The opinion of the court was delivered by: BECKER
EDWARD R. BECKER, J. District Judge
Approximately two years after we certified a class in this securities fraud action, Entin v. Barg, 60 F.R.D. 108 (E.D.Pa. 1973), and after extensive discovery and intensive settlement negotiations conducted under our auspices, David Berger, P.A., and Richard D. Greenfield, Esquire, class counsel, and the defendants have entered into a Stipulation of Settlement. We must now determine whether to approve the settlement, a task assigned to us by Fed.R.Civ.P. 23(e). Since we have decided to grant approval, we also must reach the question of the amount of fees and expenses to be awarded to class counsel from the settlement fund, and approve appropriate disbursements from the settlement fund to cover the expenses of the Settlement Committee.
This controversy arose out of a public offering of 400,000 shares of common stock of Aldon Industries, Inc. ("Aldon"), a manufacturer and distributor of carpets, in February, 1969, at an offering price of $20. On March 27, 1969, plaintiff George Entin ("Entin") purchased 200 shares of Aldon, which was then being traded on the American Stock Exchange, at $22 per share. Entin sold his Aldon stock on July 15, 1969, for $12.75 per share. Aldon stock continued to decline, reaching $3.675 in December 1970.
The defendants are Aldon; Herbert Barg, its board chairman and chief executive officer; Bernard Barg, its president; Alvin Barg, its vice-president; Marilyn and Elaine Barg, trustees of a substantial block of Aldon stock, and Arthur Andersen & Co., the company's auditor.
The gravamen of the complaint is that the registration statement and prospectus issued in connection with the public offering, and certain reports and financial statements released subsequently, showed Aldon's financial condition to be stronger than it actually was because they contained misrepresentations and omissions of material facts in violation of sections 10(b) and 13(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(a) and rules 10b-5, 13a-3 and 13a-13 promulgated thereunder.
The complaint furthermore asserted that the misrepresentations and omissions were part of a continuing conspiracy and common scheme among all of the defendants to inflate the price of Aldon stock. On the basis of that claim, plaintiff Entin asked the Court to certify a class of all the purchasers of Aldon's stock between February 13, 1969, and February 1, 1970. On June 19, 1973, after hearing, we granted the motion for class action determination, adopting the class definition proposed by the plaintiff.
By order dated July 10, 1975, we extended the class period to March 31, 1970, for settlement purposes only.
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.
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 ...