Maley v. Del Global Technologies Corp.

Page 358

186 F.Supp.2d 358

Philip MALEY, Gene Waters and Patsy Waters, on behalf of themselves and all others (CM) similarly situated, Plaintiffs, v. DEL GLOBAL TECHNOLOGIES CORPORATION, Leonard A. Trugman, Michael H. Taber Seymour Rubin, Natan Bertman, David Michael and Deloitte & Touche LLP, Defendants.

No. CIV.A. 00 CIV 8495.

United States District Court, S.D. New York.

January 29, 2002.

OPINION APPROVING SETTLEMENT OF CLASS ACTION AND AWARDING ATTORNEYS' FEES

MCMAHON, District Judge.

The parties to this securities fraud class action submitted a proposed settlement to the Court for approval. For the reasons stated below, the settlement is approved, and the plaintiff's request for attorneys' fees is granted.

I. APPROVAL OF THE CLASS ACTION SETTLEMENT

The settlement is valued at approximately $11.5 million, consisting of $2,000,000 in cash (plus interest); a Promissory Note of $2,000,000 (plus interest); 2,500,000 shares of Del Global Technologies Corp. ("Del Global" or the "Company") common stock valued at $6,250,000¹; and warrants for 1,000,000 shares of Del Global common stock exercisable at a strike price of $2.00 per share, expiring six (6) years from the date of execution, valued at $1,250,000. This recovery has been negotiated on behalf of a class (the "Class") consisting of all persons or entities who purchased the common stock of Del Global during the time period from November 6, 1997 to November 6, 2000 inclusive (the "Class Period")² against a company that admittedly had serious financial reporting problems and was in a precarious financial condition. These negotiations were made without the benefit of any governmental or agency investigation or prosecution. The proposed settlement provides a return of approximately 41% of maximum damages, which has been estimated at approximately $28,000,000.

This action was commenced in November 2000 after intensive factual and legal investigation, including interviews with former employees of Del Global, some of whom provided documents; consultation with experts; a review of all of the Company's Forms 10-Q, 10-K and other filings with the Securities and Exchange Commission ("SEC") during the three-year Class Period; all of its news releases, all news articles regarding Del Global, and industry reports. Counsel made multiple appearances before the Court. Motions to dismiss were briefed fully. The settlement was achieved after extensive arms-length negotiations while the motions to dismiss were sub judice. These negotiations were conducted against a background of Del Global's precarious financial condition, its possible imminent bankruptcy, its de-listing from the NASDAQ national exchange, subsequent trading in the "pink sheets,"³ and its investigation — initiated after the within action was commenced — by the SEC.

Pursuant to the Court's November 13, 2001 Order, plaintiffs arranged for the mailing and publication of notice of the settlement to the Class. The Court found that the printed Notice and the Summary Notice constituted the best notice practicable and complied fully with the requirements of Rule 23 and of due process. A hearing occurred on January 28, 2002 to determine whether the proposed settlement is fair, reasonable, and adequate. The deadline for shareholders to object or opt-out was January 7, 2002.

A. THE STANDARDS FOR JUDICIAL APPROVAL OF CLASS ACTION SETTLEMENTS

"The law favors settlements of class actions no less than of other cases." In re Gulf Oil/Cities Serv. Tender Offer Litig., 142 F.R.D. 588, 590 (S.D.N.Y.1992) (citing Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir.1982)). In order to approve a class action settlement, a court must determine that the proposed settlement is "fair, reasonable and adequate." Weinberger, 698 F.2d at 73; In re Warner Communications Sec. Litig., 618 F.Supp. 735, 740-41 (S.D.N.Y.1985). Under Second Circuit law, the factors to be considered in determining whether a proposed settlement is fair, reasonable and adequate include: (a) the complexity, expense and likely duration of the litigation; (b) the reaction of the class to the Settlement; (c) the stage of the proceedings and the amount of discovery completed; (d) the risks of establishing liability; (e) the risks of establishing damages; (f) the risks of maintaining the class action through trial; (g) the ability of the defendants to withstand a greater judgment; (h) the range of reasonableness of the Settlement Fund in light of the best possible recovery; and (i) the range of reasonableness of the Settlement Fund to a possible recovery in light of all the attendant risks of litigation. City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir.1974); In re American Bank Note Holographics, Inc. Sec. Litig., 127 F.Supp.2d 418, 424 (S.D.N.Y.2001).

