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IN RE CENDANT CORP. SECURITIES LITIGATION

August 16, 2000

IN RE CENDANT CORPORATION SECURITIES LITIGATION


The opinion of the court was delivered by: Walls, District Judge.

Lead Counsel, the law firms of Bernstein Litowitz Berger & Grossman LLP ("BLBG") and Barrack, Rodos & Bacine ("BRB"), petition the Court for an award of attorneys' fees in the amount of 8.275% of the total settlement fund (after deducting costs and expenses of litigation); a total fee award of $262,468,857. One of three co-Lead Plaintiffs, the New York City Pension Fund ("NYCPF"), and three other class members object to the request. The requested fee is awarded and expenses in the amount of $14,623,806 are allowed.

A. Background

On April 15, 1998, Cendant announced that it had discovered accounting irregularities in a former CUC business unit and that Cendant's financial statements for 1997, and possibly earlier years, would be restated. Thereafter, a number of purchasers of Cendant securities filed class actions against Cendant and other defendants. On May 29, 1998, this Court consolidated all of the actions then pending against Cendant under In re Cendant Corporation [Securities] Litigation, Civ. No. 98-1664 (WHW).

On August 4, 1998, the Court appointed the New York State Common Retirement Fund ("NYSCRF"), the California Public Employees' Retirement System ("CalPERS"), and NYCPF as co-Lead Plaintiffs for the class action against Cendant Corporation filed by those who held Cendant stock other than PRIDES, another form of security issued by Cendant.

At that time, this Court announced the procedure it would use to select lead counsel to represent the plaintiff class. The Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 77k, 77l, 77z-1, 77z-2, 78j-1, 78t, 78u, 78u-4, & 78u-5, attempts to protect the plaintiff class to ensure that total attorneys' fees and expenses awarded by a court to counsel for the plaintiff class do not exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class. 15 U.S.C. § 77z-1 (a)(6); § 78u-4(a)(6). To implement the objectives of the PSLRA, this Court determined that the selection of counsel should be the subject of competitive, adversarial bidding. In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998).

The Court invited any attorney who wanted to be lead counsel for the class of shareholders excluding the PRIDES-holders to submit a sealed bid to the Court.*fn1 Fifteen law firms from around the country submitted twelve separate bids which, among other requirements, described their professional qualifications and ability to undertake and maintain all costs of the litigation. The Court reserved the right to reject any bid which it deemed not to have been made in good faith or which was contrary to the interests of either plaintiff class. Id. Recognizing that the PSLRA gives Lead Plaintiffs the statutory opportunity to choose their counsel, subject to Court approval, the Court gave Lead Plaintiffs' original counsel the right of first refusal: if plaintiffs' original counsel was qualified and had not submitted the lowest qualified bid, it would be given the opportunity to agree to the terms of what the Court had found to be the lowest qualified bid. Bidders BLBG and BRB, the original counsel for co-Lead Plaintiffs, exercised that right and accepted the terms and fee bid schedule which the Court had determined to be the lowest qualified bid to represent the class. On October 13, 1998, the Court appointed BLBG and BRB as Lead Counsel for the class.

B. Lead Counsel's Analysis of Fees in Large Class Actions

Lead Counsel state "[t]he Supreme Court has . . . consistently held that the percentage [of settlement fund] approach is the correct method for determining attorneys' fees in common fund cases." LC Brf. at 9 (citing Blum v. Stenson, 465 U.S. 886, 900 n. 16, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984)). They rely, in part, on the conclusions of a report issued by the Third Circuit Task Force which analyzed court-awarded attorneys' fees (the "Task Force Report"). See Court-Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237, 255-56 (Oct. 8, 1985). That report criticized the lodestar method of awarding fees and recommended:

that in the traditional common-fund situation and in those statutory fee cases that are likely to result in a settlement fund from which adequate counsel fees can be paid, the district court, on motion or its own initiative and at the earliest practicable moment, should attempt to establish a percentage fee arrangement agreeable to the Bench and to plaintiff's counsel. . . .

In 1995, the Third Circuit expressly determined that a percentage of recovery approach was the most appropriate method of fee calculation in common fund cases. See In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir.), cert. denied, 516 U.S. 824, 116 S.Ct. 88, 133 L.Ed.2d 45 (1995); see also In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 F.3d 283, 332 (3d Cir. 1998), cert. denied, 525 U.S. 1114, 119 S.Ct. 890, 142 L.Ed.2d 789 (1999).*fn2 Courts approve of the percentage recovery fee award because it "more accurately reflects the economics of litigation practice" and is "result-oriented." Swedish Hosp. Corp. v. Shalala, 1 F.3d 1261, 1269 (D.C.Cir. 1993).

