The opinion of the court was delivered by: SHAPIRO
I. Facts and Procedural History
Plaintiff, on behalf of a class of selling shareholders, brought this action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a) (the "Act"), and Pennsylvania common law, to recover damages for misrepresentations depreciating the financial condition of C.I. Realty Investors, a real estate investment trust (the "Trust"), and keeping the market price of its shares artificially low. On May 19, 1986, a hearing in accordance with Fed.R.Civ.P. 23(e) was held on plaintiff's motion to approve the settlement and for attorneys' fees and expenses. Upon full consideration of the written submissions and oral argument in support of the settlement, the court approves the settlement as fair, reasonable and adequate to the class and grants counsel for the class' petition for fees and costs in part.
On March 11, 1981, plaintiff filed a complaint on behalf of himself and other shareholders of the Trust (other than the defendants and their affiliates), who acquired shares of the Trust prior to November 29, 1977 and sold those shares during the period from November 29, 1977 through August 30, 1979.
Plaintiff had purchased shares in April, 1972, and sold them in April, 1978. Defendant, C.I. Planning Corp., a subsidiary of defendant City Investing Company, was the advisor to the Trust during that time and until August 30, 1979. Plaintiff alleged that between November 29, 1977 and August 30, 1979, defendants, insiders and controlling persons with respect to the Trust, failed to reveal certain favorable real estate appraisals and estimates of increased rental income from prospective lease renewals to depress the market price of its shares and profit from the purchase of Trust shares.
Defendants moved for summary judgment on two grounds: (1) that the action was time-barred, and (2) that plaintiff failed to state a cause of action because disclosure of the appraisals and the estimates was adequate. In denying without prejudice defendants' claim that the action was time-barred, the court held that a two-year limitations period applied and that there was a factual issue as to whether plaintiff knew or should have known the allegedly actionable facts on or before March 11, 1979 (two years prior to suit). The court also denied defendants' claim that plaintiff failed to state a cause of action because of factual issues as to the adequacy of disclosure.
After discovery with regard to plaintiff's motion for class certification, briefing and argument, plaintiff's motion that the action be maintained as a class action, with Charles Fickinger as class representative, was granted on July 3, 1984; the court certified a class of "all C.I. Realty Investors (Trust) shareholders, other than defendants and their affiliates, who acquired Trust shares prior to November 29, 1977 and sold their shares during the period November 29, 1977 through April 4, 1978" (the "Class"). The court certified the class conditionally in order to determine the following four issues:
1) whether defendants failed to disclose adequately with regard to the Trust office buildings' negotiated increases in rentals and consequent appreciation in value in the November, 1977 Fiscal 1978 Second Quarter Report and/or the January 31, 1978 Fiscal 1978 Third Quarter Report;
2) whether defendants failed to disclose a real estate appraisal prepared March 15, 1978 and a rental projection prepared on or after March 31, 1978.
3) whether said failures to disclose caused the value of the shares to be depressed to the benefit of the defendants and the detriment of the plaintiff class; and
4) whether defendants' failure to disclose was fraudulently concealed until on or after March 11, 1979.
Plaintiff engaged in discovery and settlement negotiations with defendants throughout 1985 and early 1986. The court assisted at the request of the parties on some occasions. The parties reached an original settlement agreement on July 3, 1985. Under the settlement agreement originally proposed, defendants were to deposit $ 600,000 in cash in escrow with Provident National Bank within ten days of entry of approval of the settlement. This amount, and the interest thereon, would comprise the Settlement Fund. Plaintiff and the members of the class agreed to look solely to the Settlement Fund for satisfaction of all their claims against defendants, including but not limited to, claims for damages, interest and attorneys' fees. Class members filing Valid Proofs of Claim were entitled to receive from the Settlement Fund their provable loss (their actual out-of-pocket loss, i.e., the difference between the price at which they purchased Trust shares held as of November 29, 1977 and the price at which they sold such shares during the class period) or $ .50 per share, whichever was less. In the event the maximum allowable recovery of all qualified claimants exceeded the net Settlement Fund, qualified applicants were to receive a pro rata share. The settlement agreement also provided that before distribution of the Settlement Fund to qualified claimants, plaintiff's counsel were to receive from the Settlement Fund their costs and expenses incurred (not in excess of $ 50,000) and such attorneys' fees as the court would allow (not in excess of $ 200,000). In the event the maximum allowable recovery was less than the Settlement Fund, the balance was to be returned to defendants.
On July 3, 1985, the court directed that notice of the proposed settlement be sent to the class and published twice, in two successive weeks, in The Wall Street Journal. The court also ordered that all brokers or nominees holding shares of C.I. Realty Investors of record for members of the class who had not previously supplied counsel for the class with the names and addresses of such class members forward the notice to the beneficial owners of those shares or supply counsel for the class with a list of the names and addresses of such beneficial holders.
In accordance with the court's Order, counsel for the class sent notice to all class members that a hearing to determine whether the proposed settlement was fair, reasonable and adequate would be held on September 20, 1985. The notice stated that any member of the class could appear and be heard at the hearing to object to the settlement. The notice was also published in The Wall Street Journal. Proof of mailing and publication of the notice was filed with this court on August 9, 1985 and supplemented by a status report filed with the court on November 8, 1985.
The scheduled hearing was held before The Honorable Thomas N. O'Neill, Jr. on September 20, 1985. No objections were filed; no one appeared to testify. On November 8, 1985, counsel for the class filed a supplemental affidavit concerning class administration: were the court to approve the settlement agreement, the funds distributed to the class would have been no more than $ 10,192.50; claims representing in excess of 250,000 shares would have been rejected because they were not sold at an actual loss.
On December 4, 1984, upon review of the supplemental affidavit concerning claims' administration, the court ordered counsel for the class to submit to the court representative market prices of the shares of stock from April, 1972 through April, 1978. Upon examination of the fluctuation of the stock, the court ascertained that the reason for the nominal recovery of the class was that virtually no shares purchased between May, 1974 and November, 1977 were sold at a loss during the class period so that the actual loss requirement precluded a significant portion of the class from participating in the settlement fund. Consequently, the court concluded that it would not approve the settlement agreement and so informed the parties on January 29, 1986.
On April 4, 1986, the parties entered into a revised settlement agreement. Under the revised settlement agreement, defendants agreed to pay all shareholders who sold their shares during the class period in an amount equal to $ .50 per share, regardless of whether the sale price was above or below the purchase price. In addition, counsel for the class agreed to reduce their requested attorneys' fees from $ 200,000 to $ 135,000. In all other respects, the settlement agreement remained the same.
On April 8, 1986, a hearing was held on the revised proposed settlement agreement. Because the revised agreement removed the actual loss limitation on recovery and enabled all members of the class to participate in the settlement fund, the court gave its preliminary approval to the revised settlement agreement (the "Settlement Agreement").
On April 10, 1986, the court directed that notice of the proposed settlement be sent to the class and published in the national edition of The Wall Street Journal. Accordingly, on April 16, 1986, all class members were mailed notice of a hearing on May 19, 1986 to determine whether the proposed settlement was fair, reasonable and adequate. The notice stated that any member of the class could appear then and ...