a. Cendant issued the press release that precipitated these actions on April 15, 1998. In that press release, Cendant disclosed that it had discovered "potential accounting irregularities" in former CUC units, that these "irregularities" had increased 1997 earning by about 12%, and that it would restate earnings for 1997. Cendant also had said that it: (i) might need to restate earnings for prior periods; (ii) had informed appropriate regulatory authorities; (iii) had retained special counsel and Arthur Andersen "to perform an independent investigation;" (iv) had assigned all accounting and control functions at the CUC units to former HFS staff; and (v) had "asked counsel to explore litigation against certain officers of the former CUC as well as other potential defendants." (A copy of Cendant's press release is attached at Exhibit C.) These disclosures made it apparent that Cendant was likely to be liable under § 11.

b. However, even with the information in Cendant's April 15 press release and three additional press releases Cendant issued before the Retainer Agreement was signed (copies of which are attached at Exhibit D), Lead Plaintiffs could not have been certain about: (i) the amount of damages former HFS shareholders could recover under § 11; (ii) whether potential defendants other than Cendant had valid due diligence defenses; (iii) whether Cendant had materially misrepresented its earnings in periods prior to 1997; (iv) whether plaintiffs could prove that Cendant and other defendants had acted with the scienter necessary to establish liability under Rule 10b-5; and (v) whether the investigation commissioned by Cendant's audit committee would result in an attempt to "whitewash" any wrongdoing or, alternatively, would provide substantial evidence of widespread fraud.

a. As concerns attorney fees, the Retainer Agreement established a decision-making structure that took account of the uncertainty about the amount the class was likely to recover and the effort necessary to obtain that recovery. As a baseline, Lead Plaintiffs and Lead Counsel agreed to a cap on attorney fees equal to a declining percentage of any amount recovered, with different percentages applicable at three different stages of the litigation process. A more important feature was Lead Plaintiffs and Lead Counsel's agreement that the attorneys' fee "will be a function of both the timing and size of the recovery"and that, "[i]n any event, [Lead Counsel] will not submit any fee application to the Court without prior approval of The Funds." Retainer Agreement, ¶ I (emphasis added). Taken as a whole, these provisions clearly contemplated that, at such time as the litigation was resolved, Lead Counsel and Lead Plaintiffs would confer and reach agreement, within the agreed upon fee caps, as to what would constitute reasonable compensation to Lead Counsel in light of whatever recovery had been achieved and the effort exerted by Lead Counsel to achieve that recovery.

b. In addition, Lead Plaintiffs negotiated a critically important safeguard that provided them with the power, independent of the incentives provided by the prospect of an award of a substantial attorneys' fee, to ensure that Lead Counsel did not negotiate a settlement that advanced their interest at the expense of the class. Specifically, they obtained from Lead Counsel a commitment to "consult with [Lead Plaintiffs], and obtain [Lead Plaintiffs] prior approval for, any proposed resolution of this litigation before entering into a final settlement agreement" with defendants. Retainer Agreement, ¶ IV.

17. Lead Plaintiffs, through their counsel, thereafter filed a motion to be named lead plaintiff and to have their selection of Lead Counsel approved by the Court. In that motion, Lead Counsel state:

The present motion is . . . precisely what the framers of the Reform Act hoped to accomplish. The legislative history of the Reform Act demonstrates that it was intended to encourage institutional investors, such as CalPERS, the CRF and the City Pension Funds, to serve as lead plaintiffs. As the Statement of Managers noted, the Reform Act was intended ‘to increase the likelihood that institutional investors will serve as lead plaintiffs' because, among other reasons, institutional investors and other class members with large amounts at stake ‘will represent the interests of the plaintiff class more effectively than class members with small amounts at stake.'

Motion of California Public Employees' Retirement System, New York State Common Retirement Fund and New York City Pension Funds for Appointment as Lead Plaintiffs, and Approval of Their Selection of Lead Counsel, Pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 and Section 27(a)(3)(B) of the Securities Act of 1933, at 3 (citation omitted; emphasis added).

18. It is my understanding, based on the Declaration of Roger Pugh and representations made to me by attorneys for City Pension Funds, that following their appointment as lead plaintiff, Lead Plaintiffs actively monitored Lead Counsel's prosecution of this action; participated in the decision to employ Lazard Freres to advise Lead Plaintiffs and Lead Counsel as to how large a settlement Cendant could afford to pay and to help structure a settlement that Cendant would find financially viable; and both monitored and participated in the negotiation of the proposed settlement of this action. Thus, through the negotiation of the proposed settlement, I believe that Lead Plaintiffs have more than met their fiduciary obligations to the plaintiff class.

