The opinion of the court was delivered by: Anita B. Brody, J.
Presently before this court is plaintiffs' Motion for Final Approval of Settlement in this securities class action. Class counsel also seeks approval of their petition for attorneys' fees and reimbursement of expenses, in addition to reimbursement of lead plaintiffs' expenses. After a hearing on September 12, 2003, I grant these requests and enter a final judgment and order of dismissal.
A class of investors brought this action against Corel Corporation, Inc. ("Corel") and its former Chief Executive Officer, Michael C.J. Cowpland ("Cowpland"). Plaintiffs allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act as well as SEC Rule 10b-5, by issuing false and misleading statements regarding Corel's fourth quarter 1999 and first quarter 2000 performance, and Corel's prospects for its recently-introduced Linux and other Windows products. (Pls.' Amend. Compl. ¶¶ 31, 35, 38, 50, 53, 54). According to plaintiffs, defendants made these misrepresentations in order to deceive the investing public, artificially inflate the market price of Corel's stock, and cause class members to purchase Corel stock at inflated prices. (Pls.' Amend. Compl. ¶ 6).
On March 8, 2000, plaintiffs Anthony Basilio and Fred Spagnola ("Spagnola") filed the original complaint in this class action, on behalf of themselves and all others who purchased Corel common stock between December 7, 1999 and December 21, 1999, the day before Corel released a pre-announcement of its fourth quarter 1999 loss. On May 12, 2000, class plaintiffs Spagnola, Michael Perron ("Perron"), and David L. Chavez ("Chavez") moved for consolidation of all related cases and appointment as lead plaintiffs, as required under 15 U.S.C. § 78u-4(a). 15 U.S.C. § 78u-4(a) (2003). Spagnola and Perron made their last purchases of Corel stock on or before December 21, 2000, the ending date of the class period as stated in the original complaint. Chavez, on the other hand, in addition to purchasing Corel stock on or before December 21, 2000, also made purchases of Corel stock at several points during January 2000, and made his final purchase on January 31, 2000. I granted the motion for consolidation and appointment of Spagnola, Perron, and Chavez as lead plaintiffs on July 3, 2000.
On August 14, 2000, plaintiffs filed a consolidated and amended complaint, alleging that defendants engaged in a course of conduct, as opposed to a short-lived and focused attempt, to defraud the public concerning the financial condition of Corel and to artificially inflate the company's stock prices for a period beyond December 21, 1999. This allegation altered the closing date of the class period specified in the original complaint. The amended complaint expanded the class to include "all persons who purchased Corel common stock on the NASDAQ national exchange at any time from December 7, 1999, through and including March 20, 2000." (Pls.' Amend. Compl. ¶ 13).
On January 28, 2002 I held oral argument on the class certification motion. At that time, defendants indicated that they did not contest certification of a class as defined in the original complaint, which included purchasers of stock between December 7, 1999 and December 21, 1999, but opposed the certification of any class extending beyond that date. Defendants opposed such extension on the ground that investors who purchased their stock after Corel's preannouncement of its fourth quarter 1999 loss on December 21, 1999 differed from plaintiffs who purchased stock prior to the pre-announcement thus defeating the commonality and typicality requirements of Federal Rule of Civil Procedure 23(a). After considering the written and oral arguments of the parties and the applicable law, I issued an explanation and order certifying the class proposed by plaintiffs' amended complaint, comprised of all persons who purchased Corel common stock on the NASDAQ national exchange at any time from December 7, 1999 through and including March 20, 2000.