Furthermore, approval of the Settlement is within the Court's broad discretion. In re Painewebber Ltd. Partnerships. Litig., 171 F.R.D. 104, 124 (S.D.N.Y. 1997), aff'd, 117 F.3d 721 (2d Cir.1997). In its exercise of that discretion, a court must engage in a careful balancing act: "The Court must eschew any rubber stamp approval in favor of an independent evaluation, yet, at the same time, it must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case." Grinnell, 495 F.2d at 462. Grinnell also instructs:

It is not necessary in order to determine whether an agreement of settlement and compromise shall be approved that the court try the case which is before it for settlement ... Such procedure would emasculate the very purpose for which settlements are made. The court is only called upon to consider and weigh the nature of the claim, the possible defenses, the situation of the parties, and the exercise of business judgment in determining whether the proposed settlement is reasonable.

Id. at 462 (citing Neuwirth v. Allen, 338 F.2d 2 (2d Cir.1964)).

Consideration of the above factors in this case weighs in favor of final approval of the proposed settlement.

B. THE PROPOSED SETTLEMENT MEETS THE STANDARDS FOR APPROVAL OF CLASS ACTION SETTLEMENTS

1. The Complexity, Expense and Likely Duration of the Litigation Weigh In Favor Of Approving the Settlement

This case qualifies as complex, both in establishing liability and in proving damages. Plaintiffs asserted claims under the Federal Securities Laws and common law extending over a three-year class period from November 6, 1997 through November 6, 2000. To support these claims, plaintiffs would have to establish that Del Global's publicly reported financial results were materially overstated in violation of Generally Accepted Accounting Principles ("GAAP") throughout the three-year period.

Moreover, the claims were asserted not merely against the Company and its chief executive and financial officers, but against outside directors who had either held management positions during the Class Period or were members of Del Global's audit committee, or against Del Global's outside auditor Deloitte & Touche ("Deloitte"). Each of these defendants had different relationships and connections to the alleged fraud. Added to the complexity of the case was the prospect of a long and contentious litigation. All five Del Global locations were implicated in the alleged improper practices, necessitating testimony of numerous witnesses in the New York locations and in Chicago.

Further, the case required the engagement of both accounting and damages experts. In assessing the merits of the Settlement, Plaintiffs' Counsel considered the wide-ranging factual and legal questions that were vigorously disputed in the Action. Plaintiffs' Counsel were aware that many of the defenses that had been or would be asserted by the various Defendants had some possibility of success. This uncertainty made the outcome of the case problematic, especially when weighed against the immediate and tangible benefits conferred by the Settlement.

Moreover, further discovery in this case would have been complex and time consuming given that plaintiffs were likely to encounter hostile witnesses who would not admit wrongdoing. Although plaintiffs had already engaged in extensive investigation at the time of the settlement — including review of numerous documents and interviews with former employees of the Company — a great deal more disclosure, both factual and expert, was anticipated. Summary judgment motions were possible, extensive trial preparation was inevitable, and post-judgment appeals were highly likely. All of the foregoing would have extended the case and delayed the ability of the Class to recover for years.

Finally, the Action involves difficult issues of law and fact. For example, complex accounting questions relating to revenue recognition and inventory were raised by the complaint. Many of these issues would require proof through expert testimony concerning such issues as proper accounting practices, the degree to which Class Members suffered damages and the extent to which the decline in the value of Del Global shares was attributable to general economic conditions affecting Del Global. The expenses of continued litigation would further burden any recovery obtained for the Class, that is assuming Plaintiffs recovered more than the Settlement now before the Court, if they were to recover at all. Defendants' expenses, which would consume Del Global's insurance, would be correspondingly high.

Settlement at this juncture results in a substantial and tangible present recovery, without the attendant risk and delay of trial. These factors weigh in favor of the proposed Settlement. As the court in Slomovics v. All for a Dollar, Inc., 906 F.Supp. 146, 149 (E.D.N.Y.1995), concluded: "The potential for this litigation to result in great expense and to continue for a long time suggest that settlement is in the best interests of the Class." Id. (Citation omitted). The same reasoning applies here. Delay, not just at the trial stage but...