The opinion of the court was delivered by: LEE
The issues before the Court in this multidistrict class action securities litigation are: (i) whether the Court should certify a plaintiffs' class consisting of
All persons who purchased or acquired Chambers Development Company, Inc., securities from March 18, 1988, through October 20, 1992, inclusive, excluding the defendants herein, officers and directors of Chambers, members of the immediate family of each of the individual defendants and affiliates of the corporate defendants, partners and partnership defendants;
Upon consideration of the testimony and report of the Special Master appointed by the Court to oversee discovery and to monitor and facilitate settlement negotiations, the testimony and report of the independent real estate appraiser appointed by the Court to evaluate certain real estate which is to be transferred as part of the settlements, numerous affidavits of counsel and expert witnesses and others, memoranda and documentary material in support of settlement, and considering the entire record of the litigation with which the Court is intimately familiar, the Court answers an unqualified "Yes" to each of these questions.
On May 19, 1995, this Court conducted a hearing concerning the adequacy, fairness and reasonableness of proposed class actions settlements of all but one of the related cases that have been consolidated for all pretrial purposes and designated as appropriate for multidistrict litigation pursuant to 28 U.S.C. § 1407 and an Order of the Judicial Panel on Multidistrict Litigation;
the proposed settlements are set forth in the stipulations of settlement filed in the "main class action" at MDL NO. 982, initially filed at Civil Action No. 92-0679 (Lovato, et al v. Chambers Development Company, Inc. et al), and the "derivative action" at Civil Action No. 92-1081 (Yeager, et al v. Rangos, et al) which is part of the main class action.
Regarding the main class action, the factual allegations of the Amended Consolidated Class Action Complaint (Amended Complaint) and this Court's legal conclusions in denying the various defendants' motions to dismiss are set forth fully in In Re: Chambers Development Sec. Lit., 848 F. Supp. 602 (W.D.Pa. 1994). This memorandum opinion on the fairness and adequacy of settlement presumes the reader's familiarity with the factual predicate set forth in that opinion; to the extent this presumption is incorrect, the reader is directed to that opinion.
The initial Complaint was filed in the Lovato action on March 18, 1992, at Civil Action 92-0679. The derivative action was filed on April 14, 1992.
The derivative complaint was filed on behalf of plaintiffs David and Sally Yeager pursuant to Fed. R. Civ. P. 23.1, on behalf of all other similarly situated shareholders, and derivatively on behalf of Chambers Development Company, against John G. Rangos, Sr., Chief Executive Officer of Chambers ("CEO"), and other members of Chambers' senior management and certain of its outside directors, as well as Grant Thornton, an accounting partnership which was Chambers' former independent auditor at most relevant times of the class period. The factual predicate for the derivative action is that which forms the basis for the Amended Complaint in the main class action with, however, certain nuances required by the derivative action device. Although named the nominal defendant in the shareholders' derivative action device, Chambers is the real party in interest, and any recoveries rendered to the derivative class of shareholder plaintiffs belong to Chambers, the corporation on whose behalf the derivative suit ostensibly was brought. Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1307 n. 4 (3d Cir. 1993).
In summary, this litigation stems from allegations of fraudulent accounting policies and practices by Chambers and Grant Thornton regarding capitalization of normally expensed items, and the systematic dissemination of various material misrepresentations and omissions of material fact made by these defendants concerning the questionable nature of these accounting policies/practices, and of Chambers' earnings, assets and net worth, which consistently overstated earnings, exaggerated the state of Chambers' financial health, and artificially inflated the market price for its securities on the American Stock Exchange until the bottom fell-out of the market when Chambers corrected its accounting practices and announced that correction to the trading public initially on March 17, 1992,
The complaint in the derivative class action includes: claims for violations of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n, and Securities and Exchange Commission ("SEC") Rule 14A-9 based upon allegations of materially false, incomplete and misleading proxy statements in 1990 and 1991 disseminated to its shareholders prior to the annual shareholders' meetings in those years at which Chambers' board of directors were elected (Derivative Complaint, Count I); for individual defendants' breach of fiduciary duties to the corporation (Count II); and against Grant Thornton for its alleged professional negligence as Chambers' independent auditors (Count III).
Derivative plaintiffs requested class certification, a declaration that the 1990 and 1991 proxy statements were materially false and misleading and the setting aside of the proxies voted as a result thereof, the setting aside of certain stock option plans which benefited individual Chambers defendants, monetary damages, injunctive relief in the form of internal safeguards to monitor against future abuses, interest, costs and counsel fees. (Derivative plaintiffs point out the section 14(a) misleading proxy statements claim now is moot "because the terms of the directors elected at the 1990 and 1991 annual meetings have expired." Memorandum in Support of Plaintiffs' Motion for Final Approval of the Proposed Settlement and In Support of Counsel's Application for Attorneys' Fees ("Derivative Memorandum"), Document No. 20 at Civil Action No. 92-1081 at 2 n. 1.)
By stipulation of the parties, Chambers and the individual defendants were relieved in November 1992, of their obligations to "move or otherwise respond to the derivative Complaint" until the earlier of several events, none of which has occurred. Therefore, neither Chambers nor the individual defendants have answered or responded to the derivative complaint. Derivative Memorandum at 3. Essentially, the derivative action has laid dormant since then, except to the extent counsel may have participated in any discovery and in negotiations attached to the main class action, until the stipulation of settlement was filed on February 24, 1995.
On March 7, 1994, two weeks after this Court denied the various motions to dismiss, the main class action plaintiffs moved this Court to certify the class pursuant to Fed.R.Civ.P. Rule 23(a) and Rule 23(b)(3), and sought to extend the class period beyond that charged in the Amended Complaint to include all purchasers of Chambers securities through October 20, 1992, upon allegations that subsequent to March 17, 1992, additional disclosures of additional accounting irregularities and further adjustments to previously reported profits produced additional negative impact upon the trading price of Chambers securities.
On April 29, 1994, the Court conducted a status/settlement conference to discuss with counsel their suggestions and recommendations with regard to methods of resolution of the outstanding issues in this case, including but not limited to settlement of the various claims asserted by all of the parties. At that time, the Court was made aware that class action plaintiffs had, not unexpectedly, upped the ante following this Court's ruling in their favor on the motions to dismiss. The Court concluded that this litigation required the appointment of a special master to aid the Court in the performance of its judicial duties, including the management of discovery and overseeing settlement negotiations. By Order of May 6, 1994, the Court held:
It is the court's finding that the appointment of a Special Master will best promote the mandate of Fed.R.Civ.P. Rule 1 "to secure the just, speedy, and inexpensive determination of every action." Therefore, pursuant to Fed.R.Civ.P. Rule 16, 26 and 53, and the inherent authority of this court to supervise and administer pending cases, the court hereby appoints John J. McLean, Jr., Esquire, . . . as Special Master, who shall be paid $ 225 per hour for performing his assigned duties. The court has determined the amount of compensation to be fair and equitable in light of the complex and difficult task to be assigned to the Special Master and particularly in consideration of his unique experience and qualifications.
The appointment shall become final, unless objections are filed by any party on or before May 18, 1994.
In the absence of objections, the appointment of Special Master McLean became final. This Court issued Supplemental Orders defining the scope of his appointment and setting the amount and manner of his compensation. Case Management Order No. 4, filed on June 3, 1994, finalized the Order of appointment, and "assigned the duties of management, discovery and conducting of settlement negotiations and mediation of claims of the parties, inter se."
Following said appointment, Special Master McLean performed his charge (admirably, efficiently and professionally, the Court observes), filed monthly statements of fees charged for his services, as required, and periodically and regularly kept the Court apprised as to the status of settlement negotiations which were ongoing and continuous, and as to several discovery disputes which arose and which Special Master McLean resolved, upon the acquiescence of the parties to his recommended disposition of said discovery disputes, without additional intervention by the Court.
Given the delicacy of settlement negotiations in general and of the settlement negotiations in this litigation in particular, the Court, after consultation with the Special Master, decided to "lay off" deciding several pending motions, including the plaintiffs' Amended Motion for Class Certification (Document No. 124) and plaintiffs' Motion to Add Party Plaintiff (Document No. 199), in order not to influence the evolving settlement process or upset the emerging equilibrium.
After some substantial ups and downs and snags in the settlement process, the Court was advised in late 1994/early 1995 that stipulations of settlement were prepared and would soon be filed. The settlement negotiations finally bore fruit with a joint motion filed by the class plaintiffs in the main class action and by Chambers, the senior management and outside director individual defendants, for preliminary approval of their stipulation of partial settlement, on February 24, 1995. (Document No. 245). Also on that date, a stipulation was filed in the derivative class action for settlement by all parties, except for Grant Thornton. (Document No. 13 at Civil Action No. 92-1081).