The parties have participated in settlement negotiations throughout the course of this litigation. First, with my consent and prior to my determination of the length of the class period, parties participated in a mediation session before Former Judge Arlin Adams on March 7, 2002. Although the March 7, 2002 mediation session was unsuccessful, after my decision certifying the class and approving plaintiffs' expansion of the class period, the parties again met with Former Judge Adams on October 3, 2002. At the conclusion of that full day meeting, Former Judge Adams determined that a settlement on terms acceptable to the class was still not possible. Finally, near the end of fact discovery, on May 11, 2003, the parties again agreed to meet to make a final effort to reach a settlement, this time with Former Judge Nicholas Politan. After Former Judge Politan determined that the parties were close to an agreement, the parties allowed Former Judge Politan to make a settlement recommendation which either side could accept or reject. Subsequently, the parties agreed to Former Judge Politan's recommendation to settle the case for $7,000,000.
The settlement agreement provides that defendants make a cash payment of $7 million to create a gross settlement fund. In accordance with the terms of the agreement, one half of this sum was deposited into an interest bearing escrow account on July 2, 2003 and has been earning interest for the benefit of the class. The remainder of the settlement amount will be deposited into escrow when the settlement becomes final. In exchange for this amount, all claims of the class against the defendants shall be extinguished. Upon approval of the settlement and entry of an order approving distribution, the settlement proceeds (including all interest accrued), shall be distributed to class members who timely submit valid proof of claim forms to the claims administrator. *fn1
On June 18, 2003, plaintiffs made an application for an order of preliminary approval of the settlement. On July 1, 2003, I entered a preliminary approval order which preceded an extensive notice program including the mailing of over 116,000 notice and claim forms to putative class members and publication of the summary notice over the Internet. In addition to informing putative class members of the proposed settlement and their rights to object or opt-out, the notice also informed class members of a fairness hearing scheduled for September 12, 2003.
On August 22, 2003, plaintiffs filed the instant motion for Final Approval of Settlement and Application for Attorneys' Fees and Reimbursement of Expenses. On September 12, 2003 I held a fairness hearing. At the hearing, counsel for both plaintiffs and defendants expressed support for approval of the settlement. Although five objections to the settlement were filed with the court, none of the objectors were present at the hearing. Although all of the objections will be addressed in this opinion, of particular concern was the written objection of Mr. Stephen L. Harkavy ("Harkavy"). Harkavy, without counsel, objected to the fairness of the proposed plan of allocation in light of the fact that the class had not been divided into sub-classes with separate representation. I requested further briefing from counsel for both plaintiffs and defendants on the subject of Mr. Harkavy's written objection. Objector Harkavy was also given time to respond if he so desired, which he did. After considering the parties' positions and Harkavy's objection, I approve the settlement agreement for the reasons set forth below.
A. Final Approval of Settlement
Federal Rule of Civil Procedure 23(e) provides that "[a] class action shall not be dismissed or compromised without the approval of the court." Fed.R. Civ.P. 23(e). Approval of a proposed class actiuon settlement is within the discretion of the court. See In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 F.3d 283,299 (3d Cir. 1998). "In determining whether settlement should be approved, the court must decide whether it is fair, reasonable, and adequate under the circumstances and whether the interests of the class as a whole are being served if the litigation is resolved by the settlement rather than pursued." Manual for Complex Litigation, §30.42, at 238 (3d ed. 1995). The Third Circuit applies a nine prong test when determining the fairness of a proposed settlement: (1) adequacy of settlement in light of best possible recovery; (2) adequacy of settlement in light of all risks of litigation; (3) complexity, expense and likely duration of the litigation; (4) reaction of class; (5) stage of proceedings; (6) risks of establishing liability; (7) risks of establishing damages; (8) risks of maintaining class status; and (9) ability to withstand greater judgment. Girsh v Jepson, 521 F.2d 153, 157 (3d Cir 1975). After examining each of the nine factors, I find that the settlement agreement satisfies the Girsh test.
