ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 72-2035) (D.C. Civil No. 73-652).
Van Dusen, Adams and Garth, Circuit Judges.
On this appeal, Petitioner Frackman challenges the district court's order dismissing her objections and approving a settlement agreement. The district court, in its order of June 25, 1974, approved the settlement of a class and derivative action alleging violations of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), the Investment Companies Act of 1940, 15 U.S.C. § 80a-33b and 35, the Investment Advisors Act, 15 U.S.C. § 80b-6, and Rule 10b-5 of the Securities and Exchange Commission. Because we believe that the record before the district court was not sufficiently developed and cannot, therefore, support the district court's approval of the settlement agreement we remand to the district court for further proceedings as indicated in this opinion.
The present appeal involves two cases which were consolidated by the district court for purposes of discovery and settlement.*fn1 Girsh v. Jepson was commenced as a class action on October 18, 1972, on behalf of all persons who purchased shares of the New America Fund between September 20, 1968, the date of the public offering, and December 31, 1790. Named as defendants in the Girsh action were: (1) the New America Fund, Inc. (hereinafter, "Fund"), a Delaware corporation, whose common stock is registered with the Securities and Exchange Commission and traded on the over-the-counter market;*fn2 (2) Fund Management Corporation, an investment advisor; (3) Portfolio Management Corporation, the parent corporation of Fund Management Corporation; (4) various individual defendants who were officers, directors and shareholders in the above named corporate defendants; and, (5) Price Waterhouse and Company, the Fund's auditor. The complaint alleged in Count 1 violations of Section 10(b) of the Exchange Act and Rule 10b-5 in that defendants filed a "false and misleading prospectus with the Securities and Exchange Commission." In Count 2, plaintiffs alleged violations of the Investment Company Act of 1940, Sections 34(b) and 36, in that among other things, ". . . Defendants violated their fiduciary duty with respect to compensation for services. . . ." In Counts 3 and 4, certain plaintiffs sought derivative recovery on behalf of the Fund based upon "Defendants' usurpation of [a] valuable business opportunity. . . ."
The complaint in Helfand v. New America Fund, Inc., the case consolidated with Girsh v. Jepson, was filed on March 23, 1973. The defendants were identical to those named in the Girsh complaint. The Helfand case was brought as a derivative action alleging violations of the Investment Company Act of 1940, Sections 34(b), 36(a) and (b); the Investment Advisers Act, Section 206; and, the Exchange Act, Section 10(b) and Rule 10b-5. Specifically, the complaint alleged, among other things, that the defendants had charged the Fund excessive advisory fees, over-valued the Fund's assets, invested in highly speculative securities without adequately disclosing the risk involved, and usurped valuable business opportunities.
Soon after discovery commenced, the parties entered into settlement negotiations. These negotiations resulted in a "Stipulation of Settlement" which was filed in the district court on November 9, 1973. On November 21, 1973, the district court entered an order constituting ". . . a class action . . . for the purpose of effectuating the settlement of the cases pursuant to the Stipulation of Settlement. . . ."*fn3 The order set March 20, 1974, as the date for a hearing on the fairness and adequacy of the proposed settlement. The order directed that individual notice of the settlement hearing be sent by mail to all record holders of Fund shares as of the close of business on October 12, 1973. Concluding that the identity of class members who had ceased to be shareholders prior to October 15, 1973, ". . . cannot be determined without unreasonable expense and delay . . .," the district court directed notice to these individuals as follows: individual notice by mail to ". . . persons who were shareholders of record of the Fund and entitled to vote at the annual meetings of shareholders of the Fund held during the calendar years 1969 and 1970 . . .;" to those whose names did not appear on the annual meeting list, the court directed ". . . notice by publication . . . in the Eastern, Middle Western and Pacific Coast editions of The Wall Street Journal on two business days per week in each of two consecutive calendar weeks. . . ."
The Stipulation of Settlement provides for the payment of the following amounts by the following defendants: (1) Fund Management Corporation and its parent corporation agreed to pay $55,000 to the Fund and to reduce from its investment advisor's fee $12,500 quarterly, ". . . for as long as FMC remains the investment advisor to the Fund but in no event longer than 46 consecutive quarterly periods;" (2) Maxwell Gluck, a major shareholder, agreed to pay $10,000 to the Fund ". . . in settlement of all claims made against him in the Complaints or which might have been made by the plaintiffs or the Fund under any applicable law including particularly the provisions of Section 16(b) of the Securities Exchange Act of 1934;" (3) the Fund agreed to pay $400,000, less counsel fees and costs, to Fund Claimants (purchasers of Fund stock during the period covered by the settlement agreement).
On March 1, 1974, objector/appellant Frackman indicated her intention to object and moved in the district court to extend the time to file papers in support of her objections to the proposed settlement. By order of March 4, 1974, the district court permitted an extension until March 11, 1974. Thereafter, on March 11th, Frackman filed her objections to the proposed settlement specifying, among other grounds, the inadequacy of the settlement fund, the sparseness of the record, and the failure of certain defendants to contribute toward the settlement.*fn4
On the same date, March 11, 1974, Frackman moved to continue the date fixed for the settlement hearing ". . . to enable proper preparation for that hearing. . . ."*fn5 This motion was denied by the district court on March 20, 1974, at which time the settlement hearing was held.*fn6 On June 25, 1974, the district court entered a Memorandum and Order approving the settlement agreement and dismissing Frackman's objections. As previously indicated, we believe that a remand is required and we so order.
The decision of whether to approve a proposed settlement of a class action is left to the sound discretion of the district court.*fn7 Some of the factors which are relevant to a determination of the fairness of a settlement were listed by the Second Circuit in City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974) as follows:
". . . (1) the complexity, expense and likely duration of the litigation . . .; (2) the reaction of the class to the settlement . . .; (3) the stage of the proceedings and the amount of discovery completed . . .; (4) the risks of establishing liability . . .; (5) the risks of establishing damages . . .; (6) the risks of maintaining the class action through the trial . . .; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery . . ...