COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
|MARK ALAN ROSENBERG, et al., On Behalf
of Themselves and All Others Similarly
HYBRID NETWORKS, INC., et al.,
(Consolidated with No.
NOTICE OF MOTION AND
DATE: August 13, 1999
TABLE OF CONTENTS
I. PRELIMINARY STATEMENT
II. FACTUAL BACKGROUND AND HISTORY OF THE ACTION
III. THE SETTLEMENT
A. Settlement NegotiationsIV. THE STANDARDS FOR JUDICIAL APPROVAL OF CLASS ACTION SETTLEMENTS
B. Terms Of The Settlement
C. The Plan Of Allocation
V. THE SETTLEMENT IS FAIR, REASONABLE AND ADEQUATE
A. The Settlement Appropriately Balances The Risks Of Litigation And The Benefit To The Class Of A Certain RecoveryVI. CONCLUSION1. Continued Litigation Poses Substantial Risk In Establishing Liability And DamagesB. The Parties Have Engaged In Sufficient Pretrial Proceedings To Identify The Strengths And Weaknesses Of Their Cases
2. Balancing The Certainty Of An Immediate Recovery Against The Expense And Likely Duration Of Trial Favors Settlement
3. The Ability Of The Settling Defendants To Withstand A Judgment
C. The Recommendations Of Experienced Counsel Heavily Favor Approval Of The Settlement
D. Reaction Of The Class Supports Approval Of The Settlement
E. The Requested Contribution Bar Order Should Be Entered by the Court
TABLE OF AUTHORITIES
Backman v. Polaroid Corp.,
910 F.2d 10 (1st Cir. 1990)
Behrens v. Wometco Enters., Inc.,
118 F.R.D. 534 (S.D. Fla. 1988), aff'd, 899 F.2d 21 (11th Cir. 1990)
Berkey Photo, Inc. v. Eastman Kodak Co.,
603 F.2d 263 (2d Cir. 1979)
Blackie v. Barrack,
524 F.2d 891 (9th Cir. 1975)
Boyd v. Bechtel Corp.,
485 F. Supp. 610 (N.D. Cal. 1979)
Bullock v. Administrator of Estate of Kircher,
84 F.R.D. 1 (D.N.J. 1979)
Chatelain v. Prudential-Bache Sec.,
805 F. Supp. 209 (S.D.N.Y. 1992)
Church v. Consolidated Freightways, Inc.,
[1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶97,743 (N.D. Cal. 1993)
Detroit v. Grinnell Corp.,
495 F.2d 448 (2d Cir. 1974)
Ellis v. Naval Air Rework Facility,
87 F.R.D. 15 (N.D. Cal. 1980), aff'd, 661 F.2d 939 (9th Cir.1981)
Ernst & Ernst v. Hochfelder,
425 U.S. 185 (1976)
Fisher Bros. v. Cambridge-Lee Indus., Inc.,
630 F. Supp. 482 (E.D. Pa. 1985)
Girsh v. Jepson,
521 F.2d 153 (3d Cir. 1975)
Green v. Occidental Petroleum Corp.,
541 F.2d 1335 (9th Cir. 1976)
In re Apple Computer Sec. Litig.,
[1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,252 (N.D. Cal. 1991)
In re Pacific Enters. Sec. Litig.,
47 F.3d 373 (9th Cir. 1995)
In re Warner Communications Sec. Litig.,
618 F. Supp. 735 (S.D.N.Y. 1985), aff'd, 798 F.2d 35 (2d Cir. 1986)
In re Washington Pub. Power Supply Sys. Sec. Litig.,
720 F. Supp. 1379 (D. Ariz. 1989), aff'dsub nom. Class Plaintiffs v. Seattle,
955 F.2d 1268 (9th Cir. 1992)
Lewis v. Newman,
59 F.R.D. 525 (S.D.N.Y. 1973)
M. Berenson Co. v. Faneuil Hall Marketplace, Inc.,
671 F. Supp. 819 (D. Mass. 1987)
MWS Wire Indus., Inc. v. California Fine Wire Co.,
797 F.2d 799 (9th Cir. 1986)
Marshall v. Holiday Magic, Inc.,
550 F.2d 1173 (9th Cir. 1977)
Milstein v. Huck,
600 F. Supp. 254 (E.D.N.Y. 1984)
Officers for Justice v. Civil Serv. Comm'n,
688 F.2d 615 (9th Cir. 1982)
Randall v. Loftsgaarden,
478 U.S. 647 (1986)
Republic Nat'l Life Ins. Co. v. Beasley,
73 F.R.D. 658 (S.D.N.Y. 1977)
Sirota v. Solitron Devices, Inc.,
673 F.2d 566 (2d Cir. 1982)
TSC Indus. v. Northway, Inc.,
426 U.S. 438 (1976)
Torrisi v. Tucson Elec. Power Co.,
8 F.3d 1370 (9th Cir. 1993)
Trans World Airlines, Inc. v. Hughes,
312 F. Supp. 478 (S.D.N.Y. 1970), modified, 449 F.2d 51 (2d Cir. 1971),
rev'd, 409 U.S. 363 (1973)
Utility Reform Project v. Bonneville Power Admin.,
869 F.2d 437 (9th Cir. 1989)
Van Bronkhorst v. Safeco Corp.,
529 F.2d 943 (9th Cir. 1976)
Weinberger v. Kendrick,
698 F.2d 61 (2d Cir. 1982)
West Virginia v. Chas. Pfizer & Co.,
