liable solely for the amount of the judgment that corresponds to "the percentage of responsibility" of the Covered Person. Id. § 78u-4(f)(2)(B)(i). In describing the measurement for assessing damages against a Covered Person when a plaintiff cannot collect a judgment, it provides that each Covered Person is liable for the uncollectible share in proportion to "the percentage of responsibility" of the Covered Person. Id. § 78u-4(f)(4). By using identical language, Paragraph (7)(B)(i) incorporates this specific measure of proportionate fault, and there is no basis on which to justify varying the measure by allowing the financial ability of settling Covered Persons to be taken into account in applying that provision.
The legislative history gives little specific guidance about the settlement provisions of Section 21D(f). Footnote 15 of the House Conference Report does, however, state:
The Conference Report makes no change in the law with respect to Section 11 claims against other types of defendants. Section 11 expressly provides for a right of contribution, see Section 11(f), and this right has been construed to establish contribution and settlement standards like those set forth in the Conference Report. This section has no effect on the interpretation of Section 11(f) with respect to defendants other than outside directors.
H.R. Conf. Rep. No. 104-369, at 38 n. 15.
Section 11(f) provides that, with the exception of outside directors, violators
shall be jointly and severally liable, and every person who becomes liable to make any payment under this section may recover contribution as in cases of contract from any person who, if sued separately, would have been liable to make the same payment, unless the person who has become liable was, and the other was not, guilty of fraudulent misrepresentation.15 U.S.C. § 77k(f) (emphasis supplied).
Even apart from the fact that legislative history cannot justify reinterpretation of unambiguous provisions, see Reves v. Ernst Young, 507 U.S. 170, 183-184 (1993), this footnote does not bear on the analysis of settlements involving Covered Persons. It conveys that the contribution and settlement provisions of Section 21D(f) were not intended to codify settlement and contribution standards for most Section 11 defendants. Nonetheless, and somewhat at odds with that expressed general intent, Paragraph (7)(B) necessarily has an impact on the contribution rights of other Section 11 defendants when an outside director facing Section 11 claims settles first. Paragraph 7(B) casts its settlement discharge requirements in terms of Covered Persons, for whom the PSLRA plainly does codify contribution and settlement standards. If, however, the settling Section 11 defendant is not an outside director, Footnote 15 simply affirms what is already clear from the statutory text: the terms of such settlements would be evaluated without regard to Section 21D(f).
Footnote 15 also suggests that Congress was codifying its understanding of the law of settlement and contribution as it existed in 1995. Although in In re WorldCom, Inc. ERISA Litigation, 339 F. Supp. 2d 561, 571 (S.D.N.Y. 2004) (the "ERISA Litigation"), this Court ruled that a judgment reduction similar to that of the Stipulation was permissible under much the same body of law as the legislators must have been referencing, Congress did not phrase Paragraph 7(B) in a manner that permits the Court to import a common law analysis when a Covered Person settles.
Nor can the fact that Paragraph (7)(B) applies on its face to outside-director defendants facing Section 11 claims as well as Exchange Act claims be dismissed as imprecise statutory drafting yielding a result "demonstrably at odds with the intentions of [the statute's] drafters." Hallstrom v. Tillamook County, 49 U.S. 20, 28-29 (1989). The provision establishes a specific balance of interests among nonsettling jointly and severally liable defendants and the plaintiff. The rights of nonsettling proportionately liable defendants are unaffected by the judgment reduction provision in Paragraph (7)(B), as the amount a plaintiff (or co-defendant pressing a contribution claim) can collect from such a defendant cannot exceed its proportionate share regardless of how the judgment reduction is formulated. Jointly and severally liable defendants, however, are each bound to pay whatever portion of a final judgment the plaintiff seeks from them, so they are the unique beneficiaries of the judgment reduction provision in Paragraph (7)(B). Ordinarily, the amount a jointly and severally liable defendant could recover through contribution against a co-defendant would be limited to that co-defendant's proportionate share of liability. A defendant's ability to seek contribution is further limited on a practical level by the co-defendant's ability to pay its respective share.
This is true unless, of course, the Uncollectible Share provision of Paragraph (4) is triggered by a nonsettling co-defendant's inability to pay its own proportionate share, in which case an additional liability would exist regardless of a settlement involving other co-defendants. 15 U.S.C. § 78u-4(f)(4).
A judgment reduction based on the settling defendant's proportionate share of liability benefits nonsettling defendants facing joint and several liability more than the main alternative that was viable when the PSLRA was passed: a pro tanto reduction, in which the settlement amount is subtracted from the final judgment regardless of the settling defendant's proportionate share. See McDermott, Inc. v. AmClyde, 511 U.S. 202, 211-17 (1994) (weighing the proportionate share approach against pro tanto reduction in the admiralty context); In re Del Val Fin. Corp. Sec. Litig, 868 F. Supp. 547, 559 n. 15 (S.D.N.Y. 1994) (describing the divergence in courts' choices between pro tanto and proportionate share judgment reductions in partial settlements of securities actions); see also McDermott, 511 U.S. at 219 (opining that plaintiff is apt to settle for less than a defendant's proportionate share due to the uncertainty of recovery and other factors). To argue that nonsettling Section 11 defendants should not receive the benefit to which they are entitled under the language of Paragraph (7)(B), a benefit to which the Lead Plaintiff does not deny that Exchange Act defendants are entitled, asks too much. The Lead Plaintiff has not shown that Congress would have been more solicitous of the interests of jointly and severally liable Exchange Act violators — who, after all, would have become jointly and severally liable because their violations were committed knowingly — than of those of Section 11 violators with strict liability.
The Lead Plaintiff makes several arguments in support of the Judgment Reduction Formula in the Stipulation. First, it emphasizes that, because the Underwriter Defendants and Andersen face joint and several liability under Section 11, these defendants would be no worse off under the Judgment Reduction Formula than they would if the Settling Director Defendants proceeded to trial. This is an accurate observation. By definition, any jointly and severally liable defendant is reachable by the plaintiff for the entire judgment amount. That defendant would in turn be entitled to seek contribution from co-defendants, but its ability to collect a contribution judgment from a co-defendant — including, in this case, a Director Defendant — would be limited by that co-defendant's ability to pay. Because jointly and severally liable defendants would be responsible for amounts that exceeded their own proportion of liability but were uncollectible in a contribution action against co-defendants, the Judgment Reduction Formula simply preserves the practical extent of liability that would exist if the Settling Director Defendants stayed in the action. Conversely, Paragraph (7)(B) effectively grants nonsettling defendants facing joint and several liability a windfall to which they would not otherwise be entitled, as this Court noted in WorldCom ERISA Litigation, 339 F. Supp. at 571, unless the settling defendants have overpaid.
Ebbers similarly faces joint and several liability under Section 11.
Nor does the Judgment Reduction Formula prejudice the rights of co-defendants facing Exchange Act claims who are not knowing violators and thus are liable only for damages corresponding to their percentage of responsibility. In fact, nonsettling proportionately liable defendants stand to benefit from the settlement of claims by co-defendants who might be financially unable to pay their assessed proportion of the damages regardless of which proposed judgment reduction formula applies. If the Settling Director Defendants remain in the action, and their proportionate shares are not collectible in their entirety after a judgment, other defendants who are found proportionately liable for Exchange Act claims might be required to pay more than their assessed proportion of the judgment under the Uncollectible Share Provision of Section 21D(f)(4). Once the Settling Director Defendants have exited the action, however, remaining defendants who are ultimately found proportionately liable no longer risk increased liability stemming from the Settling Director Defendants' financial incapacity. Assuming that remaining co-defendants can pay their own way, the liability of nonsettling defendants will not exceed their respective proportionate shares.
If there were no statutory provision in effect, as was the case when this Court evaluated terms of the partial settlement in theERISA Litigation, the fact that the situation of nonsettling Section 11 defendants would be unaltered by the terms of the Judgment Reduction Formula would be a strong argument in favor of its permissibility. See WorldCom ERISA Litigation, 339 F. Supp. at 570. The common law test for approval of a settlement bar order as a whole is whether "it is narrowly tailored and preceded by a judicial determination that the settlement has been entered into in good faith and that no one has been set apart for unfair treatment." In re Masters Mates Pilots Pension v. Riley, 957 F. 2d 1020, 1031 (2d Cir. 1992). In the ERISA Litigation settlement, this Court ruled that a similar judgment reduction formula was not inconsistent with the governing common law principles largely because it did not prejudice nonsettling defendants' interests. See WorldCom ERISA Litigation, 339 F. Supp. at 570. But although the effective windfall granted to jointly and severally liable defendants under the terms of Paragraph (7)(B) is debatable as a legislative policy choice, in the context of settlements under the securities acts, this argument cannot control the Court's reading of an unambiguous statutory provision.
Specifically, in regard to the rights of nonsettling defendants, the Second Circuit has ruled that a plaintiff cannot recover more than a single satisfaction of the judgment, which means that a judgment reduction must be at the very least a pro tanto figure. Masters Mates, 957 F.2d at 1030 ("[W]hen a plaintiff receives a settlement from one defendant, a nonsettling defendant is entitled to a credit of the settlement amount against any judgment obtained by the plaintiff against the nonsettling defendant as long as both the settlement and judgment represent common damages.") (quoting Singer v. Olympia Brewing Co., 878 F.2d 596, 600 (2d Cir. 1989))).