Importantly, Congress, by the PSLRA, adopted the percentage of recovery method. 15 U.S.C. § 78u-4(a)(6) states: "Total attorneys' fees and expenses awarded by the court to counsel shall not exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class." This admonition was recognized by this Court at the time it adopted the auction process — "To seek the requisite reasonableness of costs for such talent which is to be borne by the entire plaintiff's group in this case in the event of recovery, it is my judgment that legal fees also be the subject of adversarial competition." Transcript of August 4, 1998 Hearing at 109-114 (emphasis added).

The "lowest qualified bid," determined by the Court, provides for fees ranging from 2%-9% of recovery. As the recovery rises, the fee percentage increases. Lead Counsel support this methodology and refer to Professor John C. Coffee, Jr.'s declaration submitted to the Court in August 1998:

My point is that the first dollars in any settlement are easy, while the marginal dollars become progressively harder. An optimal fee formula should reward the attorney for working harder and gaining more for the class. This does not mean that the attorneys will necessarily receive more money. A fee formula that starts low (at 5% to 10% and ascends to 25%) may produce the same (or lesser) compensation as one that starts at 25% and then descends to 5% — but it will clearly work better to discourage "cheap" early settlements. . . .

Coffee Decl. at ¶ 18. Lead Counsel further assert that the structure adopted by auction should not now be "renegotiated."

Lead Counsel argue that irrespective of the auction process, 8.275% of the recovery, net of expenses, is reasonable in relation to other awards in class action cases. The General Motors court noted that "fee awards have ranged from nineteen percent to forty-five percent of the settlement fund." 55 F.3d at 822. Counsel also surveyed fees awarded by judges within the districts of the Third Circuit which routinely were between 30-35% of the settlement. Brf. at 23-24, 23 n. 8. A study by the National Economic Research Associates ("NERA") done in 1994, and updated in 1996, concluded "[r]egardless of case size, fees average 32 percent of the settlement. This finding holds even for cases with settlements in excess of $50 million." See Denise Martin et al., National Econ. Research Ass'n, Recent Trends IV: What Explains Filings and Settlements in Shareholder Class Actions? 10-11 (NERA 1996).

Lead Counsel focus first on fees awarded in larger securities class actions — cases where the class recoveries ranged from $62-$220 million. Awards for these cases ranged from a low of 20% in the case with a $200 million recovery to a high of 33.3% for cases with recoveries of $77.5 million and $110 million. Brf. at 24-25 (chart).

They also survey recoveries in what they label "mega-fund" cases — billion dollar plus recoveries: In re NASDAQ Market-Makers Antitrust Litigation, 187 F.R.D. 465 (S.D.N.Y. 1998) ($1.027 billion recovery); Shaw v. Toshiba America Information Systems, Inc., 91 F. Supp.2d 942 (E.D.Tex. 2000) (estimated $1.1 billion); and various cases against tobacco companies brought by certain states ($17.3 billion in Texas, $13 billion in Florida, and $4 billion in Mississippi). The NASDAQ fee was 14%, plus expenses of the recovery; the Toshiba fee was approximately 15% of recovery; five firms litigating in Texas on behalf of the state against the tobacco industry will receive 19% of the state's recovery; eleven firms in Florida will receive approximately 25% of the recovery; and thirteen firms in Mississippi, 35% of the recovery. The Toshiba court noted that in "mega-fund cases, where recoveries are very large, fees in the neighborhood of fifteen percent (15%) are common." 91 F. Supp.2d at 989.

As additional support that the fee is justified, counsel rely on many of the arguments offered in favor of settlement — such as the risks of establishing liability and damages and other Girsh factors. See Companion Opinion, No. 98-1664, slip. op. at 34-49 (D.N.J. August 2000) (evaluating settlement).

C. Objectors:

NYC

Co-Lead Plaintiff, NYCPF ("the city"), objects to the fee request. This objection arises from events of June 1998. The fund alleges that during that month, it, together with co-Lead Plaintiffs CalPERS and NYSCRF, entered into a detailed retainer agreement with BLBG and BRB. The fourth section of that agreement contains a fee grid. Fees were based on a percentage of the amount recovered with the fee percentage decreasing as the recovery increased. The percentages set in this agreement were maximum awards or "fee caps": "The fee will be a function of both the timing and size of the recovery but, unless agreed to by the Funds, will in no event exceed the following: . . ." Retainer at 2 (emphasis added). The agreement further states: "In any event [Lead Counsel] will not submit any fee application to the Court without the prior approval of the Funds. . . ." Retainer at 2.

At the hearing on August 4, 1998, Max Berger of BLBG referenced the retainer agreement to argue that Lead Plaintiffs rightly and responsibly selected BLBG and BRB as counsel — "not only did they [plaintiffs] engage in an extensive process in the selection of best counsel . . . but in addition, your Honor, have negotiated the best fee probably ever negotiated in advance . . . . the hardest bargain ever driven in a security fraud class action case." Tr. at 8, 12. On August 4, the three funds were appointed co-Lead Plaintiffs and the auction was instituted. The Court stated "[s]uch [auction] will probably result in reduced costs for the entire group or groups." Tr. at 110. (The city now argues that the anticipated "reduced costs" were not realized but rather resulted in "an increased cost to the class of $76 million." Brf. at 5.)

According to the city, "Lead Plaintiffs were extremely disturbed by [the auction]" and "even discussed pulling out of the case." Pugh Decl. at ¶ 15. The city now argues that it wrote to the Court on August 17, 1998 to suggest "several considerations that we believe are crucial to obtaining the best representation at the lowest price." Letter at 1. In a footnote they added "we recommend that any numbers/percentages in the grid be established as fee caps only, with the actual fee subject to approval by Lead Plaintiffs before submission to the Court."

As noted, BLBG and BRB, although bidders, were not the lowest bidders, but agreed to match the lowest bid of a qualified bidder.*fn3 The city has since reviewed the bids placed and maintains that "[i]t does not appear that lead counsel bid the same percentages as the mileposts it had agreed to in the Retainer." Brf. at 6; Pugh Decl. ¶¶ 10, 19. It is clear that the city's fee grid decreased the percentage-of-recovery allocated as fees as the recovery increased, while the auction-set fee increases with the size of recovery. The city now alleges that post-auction it made an off-the-record objection to the use of the Court's fee schedule because of the existing retainer agreement. Pugh. Decl. ¶ 19. "To the best of Mr. Pugh's [the Assistant Corporation Counsel, City of New York] recollection, the Court agreed that the Retainer was in full force and effect except as to the grid for which the results of the auction would take precedence. The Court acknowledged that the grid represented a cap." Brf. at 7. The Court denies that recollection of Mr. Pugh. When asked by Mr. Pugh, who, with others, was walking out of chambers at the time, if the auction bid prevented Lead Plaintiffs from negotiating a lower fee in the future, the Court remarked "go ahead, if you can." (And Mr. Pugh never reported back to the Court.) That is altogether different from Court approval of a retainer agreement made before the auction, the details of which had not been revealed.

The city now asks the Court to reject the fee sought and set a "reasonable" fee; or to hold an evidentiary hearing to determine the appropriate fee; or to reinstate the retainer agreement and ask Lead Counsel to negotiate a fee with Lead Plaintiffs pursuant to the terms of the retainer.

The city states that it agrees with the percentage-of-recovery fee method of fee calculation but argues that In re Prudential Insurance Co. of America Sales Practices Litigation, 148 F.3d 283, 334 (3d Cir. 1998), cert. denied, 525 U.S. 1114, 119 S.Ct. 890, 142 L.Ed.2d 789 (1999), limits the acceptable percentage. There, the Third Circuit reversed an award of 6.7% of an approximately $1.352 billion settlement and remanded the fee determination to the district court judge to "set forth a reasoned basis and conclusion regarding the proper percentage applicable in this case . . . in light of the magnitude of recovery." 148 F.3d at 340. The city cites the Prudential district court, which noted that "percentage awards generally decrease as the amount of the recovery increases. See In re Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 572, 580 (D.N.J. 1997), vacated and remanded, 148 F.3d 283 (3d Cir. 1998), cert. denied, 525 U.S. 1114, 119 S.Ct. 890, 142 L.Ed.2d 789 (1999). On appeal, the Third Circuit agreed with this premise, but "question[ed] whether the `reduction' implemented "adequately adjusted the fee in relation to the size of the settlement." 148 F.3d at 339. The Circuit Court found that the 6.7% fee represented a higher percentage of recovery than fees in cases with smaller recoveries examined by the trial court — for example a 4.1% fee with a recovery of $183.8 million (In re Baldwin-United); a 5.5% fee of $180 million (Agent Orange); and 7% of a $205 million settlement (MGM Grand). See id. at 339 n. 118 (citing cases).