19. It is further my understanding, based on the Declaration of Lorna Goodman and representations made to me by attorneys for City Pension Funds, that subsequent to the negotiation of the proposed settlement, Lead Counsel have not engaged in any meaningful discussions with Lead Plaintiffs of the attorneys' fee to be awarded in this action and that Lead Counsel submitted its Petition for an Award of Attorneys' Fees without obtaining the prior approval of Lead Plaintiffs.

C. The Court's Auction

20. The Court held a hearing on August 4, 1998, at which it announced its designation of the three public funds as Lead Plaintiffs in this action for all but the Prides class and its intent to select lead counsel through a process of competitive bidding. In the course of that hearing, the Court also advised all interested parties that, regardless of the results of the proposed auction, "at the end of the case I will still determine, using the yardstick of reasonableness, the question of counsel fees." (Tr. 25-26)

21. On August 17, 1998, Lead Plaintiffs sent a letter to the Court (a copy of which is attached at Exhibit E) expressing their concerns about the proposed auction. Lead Plaintiffs pointed out that determining which bid is the lowest would be likely to turn on the damages ultimately recovered, which was "not predictable with certainty" at that time. Lead Plaintiffs also recommended to the Court, consistent with their view of their fiduciary responsibility and the terms of the Retainer Agreement, "that any numbers/percentages in the grid be established as fee caps only, with the actual fee subject to approval by Lead Plaintiffs before submission to the Court." (Emphasis added.)

22. The Court, in an opinion dated September 8, 1998, explained that one reason to hold an auction was its concern about its ability "‘to divine the reasonable value of the services rendered'" by lead counsel at the conclusion of a class action. In re Cendant Corp. Litigation, 182 F.R.D. 144, 150 (D. N.J. 1998) (quoting Raftery v. Mercury Finance Co., 1997 WL 529553 (N.D.Ill. Aug. 15, 1997), at *2). The Court also acknowledged that its "expertise is rarely at its most formidable in the evaluation of counsel fees; judges rarely retain counsel." 182 F.R.D. at 150. The Court said that an auction at least would provide it with data concerning the fees attorneys engaged in marketplace competition would charge to represent the class, which would place the Court in a better position, at the end of this action, to meet its obligations to the plaintiff class.

23. The Court also clarified two other aspects of the proposed auction. First, the lowest qualified bidder would not be assured appointment as lead counsel. Rather, the Court announced, counsel chosen by Lead Plaintiffs, if they were not the lowest bidder and "if otherwise qualified, will have the opportunity to agree to the terms of what the Court has found to be the lowest qualified bid." Id. Moreover, the Court reiterated, "[t]he auction will not obviate the Court's final review of fees and costs . . . if this matter is ultimately resolved in favor of the putative class. During the requisite post-resolution evaluation, the results of the auction will serve as a benchmark of reasonableness." Id.

24. There are other factors, not discussed in the Court's September 8 opinion, that one could view as arguing in favor of an auction. The most significant of these was that, shortly after Lead Plaintiffs signed the Retainer Agreement and moved to be named lead plaintiff, Cendant made a series of damning additional disclosures. First, Cendant disclosed that it had discovered "a continuing program of false entries [at CUC] which misrepresented the financial performance and condition of that company" at least since 1995. See Cendant Press Release dated July 14, 1998, attached at Exhibit F. This disclosure reduced many of the uncertainties, as to damages and scienter, that existed at the time the Retainer Agreement was negotiated. It also suggested that the damages attributable to Cendant's fraud were likely to be much larger than suggested by Cendant's earlier public statements.

25. On August 27, 1998, Cendant further reduced the uncertainties relating to its and other defendants' liability, and also made it apparent that defendants' total liabilities were likely to greatly exceed the amounts previously anticipated, by releasing the report of its Audit Committee and filing a copy of that report with the SEC. See Cendant Press Release dated August 27, 1998, attached at Exhibit G. The Committee's report disclosed that one-third of CUC's income during 1995-1997 "was deliberately and fictionally manufactured.," that the former CFO and former Controller of CUC "directed accounting irregularities to be entered," and that the former CEO and COO of CUC "are among those who must bear responsibility for what occurred at CUC."