Second, the Lead Plaintiff notes that nothing in the PSLRA or its legislative history indicates that the Act was intended to reduce the liability of Section 11 defendants other than outside directors. In a similar vein, it argues that "the beneficiaries of the reduction scheme [of Section 21D(f)(7)] are Exchange Act defendants, not those who, like the Underwriter Defendants, are subject to joint and several liability under the Securities Act." The Lead Plaintiff is correct that the PSLRA does not contain language reflecting any specific intention to reduce the liability of most Section 11 defendants. But this line of argument falls short. As explained above, the statutory language clearly implicates the rights of Section 11 defendants by including outside directors facing such claims within its purview, and to read in an exception that exempts strictly liable Section 11 defendants from a provision that advantages knowing Exchange Act violators would be unwarranted. The Lead Plaintiff has been unable to point to any statutory language that would permit such a distinction.
The Lead Plaintiff also submits that because a "central tenet" of the PSLRA was to protect outside directors, and because the Act excludes most Securities Act defendants from its scope, taking outside directors' financial ability into account in the judgment reduction formula is not inconsistent with the purpose of the Act. The Judgment Reduction Formula may conflict with thepolicies underlying the PSLRA's inclusion of outside directors facing Section 11 claims in the proportionate liability scheme of Section 21D(f). The judgment reduction provision of Paragraph (7)(B) significantly undermines the PSLRA's protection of outside directors, because it may make it extraordinarily difficult in some actions for outside directors to enter partial settlements and thus gives them little opportunity to reduce their risk of potentially devastating personal liability. Even taking into account directors and officers liability coverage, the resources of outside directors may be dwarfed by the wealth of other likely Section 11 defendants such as underwriters and accounting firms — defendants that remain jointly and severally liable.
To recap, on one hand, if the outside directors remain in an action where this imbalance of wealth is present, the plaintiff will be able to collect the entirety of a judgment from other Section 11 violators regardless of what percentage of responsibility the jury assigns to the outside directors. This is because the plaintiff can collect the entire judgment from a wealthy jointly and severally liable defendant (who will in turn be able to recover only what the outside director co-defendants are actually able to pay, up to the percentage of the final judgment for which the jury has deemed them responsible). On the other hand, if the outside directors settle, under the Paragraph 7(B) formula, the outside directors' assessed proportion of liability will be subtracted from the final judgment amount if it is greater than the actual settlement amount, reducing the plaintiff's overall recovery by the difference between the proportion of liability and the settlement amount. As explained above, if the stakes in the case are high, even a relatively small percentage of outside-director liability can translate into a vast sum of money to which the plaintiff will have denied itself access by choosing to settle with the outside directors. As a result, if the "deep pockets" refuse to settle, it is likely that the plaintiff will refuse to settle with outside directors on terms they are able to meet. Such a destructive set of incentives may deserve to be remedied, but because the statutory language is clear, the remedy must be legislative.
It should be noted that this disincentive toward settlement with comparatively less wealthy parties is created in the Exchange Act context as well when the facts are such that one or more wealthy defendants are likely to be subject to joint and several liability for knowing conduct.
Finally, the Lead Plaintiff argues that the Uncollectible Share provision of Paragraph (4) does not address settlement and "cannot be read to override a key point of the PSLRA in seeking to put outside directors less at risk from suffering large judgments against them." The Lead Plaintiff is correct that Paragraph (4) does not in itself provide any reason to disapprove the Judgment Reduction Formula, particularly because the provision does not affect the liability of jointly and severally defendants. Paragraph (4) requires collection from jointly and severally liable Exchange Act defendants (and, presumably, Section 11 defendants who are not Covered Persons) before any additional liability is triggered for proportionately liable Covered Persons. See 15 U.S.C. § 78u-4(f)(4)(A). But the decision reached here is based on the plain language of Paragraph (7)(B), not on the Underwriter Defendants' argument regarding Paragraph (4). Conclusion
In its Reply Memorandum, the Lead Plaintiff also argues that the Underwriter Defendants do not have standing to object to the terms of the settlement, citing Zupnik v. Fogel, 989 F.2d 93 (2d Cir. 1993), for the proposition that the Underwriter Defendants lack standing because they would suffer no "legal prejudice" from the settlement. Id. at 98. If the Court gave effect to the Judgment Reduction Formula of the Stipulation under consideration here, however, the Judgment Reduction Formula's divergence from the terms of 15 U.S.C. § 78u-4(f)(7)(B)(i) would have a direct and binding effect on the Underwriter Defendants' rights to a judgment credit to which they would otherwise be entitled. They therefore face "formal legal prejudice," Zupnik, 989 F.2d at 98 (citation omitted), and have standing to object.
Because the Judgment Reduction Formula of the Stipulation is inconsistent with Section 21D(f)(7)(B) of the Exchange Act, it is unnecessary to reach the objectors' arguments that are premised on common-law principles.
The application of the settling parties for approval of the Judgment Reduction Formula of the Stipulation is denied insofar as the "Contribution Credit" included in that formula is adjusted to reflect any limitation on the financial capability of the Settling Director Defendants.
SO ORDERED.