The city also claims that lodestar must be used as a "cross-check" on the reasonableness of a percentage fee in common fund cases. It contends that Lead Counsel's lodestar indicates that an 8.275% recovery is clearly unreasonable. Here, according to the city, the requested fee is 32.7 times lodestar or $10,861 per hour. "The highest multiplier the City Pension Funds have been able to find in the Third Circuit is 9.3 times lodestar." Brf. at 14 (citing In re Prudential, 148 F.3d at 340 (referencing Weiss v. Mercedes-Benz, 66 F.3d 314 (3d Cir. 1995))). (Time records through December 31, 1999 show that counsel had spent 20,208 hours, a $6,701,557 lodestar. Lead Counsel now estimate that to date lodestar is approximately $8 million.*fn4)

The city contends that such a high fee award/lodestar multiplier is also unreasonable where, as here, "[l]iability . . . was a foregone conclusion." They cite to the (recently unsealed) bid opinion of October 1998 which states: "Basic liability in this case has been conceded by the major corporate defendant. No one needs to be reminded that it was Cendant's public admission on April 15, 1998 that spawned this litigation." In re Cendant Corp. Litig., 191 F.R.D. 387 (D.N.J. 1998). Scrutiny of this case, argues the city, "reveals no justification for an enhancement of attorneys' fees in light of the low contingency risk in this case." Brf. at 16. Moreover, the city attributes at least some of the recovery not to counsel but to experts' input for which the class will pay dearly. See In re Oracle Securities Litig., 136 F.R.D. 639, 644 (N.D.Cal. 1991); Pugh Decl. ¶ 22.

The city then argues that the results of the auction are not set in stone: "There is nothing in the Court's orders that requires lead counsel to apply for fees in accordance with the Court's auction grid and we would have expected our attorneys to honor the terms of the Retainer and to have sought our approval before submitting their fee application." See 182 F.R.D. 152 ( "The auction will not obviate the Court's final review of fees and costs pursuant to Rule 23(e).").

The city addresses the auction process. "[A]nother way of looking at the Court's non-binding auction is to view it as a process to determine which counsel will work for the lowest fee; and not as establishing precisely what that fee will be. As it turned out, the counsel chosen by lead plaintiffs agreed to work at the fee determined by the Court to be the `lowest' fee. We now know that the `lowest' fee is that specified in the Retainer."

Finally, the city argues that the auction was an unnecessary intrusion into the rights and duties of Lead Plaintiffs under the PSLRA. The PSLRA specifies that the party "most capable of adequately representing the interests of class members" should serve as Lead Plaintiff. 15 U.S.C. § 77z-1(a)(3)(B)(i), 78u-4(a)(3)(B)(i). Usually this means the party or parties with the largest financial stake in the litigation. §§ 77z-1(a)(3)(B)(iii)(I)(bb), 78u-4(a)(3)(B)(iii)(I)(bb). The act further provides that "the most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class." §§ 77z-1(a)(3)(B)(v); 78u-4(a)(3)(B)(v). The city reads this to mean that "the only time lead counsel's right to choose class counsel should be interfered with is when the court deems that choice adverse to the interests of the plaintiff class." See In re Milestone Scientific Securities Litig., 187 F.R.D. 165, 176 (D.N.J. 1999). Here, it asserts, it had already selected counsel in a competitive manner, thus the Court had no right to intervene. In fact, Lead Plaintiffs signed the retainer agreement with BRB and BLBG after conducting their own bidding process. Moreover, the retainer agreement safeguarded the rights of plaintiffs by mandating that Lead Plaintiffs pre-approve all fee requests.

In conclusion, "[b]y substituting an auction and its own fee grid, the court, in effect, nullified lead plaintiffs arm's-length negotiations . . . . [i]n doing so the Court not only unnecessarily interfered with lead plaintiff's attorney-client relationship with lead counsel . . . but ran counter to the policies at the heart of the Reform Act."

Aboff/Sirota

The Joanne A. Aboff Family Trust ("the trust"), represented by the law firm of Sirota & Sirota LLP, objects to the fee request on the grounds that "it is grossly excessive and seeks unprecedented compensation."

First, the trust argues that the settlement documents do not contained sufficient information regarding the lodestar figure — "based on the information provided, class members have no way to compare the fee with the amount of work actually performed since the number of hours worked was not stated in the [Settlement] Notice or in the fee application." (The trust estimates that the fee sought is 33 times lodestar.)

Second, the trust contends that it should have been provided with information on competing bids in order to make an informed objection to the fee request.

Third, the trust argues that the fee is "excessive" and "outrageous." The trust cites to In re Prudential that percentage of recovery fee awards should decrease as the size of the recovery increases. 148 F.3d at 339. Here the percentage increases with the recovery. For many of the same reasons presented by the city, the trust states that 8.275% is far above other mega-fund recoveries.

The trust further argues that once the fee request is cross-checked against lodestar, the "magnitude of the windfall sought by lead ...


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