Opinion
97 CIV. 6742 (DLC).
November 8, 2000.
For Plaintiffs: Lee S. Shalov, Ralph M. Stone, Shalov Stone Bonner, New York, NY.
For Defendants Palomar Medical Technologies and Joseph Caruso: Gabrielle R. Wolohojian, Hale and Dorr LLP, Boston, MA.
Geoffrey S. Stewart, Jones, Day, Reavis Pogue, Washington, DC.
For Defendant Steven Georgiev: William H. Kettlewell, Dwyer Collora Boston, MA.
OPINION
Plaintiffs petition for court approval of a proposed settlement and for an award of attorneys' fees and reimbursement of litigation costs and expenses. For the reasons discussed below, the settlement is approved and attorneys' fees and costs are awarded.
Plaintiffs filed this class action lawsuit on September 11, 1997, alleging violations of federal securities laws and state law. Defendant H.J. Meyers, Inc. ("HJM") filed a motion to dismiss, which was denied on July 14, 1998. The parties began discovery, during which defendant HJM ceased doing business. A default against HJM was entered on January 8, 1999. On March 9, 1999, the Court granted plaintiffs permission to file a Second Amended Complaint naming Palomar Medical Technologies, Inc. ("Palomar") and its officers Joseph Caruso and Steven Georgiev as defendants. The Court denied their motion to dismiss on August 6, 1999. Thereafter, discovery of the Palomar defendants began.
On July 5, 1999, the Court signed an order dismissing without prejudice defendant Amy M. Bell from this case. Individual settlements were reached between plaintiffs and Tobin J. Senefeld, William F. Masucci, Robert J. Setteducati, and Michael Bergin. The Court signs today a final judgment of dismissal for these four defendants. Defendants James A. Villa and HJM have filed for bankruptcy; the Court signs today a final judgment of dismissal for these two defendants.
On September 17, 1999, plaintiffs moved to certify the litigation as a class action pursuant to Rule 23(b)(3), Fed.R.Civ.P. It defined the class to include all persons or entities who purchased Palomar common stock from February 1, 1996 through and including March 26, 1997. The parties reached this proposed settlement with the remaining defendants — Palomar, Caruso, and Georgiev — before the motion for class certification was decided by the Court. According to their agreement, the Gross Settlement Fund was to be set at $5,040,750.00, representing a cash sum of $4,040,750.00 and Palomar stock valued at $1,000,000.00. As part of that Settlement, plaintiffs identified two separate periods for damages and broke the Class Period into two segments, one prior to and one subsequent to July 23, 1996. During the first segment, plaintiffs describe a substantial increase in the price of Palomar stock due to manipulation and unrelated to any news event. In contrast, the substantial decrease in the stock price on July 24, 1996, was apparently influenced by several publicized events occurring around that date, including a report issued by HJM lowering earnings projections for Palomar and HJM's agreement with the NASE to repay over $1 million in restitution for improper sales practices. Division of the class into two periods is corroborated by a corresponding decline in the volatility of Palomar stock around July 24, 1996. Plaintiffs have attributed a $1.50 inflationary effect to the price of Palomar stock in the first period and a $0.30 inflationary effect on the price in the second period.
On May 18, 2000, the parties executed the Stipulation of Settlement. On June 19, 2000, the Court entered an Order which, among other things, certified a Class for the purposes of Settlement and scheduled a hearing for October 27, 2000 on the proposed Settlement and the application for attorneys' fees and costs.
Plaintiffs sent a detailed notice of the proposed Settlement to over 24,000 identified class members on or about June 28, 2000, and published a summary notice in the national edition of The Wall Street Journal on June 30, 2000. The Notice was also available on the internet.
The Notice also advised that plaintiffs' counsel intended to apply to the Court for expenses as well as for attorneys' fees not in excess of 33% of the Settlement Fund. The Notice instructed Class members how to opt-out of the Settlement and informed members that they could serve and file objections to the Settlement or to plaintiffs' counsel's fee application or both. As of October 27, 2000, no class members had opted-out or objected. I find that the notice provided by plaintiffs was adequate pursuant to Rule 23(c)(2), Fed.R.Civ.P.
On October 27, 2000, this Court held a fairness hearing in order to discuss class certification, settlement approval, and attorneys' fees and costs. No class members appeared at the fairness hearing. This Court indicated that it would certify the class as defined and approve the Settlement. It agreed to take further submissions on the issue of attorneys' fees and costs.
The Court addressed the issue of sub-classes during the fairness hearing and was satisfied that sub-classes were not necessary where, as in this case, the class was notified and no objections were made.
Subsequent to the fairness hearing, the parties agreed that the attorneys' fees would be paid out in both cash and Palomar stock. The parties further agreed that the Palomar stock component of the Gross Settlement Fund was the equivalent of 447, 547 shares, based on the average closing price of Palomar stock on the ten trading days prior to the fairness hearing on October 27, 2000.
I. STANDARD FOR CLASS CERTIFICATION
Pursuant to Rule 23(a), Fed.R.Civ.P., plaintiffs must satisfy each of four prerequisites in order to secure class certification: numerosity, commonality, typicality, and adequacy of representation. Amchem Products, Inc. v. Windsor, 521 U.S. 591, 613 (1997) ; Blyden v. Mancusi, 186 F.3d 252, 269 (2d Cir. 1999). In addition, plaintiffs "must qualify under one of three criteria set forth in Rule 23(b)." Marisol v. Giuliani, 126 F.3d 372, 376 (2d Cir. 1997). In this case, plaintiffs seek certification under Rule 23(b)(3), based on the questions of law and fact common to the members of the class.
A. Numerosity
The requirement of numerosity is met if it is impracticable to join all class members. Marisol, 126 F.3d at 376. Notice was sent to 24,461 Class members as of October 12, 2000, indicating a class numbering in the thousands. I find that the class would be too numerous to make joinder practicable.
B. Commonality
The plaintiffs allege several questions of law or fact common to the class: that the defendants engaged in an elaborate scheme to artificially inflate and manipulate the prices at which Palomar stock was sold to the investing public; that the defendants engaged in a course of conduct that inflated and maintained the price of Palomar stock at artificial levels; that the scheme included the widespread dissemination of materially false and misleading reports about the Company as well as numerous improper broker promotions; and that the scheme included payments to brokers at other firms to promote the Company's stock. These common questions satisfy Rule 23(a)(2).
C. Typicality
The requirements of commonality and typicality "tend to merge into one another." Marisol, 126 F.3d at 376. While the commonality inquiry asks if the named plaintiffs' "grievances share a common question of law or of fact" with those of the proposed class, id., the focus of the typicality inquiry concerns whether "each class member's claim arises from the same course of events, and [whether] each class member makes similar legal arguments to prove the defendant's liability," id. (internal citations omitted).
The plaintiffs' claims stem from similar events and rely on similar legal arguments. Accordingly, Rule 23(a)(3) is satisfied.
D. Adequacy of Representation
A class is adequately represented when its counsel "is qualified, experienced, and generally able to conduct the litigation." Marisol, 126 F.3d at 378. Plaintiffs must also show that there is no conflict of interest between the named plaintiffs and other members of the class.
The Court has confidence that plaintiffs' counsel has fairly and adequately protected the interests of the class. Plaintiffs are represented by counsel who are skilled in federal securities and class action litigation. In addition, plaintiffs' counsel allege that they know of no conflicts of interest among class members.
II. STANDARD FOR JUDICIAL APPROVAL OF CLASS ACTION SETTLEMENTS UNDER RULE 23(e)
Rule 23(e), Fed.R.Civ.Pro., 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 determine that it is "fair, adequate, and reasonable, and not a product of collusion." 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).
The district court must consider several factors, including "the complexity of the litigation, comparison of the proposed settlement with the likely result of litigation, experience of class counsel, scope of discovery preceding settlement, and the ability of the defendant to satisfy a greater judgment." In re the Drexel Burnham Lambert Group. Inc., 960 F.2d 285, 292 (2d Cir. 1992) (internal citations omitted). The court should also 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) (internal citations 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).
