Opinion
95 CV 3431 (ARR)
August 17, 2001
Attorney for the Plaintiff(s) David Brower, Wolf Haldenstem, Adler Freeman Herz LLP 270 Madison Avenue, Floor 9, Joseph H. Weiss, Weiss Yourman 551 Fifth Avenue New York, NY. Gary E. Cantor, Berger Montague 1622 Locust Street Philadelphia, PA. Richard Bemporad, Lowey Dannenberg Bemporad Selinger, PC. The Gateway, One North Lexington Avenue White Plains, NY.
Attorney for the Defendant(s) Mario Aieta, Aieta Greco 73 Spring Street Suite 601 New York, NY. Kenneth Sagat, D'Amato Lynch 70 Pine Street New York, NY.
REPORT AND RECOMMENDATION
Plaintiffs commenced this action in August 1995 with the filing of approximately 22 separate putative class actions in this Court and in other federal district courts, alleging that the defendant Arakis Energy Corporation ("Arakis") and individual executives within the corporation had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j) et seq., and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, by engaging in a scheme to deceive investors in Arakis stock through the public dissemination of misrepresentations concerning, among other things, an alleged financing agreement between Arakis and Arab Group International ("AGI") that would provide $750 million toward a project permitting Arakis to drill for oil and construct a pipeline from the Sudan to the Red Sea. Pursuant to a transfer order dated March 7, 1996, the Judicial Panel for Multidistrict Litigation ("MDL") transferred all of the related Arakis securities actions to this court. The parties stipulated to the certification of the action as a class action, and the district court certified an additional class, both of which are referred to in this Report and Recommendation as "the class." The district court appointed Co-Lead Counsel as Class Counsel.
Co-Lead Counsel includes the firms of Lowey, Dannenberg, Bemporad Selinger, P.C.; Wolf, Haldenstein, Adler, Freeman Herz, LLP; Berger Montague, P.C.; and Weiss Yourman.
Over a period of more than five years, plaintiff's counsel conducted an investigation relating to the claims alleged in the complaint and the defenses asserted thereto. Concurrent with the investigation and in preparation for trial, plaintiffs' counsel and defendants' counsel participated in settlement negotiations, both informal and before the undersigned. After extensive negotiations, the parties reached a settlement agreement and a Proposed Order of Preliminary Approval and Procedures For Final Approval of Settlement was submitted to the district court for approval on May 22, 2000. On August 16, 2000, the Order of Preliminary Approval and Procedures For Final Approval of Settlement was approved by the district court. Pursuant to the settlement, plaintiffs' attorneys made a motion for attorney's fees and expenses totaling one third of the settlement amount. This motion was referred to the undersigned to prepare a Report and Recommendation.
FACTUAL BACKGROUND
Arakis was incorporated in 1986 under the laws of the province of British Columbia, Canada, and, during all times relevant to this class action, maintained its corporate headquarters in Vancouver, British Columbia, Canada. (Pls.' Second Consolidated Am. Compl. ("2nd Am. Compl.") ¶ 14). In August 1993, State Petroleum, a British Columbia Corporation, entered into an agreement with the Sudanese government that gave State Petroleum and Arakis the right to explore for oil in the Sudan and to develop oil and gas reserves in certain areas. (Id. ¶¶ 40-41). Since Arakis lacked sufficient funds to meet the terms of the agreement which required the Arakis/State Petroleum joint venture to spend a minimum of $30 million in 1995 and $150 million in 1996 on the Sudan project, Arakis entered into an agreement with AGI regarding a prospective financing of $750 million for the project. (Id. ¶¶ 42, 48-61).
In 1994, Arakis acquired State Petroleum. (2nd Am. Compl. ¶ 45).
The class in this litigation consists of all purchasers of Arakis common stock traded on the National Association of Securities Dealers' Automated Quotation System ("NASDAQ"), all purchasers of publicly traded call options on Arakis stock, and sellers of publicly traded put options on Arakis stock, during the period between July 6, 1995 and August 21, 1995, who were damaged as a result of the defendants' alleged misrepresentations. (Joint Aff. of Pls.' Co-Lead Counsel ("Joint Aff.") ¶ 12). The class claims that it was harmed by the alleged misrepresentations of Arakis and the individually named defendants concerning this purported $750 million financing agreement between Arakis and AGI. Specifically, on July 6, 1995, Arakis issued a press release stating that it had entered into a contract with AGI for the purpose of financing the company's Sudan project, and that Prince Sultan Bin Saud Abdullah Al Saud ("Prince Sultan") had joined AGI's Board of Directors. (2nd Am. Compl. ¶¶ 70-72). The press release further represented that of the total of $750 million to be provided by AGI, $345 million would be paid to Arakis as part of a private placement of 23 million Arakis common shares to be delivered in a series of payments between July 27, 1995 and September 15, 1995. (Id. ¶ 71). Plaintiffs allege that, contrary to the implication of the press release, Arakis failed to disclose that pursuant to the contract with AGI, only $40 million was to be paid in cash; the third and fourth payments in the series were to be paid for in "'equipment'" and "'cash or kind.'" (Id. ¶ 78). There were additional alleged misrepresentations in the press release regarding, among other things, a $405 million letter of credit. (Id.)
Shares of Arakis common stock rose by $1.50 per share following the announcement on July 6, 1995, and rose $2 3/8 per share, nearly 15%, to $19 1/2 over a two day period immediately after the financing deal with AGI was publicly announced. (Id. ¶ 77).
This Court notes that although plaintiffs claim that the stock rose $2 3/8 per share over the two day period from July 6 to July 7, 1995 (Joint Aff. ¶ 15), it appears from the figures listed in the complaint that the stock actually rose $2 5/8 during that period. (2nd Am. Compl. ¶ 77).
Plaintiffs allege that throughout the class period, defendants continued to make misrepresentations regarding the $345 million financing in a Proxy Statement filed on July 28, 1995 and in various statements to the public and to the Vancouver Stock Exchange ("VSE"). (Id. ¶¶ 94-96, 110, 113). Defendants also allegedly made a serious of misrepresentations regarding Prince Sultan and other AGI investors. (Id. ¶¶ 101-103). However, beginning on or about August 3, 1995, rumors began circulating about Prince Sultan, and a number of securities analysts questioned whether Prince Sultan was actually related to the powerful and wealthy Saudi ruling or royal families. (Id. ¶¶ 102, 121). The August 21, 1995 issue of Barron's reported that, according to a U.S. State Department Official, the Prince supposedly involved in AGI "is not well-to-do. He is one of 10, 000 princes there, and he is not a man of consequence." (Id. ¶ 121, Ex. 36). The Barron's article also reported that according to the same U.S. State Department Official, AGI "does not appear to exist, but rather seems to be a new name for this particular development project. We question whether this is a real investment and are concerned because there seem to be a lot of U.S. investors with money in this company." (Id.) The price of Arakis stock began to decline based on this information. (Joint Aff. ¶ 17). Plaintiffs allege that in response to these comments, Arakis issued a series of misleading statements indicating that there were" "'some very heavy hitters'" in the AGI group. (2nd Am. Compl. ¶ 108, Ex. 28).
