Plaintiff asserts that the total damage suffered by class members was a maximum of $6,530,000. Plaintiff arrives at this figure by taking December 31, 1970, the date on which the price of Aldon stock reached a low point of $3.675 as the cut off point for damages, thus calculating that each share of stock offered at $20 in the public offering suffered a market decline of $16.325 by December 31, 1970. The $6,530,000 is the product of $16.325 (the amount of decline) and 400,000 (the number of shares sold in offering). This figure is merely an outside "guesstimate" of the damages suffered, however, since some class members, including Entin, purchased their stock at a price in excess of $20, and some sold their stock after March 31, 1970 (so that the new purchaser does not qualify as a class member) but before the price dipped to $3.675. We shall, however, use this liberal "guesstimated" figure in weighing potential class recovery against the proposed settlement amount.
The Stipulation of Settlement, which was entered into on July 8, 1973, provides that the defendants shall pay to the class a total of $1.1 million, the settlement figure we recommended.
The defendants have paid that amount into an escrow fund, which has been earning interest since January 14, 1975. Excluding interest, the gross settlement amount is 17% of the approximated damage figure.
The Stipulation of Settlement provides that after plaintiff's counsel fees and litigation costs, and the costs of administration of the settlement, including the costs of sending notice of the settlement offer to class members, are deducted from the fund, the remainder shall be distributed to the class members who have filed claims, according to their provable loss. The provable loss of class members shall be measured in two ways. For those members who sold their Aldon stock by December 31, 1970, their provable loss is to be measured by the difference between their purchase and sale prices. For those class members who did not sell their stock by December 31, 1970, their provable loss is to be the difference between their purchase price and the closing price of Aldon stock on the American Stock Exchange on December 21, 1970 ($3.675).
No class member filed objections to the settlement and none appeared at the hearing held, pursuant to notice, on November 15, 1975, to consider the settlement approval and counsel fees. One class member filed an objection to an award of a counsel's fee in excess of 33% of the settlement amount, unless the value of counsel's time was in excess of 20% of the settlement amount, though he did not appear at the hearing. The hearing was held as scheduled on November 15, and we received evidence in support of settlement approval and counsel fees. Because a number of class members had received late notice of the settlement proposal,
we ordered additional notice and scheduled a second hearing approximately six weeks later to give these class members an opportunity to object. However, no objections were filed by the late notice recipients, and on the date scheduled, no class members appeared to object; hence, the second hearing was not formally held.
II. Notification Program
In accordance with the mandate of Fed.R.Civ.P. 23(c)(2) and the Supreme Court in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 173, 40 L. Ed. 2d 732, 94 S. Ct. 2140 (1974), that class members should receive "the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort," Rule 23(c)(2), we ordered an extensive program of individual mailings and newspaper publications. This was a function not only of customary practice but also of our knowledge that a not inconsiderable number of Aldon shares had been held by brokerage houses in "street names" and that in the intervening years a large number of brokerage houses had failed. After the Court of Appeals in Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975), reemphasized the importance of adequate notice, we reviewed the results of the initial individual mailings and publication program and ordered that a finding service be engaged to find current addresses for potential class members whose initial notices were returned by the Postal Service as undeliverable.
The original mailing list of approximately 3,469 potential class members was compiled by using 1970 and 1971 year-end shareholder lists (with addresses updated, where possible, from the 1974 year-end shareholder list), supplemented by the actual transfer records of both transfer agents for Aldon stock from the time of the public offering through one month beyond the class period. The settlement committee, on or about July 18, 1975, sent notice and proof of claim forms to the 3,469 potential class members on the list. Where the record owner was a brokerage firm which appeared not to be the beneficial owner of the stock, an additional form of notice was included, directing the recipient (1) to mail copies of the notice and proof of claim forms to the beneficial owners; (2) to certify to the Court that the required mailing was done; and (3) to report to the Court the names and current addresses of the beneficial owners. The post office returned 598 of the notices as undeliverable. The Shareholder Communications Corporation was then engaged to attempt to correct the addresses of those potential class members whose notices were returned by the post office. Shareholder Communications provided corrected addresses for 424 or 71% of these 598 potential class members.
A second, later mailing was made to these persons.
In addition, a long form of notice containing, among other information, the history of the litigation, instructions on how to file a claim, and the time and place of the original hearing, was published once a week for two successive weeks in the national and regional editions of the Wall Street Journal and once in both the Philadelphia Inquirer and Philadelphia Bulletin. A short form of notice, which gave inter alia, the time and place of the hearing and the address to write for further information, was published twice in the New York Times, Chicago Tribune, Los Angeles Times and Atlanta Journal, and once in both the Philadelphia Inquirer and Philadelphia Bulletin. As a result of the two mailings and the publication program, a total of 1,512 valid claims, representing 319,333 shares and claiming damages of $3,410,863.23, have been filed. The gross settlement amount is thus one third of the amount of claimed damages.
We find this three stage notification program to constitute the "best notice practicable under the circumstances," and that the Rule 23 requirements were thus satisfied.
III. The Merits of the Settlement Offer
A. Standards to be Used in Determining Whether to Approve the Settlement
In evaluating the adequacy of a proposed settlement, we must apply a balancing test, weighing the likelihood of success and the amount of the potential recovery if the case continued against the amount offered in the settlement. See Bryan v. Pittsburgh Plate Glass Co., 494 F.2d 799, 801 (3d Cir. 1974); State of W. Va. v. Charles Pfizer & Co., 314 F. Supp. 710, 740-41 (S.D.N.Y. 1970), aff'd, 440 F.2d 1079, 1085 (2d Cir. 1971); cf. Protective Committee v. Anderson, 390 U.S. 414, 424, 20 L. Ed. 2d 1, 88 S. Ct. 1157 (1968). The Court of Appeals in Girsh noted with approval a list of some of the factors to be considered which had originally been enumerated by the Second Circuit in City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974). They are 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 . . .; (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation . . .
Girsh, 521 F.2d at 157; Grinnell, 495 F.2d at 463.
Other general principles in this area are that the judge must not turn review of the settlement into a hearing on the merits. See Newman v. Stein, 464 F.2d 689, 691-92 (2d Cir. 1972). The Court need not "balance the scales with the nicety of an apothecary ". Glicken v. Bradford, 35 F.R.D. 144, 152 (S.D.N.Y. 1964), or "substitute its business judgment for that of the parties; . . ." but rather must only determine whether the settlement falls within the reasonable range of fairness to the class. See Newman, 464 F.2d at 693 (2d Cir. 1972). Finally, the view of experienced counsel as to the merits of the settlement is "entitled to considerable weight." See State of W. Va. v. Charles Pfizer & Co., 314 F. Supp. at 743.
With these basic principles in mind, we turn to the case and the settlement proposal now before us.
B. Application of the Basic Principles
1. Risks Involved in Establishment of Liability
To establish liability in a 10b-5 action, plaintiff must not only show misrepresentations and omissions, but also that the misrepresentations and omissions were material. The test of materiality is whether "a reasonable investor might have considered them [misrepresentations and omissions material] in the making of [the investment] decision." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972).
To establish a claim, plaintiff, of course, must first establish that there actually were misrepresentations and omissions. In this case, several of plaintiff's claims deal with the manner in which Aldon presented certain financial data in its prospectus, including a certain change in the fiscal year. The papers filed by defendants, particularly by the auditors, reflect a sharp dispute on this point, and we perceive that plaintiffs might have serious difficulty in establishing misrepresentation in this area.
Another group of plaintiff's allegations deal with the failure to reveal that the prime interest rate had increased within the sixty day period prior to the offering, which would have an adverse impact on Aldon's earnings prospects. The prime interest rate is public information, which is readily available to investors in newspapers and from other sources, and its short term effect on earnings of highly leveraged companies is common knowledge. Thus, there might be a question as to whether the prime interest rate and its economic effect are facts that must be repeated in every prospectus and registration statement, or fall into the area of commonly known facts and information about the world which an issuer of securities may properly assume are known by investors and which need not be repeated in each prospectus and registration statement that is written. Thus, these omissions might not have provided a firm basis for liability either.
Another set of plaintiff's allegations relate to putative changes in consumer preferences, the disclosure of which might be argued to be of doubtful value. While most of plaintiff's claims, including his major claims, relating to alleged nondisclosure or misleading disclosure of financial data, the inventory accumulation, proposed construction and existing plant obsolescence are subject to problems of proof rather than of legal sufficiency, it is our view, from our review of the documents and our many conferences in the case, that any trial would have been extremely lengthy and with an uncertain outcome.
To establish the liability of defendant Arthur Andersen & Co., plaintiff would have to have shown scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976). Plaintiff therefore would have faced the difficult task of proving that a large accounting firm acted wilfully. Additionally, plaintiff might have had to convincingly present to the finder of fact complex and technical questions of accounting principles and procedure in order to prove Arthur Andersen's wrongdoing. The risks inherent in litigating each and every one of these questions are obvious.