314 F. Supp. 710 (S.D.N.Y. 1970), aff'd, 440 F.2d 1079 (2d Cir. 1971)
Williams v. First Nat'l Bank,
216 U.S. 582 (1910)
Wool v. Tandem Computers, Inc.,
818 F.2d 1433 (9th Cir. 1987)
Young v. Katz,
447 F.2d 431 (5th Cir. 1971)
Statutes, Rules and Regulations
Federal Rules of Civil Procedure
Arnold S. Jacobs, The Measure of Damages in Rule 10b-5 Cases,
65 Geo. L.J. 1093 (1977)
Manual For Complex Litigation, Third (1995)
TO: ALL PARTIES AND THEIR ATTORNEYS OF RECORD
PLEASE TAKE NOTICE that pursuant to this Court's Order of June 16, 1999, on August 13, 1999, at 9:00 a.m., in the Courtroom of the Honorable Ronald M. Whyte, United States District Judge, United States District Court, Northern District of California, San Jose Division, 280 South First Street, San Jose, California, plaintiffs will and hereby do move for orders and/or judgments (1) finally approving the partial settlement of this Litigation and dismissing it against the Settling Defendants with prejudice; (2) approving the Plan of Allocation of settlement proceeds; and (3) entering an order barring claims for contribution against the Settling Defendants. Plaintiffs' motion is based upon the Memorandum of Points and Authorities in Support of Plaintiffs' Motion for Final Approval of Settlement and Plan of Allocation and Entry of Bar Order, the Declarations of counsel for the plaintiffs, the Stipulation of Settlement dated as of March 3, 1999, all other pleadings and matters of record, and such additional evidence and testimony as may be presented at the hearing on plaintiffs' motions.
MEMORANDUM OF POINTS AND AUTHORITIES
I. PRELIMINARY STATEMENT
Pursuant to Rule 23 of the Federal Rules of Civil Procedure, plaintiffs, on behalf of a class of purchasers of Hybrid Networks, Inc. ("Hybrid" or the "Company") common stock between November 12, 1997 and June 17, 1998, inclusive (the "Class"), submit this memorandum of points and authorities in support of their motion for final approval of the partial settlement of these class actions for $8.8 million in cash and 3 million shares of Hybrid common stock (the "Settlement"). The settling defendants in these actions (the "Litigation") are Hybrid, Carl S. Ledbetter, Dan E. Steimle, James R. Flach, Stephen E. Halpran, Gary M. Lauder, Douglas M. Leone, Gustavo Ezcurra and Howard L. Strachman (the "Settling Defendants"). Plaintiffs' remaining claims, asserted against Hybrid's auditor, PricewaterhouseCoopers ("Coopers"), will continue to be prosecuted. In this regard, the Settlement provides for the Settling Defendants' agreement to cooperate in the continued prosecution of the Litigation.
The proposed Settlement represents an excellent recovery for the Class in light of the relative strengths and weaknesses of the claims that plaintiffs have asserted in the Litigation, and, in particular, the financial condition of Hybrid. The Settlement was not arrived at until after plaintiffs conducted an extensive investigation and filed detailed complaints in this Court ("Federal Action") and the Santa Clara County Superior Court ("State Action") asserting claims for violations of the federal securities laws and California law. Plaintiffs have reviewed and analyzed publicly filed documents regarding Hybrid, key internal documents produced by the Company in confirmatory discovery, as well as securities analysts' reports and documents produced by third parties. Plaintiffs also met several times with Hybrid's counsel to discuss the allegations of the complaints. In addition, plaintiffs' co-lead counsel consulted with experts in accounting and thoroughly researched the law pertinent to the claims and defenses asserted. Furthermore, the settlement negotiations themselves were difficult and protracted, extending for several months.