Turning to the substantive terms of the proposed Settlement, which need not be restated in this Opinion, the Court is satisfied that the Settlement is fair, adequate, and reasonable. The Settlement provides for recovery of approximately $5 million out of a generously estimated $29 million in total damages. Plaintiffs originally filed this case against HJM. After HJM ceased to do business, plaintiffs filed a Second Amended Complaint which included the Palomar defendants. Genuine hurdles exist for plaintiffs in their suit against Palomar. Significantly, Palomar, a fledgling research and development company, may also enter bankruptcy if faced with a judgment significantly greater than is proposed here. Further, it will be more difficult to prove Palomar's liability than HJM's. Plaintiffs will have the burden of establishing Palomar's knowledge of and involvement in HJM's misconduct. Finally, the litigation is admittedly complex and will necessitate expensive expert testimony. There are also serious questions about the reliability of the damage calculation on which plaintiffs have relied. In particular, the plaintiffs would have had to address the defendants' evidence that Palomar's stock price was reacting during the relevant period to forces affecting its industry.
III. ATTORNEYS' FEES AND COSTS
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. Id. There are two methods by which the district court may calculate reasonable attorney's fees in class action cases, 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 (internal citations omitted).
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 (internal 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, 888 F. Supp. at 562; 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 a solution to some problems raised by the lodestar method. First, it "relieves the court of the cumbersome, enervating, and often surrealistic process of evaluation fee petitions." Id. at 461 n. 4 (internal citations and quotations 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.
Plaintiffs' counsel requests a 33% fee, resulting in an award of $1, 663, 447.50. It uses the lodestar method as a crosscheck of its proposed fee, calculating a total of $1, 029, 298.25 from over 2500 hours worked at a variety of hourly rates from seven law firms. The lodestar figure for the firm representing the lead plaintiffs and their bankruptcy counsel, however, is $788,844.25. A lodestar multipher of 1.6 is used to reach the 33% amount of $1,646, 877.20 for the seven law firms. The corresponding figure for the lead plaintiffs and their bankruptcy counsel is $1, 262,150.80.
Five law firms beyond lead counsel and their bankruptcy counsel sought attorneys' fees in the amount of $240,454.00. I have reviewed descriptions of their work and, to the extent that the work is non-duplicitous and merits reimbursement, I have valued the work as reasonably supporting an award of no more than $60,000.
Plaintiffs' counsel further requests $173,692.72 in costs incurred. Plaintiffs' counsel's costs include expert fees of $54,519.33, settlement administration fees of $64,355.00, as well as an array of mailing, photocopies, telecopier, telephone, computer research, and other like costs. The costs incurred by lead counsel and their bankruptcy counsel, however, are $150,811.47. It is estimated that an additional $138,362.00 will be needed for settlement administration. I find that total costs not in excess of $290,000.00 are fair and reasonable.
Plaintiffs Mark Varljen and Simon Becker requested lost wages in the amounts of $880.00 and $1,800.00, respectively. Pursuant to 15 U.S.C. § 78u-4(a)(4), I have approved this award in principle as it encourages participation of plaintiffs in the active supervision of their counsel. Their claims have been considered in the award of costs.
Balancing the relevant factors enumerated in Goldberger, I award an attorneys' fee of approximately 20% of the cash sum and of the Palomar stock, or $800,000.00 in cash and 89,000 shares. This is a relatively generous percentage given the fact that there has been no trial and not even full discovery. This amount reflects an amount between an unexamined lodestar figure for principal counsel — albeit one without any enhancement — and the 33% fee requested and, I believe, adequately recognizes the efforts of counsel and the risks and complexities of this litigation while ensuring sufficient remaining funds for distribution to Class members. The attorneys' fee also recognizes the considerable public benefit from adding the pressure of this lawsuit to whatever other pressures drove H.J. Meyers Co. from business.
I also award costs in the amount of $290,000.00, which includes the total costs for principal counsel and their bankruptcy counsel as well as the estimate of future settlement administration costs. I decline to award costs to the remaining five law firms.
CONCLUSION
For the aforementioned reasons, I hereby certify the Class and approve the Class Settlement as fair, adequate, and reasonable. I award attorneys' fees in the amount of $800,000.00 cash and 89,000 shares of Palomar stock. I award costs in the amount of $290,000.00.
It is my judgment that plaintiffs' counsel have been dingent and responsible in this litigation and have served the class with vigor, dedication and professionalism.
SO ORDERED:
Dated: New York, New York November 6, 2000 DENISE COTE United States District Judge