Status/settlement conferences followed in rapid succession on February 28, March 14, March 17 and March 20, which produced stipulations of settlements which would globally dispose of all of the remaining claims in this case. Fittingly, this global settlement was announced in open court on March 17, 1995,
three years to the date that Chambers announced that it was changing its longstanding accounting policies and practices which required it to revise its 1991 after-tax earnings from $ 49.9 million to $ 1.6 million, or from 83 cents a share to 3 cents a share, the announcement which sent shock waves through the market and spawned the more than 20 cases that have been consolidated in this action.
The Court approved the settlement class, provisionally only, for the purposes of disseminating the requisite notices required by Rule 23(c) and Rule 23.1 to all potential class members broadly defined in the main class action, and to all current shareholders of record in the derivative action. It was and is the Court's opinion that the proposed settlements reposed within the range of reasonableness that would permit the court to have the parties notify the potential class members, and that stipulations of settlement were the product of vigorous, arms' length negotiations between experienced adversaries following adequate discovery. See 2 Newberg & Conte ("Newberg") § 11.41 at 11-91.
III. STIPULATIONS OF PROPOSED SETTLEMENTS
(i) $ 25 million from Chambers;
(ii) $ 8 million from the individual directors and officers via their directors and officers liability policy ("D&O policy");
(iii) Approximately $ 53 million from a Transaction and Refinancing Payment to be entered between Chambers and U.S.A. Waste Services, Inc., or through another financing arrangement;
(iv) $ 8.8 million from Grant Thornton;
(v) $ 300,000 from the settlement with the underwriters;
(vi) Additionally, the settlements provided that counsel for plaintiffs in the class action would apply to the Court for an award of attorneys' fees "not to exceed thirty percent (30%) of the Settlement Fund, and for the reimbursement of expenses (including expert fees and expenses) incurred on behalf of the class . . . payable solely out of the Settlement Fund and . . . deducted from the Settlement Fund prior to the distribution to the class. . . Counsel might also apply by the terms of this settlement to the Court for approval of an award of compensation to the main class representative plaintiffs in the amount of $ 2,500 per plaintiff as incentive for prosecuting the class action in their name, to be paid out of the Settlement Fund";
(vii) The main class action settlements also contain a "recapture" provision that "in the event the Court disapproves any portion of the requested award of ONE MILLION NINE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($ 1,975,000), plus interest, for fees and reimbursements of expenses in the Derivative Action settled concurrently herewith (In Re: Chambers Development Co. Sec. Lit., Civil Action No. 92-1081), then the portion not approved shall be paid over into the Settlement Fund in this action . . ."
The essence of the stipulation of settlement in the derivative action is as follows:
(i) The Chambers settling defendants, through their D&O insurance carrier, have agreed to pay or cause to be paid to Chambers (the real party in interest in the derivative class action) $ 2 million;
(ii) Defendant John G. Rangos, Sr., Chambers' CEO, has agreed to transfer or cause to be transferred from Synergy Associates to Chambers, that certain real estate owned by Synergy Associates and situate in Penn Hills Township, Allegheny County, Pennsylvania, which presently houses offices of the Chambers Development Corporation, by way of a lease from Synergy Associates, and containing approximately 7.018 acres of land, having erected thereon an office building containing a gross floor space of approximately 55,000 square feet; the market value of the leased fee estate has been appraised at $ 7,185,000 to $ 8,650,000, according to an appraisal by Omni Evaluation Services dated October 31, 1994 submitted by derivative plaintiffs (Document No. 19 at Civil Action No. 92-1081), depending upon whether Chambers elected to exercise an option to renew the lease for an additional ten years as provided in the existing lease;
(iii) Defendant Grant Thornton shall pay Chambers $ 200,000 and release all claims it has against Chambers arising from or related to the facts alleged in the Complaint;
(iv) The settlement also provides that Chambers shall implement, for a period of two years after the effective date of the settlement appropriate therapeutic measures, including appointment of an outside director who is a certified public accountant as Chairman of the Audit Committee of the Board of Directors. However, this obligation will end on the effective date of any merger of Chambers into a publicly-traded corporation, and will end on the day the U.S.A. Waste merger is completed.
(v) Defendant John G. Rangos, Sr., will provide a $ 15 million personal guaranty with respect to the cash payments to be made by Chambers to settle the related securities class action;
(vi) Additionally, Chambers has agreed to pay derivative plaintiffs' attorneys such fees as are approved by the Court in an amount "not to exceed $ 1,975,000, which includes reimbursement of all reasonable costs incurred and interest on such costs, which amount is to be paid from the proceeds of the D&O policy; Grant Thornton has agreed to pay the ...