26. In sum, by the time the Court ordered a competitive bidding process, it should have been obvious to experienced and sophisticated plaintiffs' attorneys that (i) the §11 claims against Cendant were virtually sure to succeed and that statutory damages under those claims would amount to several billion dollars; (ii) many defendants would have difficulty establishing due diligence defenses to the § 11 claims made against them; (iii) plaintiffs probably would find it relatively simple to establish that Cendant and at least certain CUC defendants had acted with scienter; and (iv) potential damages were likely to be much larger than previously anticipated. These factors made it virtually certain that qualified attorneys would bid to represent the class for fees considerably lower than the maximum percentages negotiated by Lead Plaintiffs and Lead Counsel at a time prior to Cendant's disclosure of these facts.

a. The most important is that if courts develop a practice of second-guessing the considered decisions of sophisticated institutional investors concerning which attorneys to hire and on what terms to retain them, such institutional investors will become even more reluctant than they are now to assume the burdens of serving as lead plaintiffs.

b. Other distinguished commentators share this view. In the instant action, Professor John C. Coffee, Jr. advised the Court: "I must acknowledge that I do not believe the PSLRA contemplates the use of Auction procedures. . . ." Declaration of John C. Coffee, Jr. at ¶ 8, n.1. Similarly, in a declaration filed in another action and relied upon by the Court in Network Associates, see 76 F.Supp.2d 1033, Professor Joseph Grundfest opined that "the court should take over the procedure of selecting lead counsel and substitute its judgment as to counsel selection and fee arrangements . . . only in the most rare of circumstances when it is clear that the lead plaintiff mechanism will fail to operate in accordance with the statutory design". Declaration of Joseph Grundfest Regarding Procedures Employed in the Selection of Lead Plaintiff and Lead Counsel Pursuant to the Private Securities Litigation Reform Act of 1995, dated Oct. 7, 1999, In re McKesson HBOC Securities Litig., Action No. 99-20743 RMW (N.D.Cal.), ¶ 11. (Copy attached at Exhibit H.) Professor Grundfest explained that he was taking this position because such an assertion of judicial authority "is fundamentally at odds with Congressional intent and with the clear language of the Act." Id.

c. Similarly, the Court in Network Associates followed a procedure more consistent with Congressional intent. Faced with an institutional investor that (unlike Lead Plaintiffs in the instant action) refused to negotiate fee arrangements in advance with its preferred attorneys, the Court revoked its tentative designation of that institution as lead plaintiff, selected as lead plaintiff the class member who the Court believed was most capable of effectively selecting and retaining attorneys to represent the plaintiff class, and subsequently confirmed that lead plaintiff's selection of lead counsel.

d. In the instant action, the Court had better alternatives available. If, at the time the Court was asked to approve Lead Plaintiffs' selection of lead counsel, the Court was uncomfortable with the fee cap negotiated by Lead Plaintiffs, the Court could have advised them of its concerns; could have questioned Lead Plaintiffs to ensure that they intended to use their veto power under the Retainer Agreement to prevent their preferred attorneys from filing a fee request that was unreasonably large; or (though I believe this alternative would have been less desirable) could have directed Lead Plaintiffs either to renegotiate the Retainer Agreement or, if BLBG and BRB were not willing to renegotiate, to select new attorneys.

e. The Court's decision selecting the "lowest qualified bid," In re Cendant Corp. Litig., 191 F.R.D. 387 (D. N.J. 1998), illustrates some of the perils of a judicially mandated and controlled auction process. With the benefit of 20/20 hindsight, it is clear that the bid the Court selected as the "lowest qualified bid" will not produce the lowest fee of the qualified bids made in this action.

i. The Court selected Bidder 9 as the lowest qualified bidder, on the basis that Bidder 9 had the experience necessary to serve as lead counsel and that its bid was the lowest qualified bid. Bidder 9 submitted an escalating percentage bid. As it relates to any recovery in excess of $500 million, Bidder 9's bid was equal to $22 million for the first $500 million recovered and 9 percent for all amounts above $500 million.

ii. The Court seemed to consider Bidder 6 the second best. The court described Bidder 6 as qualified and its fee schedule as realistic, but rejected Bidder 6 because its "fee schedule is higher than that of another equally qualified bidder."Id. at 390. Bidder 6 submitted a declining percentage bid, that, as it relates to any recovery in excess of $500 million, was equal to $42 million for the first $500 million recovered and 3 percent for all amounts above $500 million.

iii. The Court rejected as "unrealistic" the bid of Bidder 10. The court noted that Bidder 10 did not have "a history of actual trial litigation" but did not hold that Bidder 10 was unqualified. Rather, the court pointed out that Bidder 10's bid was so low as to appear "quasi philanthropic." More specifically, the Court stated: "Unless the eventual monetary recovery in this case is in the billions, such an apparently ‘cheap' fee schedule does not make professional sense." Id. at 391. As it relates to any recovery in excess of $500 million, Bidder 10's bid was equal to $7 million for the first $500 million recovered and 2% for all amounts above $500 million.

iv. The Court also implicitly rejected the fee caps in the Retainer Agreement. As they relate to any recovery in excess of $500 million, those fee caps were equal to $52.5 million for the first $500 million recovered and 5 percent for all amounts above $500 million.

v. Bidder 10's bid, as the Court recognized, was lower than Bidder 9's bid at all levels of recovery. The Court opinion does not make clear whether it recognized that Bidder 6's bid and the fee caps negotiated by Lead Plaintiffs also were lower than Bidder 9's bid at certain levels of recovery. The "crossover point" with Bidder 6 was $834 million, at which level Bidder 6 would be limited to a fee of $52,020,000 while Bidder 9 would be limited to a fee of $52,050,000. The "crossover point" with the fee caps negotiated by Lead Plaintiffs was $1.263 billion. At that level, the fee caps would limit Lead Counsel to a fee of $90,650,000, while the bid selected by the Court would limit Bidder 9 to a fee of $90,670,000.

vi. The differences between the qualified bids considered by the Court are even more dramatic when analyzed in terms of the proposed settlement. Bidder 10's "unrealistic" bid would produce a maximum fee of about $60.4 million, an amount equal to 7.5 times Lead Counsel's lodestar. Bidder 6's bid would produce a maximum fee of about $122 million, an amount equal to 15.2 times Lead Counsel's lodestar. The fee caps negotiated by Lead Plaintiffs would produce a maximum fee of about $186 million, an amount equal to 23.2 times Lead Counsel's lodestar. Lead Counsel, "adher[ing] precisely to the parameters" of Bidder 9's bid, is seeking a fee of $262 million, an amount equal to 32.7 times their lodestar.

a. The $3.1 billion proposed settlement, which will allow class members to recover approximately 37% of their losses.

b. The time, effort and quality of effort expended by Lead Counsel to negotiate the proposed settlement.

c. The extent of Lazard Freres' contribution to negotiating the proposed settlement with Cendant and the contingent fee arrangement that Lazard Freres negotiated, at arms's length, with Lead Plaintiffs and Lead Counsel before undertaking that engagement.

d. The maximum fee to which Lead Counsel is entitled under the fee grid identified by the Court as the lowest qualified bid and the fee grid in the Retainer Agreement, as well as the Court's caution that the lowest qualified bid would serve only as a "benchmark" for the award of attorneys' fees in this action.

e. The maximum fees that other qualified attorneys indicated, as part of the Court's auction process, they were prepared to accept were they selected to serve as lead counsel.

f. The $19.3 million fee the Court awarded to counsel for the Prides class, which will be paid entirely or primarily by assignment to counsel of unclaimed rights, rather than from funds that otherwise would be distributed to the class. That fee is equal to 56% of the fee requested by counsel, to 5.6 percent of the net amount recovered by the class, and to 10.1 times that counsel's lodestar. See In re Cendant Corp. Prides Litig., 51 F.R.D. 531 (1999). Moreover, counsel for the Prides class had succeeded in very quickly negotiating a settlement that fully compensated class members for their entire loss.

g. The fact that highly qualified plaintiffs' attorneys appear to be prepared to work for steadily decreasing percentages of the amounts recovered in securities class actions. Lead Plaintiffs could view this trend as corroborating the Second Circuit's recent observation that "attorneys in these cases are routinely overcompensated for such things as contingency risk." Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 57 (2d Cir. 2000) (affirming award of $2.1 million fee, equal to plaintiffs' attorneys' lodestar without any multiplier and to 4 percent of $54 million settlement).

h. The continued willingness of some courts to award contingent fees in securities class actions of 25 percent to 33 percent of the amounts recovered. See, e.g., In re Ikon Office Solutions, Inc. Sec. Litig., 2000 WL 567104 (E.D. Pa. 5/9/00) (awarding fee equal to 30 percent of net recovery). However, Lead Plaintiffs also would want to take account of the fact that most such decisions operate from the false premise that no information is available concerning the fees that an informed plaintiff would negotiate in similar litigation. See id. at *28 (saying that this factor is "of relatively little weight in a case such as this.")

 

I declare under penalty of perjury that the foregoing is true and correct.

Executed on May __, 2000.

 

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ElliottJ.Weiss