The proposed Settlement represents a substantial recovery in light of the distinct possibility that even if plaintiffs had ultimately obtained a sizeable judgment against Hybrid and the individual defendants after protracted litigation, Hybrid could be effectively judgment-proof, given its financial condition.
The $8.8 million component of the Settlement Fund from Hybrid's directors' and officers' liability insurance represents a substantial portion of that coverage. Further, given: (i) Hybrid's poor financial condition and its corresponding limited ability to contribute to a settlement (or respond to a judgment for a greater amount); (ii) the reality that Hybrid's insurance coverage would be further depleted by defense costs if the Litigation were to continue; and (iii) the individual defendants' adamant denial of any wrongdoing and concomitant refusal to contribute to a settlement, the cash component likely represents the best possible recovery for the Class. The 3 million shares of Hybrid common stock represents at current prices an additional $6.75 million in value to the Class. In addition, plaintiffs are to receive cooperation from the Settling Defendants with respect to the claims against Coopers.
Pursuant to this Court's Order dated June 16, 1999, the Notice of Pendency and Settlement of Class Action and Settlement Hearing (the "Notice") was mailed on or before June 25, 1999 to more than 3,800 potential Class members.(1) A Summary Notice of Proposed Settlement was published in the national edition of Investor's Business Daily on July 5, 1999. The Notice, which conforms in all respects to the requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA") contains a description of plaintiffs' allegations and the procedural history of the Litigation; a description of the terms of the Settlement, including the Settlement amount; the average gross distribution to be made to participating Settlement Class Members; the manner in which the Settlement Fund will be allocated among participating Settlement Class Members; the claims that will be released in the Settlement; the fact that the claims against Coopers will continue to be prosecuted; the deadline for filing objections to the Settlement and for filing proofs of claim; and the date, time and location of the Settlement hearing scheduled by the Court. The Notice further advises Settlement Class Members of their right to object to the Settlement by filing and serving written objections no later than July 26, 1999.
Despite the fact that Notices were mailed to over 3,800 Settlement Class Members, no objections to the Settlement or Plan of Allocation of Settlement Proceeds have been received by plaintiffs' counsel. The lack of any objections to the Settlement is not surprising. The Settlement represents the best possible recovery for the Class in light of the serious disputes between plaintiffs and the Settling Defendants concerning liability and damages, the limits of available insurance and Hybrid's financial condition. While plaintiffs believe that they could have ultimately prevailed had the case gone to trial, the Settling Defendants contend that they possessed absolute defenses to the claims alleged by plaintiffs, and were prepared to assert them to the very end. Accordingly, as demonstrated below and in the accompanying Declaration of Kimberly C. Epstein in Support of Plaintiffs' Application for (1) Approval of Settlement, (2) an Award of Attorneys' Fees and Reimbursement of Expenses, and (3) Approval of Plan of Allocation ("Epstein Decl."), the Settlement is fair, reasonable and adequate, and should be approved by this Court.
This memorandum also demonstrates that, under the circumstances of this case, pursuant to the PSLRA, §21D(g)(7) of the Securities Exchange Act of 1934, 15 U.S.C. §78u-4(g)(7), the Court should enter an order barring all claims for contribution against the Settling Defendants.
II. FACTUAL BACKGROUND AND HISTORY OF THE ACTION
A review of the factual background of the claims and procedural history of the Litigation is set forth in the Epstein Decl. For the sake of brevity, it is not repeated here and the Court is respectfully referred to the Epstein Decl. for a detailed discussion of the Litigation. See Epstein Decl., ¶¶6-20.
III. THE SETTLEMENT
A. Settlement NegotiationsThis Settlement was reached only after extensive, difficult and complex negotiations among plaintiffs' counsel and counsel for the Settling Defendants. Prior to March 3, 1999, the date the parties entered into a Memorandum of Understanding, the parties held numerous meetings both in person and telephonically to reach an agreement with the Settling Defendants to settle the Litigation. The settlement negotiations were difficult and structuring a settlement that would give investors both cash and Hybrid stock and further the potential that the Hybrid stock received in the Settlement would have value and growth potential was no easy task. These negotiations and the impediments to a fair settlement, including the defenses asserted by defendants to the merits of the case, the individuals' denial of liability and the impact of Hybrid's financial condition on the settlement discussions are discussed in greater detail in the Epstein Decl., ¶¶31-38.