Finally, in order to prove the allegation that the individual defendants and Arthur Andersen conspired to perform the allegedly violative acts, plaintiff would have to show that each alleged conspirator participated in the violative act or either entered into agreement with or gave assistance to the primary wrongdoers.
Particularly in the cases of Marilyn and Elaine Barg and Arthur Andersen, there is a significant risk that plaintiff would have been unable to establish the requisite degree of participation.
Given these risks alone, we would find a recovery of 17% of the amount of the "guesstimated" alleged damage (and probably a much higher percentage of the true figure if it could be known) and about one third of the amount of the damages suffered by claim-filing class members to be within the range of reasonableness. The risks involved in proving causation, to which we now turn, serve to reinforce this view.
2. Risks Involved in Proving Causation and Damages
Even if liability were shown at trial, defendants would have argued that the "actual damages [suffered] on account of the act complained of," Securities Exchange Act of 1934, § 28(a), 15 U.S.C. § 78bb(a), is the amount by which the price of Aldon stock was inflated due to the alleged misrepresentations and omissions, not the entire decline in price, since the securities issuer who violates the antifraud provisions of the securities laws does not hold his victim-purchaser harmless against losses due to general market declines. See Securities Act of 1933, § 15 U.S.C. § 77k(e); Bleznak v. C.G.S. Scientific Corp., 61 F.R.D. 493 (E.D.Pa. 1974); cf. Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S. Ct. 913, 25 L. Ed. 2d 93 (1970); Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544, 586 (E.D.N.Y. 1971); Fox v. Glickman, 253 F. Supp. 1005, 1010 (S.D.N.Y. 1966). Using this measure of damages, one of the defendants argued at one point during settlement negotiations that the proper measure of recovery, if liability were shown, would be the amount of decline in market price following immediately after the March 1970 press release, or $.375 per share. According to this theory, the total class recovery would be limited to $150,000 ($.375 x 400,000 shares). Although we intimate no view respecting this theory,
it does serve to highlight the risks which plaintiff would have faced at trial on the questions of causation and proof of damages. The risk is certainly substantial that the full recovery at trial would have only been a fraction of our $6,530,000 base figure.
Further evidence that plaintiff would have had difficulty establishing causation is the fact that there was a general decline of similar magnitude in the prices of other carpet industry stocks during the relevant period,
suggesting that general market conditions were responsible for the decline in Aldon stock. The possibility that recovery could be limited to as little as $150,000, even if liability were shown, makes the $1.1 million settlement amount look even more reasonable.
Reviewing the factors enumerated in City of Detroit v. Grinnell Corp., supra, approved in Girsh, we have found that the preponderance thereof strongly militate in favor of approval of this settlement: the complexity, expense, and likely duration of the litigation; the reaction of the class to the settlement (no class members have objected); the risks of establishing liability; the risks of establishing damages; and the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation. Still another criterion, that set forth in State of W. Va. v. Charles Pfizer & Co., supra, is met, for we note that eminent class counsel has recommended the settlement, thus constituting an independent factor supporting a finding of reasonableness. Accordingly, we find the settlement to be reasonable, and we approve it.
IV. Approval of Disbursements for Plaintiff's Counsel Fee and Litigation Expenses, and the Costs of the Settlement Committee
David Berger, P.A., and Richard D. Greenfield, Esquire, have jointly petitioned the Court for a total counsel fee of $360,000. The Stipulation of Settlement provides that plaintiff's litigation expenses shall also be paid out of the settlement fund. David Berger, P.A., has also petitioned the Court for reimbursement of $37,609.25 in expenses, and Richard D. Greenfield has petitioned for reimbursement of $1,936.89. Additionally, the Court has before it a petition of the Settlement Committee for reimbursement of costs of $45,209.06.
The Committee has also petitioned for allowance of the fees of the disbursing agent, the precise amount of which will not be known until the time of distribution.
After a hearing at which no objections were raised,
we award class counsel a fee of $258,447.38, plus $4,240.00 to cover time spent on settlement administration. The petitions for litigation expenses are approved in full. The Settlement Committee shall also be reimbursed in full,
including the costs of the disbursing agent.
The standard for determining the amount of the fee to be awarded to plaintiff's counsel in a class action settlement is set forth in Lindy Brother Builders, Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973). The Court there specified four factors to be considered in determining the fee:
1. the number of hours spent in specific categories of legal work by individual attorneys;
2. the reasonable hourly rate for the time spent by each particular attorney when engaged in the various activities;