1) The Ability of the Defendants to Withstand a Greater Judgment
This factor is addressed first because it is the dominant factor favoring settlement in this case. Several considerations suggest that Corel could not withstand a greater judgment. First, Corel's finances have not recovered since the end of the class period. Due to significantly declining revenues and losses, Corel has sold its Linux business and has been unable to sustain operations from the sale of its products. As a result, Corel has had to depend on outside financing to sustain operations. Second, throughout this litigation, defendants have maintained that if judgment is entered against them, they will seek the protection of the Canadian bankruptcy court. If this were to occur, there would be a significant question regarding whether or not Corel's insurance policies would still be available to fund a judgment for plaintiffs. Third, on March 24, 2003, Corel announced that it signed a non-disclosure and standstill agreement with Vector Capital in anticipation of a formal offer by Vector to buy all of Corel's stock. Corel also stated its intention to recommend a bid of $1.10 per share should Vector make an offer to buy. Therefore, there is a strong possibility that Vector could acquire all of Corel's remaining cash before plaintiffs obtain judgment.
2) Adequacy of Settlement in Light of Best Possible Recovery
The proposed settlement agreement is fair and reasonable in light of the best possible recovery. In General Motors Corp. Pick-up Truck Fuel Tank Products Liability Litigation, the Third Circuit cautioned the evaluating court to "guard against demanding too large a settlement based on its view of the merits of the litigation; after all, settlement is a compromise, yielding of the highest hopes in exchange for certainty and resolution.: 55 F.3d 768, 806 (3d Cir. 1995). Even if the proposed settlement amounts to only "a fraction of the potential recovery," it does not necessarily follow that the settlement "is grossly inadequyate and should be diusapproved." In re Sunrise Sec. Litig., 131 F.R.D. 450, 457 n.13 (E.D. Pa. 1990). There is a range of reasonableness applicable to any given case; the appropriate amount is not susceptible to a mathematical formula yielding a particular sum. In this case, the "best possible recovery" is highly disputed between the parties. Plaintiffs' damages expert estimates that the total damages sustained by the class is $46.3 million. Therefore, the proposed settlement of $7,000,000 plus interest amounts to, at worst, 15% of the maximum provable damages. A settlement amounting to 15% of maximum provable damages is within the range of settlement agreements approved by other courts in this District. Cullen v. Whitman Med. Corp., 197 F.R.D. 136, 144 (E.D. Pa. 2000); In re Crazy Eddie Sec. Litig., 824 F.Supp. 320, 324 (E.D.N.Y. 1993).
3) Adequacy of Settlement in Light of all Risks of Litigation
In assessing the fairness, reasonableness and adequacy of a proposed settlement, a court must balance the immediacy and certainty of a substantial recovery against the risks of continuing litigation. Girsh, 521 F.2d at 157. In this case, defendants vigorously deny that they engaged in any wrongdoing. In addition, the presence of serious factual and legal obstacles place plaintiffs at a considerable risk in establishing both liability and damages. Assuming plaintiffs could prevail at trial, lengthy appeals would likely prolong this case for years. Finally, plaintiffs face the significant possibility that a judgment would not be collectable, or would be limited to the available insurance coverage.
4) Complexity, Expense, and Likely Duration of Litigation
This action has been, and, absent settlement, would continue to be extremely complicated, expensive, and lengthy. Plaintiffs recognize that, because of the nature of available information, proving their case at trial would depend upon the development of a complicated paper trail through numerous public and private documents, and would require the jury to comprehend complex financial documents. In addition, plaintiffs have informed the court that because they would have to rely on Corel internal documents created after the alleged fraud, rather than contemporaneously, plaintiffs would be required to prove their claims largely by the inference that because certain types of data were monitored by managers after the alleged fraud, those managers knew or should have known that Corel would post a loss by the beginning of the class period. In addition, plaintiffs would have to show that information regarding the loss was communicated to defendant Cowpland. Thus, the complexity of proof in this case makes the outcome of trial, and potential appeals, uncertain.
Over 116,000 copies of the notice were sent to class members and a summary notice was published on the internet on July 15, 2003. As of August 29, 2003, the last date for filing objections to the settlement, only five class members objected. Of those five objectors, only two, Loretta Adelstein ("Adelstein") and Robert F. Aberger ("Aberger"), objected to the ...