On Monday, August 21, 1995, Dow Jones News reported that "there is no backing for the project from the Saudi royal family" and that the description that Arakis had given of Prince Sultan's position in the Saudi royal family was "genealogically inaccurate." (Id. ¶ 122-23, Ex. 37). On that day, Arakis stock closed at $13.50, down $4.50 from the close of the prior day of trading, August 18, 1995. (Id. ¶ 124). On August 22, 1995, Arakis issued a press release stating that the VSE had approved the transaction with AGI, and disclosed for the first time that only $40 million of the total of $345 million in financing from AGI would be in cash. (Id. ¶ 125). At mid-day on August 22, 1995, the NASDAQ and the VSE halted trading in Arakis stock, which was trading at $11 7/8 per share at the time. (Id. ¶¶ 128-131). Arakis delisted its shares from the VSE on August 23, 1995, and NASDAQ trading did not resume until September 22, 1995. (Id. ¶ 132-136, 140). Although Arakis thereafter attempted to obtain other financing for the Sudan Project, it was unsuccessful and ultimately lost 75% of its ownership in the project to a consortium of investors. (Id. ¶ 147-152).
In August 1995, approximately 22 separate putative class action complaints were filed in multiple districts across the country, alleging substantially identical claims against Arakis. Pursuant to an order dated March 7, 1996, the Judicial Panel for Multidistrict Litigation transferred all of the related Arakis securities actions to the Eastern District of New York. (Joint Aff. ¶ 22). A class of Arakis stock holders was certified on October 17, 1995, and on April 23, 1999, following a contested motion, a class consisting of option holders was also certified by the court. (Id. at ¶ 24). Co-Lead Counsel were thereafter certified as Class Counsel. (Id. ¶ 25).
On April 4, 1996, plaintiffs filed an Amended Consolidated Complaint, and on August 23, 1996, defendants moved to dismiss the Amended Consolidated Complaint, arguing that plaintiffs had failed to allege fraud with sufficient particularity. (Id. ¶ 26). The district court granted defendants' motion to dismiss on November 26, 1996, but allowed the plaintiffs to file a revised complaint. (Id.) The plaintiffs filed an 85-page Second Consolidated Amended Complaint on January 15, 1997, and defendants' motion to dismiss that complaint was thereafter denied on February 20, 1998. (Id. ¶ 27). Defendants also filed a separate motion to stay discovery pending the decision on the motion to dismiss.
Early in the litigation, the plaintiffs retained John C. Hammerslough, a damages consultant, to provide an estimate of class-wide damages. (Id. ¶ 35). Mr. Hammerslough's preliminary estimate, which was prepared without the benefit of actual NASDAQ trading records, placed class-wide damages at approximately $190 million, based on an assumption that the "true value" of Arakis common stock was less than $6.00 a share throughout the class period. (Id.) However, the use of this $6.00 figure was seen by plaintiffs' counsel as overly-aggressive because it reflected post-class period information that could not be relied upon to set a reasonable "true value" for the shares within the class period. (Id.) As the litigation progressed and additional trading information became available, Mr. Hammerslough was able to refine his estimates. (Id. ¶ 37). Based on the last reported price of Arakis shares before the halt in trading — $11 7/8 per share — Mr. Hammerslough estimated gross class wide damages to be $114,400,000.00. (Id.) He also calculated the profits realized by class members through the sale of Arakis securities during the class period to be approximately $8,000,000.00, yielding net damages of $106,400,000.00. (Id.)
A second damages expert retained by plaintiffs, Philadelphia Investment Banking Company ("PIBC"), used a statistical "decline curve" methodology to test Mr. Hammerslough's conclusions, producing an estimate of gross class wide damages at approximately $84,800,000.00. (Id. ¶ 38). PBIC also calculated profits realized by class members from the sale of Arakis stock during the class period to be approximately $25,300,000.00, yielding net damages for the class of $59,500,000.00. (Id.) These calculations made by the damages experts reflect the assumption that plaintiffs would have been successful on behalf of the entire class in recovering all market losses for the entire class period based on every allegation in the Complaint. (Id. ¶ 40).
Apart from researching and briefing the contested motion to certify the options class and the two motions to dismiss and stay discovery, plaintiffs' counsel have been involved in extensive discovery during the more than five years of litigation on this matter in preparation for trial. Plaintiffs' investigation has included, inter alia, service of subpoenas upon various financial publications and news publications that issued articles or reports on Arakis; review of the responsive documents; review of the National Association of Securities Dealers investigatory file created in connection with the decision to halt trading of Arakis stock on the NASDAQ; and the examination of thousands of documents produced by securities and oil industries analysts and brokerage firms that issued reports on Arakis or held positions in Arakis securities. (Id. ¶ 30). Furthermore, due to the fact that Arakis is a Canadian corporation and was listed on the VSE during the class period, plaintiffs' counsel were required to undertake research into Canadian law, draft letters rogatory, and work with Canadian counsel to obtain documents and to depose Canadian witnesses relevant to this action. (Id.) In addition to the numerous discovery disputes presented to this Court, a hearing before the Supreme Court of British Columbia was required before obtaining an order permitting the discovery sought in Canada. (Id.) Not only were the motions to compel contested by defendants but by third parties as well. (Id. ¶ 33).
Among other things, issues arose relating to attorney-client privilege, work product, common interest privilege and the production of trading records of defendants' offshore companies. (Id.)
Settlement negotiations between the parties continued throughout the discovery process. The issue of settlement was addressed by this Court at the initial conference and preliminary discussions were held even prior to the briefing of the second motion to dismiss. (Id. ¶ 41). Then, following the district court's denial of the defendants' second motion to dismiss, this Court held several sessions of supervised settlement negotiations. (Id. ¶ 43). Prior to these court supervised settlement negotiations, Arakis had offered plaintiffs $4,000,000.00 to settle the action, asserting that Arakis was in poor financial condition at the time, did not have sufficient cash to pay a substantial settlement and continue as a going concern, and did not at the time have insurance coverage for a suit of this kind. (Id. ¶ 42). Upon learning that Arakis had obtained DO insurance coverage for these claims, plaintiffs rejected this offer and requested a sum in the high eight figures. (Id. ¶ 43). When defendants refused to offer greater than $4,000,000.00, an impasse occurred in the negotiations. (Id.)
However, following a new round of discovery and informal settlement negotiations, the parties reached a tentative settlement of approximately $19 million. (Id. ¶ 45). Before the settlement was finalized, the plaintiffs discovered that defendant Alexander, in his role as controller of a number of off-shore accounts, along with several other of the individual defendants, had sold Arakis common stock during the class period. (Id. ¶ 46). This revelation, which was contrary to prior representations by the defendants that none of them had sold during the class period, prompted plaintiffs to seek additional information prior to proceeding with the settlement. (Id.) Additional discovery into these trades was sought by plaintiffs, including the letters rogatory and litigation before the Canadian courts to obtain records from a Canadian brokerage firm and Alexander's personal attorney regarding the various controlled transactions executed by Alexander. (Id.) Following several more months of negotiations, the parties reached a final settlement amount of $24,000,000.00, to be placed in a reversionary fund, with the amount remaining after the payment of claims, fees, and expenses to revert to the defendant. (Id.) Additional negotiations were conducted, including consultation with the parties' damages experts, in an effort to determine the proper method for allocating the settlement fund among the various types of class members. (Id. ¶ 47). On August 16, 2000, the district court approved the Revised Proposed Order of Preliminary Approval and Procedures For Final Approval of Settlement. (Id. ¶ 52). Notice was thereafter disseminated to the class members in accordance with the Preliminary Approval Order. (Id. ¶ 54-62).
In the Settlement Agreement, plaintiffs' counsel notified the class members that counsel would be making an application to the court for attorneys' fees and reimbursement of expenses incurred in the pursuit of this litigation of up to one-third of the settlement as compensation for their representation of the class. The class was notified that it could object to the amount of attorneys' fees requested. As of the date of the Joint Affidavit, November 30, 2000, no objections to the fee request had been received. (Joint Aff. ¶ 111). At this time, plaintiffs' counsel requests $7,259,052.02 in fees. (Pls.' Supp. Report With Respect To The Joint Petition For An Award of Attorneys' Fees And Reimbursement of Litigation And Administration Expenses ("Pls.' Supplemental Report") at ¶ 65). This request represents a multiplier of 1.43 on the plaintiffs' counsel's lodestar of $5,052,602.70. (Id. at Ex. F). Plaintiffs' counsel have also requested reimbursement for expenses in the amount of $740,947.98, including copying expenses, transcript printing, expert fees, and claims administration costs. (Id. at ¶¶ 4-7). The request for fees and expenses therefore totals $8 million or 1/3 of the total settlement amount of $24,000,000.00.
As of January 30, 2001, the claims administrator for the settlement has received a total of 4, 411 claims from members of the class, and the administrator has preliminary determined that 3,277 claims are eligible to receive payment in the settlement. (Pls.' Pre-Hearing Status Report at 2-3). Since the date for filing claims has now passed, the total "recognized loss," defined in the Stipulation of Settlement to be the amount claimed from the settlement fund (Stip. of Settlement at 21-27), is currently $7,200,471.94, based on the 3,277 claims determined to be preliminary eligible, and on the aggregate purchase of 10,536,936 shares. (Id. at 3).
DISCUSSION
Plaintiffs' counsel request an award of attorneys' fees in the amount of $7,259,052.02, and expenses in the amount of $740,947.98. This represents one third of the settlement amount, and is based on a multiplier of 1.43 on counsels' lodestar. Counsel argue that this amount is warranted based on the risk involved in the litigation, the complexity of the litigation, the size of the recovery, the experience and ability of counsel, and the fees granted in similar securities class action litigations.
A. The Second Circuit Has Held that the Choice Between the Application of the Percentage of Recovery Analysis or the Lodestar Analysis is Within the Discretion of the District CourtPlaintiffs' counsel argue that, in the Eastern District of New York, an attorneys' fee award in litigation where a common fund is created, such as here, should be based upon a percentage of the recovery. (Mem. of Law in Support of Pls.' Application For An Award of Attorneys' Fees And Reimbursement of Litigation And Administration Expenses ("Pls.' Mem. of Law"), at 4). However, in Goldberger v. Integrated Resources, Inc., the Second Circuit held that it is within the discretion of the district court to determine whether to apply a "percentage of recovery" analysis, or a lodestar analysis. 209 F.3d 43, 50 (2d Cir. 2000).
The Second Circuit has long held that a party that has secured a benefit on behalf of a class of people is entitled to recover its costs, including reasonable attorneys' fees, from the common fund created as part of the settlement agreement. See Savoie v. Merchants Bank, 166 F.3d 456, 460 (2d Cir. 1999) ("Savoie II") (citing Savoie v. Merchants Bank, 84 F.3d 52, 56 (2d Cir. 1996) ("Savoie I")). This doctrine, known as the "common fund doctrine," In re Fine Host Corp. Sec. Litig., No. 97 CV 2619, 2000 WL 33116538, at 1 (D. Conn. Nov. 8, 2000), is designed to prevent the unjust enrichment of class members who benefit from a lawsuit without paying for its costs. See Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980).
Historically, fees in common fund cases in this country were calculated based on a percentage of the fund. In re Crazy Eddie Sec. Litig., 824 F. Supp. 320, 325 (E.D.N.Y. 1993); see also Cent. R.R. Banking Co. v. Pettus, 113 U.S. 116 (1885) (applying percentage of recovery method). In the 1970s, an alternate method to calculating attorneys' fees in common fund cases, the "lodestar" method, was devised as a response to perceived problems with the percentage approach. See, e.g., City of Detroit v. Grinnell Corp., 495 F.2d 448, 468-74 (2d Cir. 1974) ("Grinnell I") and City of Detroit v. Grinnell Corp., 560 F.2d 1093, 1098-1100 (2d Cir. 1977) ("Grinnell II"); see also Lindy Bros. Builders, Inc. v. Am. Radiator Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973). Under the lodestar approach, the court first calculates a lodestar by multiplying the number of hours reasonably devoted to the case, times a reasonable hourly rate. Savoie II, 166 F.3d at 460; In re Crazy Eddie Sec. Litig., 824 F. Supp. at 325. The resulting "lodestar" is then adjusted by applying a multiplier to reflect such factors as "the risk of litigation, the complexity of the issues, and the skill of the attorneys." Savoie II, 166 F.3d at 460 (citation omitted); see also Goldberger v. Integrated Res. Inc., 209 F.3d at 47. In Grinnell I and II, the Second Circuit reasoned that the mathematical computation of the lodestar was "the only legitimate starting point for analysis," Grinnell I, 495 F.2d at 471, and directed the district court to "begin its inquiry . . . by first calculating the basic value of appellee's services," recommending that "district courts should place primary reliance on the value of the time actually expended by fee applicants as determined by normal billing rates." Grinnell II, 560 F.2d at 1098-99. However, district courts applying the lodestar method discovered that it encouraged plaintiffs' lawyers "to run up the number of hours for which they could be paid," created a disincentive to early settlements, and resulted in a waste of judicial resources as the courts were forced to review every item billed. Goldberger v. Integrated Res., Inc., 209 F.3d at 48-49.
One such problem with the percentage method, as the Second Circuit has noted, was that in applying such a method, a court ran the risk of creating a "'windfall' for attorneys that bore no relationship to 'the actual effort made by the attorney to benefit the class.'" In re Fine Host Corp. Sec. Litig., 2000 WL 33116538, at 1 n. 2 (quoting City of Detroit v. Grinnell Corp., 560 F.2d 1093, 1099 (2d Cir. 1977)). Indeed, many of the cases routinely awarded fees ranging from 20% to 30% percent of the award, leading the Second Circuit to comment that the approach was yielding a "golden harvest of fees" for counsel which was unjustified and resulted in the class receiving too little in terms of the award. See City of Detroit v. Grinnell Corp., 495 F.2d 448, 468-469 (2d Cir. 1974).
Thereafter, the Supreme Court in Blum v. Stenson resurrected the viability of the percentage-of-the fund method by noting, in dicta, that "under the 'common fund doctrine' . . . a reasonable fee is based on a percentage of the fund bestowed on the class." 465 U.S. 886, 900 n. 16 (1984); see also In re Fine Host Corp. Sec. Litig., 2000 WL 33116538, at 2 (noting that the Third Circuit repudiated its earlier endorsement of the lodestar method in Lindy Bros., and returned to a percentage of the fund analysis). A Third Circuit Task Force, convened in the mid-1980s by Chief Judge Aldisert, the author of the seminal Lindy Bros. decision which developed the lodestar analysis, rejected the lodestar approach and recommended a return to a percentage of the fund calculation, noting that the lodestar method "unnecessarily overtaxed the judicial system, created an illusory sense of mathematical precision leading to disparate results, was easily manipulated by judges, and created disincentives to an early settlement." In re Crazy Eddie Sec. Lititg., 824 F. Supp. at 325 (citing Court Awarded Attorney Fees: Report of the Third Circuit Task Force, 108 F.R.D. 237, 246-49 (1985) ("Third Circuit Task Force")).