B. Terms Of The SettlementThe Settlement consists of $8.8 million in cash, plus 3 million shares of Hybrid common stock. Moreover, under certain circumstances involving a sale, acquisition or merger of Hybrid, the Class could receive an additional 10% of the consideration for such a transaction (the "Settlement Fund"). A portion of the Settlement proceeds will be used for certain administrative expenses, including costs of printing and mailing notice to shareholders, cost of publishing a newspaper notice, payment of any taxes assessed against the Settlement Fund and costs associated with the processing of claims submitted. In addition, a portion of the Settlement Fund will be deducted to reflect the award by the Court to plaintiffs' counsel as attorneys' fees and for reimbursement of out-of-pocket expenses. The balance of the Settlement Fund (the "Net Settlement Fund") will be distributed according to the Plan of Allocation to Settlement Class Members who submit valid and timely proof of claim forms. Finally, as previously noted, the Class claims against Coopers have been preserved and are currently being prosecuted. The Settling Defendants have agreed to cooperate in the prosecution of the claims against Coopers.
C. The Plan Of AllocationThe Plan of Allocation provides that Settlement Class Members who purchased Hybrid common stock during the Class Period and either sold such shares during the Class Period or retained such shares after the Class Period are eligible for a distribution from the Settlement Fund. Specifically, for the shares purchased and sold during the Class Period, the claim per share is the difference between the price paid for the shares and the amount realized from the sale of any such sales. In contrast, for those shares retained at the end of the Class Period, the claim per share is the difference between the price paid for the shares and $2.188 per share (the closing price at the end of the Class Period). The Plan was developed in consultation with co-lead counsels' damage consultants and is a fair way to divide the Net Settlement Fund among Class members.
IV. THE STANDARDS FOR JUDICIAL APPROVAL OF CLASS ACTION SETTLEMENTS
It is established in the Ninth Circuit that "voluntary conciliation and settlement are the preferred means of dispute resolution." Officers for Justice v. Civil Serv. Comm'n, 688 F.2d 615, 625 (9th Cir. 1982). It is beyond question that "there is an overriding public interest in settling and quieting litigation," and this is "particularly true in class action suits." Van Bronkhorst v. Safeco Corp., 529 F.2d 943, 950 (9th Cir. 1976) (footnote omitted); see also Utility Reform Project v. Bonneville Power Admin., 869 F.2d 437, 443 (9th Cir. 1989).(2) In deciding whether to approve a proposed settlement of a stockholders' class action under Fed. R. Civ. P. 23(e), the court must find that the proposed settlement is "fair, adequate and reasonable."(3) As the Ninth Circuit has noted:
Although Rule 23(e) is silent respecting the standard by which a proposed settlement is to be evaluated, the universally applied standard is whether the settlement is fundamentally fair, adequate and reasonable. The district court's ultimate determination will necessarily involve a balancing of several factors which may include, among others, some or all of the following: the strength of plaintiffs' case; the risk, expense, complexity, and likely duration of further litigation; the risk of maintaining class action status throughout the trial; the amount offered in settlement; the extent of discovery completed, and the stage of the proceedings; the experience and views of counsel; the presence of a governmental participant; and the reaction of the class members to the proposed settlement.
Officers for Justice, 688 F.2d at 625 (citations omitted). Accord Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370, 1375 (9th Cir. 1993); Church v. Consolidated Freightways, Inc., [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶97,743 (N.D. Cal. 1993); In re Washington Pub. Power Supply Sys. Sec. Litig., 720 F. Supp. 1379 (D. Ariz. 1989), aff'd sub nom. Class Plaintiffs v. Seattle, 955 F.2d 1268 (9th Cir. 1992).The district court must exercise "sound discretion" in approving a settlement. Ellis v. Naval Air Rework Facility, 87 F.R.D. 15, 18 (N.D. Cal. 1980), aff'd, 661 F.2d 939 (9th Cir. 1981); Torrisi, 8 F.3d at 1375. However, where, as here, a proposed class settlement has been reached after arm's-length negotiation conducted by capable counsel, it is presumptively fair. See M. Berenson Co. v. Faneuil Hall Marketplace, Inc., 671 F. Supp. 819, 822 (D. Mass. 1987). Therefore, in exercising its discretion, "the court's intrusion upon what is otherwise a private consensual agreement negotiated between the parties to a lawsuit must be limited to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned." Officers for Justice, 688 F.2d at 625. The Ninth Circuit defined the limits of the inquiry to be made by the court in the following manner:
Therefore, the settlement or fairness hearing is not to be turned into a trial or rehearsal for trial on the merits. Neither the trial court nor this court is to reach any ultimate conclusions on the contested issues of fact and law which underlie the merits of the dispute, for it is the very uncertainty of outcome in litigation and avoidance of wasteful and expensive litigation that induce consensual settlements. The proposed settlement is not to be judged against a hypothetical or speculative measure of what might have been achieved by the negotiators.Id. (emphasis in original). As explained below, applying these criteria demonstrates that this Settlement warrants the Court's approval.
Moreover, "[t]he recommendations of plaintiffs' counsel should be given a presumption of reasonableness." Boyd v. Bechtel Corp., 485 F. Supp. 610, 622 (N.D. Cal. 1979). The presumption of reasonableness in this Litigation is fully warranted because the Settlement is the product of arm's-length negotiations conducted by capable counsel who are well experienced in securities litigation. M. Berenson Co., 671 F. Supp. at 822; Ellis, 87 F.R.D. at 18 ("the fact that experienced counsel involved in the case approved the settlement after hard-fought negotiations is entitled to considerable weight"); Manual For Complex Litigation, Third §30.42 (1995). Here, it is the considered judgment of experienced counsel - after investigation and extensive settlement discussions - that this Settlement for $8.8 million in cash plus 3 million shares of Hybrid common stock is a fair, reasonable and adequate settlement of this case.
In light of the complex and contested factual and legal issues giving rise to questions as to whether a more favorable economic result could or would be accomplished through a costly and prolonged trial on the merits and inevitable post-trial motions and appeals, the Settlement warrants this Court's approval. See Epstein Decl., ¶¶32-36.
V. THE SETTLEMENT IS FAIR, REASONABLE AND ADEQUATE
A. The Settlement Appropriately Balances The Risks Of Litigation And The Benefit To The Class Of A Certain RecoveryTo determine whether the proposed Settlement is fair, reasonable and adequate, the Court must balance against the continuing risks of litigation, the benefits afforded to members of the Class and the immediacy and certainty of a substantial recovery. Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975); Boyd, 485 F. Supp. at 616-17; In re Warner Communications Sec. Litig., 618 F. Supp. 735, 741 (S.D.N.Y. 1985), aff'd, 798 F.2d 35 (2d Cir. 1986). In the context of approving class action settlements, courts attempting to balance these factors have recognized "that stockholder litigation is notably difficult and notoriously uncertain." Lewis v. Newman, 59 F.R.D. 525, 528 (S.D.N.Y. 1973) (footnote omitted); seealso Republic Nat'l Life Ins. Co. v. Beasley, 73 F.R.D. 658 (S.D.N.Y. 1977).
A balance of these factors in this case supports approval of the Settlement, particularly in light of the risks presented by the state of the law under the PSLRA. One of the principal claims asserted against the Settling Defendants in the Federal Action is under §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs' burden of proof with respect to these claims has historically been quite significant, as plaintiffs must establish that each defendant was responsible for material omissions or misstatements, that the class relied on each omission or misstatement, that the omission or misstatements caused damages to the class, and that each defendant acted with scienter. TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). This burden was codified in the PSLRA, which requires a §10(b) complaint to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. §78u-4(b)(2).
Here, the Federal Action was subject to the provisions of the PSLRA. Although plaintiffs believe that their claims are strong and are confident as to the likelihood of success on the merits, surviving the Settling Defendants' motion to dismiss, and any motion for summary judgment that the Settling Defendants may have asserted if they lost on the motion to dismiss, or establishing liability at trial would by no means be guaranteed, especially in light of the heightened pleading requirements under the PSLRA. Indeed, defendants argued throughout the course of this Litigation that they lacked scienter and that plaintiffs' allegations were speculative and conclusory and not supported by sufficient facts to establish liability under §10(b).
Any motion or defense by the Settling Defendants to plaintiffs' complaint could be expected to challenge the sufficiency of plaintiffs' claims on these grounds. Plaintiffs believe they would have been able to demonstrate that the complaint states proper claims under the securities laws pursuant to which they were brought, and that those claims that required pleading with particularity were, in fact, pled with a sufficient factual basis to pass muster under the PSLRA and Rule 9(b) of the Federal Rules of Civil Procedure. However, plaintiffs had to recognize the possibility that their claims could have been dismissed, in whole or in part, at the motion-to-dismiss stage.
As discussed above, to prevail on the §10(b) claims, plaintiffs have the burden of establishing certain elements of liability. Plaintiffs would have to prove, inter alia, that the alleged misstatements were material, TSC Indus., 426 U.S. 438, and made with scienter, Ernst & Ernst v. Hochfelder, 425 U.S. 185. Accordingly, in order to prevail in this Litigation, plaintiffs would have to prove defendants participated in the public dissemination of misleading financial information, that the information was material to an investor in determining whether to invest in Hybrid stock, that the information would have materially affected the price of the stock, and that defendants misrepresented Hybrid's financial condition either with actual intent to deceive, manipulate or defraud, or that defendants were reckless in this regard. Although plaintiffs believe their claims are provable and that they could prevail at trial, further litigation to establish liability when defendants have denied any wrongdoing poses significant risks.1. Continued Litigation Poses Substantial Risk In Establishing Liability And Damages
Assuming that plaintiffs' claims survived defendants' anticipated motions to dismiss or for summary judgment after discovery was completed, at trial defendants would likely present evidence supporting their contention that they had a reasonable good-faith basis for believing that their statements were true and accurate when made and that, at most, they were merely reckless in their preparation of Hybrid's financial information. In addition, the Settling Defendants could be expected to assert their reliance on Cooper's audit of Hybrid's financial statements.