While many of the circuits across the nation settled on the percentage of recovery method in common fund cases, the courts within the Second Circuit exhibited uncertainty throughout the 1990s as to which method, lodestar or percentage of recovery, was preferred. Compare In re Union Carbide Corp. Consumer Prods. Bus. Sec. Litig., 724 F. Supp. 160, 166 (S.D.N.Y. 1989) (stating that the lodestar method "is not an ideal way to fix fees"), with Wallace v. Fox, 7 F. Supp.2d 132, 138-39 (D. Conn. 1998) (finding lodestar approach still required in Second Circuit despite the Supreme Court's statement in Blum). As at least one court in the Second Circuit has noted, however, the definite trend within the circuit since the late 1980s was toward the use of the percentage of recovery method.See In re Crazy Eddie Sec. Litig., 824 F. Supp. at 325-26 (citations omitted). As that same court further noted, and as plaintiffs' counsel have noted (Pls.' Mem. of Law at 4), consistent with this "trend," the Eastern District of New York adopted the "Civil Justice Expense and Delay Reduction Plan" on December 17, 1991, which provided that "attorneys' fees in common fund cases in which significant attorney time has been expended shall be based on a percentage of the recovery," with time records to be submitted (similar to the lodestar process) to serve as a guideline in setting the percentage recovery. In re Crazy Eddie Sec. Litig., 824 F. Supp. at 326 (citing the Civil Justice Expense Delay Reduction Plan § V(A)(2)).
Although the Eastern District Plan has since expired, see In Re Medical X-Ray Film Antitrust Litig., No. 93 CV 5904, 1998 WL 661515, at 6 (E.D.N.Y. Aug. 7, 1998), the Second Circuit has now made clear that it is within the discretion of district courts in this circuit to determine which method to use in setting the attorneys' fees in common fund cases.See Goldberger v. Integrated Res., Inc., 209 F.3d at 50. In Goldberger v. Integrated Resources, Inc., a securities class action stemming from the Drexel, Burnham, Lambert/Michael Milken securities fraud cases of the 1980s, plaintiffs' counsel sought 25% of the $54 million recovery. The district judge declined to award that amount, instead awarding 4% of the recovery, based on a lodestar of counsel's hours. Counsel appealed, claiming that application of the lodestar method, rather than percentage of the fund, was an error by the district court. Id. at 44-45. On appeal, the Second Circuit rejected counsel's argument "to 'junk' the lodestar altogether," holding that "either the lodestar or percentage of the recovery methods may properly be used to calculate fees in common fund cases, and that the district court did not abuse its discretion in choosing the lodestar in this case." Id. at 45, 50. The court noted that this holding was consistent with the earlier Grinnell opinions which suggested the use of a lodestar analysis, because "[t]he express goal of the Grinnell opinions was to prevent unwarranted windfalls for attorneys [and] [s]o long as that object is achieved, we see no need to compel district courts to undertake the 'cumbersome, enervating, and often surrealistic process' of lodestar computation." Id. at 49-50 (quotingSavoie II, 166 F.3d at 461 n. 4, and citing Grinnell II, 560 F.2d at 1098-1099, and Grinnell I, 495 F.2d at 469-7 1). The court also noted that "the lodestar remains useful as a baseline even if the percentage method is eventually chosen." Id. at 50. Perhaps most importantly, the Court of Appeals stressed the fact that fees awarded "may not exceed what is 'reasonable' under the circumstances" id at 47 (citation omitted), and noted that although either option, lodestar or percentage of recovery, is available to the district court in setting attorneys' fees, the same criteria should guide a court in applying either method:
[N]o matter which method is chosen, district courts should continue to be guided by the traditional criteria in determining a reasonable common fund fee, including: "(1) the time and labor expended by counsel; (2) the magnitude and complexities of the litigation; (3) the risk of the litigation. . . ; (4) the quality of representation; (5) the requested fee in relation to the settlement; and (6) public policy considerations."Id. at 50 (quoting In re Union Carbide Corp. Consumer Prods. Bus. Sec. Litig., 724 F. Supp. at 166 (summarizing the Grinnell opinions)).
B. The Trend in the Second Circuit Has Been Toward Using The Percentage of Fund Method in Common Fund Cases, and Away From Use of a Benchmark
Although the Second Circuit has left it to the discretion of the district courts to decide the method to use for setting fees in common fund cases, more recent cases have indicated that the "use [of] the percentage method is consistent with the trend in the Circuit." In re Dreyfus Aggressive Growth Mut. Fund Litig., No. 98 CV 4318, 2001 WL 709262, at 4 (S.D.N.Y. June 22, 2001) (citing In re Am. Bank Note Holographics, Inc., 127 F. Supp.2d 418, 431 (S.D.N Y 2001) (noting that "[a]lthough the law in this Circuit has not been uniform, the trend of the district courts in this Circuit is to use the percentage of the fund approach to calculate attorneys' fees") (citations omitted).
Congress has also suggested that the percentage of find method is the correct route to follow. In enacting the Private Securities Litigation Reform Act, Congress provided that "Total attorneys' fees and expenses awarded by the court to counsel for the plaintiff class shall not exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class." 15 U.S.C. § 78u-4(a)(6). Though the Act is not applicable to this action because it does not apply to cases commenced before and pending as of the effective date of the Act, December 22, 1995, this Congressional Statement represents strong evidence of the growing trend of a return to use of the percentage method.
In urging this Court to apply the percentage method to determine the appropriate amount of fees to be awarded in this case, plaintiffs' counsel argue that 30% is a proper benchmark for percentage fee awards. (Pls.' Mem. at 18-19) (citing, inter alia, In re Baldwin-United Corp. Single Premium Deferred Annuities Litig., MDL 581 (CLB), M-21-35 (CLB), slip op. at 10-11 (S.D.N.Y. Sept. 4, 1990) and In Re Activision Sec. Litig., 723 F. Supp. 1373, 1378 (N.D. Cal. 1989)). While these district court decisions may contain suggestions for determining a benchmark, this circuit has indicated that "[w]e are nonetheless disturbed by the essential notion of a benchmark," and has rejected the notion of beginning a common fund attorneys' fees analysis with even a 25% benchmark, noting that "even a theoretical construct as flexible as a 'benchmark' seems to offer an all too tempting substitute for the searching assessment that should properly be performed in each case."Goldberger v. Integrated Res., Inc., 209 F.3d at 51-52. Although recognizing that district courts have "apparently eased into a practice of 'systematically' awarding fees in the 25% range, 'regardless of type of case, benefits to the class, numbers of hours billed, size of fund, size of plaintiff class, or any other relevant factor,'" the court inGoldberger expressed its concerns, stating: "we question whether a fully informed group of plaintiffs able to negotiate collectively would routinely agree to pay their lawyers a fee of 25% of a multi-million dollar settlement." Id. (citing the Third Circuit Task Force, 108 F.R.D. at 274 n. 32). The court further noted that "[s]tarting an analysis with a benchmark could easily lead to routine windfalls where the recovered fund runs into the multi-millions" which would go against the goals the circuit has noted since the Grinnell opinions. Id. at 52. In explaining its concerns, the court in Goldberger noted that the "principal analytical flaw" in the argument in support of a benchmark "lies in [the] assumption that there is a substantial contingency risk in every common fund case." Id. Thus, the court held that it "continue[s] to approach fee awards 'with an eye to moderation.'" Id. at 53. (quoting Grinnell II, 560 F.2d at 1099 (quoting Grinnell I, 495 F.2d at 470)).
Plaintiffs' counsel cite numerous cases for the proposition that their request for fees in the amount of approximately 30% of the settlement fund is reasonable and presumptively proper. (Pls.' Mem. of Law at 17-20). However, the cases upon which they rely pre-date the Goldberger court's admonition that use of a benchmark is not warranted, and that there must be a return to approaching fee awards with an eye toward moderation. See, e.g., In re Spectrum Info. Techs., Inc. Sec. Litig., No. 93 CV 2195, Final Order Judgment (E.D.N.Y. Feb. 28, 1997) (awarding 30% in fees); In re Crazy Eddie Sec. Litig., 824 F. Supp. at 325-26 (awarding 34% of $42,000,000.00 fund in fees); In re Gulf Oil/Cities Serv. Tender Offer Litig., 142 F.R.D. 588, 597 (S.D.N.Y. 1992) (awarding 30% in fees); Golden v. Shulman, [1988-1989 Transfer Binder], Fed. Sec. L. Rep. (CCH) 94, 060 at 90, 953 (E.D.N.Y. Sept. 30, 1988) (holding that 30% "is well within the range of awards allowed by courts in this circuit"). In fact, in the litany of decisions cited by plaintiffs' counsel, consisting of over 30 decisions from various courts in the Second Circuit, there are only three decisions written in the last five years in this circuit which allow a 30% award. of these three decisions, none were decided after the Goldberger decision. (See Pls.' Mem. of Law at 17-20 (citing In re Jennifer Convertibles Sec. Litig., No. 94 CV 5570, Order (E.D.N.Y. Nov. 20, 1998); In Re Spectrum Info. Techs., Inc. Sec. Litig., No. 93 CV 2195, inal Order Judgment; Kurzweil v. Philip Morris Cos., Inc., No. 94 CV 2373, 1999 WL 1076 105, at 1, 3 (S.D.N.Y. Nov. 30, 1999)).
Contrary to plaintiffs' counsel's argument, the trend within this circuit after Goldberger has been to award attorneys' fees in amounts considerably less than 30% of common funds in securities class actions, even where there is a substantial contingency risk. See, e.g., In re Dreyfus Aggressive Growth Mut. Fund Litig., 2001 WL 709262, at 7 (awarding fees equal to 15% of the common fund); Varljen v. H.J. Meyers Co., Inc., No. 97 CV 6742, 2000 WL 1683656, at 5 (S.D.N.Y. Nov. 8, 2000) (awarding 20% of the fund as fees in an action where there had been no trial and not even full discovery); In re Am. Bank Note Holographics, Inc., 127 F. Supp. 2d at 433 (rejecting a 30% claim and awarding 25%, stating that counsel should be made to bear some risk); cf., In re Blech Sec. Litig., Nos. 94 CV 7696, 95 CV 6422, 2000 WL 66 1680, at 5 (S.D.N.Y. May 19, 2000) (awarding 30%, but only where the 30% represented a negative multiplier of the lodestar); but see Steiner v. Williams, No. 99 CV 10186, 2001 WL 604035, at 7 (S.D.N.Y. May 31, 2001) (awarding 30% because plaintiffs' argument was "novel and risky" and because "counsel took a tremendous risk that, in-the end, nothing would be recovered").
Plaintiffs' counsel argue that public policy is advanced when there are substantial percentage fee awards in securities class actions. Counsel note that private securities class actions "provide 'a most effective weapon in the enforcement' of the securities laws and are 'a necessary supplement to [Securities and Exchange] Commission action.'" Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985) (quotingJ.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)).
One district court has noted that this argument is often extended to suggest "that actions for violations of the securities law are often viable only through the economies of scale of a class action, and that quality attorneys would not assume the risks inherent in such actions absent the promise of large returns." In re Dreyfus Aggressive Growth Mut. Fund Litig, 2001 WL 709262, at 4. The court, however, then went on to refute what plaintiffs suggest is conventional wisdom, noting that it was "not persuaded that meritorious cases would go unlitigated or poorly litigated but for the hope of a 30% fee. . . . What empirical data does exist indicates that all but a small percentage of class actions settle, thereby guaranteeing counsel payment of fees and minimizing the risks associated with contingency fee litigations." Id. This statement by the court in In re Dreyfus Aggressive Growth Mut. Fund Litig. is supported by a Congressional finding that approximately 300 securities lawsuits are filed each year, of which 93% are settled. Id. at n. 10 (citing S. Rep. No. 104-98, at 9 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 687). While these findings do not suggest that the pursuit of a securities class action is risk-free, nor do they show that a given case may not be extremely complex, the findings do show that the risks in taking on meritorious cases may not be as prevalent as was once thought, and as steep as plaintiffs' counsel might argue. Therefore, the potential of a large payday guaranteed by a high percentage benchmark may not be necessary in order to persuade plaintiffs' attorneys to fulfill the public necessity of bringing these class actions.
C. A 25% Fee Award Is Fair and Reasonable Given an Application of the Goldberger Criteria
Having considered plaintiffs' counsel's request for an award of fees and expenses in the amount of $8 million, representing 33.3% of the total settlement, this Court does not feel that such a request is reasonable, given an application of the Goldberger criteria for determining a reasonable percentage fee to the facts before the Court, and the general trend in this circuit away from large percentage awards.
Turning to the first Goldberger criterion, the time and labor expended by counsel, this factor favors a sizeable fee award here. Counsel claim to have expended over 13, 000 hours on this case, with a few members of co-lead counsel's firms spending over 1000 hours on the case individually. (See Compendium of Pls.' Counsel's Contemporaneous Time Records). Based upon a review of the affidavits and the supplemental report submitted by counsel, it appears that the total hourly charges of all counsel is $5,052,602.70.
This represents the hours billed by 133 attorneys rand 94 paralegals from 31 firms.
In analyzing the reasonableness of the hours expended, the docket sheet for the case reflects 73 numbered entries. of the total 13, 000 hours billed, it appears that plaintiffs seeks approximately 563 hours in connection with the preparation of pleadings in this action and in the related cases prior to consolidation. Among other things, plaintiffs filed a complaint, an order to show cause requesting a temporary restraining order, a preliminary injunction and expedited discovery, a consolidated amended complaint combining 22 previously filed cases, a second amended complaint, a joint status report, responses to defendants' two motions to dismiss, a motion for certification of an options class, a motion for approval of the proposed settlement and various letters to the court regarding a variety of issues. In addition, the attorneys appeared before this Court on at least three occasions to deal with discovery matters and settlement negotiations, and appeared for oral argument on several motions before the district.
Not reflected on the docket sheet, however, is the amount of time spent by counsel on various discovery matters and factual and legal research. A review of counsel's submissions suggests that plaintiffs' counsel expended hundreds of hours gathering the necessary discovery and conducting the necessary research to pursue these claims. As noted above, the discovery in this case was complicated by the need to obtain documents and depose witnesses in Canada and the United Kingdom, requiring extensive research and litigation in this Court, as well as in the Canadian courts. Finally, counsel spent considerable time consulting with the various damages experts in an effort to calculate a reasonable estimate of losses suffered in order to further settlement negotiations.
Although the court, in analyzing the records, finds that the amount of hours billed may be somewhat excessive, the parties have been through a nearly six year long process to reach this settlement, and this Court finds that they deserve to be properly compensated for their efforts.
See discussion infra at 30-31.
The second Goldberger criterion — the magnitude and complexities of the litigation — again speaks for a sizeable fee award. This case involved over 25,000 potential class members. (Pls.' Pre-Hearing Status Report at 2). The magnitude of the potential class is further evidenced by the fact that prior to the consolidation, there were 22 separate actions filed by shareholders throughout the United States and, as a consequence, there are 31 law firms participating in this application for attorneys' fees. This case has also proven to be extremely complex, as evidenced by the need for counsel to conduct extensive discovery, including international discovery, in Canada, the Middle East, Sudan and the Channel Islands. The research performed in the preparation and service of letters rogatory necessary in order to conduct discovery of witnesses and obtain documents from the VSE in Canada and the litigation relating to those letters rogatory were time consuming and difficult. Similarly, there were numerous issues involved in plaintiffs' counsel's preparation to prove the defendants' scienter as to the alleged violations of securities laws, a key element in plaintiffs' case should the case have gone to trial. Finally, negotiation of the settlement was also a complicated process, requiring an analysis of the distribution of the funds to various categories of class members.
With respect to the third criterion — risk of success — the Goldberger court noted that "[w]e have historically labeled the risk of success as 'perhaps the foremost' factor to be considered in determining whether to award an enhancement." Goldberger v. Integrated Res., Inc., 209 F.3d at 54 (quoting Grinnell I, 495 F.2d at 471). Therefore, though the risk of the litigation may nominally be listed as the "third" Goldberger criterion, the courts consider this factor to be the most important in determining the reasonableness of a fee award. Given the facts of this litigation, it is clear that from the beginning there were substantial risks involved this litigation. First, unlike the litigation in Goldberger, which was preceded by a lengthy SEC investigation into the activities of Drexel Burnham Lambert and Michael Milken, and by guilty pleas to charges of securities fraud, there was no such precedent here. Although the NASDAQ and British Columbia Securities Commission ("BCSC") instituted internal investigations into the Arakis matter, the NASDAQ investigation ended quickly without any findings, and the BCSC investigation ended in two separate consent decrees, neither of which have had an impact on this case due to the differences between the securities laws in the United States and Canada. (Pls.' Mem. of Law at 37-8). Thus, plaintiffs' counsel had to do most of the investigative ground work on their own. Second, it was not until the lawsuit and settlement negotiations were well underway that defendants obtained insurance coverage for this action. Instead, when plaintiffs' counsel initially agreed to pursue this case there was the distinct possibility that Arakis would be unable to offer the class a substantial settlement and the real risk that Arakis would become insolvent during the litigation, leaving the class members, and therefore their counsel, without any recovery. Not only did plaintiffs' counsel dedicate substantial attorneys' hours and incur over $400,000.00 in expenses on a wholly contingent basis, but also there were significant risks in plaintiffs' ability to prove scienter in the face of defendants' vigorously advanced good faith defense and contention that no significant amount of shares were sold by defendants during the class period. (Joint Aff. ¶¶ 90, 96). Additional challenges to plaintiffs' recovery stemmed from problems in establishing control person liability, causation and damages. (Id. ¶¶ 99, 101, 104).
While this Court acknowledges that there were risks inherent in this litigation, there are countervailing considerations which serve to minimize the risk taken on by counsel. First, although counsel was required to assume the laboring oar in undertaking the investigation into the company's actions, there was substantial news coverage of the Arakis situation in the financial press, possibly attributable to the explosiveness of the situation in the Sudan and the dramatic fluctuations in the price of Arakis stock. This press coverage undoubtedly aided counsel in their preparation for settlement negotiations, as evidenced by the time spent by counsel reviewing this coverage. (See Compendium of Pls.' Counsel's Contemporaneous Time Records).
Second, this Court is mindful of the fact, noted supra, that 90% of these class action cases settle — a statistic noted by theGoldberger court, 209 F.3d at 52, and further supported by an empirical study published in the Stanford Law Review, which notes that there appears to be no appreciable risk of non-recovery in securities class actions, because "virtually all cases are settled." See Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 578 (1991). Given these statistics, the plaintiffs' counsel seemingly faced a one in ten chance of not settling when they took on the case.
Further, while there were some complex discovery issues and certainly contentious settlement negotiations involved in the case, the case is significantly different from Levy v. Southbrook, one of the two cases discussed in Steiner v. Williams, 2001 WL 604035, at 7. There the corporation, which was the beneficiary of a derivative action seeking the recovery of short-swing profits, asserted a novel and risky theory which the SEC refused to endorse, and which had been rejected by all of the courts that had previously considered it, thus justifying a fee amounting to 30% of the $20,000,000.00 total recovered by the corporation. By contrast, the claims asserted here are not uncommon in securities class actions which allege misrepresentations by executives of the defendant corporation; the main difference is that the case involved complex foreign discovery issues. Given the high likelihood of success in this action in the form of a substantial settlement, despite the initial lack of insurance on the part of Arakis and the existence of some complex discovery, this Court does not find the risk to plaintiffs' counsel, in undertaking the representation of the plaintiff class in this action, to be substantial enough to warrant an extraordinary fee award based on risk. On the other hand, because there was, as noted above, a certain degree of risk involved, this Court does not find that a severe decrease in the fee award is warranted. See Goldberger v. Integrated Res., Inc., 209 F.3d 43 (allowing only a 4% fee as there was very low risk).
ft is interesting to note that in the companion class action,Steiner v. Williams, 2001 WL 604035, at 3-6, the court denied the plaintiffs' counsel's request for 30% in fees in its entirety, noting that under the Goldberger analysis, counsel had failed to establish that a substantial benefit was conferred on the class by the settlement which did not involve any payment for money.
The fourth Goldberger criterion, the quality of representation, favors a sizeable fee award. This Court is familiar with the collective experience of counsel, particularly Co-Lead counsel, through its review of the firm resumes presented to the Court by counsel and, more importantly, is familiar with the work performed on the case based on its interaction with counsel during the discovery process as well as settlement negotiations. (See App. to Joint Aff.). This Court has no doubt that counsel are experienced in this field and that they represented the class successfully. This is further evidenced by the size of the recovery counsel were able to obtain for the class. Even if one were to consider the amount recovered relative to the largest reasonable estimate of damages presented by plaintiffs' experts — $106,400,000.00 which was suggested by John C. Hammerslough — the settlement recovered nearly 23% of damages possibly provable at trial. As was noted, however, this estimate is likely high and would only be recovered at trial if the plaintiffs succeeded on all claims and on all theories of recovery.
The fifth Goldberger criterion, the relation of the requested fee to the settlement, speaks against awarding the one-third of the settlement requested here as the fee. Given that the trend in this circuit has been to move away from awards of attorneys' fees equivalent to one-third of the common fund in securities class actions except in extraordinary cases, careful scrutiny of the fee relative to the settlement is warranted. As this is not an exceedingly extraordinary case, it is not clear why a fee of this magnitude is warranted in light of the trend within the circuit.
The sixth and final Goldberger criterion, public policy considerations, also favors a reduction in the amount of the fees requested. The Court's chief concern is that the requested fee is actually larger than the amount claimed from the fund by class members. As noted, the amount of actual claims made on the reversionary fund to date in this action totals $7,200,471.94. (Pls.' Pre-Hearing Status Report at 3). The amount that plaintiffs' counsel have requested in fees and expenses, $8,000,000.00, is larger than the amount claimed, with the fees requested totaling $7,259,052.02 alone. (Pls.' Supp. Report at 7).
Although the Supreme Court has held that an award of attorney's fees in a class action is to be based on the total fund available to the class rather than the amount actually claimed, the circuits are split on how to deal with the arguable necessity of a rational connection between the size of the actual distribution to the class and the amount of requested attorneys' fees. See Boeing Co. v. Van Gemert, 444 U.S. 472 (1980). In arguing that the size of the actual distribution should not be considered, plaintiffs' counsel cite Waters v. Int'l Precious Metals Corp., 190 F.3d 1291 (11th Cir. 1999), cert. denied, 530 U.S. 1223 (2000), where the Eleventh Circuit upheld a fee award of approximately twice the amount actually claimed by the class from the fund. Plaintiffs' counsel contend that Waters stands for the proposition that Boeing v. Van Gemert precludes the Court from comparing the actual amount of claims made against the reversionary fund, requiring consideration of the entire sum as the size of the benefit conferred upon the class. (See Pls.' Supp. Report at 13). The court in Waters quoted the district court in noting that in long litigations, such as this, the result will often be that the fees requested are actually higher than the amount claimed from the reversionary fund by the class, because "'after seven years the number of class members actually asserting claims will be significantly lower than the class membership.'" Waters v. Int'l Precious Metals Corp., 190 F.3d at 1295.
While the Eleventh Circuit is likely correct in its assessment of the mindset of a class at the close of a lengthy litigation, the fact that class apathy may yield disproportionately high attorneys' fees still troubles this Court. First, the allowance of attorneys' fees in an amount greater than the sum actually claimed by the class from the reversionary fund seems, prima facie, to create a windfall for the attorneys. As the Second Circuit has noted, "[t]he express goal of the Grinnell opinions was to prevent unwarranted windfalls for attorneys." Goldberger v. Integrated Res., Inc., 209 F.3d at 49 (citing Grinnell II, 560 F.2d at 1098-1099, and Grinnell I, 495 F.2d at 469-71).
Moreover, one member of the Supreme Court has expressed her concern over the potential consequences of not comparing a fee award with the actual amount claimed. In a statement issued in connection with the denial of the petition for a writ of certiorari in Waters, Justice O'Connor noted that not reviewing fee awards in relation to actual claims "could encourage the filing of needless lawsuits where, because the value of each class member's individual claim is small compared to the transaction costs in obtaining recovery, the actual distribution to the class will inevitably be minimal." Int'l Precious Metals Corp. v. Waters, 530 U.S. 1223 (2000) (denying a petition for a writ of certiorari). While Justice O'Connor's statement is in no way binding on this Court, the concerns she voiced are legitimate and shared by others.See, e.g., Strong v. BellSouth Telecomm., Inc., 137 F.3d 844, 852 (5th Cir. 1998); Union Fid. Life Ins. Co. v. McCurdy, 781 So.2d 186, 193-95 (Ala. 2000). Indeed, at least one circuit court has held that a district court did not abuse its discretion in basing a fee award on the actual payout rather than on the size of the reversionary fund. See Strong v. BellSouth Telecomm., Inc., 137 F.3d at 852. While these public policy considerations are not dispositive in this Court's consideration of the request for attorneys' fees presently before it, and, indeed, it is "not the usual" course of action to consider the size of the fee award relative to the amount actually claimed by the class from the fund, id. at 853, these concerns, when considered along with the other Goldberger criterion, suggest that caution is required where, as here, counsel is seeking an award of fees that is not only one-third of the total settlement but more than 100% of the amount actually paid to the class members.
Having considered the Goldberger criterion, this Court recommends that plaintiffs' attorneys be awarded a fee of $6,000,000.00, which is the equivalent of 25% of the common fund created as a result of this settlement. This percentage, as noted supra, is more in line with the trend of recent percentage awards in this circuit than the requested one-third, and is in fact toward the high end of the range of recent awards. See, e.g., In re Dreyfus Aggressive Growth Mut. Fund Litig., 2001 WL 709262, at 4-6 (rejecting a 30% award as "at the far end of the reasonableness spectrum" and awarding 15%); Varljen v. H.J. Myers Co., 2000 WL 1683656, at 5 (awarding 20%); In re Fine Host Corp. Sec. Litig., 2000 WL 33116538, at 5 (awarding 17.5%). This percentage award is significantly higher than that awarded in Goldberger (4%) and In re Dreyfus Aggressive Growth Mut. Fund Litig. (15%), where both courts focused on the assistance counsel received from SEC investigations and press reports, allowing them to follow the path prepared for them by others. Although there was no such assistance by the regulatory commissions here, the Arakis situation was highly visible and received much press coverage. While a 25% award is less than the 30% awarded inSteiner v. Williams, 2001 WL 604035, at 7, the difference there was the novel legal theory presented by plaintiffs' counsel, a risk that was not present here. An award of 25% was found to be reasonable in In re Am. Bank Note Holographics, where, like here, it was questionable whether defendants would be able to make any sort of substantial payment in a settlement given their precarious financial situation and lack of proper insurance coverage; given these factors, the court saw it as reasonable to ask counsel to absorb some of this risk. 127 F. Supp. 2d at 432-33.
The 25% fee award also appears reasonable based on a "cross-check" of the percentage award against the lodestar, as suggested by the Second Circuit. See Goldberger v. Integrated Res., Inc., 209 F.3d at 50 (citation omitted). An award of $6,000,000.00 in fees, equivalent to 25% of the fund, represents a multiplier of approximately 1.2 on the claimed lodestar of the plaintiffs' counsel, $5,052,602.70. (Pls.' Supp. Report at 7). Such a multiplier would not deviate materially from that requested by plaintiffs' counsel in their memorandum where they request a multiplier of 1.43 on the lodestar. (Id.) Nor would a multiplier of 1.2 deviate materially from post-Goldberger decisions of courts within the Second Circuit as to whether or not to apply a multiplier to a given lodestar. See In re Dreyfus Aggressive Growth Mut. Fund Litig., 2001 WL 709262, at 6 (awarding no multiplier) (citingGoldberger v. Integrated Res., Inc., 209 F.3d at 54); In re Auction Houses Antitrust Litig., No. 00 CV 648, 2001 WL 210697, at 3 (S.D.N.Y. Feb. 26, 2001) (awarding no multiplier); Varljen v. H.J. Meyers Co., Inc., 2000 WL 1683656, at 6 (refusing to apply a 1.6 multiplier)).
When deciding whether to apply a multiplier to a claimed lodestar, the court should consider the following factors:
"(i) the contingent nature of the expected compensation for services rendered; (ii) the consequent risk of non-payment viewed as of the time of the filing of the suit; (iii) the quality of representation; and (iv) the results achieved."Varljen v. H.J. Meyers Co., Inc., 2000 WL 1683656, at 4 (quoting In re Boesky Sec. Litig., 888 F. Supp. 551, 562 (S.D.N.Y. 1995)). While this Court recognizes the high level of quality of representation that was present in this litigation and finds that the results achieved by counsel for the class were impressive, it questions whether the risk of non-payment was so substantial in this action as to merit a higher multiplier, particularly in light of the foregoing discussion of the high rate of settlements in securities class actions.
More significant, however, is this Court's finding that the costs incurred by counsel due to the contingent nature of the fees in this action have been adequately accounted for in the lodestar figure counsel has presented to the Court. Indeed, it is arguable that in some respects this lodestar figure appears to be somewhat inflated.
First, the Court is concerned as to whether there may have been excessive billing with regard to certain motions in the case. Specifically, plaintiffs' counsel claim to have spent approximately 475 billable hours on the Memorandum of Law in Opposition to Defendants' Motion to Dismiss, seeking compensation for the work of five different law firms, many using partners to prepare a 58 page document. (See Compendium of Plaintiffs' Counsel's Contemporaneous Time Records at Exs. 1, 2, 18, 29, 31). Although the Court recognizes that defeating this motion was necessary to the success of plaintiffs' case, it questions whether such an amount of time, much of which was billed by partners, at an approximate cost of $ 172,000.00 was necessary in order to prepare this 58 page document, which although clearly requiring research does not appear to have presented overly complex or novel issues of law. (See Mem. of Law in Opposition to Defs.' Motion to Dismiss, dated May 16, 1997).
The Court notes, as an aside, that this Memorandum required approximately 8 hours of work per page at a cost of $3,000.00 per page.
Second, it is questionable whether the hourly rates claimed by counsel are inflated. Counsel have claimed hourly rates often exceeding $450.00, ranging to over $500.00. (See App. of Exs. to Joint Aff.). While the Court recognizes the ability and experience of counsel, it also notes that at least one court in this circuit has examined the rates claimed by firms participating heavily in securities class actions, and opined that such rates are on the high end of the range of rates charged by attorneys in the New York City area. See Wallace v. Fox, 7 F. Supp.2d 132 (D. Conn. 1998). In reducing the requested rates substantially, the court in Wallace v. Fox noted that rates should not be set in reference to those paid by large corporate clients as "[c]orporations are subject to corporate tax rates as high as fifty percent and may deduct legal fees," and "[i]t is not reasonable to expect unsubsidized shareholders to match corporate clients' abilities to pay legal fees." Id. at 139, appendix (reducing rates from as high as $550.00 to a maximum of $300.00).
This is the correct sample of fees to consider, as the Second Circuit has noted that "[i]n calculating the lodestar fee, district courts generally must apply prevailing market rates 'for comparable attorneys of comparable skill and standing in the pertinent legal community.'" Savoie II, 166 F.3d at 463 (quoting Kirsch v. Fleet St., Ltd., 148 F.3d 149, 172 (2d Cir. 1998)).
While this Court is applying the percentage of fund method, rather than an exhaustive lodestar review, and therefore has not engaged in the exercise of reducing each attorney's requested rate, it is concerned that the rates requested here seem to be somewhat higher than reasonable for comparable counsel in this community. Indeed, the Second Circuit itself has noted that a rate of $550.00 per hour is at the high end of the prevailing range and therefore, the district court's finding that the rates were excessive was not an abuse of discretion by the district court. Goldberger v. Integrated Res., Inc., 209 F.3d at 56 (citing Altman Weil Pensa Inc., Survey of Law Firm Economics, at II-5 (1997), noting that the average billing rate for the top decile of partners in the Northeast was $295.00 per hour in 1997; and Cities At A Glance: High And Low Hourly Billing Rates, Nat'l L. J., Dec. 21, 1998, at B12 (listing hourly rates in cities across the country)). This use of rates which are higher than reasonable serves to meet the concerns of plaintiffs' counsel that they will be properly compensated for value lost due to the contingent nature of the fee arrangement and for the risk associated with this litigation, and alleviates the necessity of the application of a heightened multiplier here. (Pls.' Mem. of Law at 39-40); see also Savoie II, 166 F.3d at 464.
Given some evidence of excessive billing, visible on only a cursory review of the time records, and the high rates used by plaintiffs' counsel in calculating their lodestar, the 1.2 multiplier on the plaintiffs' counsel's claimed lodestar, yielding an award of 25% of the settlement fund, is reasonable. Considering that the appropriate lodestar of plaintiffs' counsel is, in all probability, significantly lower than that requested, based on the factors discussed above, the actual multiplier is in reality likely to be much greater than 1.2 and closer to the requested multiplier of 1.43.
Accordingly, based on all of the factors addressed above, this Court respectfully recommends that plaintiffs' counsel be awarded fees in the amount of $6,000,000.00 or 25% of the total fund.
D. Plaintiffs' Counsel's Request for Reimbursement of Expenses Should be Granted
Plaintiffs' counsel have requested that they be reimbursed for expenses from the common fund in the amount of $740,947.98. (Pls.' Supp. Report at 4). The largest portion of this request, $316,093.35, has gone to the Garden City Group, which is the claims administrator selected to assist plaintiffs' counsel in administering the common fund recovered in the settlement. (Id.) While that charge may seem high, reimbursement for such funds for the retention of Garden City Group was previously approved by the district court. (See Order of Preliminary Approval and Procedures for Final Approval of Settlement, approved on August 16, 2000 at ¶ 6). With respect to the remainder of expenses requested by plaintiffs' counsel, given the scope and complexity of this litigation, the expenses requested by plaintiffs' counsel are reasonable, and this Court recommends that plaintiffs' counsel's request for reimbursement of expenses by granted in full.
Courts in the Second Circuit normally grant expense requests in common fund cases as a matter of course. See, e.g., In re Dreyfus Aggressive Growth Mut. Fund Litig, 2001 WL 709262, at 7 (granting expenses in a securities class action in a one sentence statement);Wallace v. Fox, 7 F. Supp. 2d at 142 (granting costs summarily); In re Fine Host Corp. Sec. Litig., 2000 WL 33116538, at 6 (granting costs summarily).
CONCLUSION
Given the foregoing analysis of the criteria for evaluating attorneys' fees awards in common fund cases set forth by the Second Circuit inGoldberger v. Integrated Resources, Inc., this Court respectfully recommends that plaintiffs' counsel's request for attorneys' fees be granted and that they be awarded 25% of the settlement fund — $6,000,000.00 — in fees. This award is reasonable given the risks taken on by plaintiffs' counsel and the trend within this circuit toward lower percentage fee awards. Such an award is also reasonable when compared with the lodestar claimed by counsel, as it yields a multiplier of 1.2 to a lodestar which is likely higher than reasonable.This Court also respectfully recommends that plaintiffs' counsel's request for reimbursement of expenses in the amount of $740,947.98 be granted. The request is reasonable given the length of the litigation, and the nature of the expenses requested.
Any objections to this Report and Recommendation must be filed with the Clerk of the Court, with a copy to the undersigned, within ten (10) days of receipt of this Report. Failure to file objections within the specified time waives the right to appeal the District Court's Order. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(e), 72; Small v. Sec'y of Health and Human Servs., 892 F.2d 15, 16 (2d Cir. 1989).
The Clerk is directed to mail copies of this Report and Recommendation to the parties.
SO ORDERED.