The risks of establishing liability posed by the conflicting testimony and evidence would be exacerbated by the following risks inherent in all shareholder litigation under §10(b):
ï The unpredictability of a lengthy and complex jury trial - witnesses could suddenly become unavailable or jurors could react to the evidence in unforeseen ways.Moreover, in addition to the risks discussed above, plaintiffs also faced the further risk that developments during future discovery might undermine plaintiffs' ability to establish liability. There was no certainty as to whether subsequent discovery would tend to further support or disprove the allegations of the complaint.
ï The risk that the jury would find that some or all of the misrepresentations and omissions were not material during part or all of the Class Period.
ï The risk that the jury would find that defendants reasonably believed in the appropriateness of their actions at the time and that plaintiffs failed to prove that defendants acted with scienter.
In addition, while plaintiffs believe that they would be able to establish that the Class suffered damages as a result of defendants' conduct, there was a real risk of not doing so because it would be expected that each side's experts would offer starkly contrasting testimony in support of their respective positions. Defendants' experts would likely contend, at a minimum, that much or all of the loss experienced by Class members was due to factors unrelated to defendants' conduct, thereby limiting plaintiffs' recovery. See Warner Communications, 618 F. Supp. at 744-45 (approving settlement where "it is virtually impossible to predict with any certainty which testimony would be credited, and ultimately, which damages would be found to have been caused by actionable, rather than the myriad of nonactionable factors such as general market conditions"); Chatelain v. Prudential-Bache Sec., 805 F. Supp. 209, 214 (S.D.N.Y. 1992); Behrens v. Wometco Enters., Inc., 118 F.R.D. 534, 542 (S.D. Fla. 1988), aff'd, 899 F.2d 21 (11th Cir. 1990). Thus, even if plaintiffs prevailed in establishing liability, additional risks would remain in establishing both loss causation and the existence of damages.
The general measure of damages for the claims brought under §10(b) of the Securities Exchange Act of 1934 is the "out of pocket" measure. Randall v. Loftsgaarden, 478 U.S. 647, 662 (1986) (citing Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir. 1975)); see alsoWool v. Tandem Computers, Inc., 818 F.2d 1433, 1436 (9th Cir. 1987). Under this measure, a defrauded buyer recovers the difference between the price paid for the security and the "fair value" of the security (value absent the fraud) as of the date of purchase. See Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1344 (9th Cir. 1976); Sirota v. Solitron Devices, Inc., 673 F.2d 566, 577-78 (2d Cir. 1982); seegenerally Arnold S. Jacobs, The Measure of Damages in Rule 10b-5 Cases, 65 Geo. L.J. 1093, 1099-1102 (1977).
Because "fair value" presumably will differ from the market price of the security (the latter being inflated by the alleged fraud), expert testimony is necessary in order to fix the amount - and indeed the existence - of actual damages. See, e.g., Sirota, 673 F.2d at 576-78. Such an evaluation often is based not only on stock price history but on other, more elusive factors as well, including corporate asset value, cash flow, income and growth prospects for the future, industry and economic trends, the quality of management, the nature and amount of liabilities and many other variables. Defendants' damages experts predictably would reach far different conclusions about true value than plaintiffs' experts. Therefore, in the unavoidable "battle of experts," it is impossible to predict with any certainty which arguments would find favor with the jury.
In summary, although plaintiffs believe that their case is meritorious and that they could ultimately prevail in establishing liability and damages, their counsel's experience has taught them how the above-mentioned factors can make the outcome of a trial extremely uncertain. Moreover, even if plaintiffs were to prevail at trial, risks to the Class remain. For example, in In re Apple Computer Sec. Litig., [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,252 (N.D. Cal. 1991), the jury rendered a verdict for plaintiffs after an extended trial. Based upon the jury's findings, recoverable damages could have exceeded $100 million. However, weeks later, the court overturned the verdict, entering judgment n.o.v. for the individual defendants and ordered a new trial with respect to the corporate defendant. In another case, the class won a jury verdict and a motion for j.n.o.v. was denied, but on appeal the judgment was reversed and the case dismissed. Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990). Seealso West Virginia v. Chas. Pfizer & Co., 314 F. Supp. 710, 743-44 (S.D.N.Y. 1970) ("It is known from past experience that no matter how confident one may be of the outcome of litigation, such confidence is often misplaced."), aff'd, 440 F.2d 1079 (2d Cir. 1971); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979) (reversing $87 million judgment after trial); Trans World Airlines, Inc. v. Hughes, 312 F. Supp. 478 (S.D.N.Y. 1970), modified, 449 F.2d 51 (2d Cir. 1971), rev'd, 409 U.S. 363 (1973) (overturning $145 million judgment after years of appeals). Therefore, careful consideration of the above risks further supports approval of the Settlement as fair, adequate and reasonable.
The immediacy and certainty of a recovery is a factor for the Court to balance in determining whether the proposed Settlement is fair, adequate and reasonable. E.g., Girsh, 521 F.2d at 157. Courts consistently have held that "[t]he expense and possible duration of the litigation are major factors to be considered in evaluating the reasonableness of [a] settlement." Milstein v. Huck, 600 F. Supp. 254, 267 (E.D.N.Y. 1984); see also Officers for Justice, 688 F.2d at 526; Boyd, 485 F. Supp. at 616-17; Bullock v. Administrator of Estate of Kircher, 84 F.R.D. 1, 10 (D.N.J. 1979). Therefore, the present Settlement, achieved early on, must be balanced against the expense and delay in achieving a larger result at trial. Young v. Katz, 447 F.2d 431, 433 (5th Cir. 1971).2. Balancing The Certainty Of An Immediate Recovery Against The Expense And Likely Duration Of Trial Favors Settlement
This case is obviously a complex one. The Settling Defendants have demonstrated a commitment to defend the case through and beyond trial, if necessary, and are represented by well-respected and capable counsel. Such a trial would occupy several attorneys on both sides for many weeks or months, and would require substantial expert testimony on both sides. The incursion of additional time and very substantial expense due to a trial would severely impact any eventual recovery. Moreover, a judgment favorable to plaintiffs would, inevitably, be the subject of post-trial motions and appeal, which could prolong the case even further. See, e.g., Warner Communications, 618 F. Supp. at 745 (delay from appeals is a factor to be considered). Therefore, delay, not just at the trial stage but through post-trial motions and the appellate process as well, could force members of the Class to wait years for any recovery, further reducing its value. Accordingly, where the relative strengths of the parties' claims and defenses have been recognized, early settlement of this Litigation before significant additional resources have been expended will benefit the Class.
Moreover, as the Ninth Circuit has made clear, the very essence of a settlement agreement is compromise, "'a yielding of absolutes and an abandoning of highest hopes.'" Officers for Justice, 688 F.2d at 624 (citation omitted).
"Naturally, the agreement reached normally embodies a compromise; in exchange for the saving of cost and elimination of risk, the parties each give up something they might have won had they proceeded with litigation ...."Id. (citation omitted); see also Ellis, 87 F.R.D. at 19 (as a quid pro quo for not having to undergo the uncertainty and expense of litigation, the plaintiffs must be willing to moderate the measure of their demands). Accordingly, the fact that the Class potentially could have achieved a greater recovery at trial is not dispositive and does not preclude the Court from finding that the Settlement is within a "range of reasonableness" that is appropriate for approval. E.g., Warner Communications, 618 F. Supp. at 745.
In plaintiffs' view, the inability of the Settling Defendants to withstand a greater judgment is an important factor mitigating in favor of the Settlement presently before the Court. There is a serious question regarding Hybrid's ability to pay a large judgment. At the time the parties were negotiating a settlement, Hybrid's financial condition was such that the Class' chances of recovery from the Company were problematic. Finally, the insurance coverage was a wasting asset because it was being used to pay defense costs. If a settlement were not achieved, there would have been substantially less insurance to pay any judgment.3. The Ability Of The Settling Defendants To Withstand A Judgment
B. The Parties Have Engaged In Sufficient Pretrial Proceedings To Identify The Strengths And Weaknesses Of Their Cases"'[T]he stage of the proceedings and the amount of discovery completed'" is a factor which the courts consider in determining the fairness, reasonableness and adequacy of a settlement. Warner Communications, 618 F. Supp. at 741 (citation omitted); see also Girsh, 521 F.2d at 157; Weinberger, 698 F.2d at 74; Ellis, 87 F.R.D. at 18; Boyd, 485 F. Supp. at 616-17.
Plaintiffs' counsel were able to conduct adequate document discovery and investigation of the matters alleged through a review of the Company's internal documents, third-party documents and discussions with defense counsel. Plaintiffs' counsel also consulted with experts to assist them in their analysis of the accounting issues.
In short, although the Litigation was relatively young when the Settlement was consummated, it had reached the stage where "the parties certainly have a clear view of the strengths and weaknesses of their cases." Warner Communications, 618 F. Supp. at 745; see also Ellis, 87 F.R.D. at 18; Boyd, 485 F. Supp. at 616-17. Therefore, sufficient information was before the parties and their counsel to permit them to carefully consider the adequacy of the Settlement in the context of their respective cases.
C. The Recommendations Of Experienced Counsel Heavily Favor Approval Of The SettlementExperienced counsel, negotiating at arm's length, have weighed the above factors and endorse the Settlement. As courts have stated, the view of the attorneys actively conducting the litigation, while not conclusive, "is entitled to significant weight." Fisher Bros. v. Cambridge-Lee Indus., Inc., 630 F. Supp. 482, 488 (E.D. Pa. 1985); Ellis, 87 F.R.D. at 18 ("the fact that experienced counsel involved in the case approved the settlement after hard-fought negotiations is entitled to considerable weight"). In approving a settlement, courts often focus on the "negotiating process by which the settlement was reached." Weinberger, 698 F.2d at 74.
This Litigation has been litigated by experienced and competent counsel on both sides of the case. The law firms representing plaintiffs are well known for their experience and success in class action securities litigation. The Settling Defendants' counsel, Morrison & Foerster, have an abundance of experience in this type of litigation. That qualified and well-informed counsel, operating at arm's length, endorse the Settlement as being fair, reasonable and adequate to the Class favors this Court's approval of the Settlement.
D. Reaction Of The Class Supports Approval Of The SettlementNotices of the Settlement were sent to over 3,800 potential members of the Class. The time period for objecting to the Settlement expired on July 26, 1999. As noted above, no objections to the Settlement have been registered. The absence of a single objection by Class members is an important factor in evaluating the fairness, reasonableness and adequacy of the Settlement and supports approval of the Settlement. Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974); Warner Communications, 618 F. Supp. at 746; Milstein, 600 F. Supp. at 267.
E. The Requested Contribution Bar Order Should Be Entered by the CourtThe PSLRA requires that claims for contribution against a settling defendant be barred as part of a partial settlement:
(7) Settlement discharge15 U.S.C. §78u-4(g)(7).(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 ....
Accordingly, a contribution bar order has been included as part of the form of judgment submitted herewith.
The Settlement is a very good result, given the presence of skilled counsel for all parties, the complexity and expense if this Litigation were to continue and eventually go to trial, the risks attendant in further litigation, the present benefit of the Settlement to all members of the Class, the deteriorating financial condition of Hybrid and the arm's-length negotiations themselves. Plaintiffs respectfully request that this Court approve the Settlement of this Litigation as fair, reasonable and adequate and enter a contribution bar order as requested.
DATED this 5th day of August, 1999.
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
KEITH F. PARK
KEITH F. PARK
600 West Broadway, Suite 1800
San Diego, CA 92101
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
REED R. KATHREIN
KIMBERLY C. EPSTEIN
222 Kearny Street, 10th Floor
San Francisco, CA 94108
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
STEVEN J. TOLL
KRISTOPHER A. KINKADE
999 Third Avenue, Suite 3600
Seattle, WA 98104
Co-Lead Counsel for Plaintiffs
DECLARATION OF SERVICE BY MAIL
PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interest in the within action; that declarant's business address is 600 W. Broadway, Suite 1800, San Diego, California 92101.
2. That on August 5, 1999, declarant served the NOTICE OF MOTION AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFFS' MOTION FOR FINAL APPROVAL OF SETTLEMENT AND PLAN OF ALLOCATION AND ENTRY OF BAR ORDER by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and this document was forwarded to the following designated Internet site at:
3. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 5th day of August, 1999, at San Diego, California.
DANELLE L. MCNERTNEY
1. See the Declaration of Cheryl Washington Re: A) Mailing of Notice of Pendency and Partial Settlement of Class Action and Settlement Hearing; B) Proof of Claim and Release Form; and C) Publication of Summary Notice, filed concurrently herewith.
2. The law always favors the compromise of disputed claims, Williams v. First Nat'l Bank, 216 U.S. 582, 595 (1910); In re Pacific Enters. Sec. Litig., 47 F.3d 373, 378 (9th Cir. 1995); MWS Wire Indus., Inc. v. California Fine Wire Co., 797 F.2d 799, 802 (9th Cir. 1986), including those asserted in stockholder class actions, Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982).
3. Officers for Justice, 688 F.2d at 625; Marshall v. Holiday Magic, Inc., 550 F.2d 1173, 1178 (9th Cir. 1977).
Source: Milberg Weiss website