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In re Cendant Corporation Securities Litigation

August 16, 2000

IN RE CENDANT CORPORATION SECURITIES LITIGATION


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

FOR PUBLICATION

OPINION

Pursuant to Federal Rule of Civil Procedure 23(e), Lead Plaintiffs, the New York State Common Retirement Fund ("NYSCRF"), the California Public Employees' Retirement System ("CalPERS") and the New York City Pension Fund ("NYCPF"), move for (i) approval of two settlements, one with Cendant Corporation ("Cendant") and the HFS Individual Defendants named below, and one with Ernst & Young LLP ("E&Y"), and (ii) approval of the Plan of Allocation of the Net Settlement Fund. The Cendant settlement provides for a payment to the class of $2,851,500,000 in cash, provides for additional payment to the class from Cendant and the HFS Individual Defendants in the event they recover damages in their suits against E&Y--50% of any recovery--and imposes certain corporate governance changes on Cendant. The E&Y settlement provides for a cash payment of $335,000,000 to the class. For the reasons stated, the settlements and Plan of Allocation are approved.

A. The Action

Cendant was formed by the merger of CUC International, Inc. ("CUC") and HFS Incorporated ("HFS") on December 17, 1997. CUC, the surviving corporation, was renamed Cendant after the merger. Holders of HFS common stock were issued shares of CUC common stock pursuant to a Registration Statement dated August 28, 1997 ("Registration Statement") and a Joint Proxy Statement/Prospectus. Am. Compl. ¶ 33.

On March 31, 1998, Cendant filed its Form 10-K Annual Report with the SEC including its 1997 financial statements. Two weeks later, after the close of the stock market on April 15, 1998, Cendant announced that it had discovered accounting irregularities in certain former CUC business units. As a result, it announced that it expected to restate its annual and quarterly financial statements for 1997 and possibly for earlier periods as well. The next day, Cendant's stock fell 47%, from $35-5/8 to $19-1/16 per share. Shareholder suits were then filed in this and other districts against Cendant, its officers and directors, and other parties including E&Y. E&Y had acted as CUC's independent public accountant from 1983 through the formation of Cendant, and post-merger audited the financial statements of Cendant Membership Services ("CMS"), *fn1 a wholly-owned subsidiary of Cendant, for the year ended December 31, 1997. These financial statements of CMS were consolidated into Cendant's financial statements and included in Cendant's Form 10-K for the 1997 fiscal year. On July 14, 1998, Cendant announced that it would also restate CUC's annual and quarterly financial statements for 1995 and 1996. Following this announcement, Cendant's stock fell by another 9% to $15-11/16 per share. Finally, on August 28, 1998, Cendant filed with the SEC a report prepared by Willkie Farr & Gallagher ("WF&G"), the law firm it had engaged to perform an independent investigation, which disclosed, among other things, that Cendant would restate its 1995, 1996, and 1997 financial statements by approximately $500 million. Cendant's stock then fell 11% to $11-5/8 on August 31, 1998, the first trading day after Cendant's disclosure of the audit report.

Following the selection of Lead Plaintiffs and approval of Lead Counsel (the process is addressed in companion opinion discussing Lead Counsel's fee request), on December 14, 1998, Lead Plaintiffs filed an amended and consolidated class action complaint on behalf of all persons and entities who purchased or acquired Cendant or CUC publicly traded securities, excluding PRIDES, during the period of May 31, 1995 through August 28, 1998 (the "class period"), and were injured thereby. Concurrently, plaintiffs filed a motion for class certification, granted on January 27, 1999.

The Amended Complaint named as defendants Cendant, E&Y, and individual officers and directors of Cendant, CUC, and HFS. Lead Plaintiffs alleged that defendants Walter A. Forbes, E. Kirk Shelton, Christopher K. McLeod, Cosmo Corigliano, and Anne M. Pember, officers of CUC before the merger, reviewed or were aware of the false and misleading statements alleged in the complaint, and "were in a position to control or influence their contents or otherwise cause corrective or accurate disclosures to have been made." Am. Compl. ¶¶ 16-17. The complaint asserted that the following defendants, together with defendants Walter Forbes, Shelton, and McLeod, were members of CUC's Board of Directors before the merger, signed the Registration Statement, and were named therein as directors of Cendant upon the completion of the merger: Burton C. Perfit, T. Barnes Donnelley, Stephen A. Greyser, Kenneth A. Williams, Barlett Burnap, Robert R. Rittereiser, and Stanley M. Rumbough, Jr. Id. at ¶ 18 (all of the named officers and directors of CUC are referred to collectively as the "CUC Individual Defendants"). The following defendants, except Scott Forbes, were directors of HFS before the merger and were named in the Registration Statement as directors of Cendant upon the completion of the merger: Henry R. Silverman, John D. Snodgrass, Michael P. Monaco, James E. Buckman, Scott E. Forbes, Steven P. Holmes, Robert D. Kunisch, Leonard S. Coleman, Christel DeHaan, Martin L. Edelman, Brian Mulroney, Robert E. Nederlander, Robert W. Pittman, E. John Rosenwald, Jr., Leonard Schutzman, and Robert F. Smith (collectively, the "HFS Individual Defendants"). Scott Forbes served as the Senior Vice President-Finance of HFS and then Cendant from August 24, 1993 to April 15, 1998, and later the Executive Vice President and Chief Accounting Officer of Cendant.

Plaintiffs claimed that defendants made several materially false and misleading statements during the class period. Plaintiffs alleged that a number of CUC and Cendant's filings with the SEC from June 1995 through April 1998 were materially false and misleading as were their press releases from May 31, 1995 through June 2, 1998 in which they announced their quarterly and annual earnings. Am. Compl. ¶¶ 66-67. These press releases and SEC filings, according to plaintiffs, contained or incorporated by reference Cendant and CUC financial statements that were not prepared in conformity with Generally Accepted Accounting Principles ("GAAP") and contained other assertions that were materially false and misleading. Am. Compl. ¶¶ 68-82. In particular, plaintiffs alleged that Cendant and CUC overstated their revenues, net income, and operating income for the 1995, 1996, and 1997 fiscal years through various improper accounting practices. These included manipulation of merger reserves (reserves created which consist of the anticipated future costs of a business combination), irregular revenue recognition practices, CUC's improper accounting for membership cancellations, as well as a number of other improper accounting practices by CUC and its subsidiaries including Comp-U-Card. Am. Compl. ¶¶ 71-78.

In addition, plaintiffs asserted that the August 28, 1997 Registration Statement and the Joint Proxy Statement/Prospectus were materially false and misleading because of the financial statements incorporated by reference therein, misrepresentations contained in the Merger Agreement which was an appendix to the Joint Proxy Statement/Prospectus, and misrepresentations regarding the "due diligence" conducted by HFS in connection with the merger. Am. Compl. ¶¶ 86-102. The complaint further maintained that E&Y failed to audit CUC's annual and quarterly reports for 1995, 1996, and 1997 in accordance with Generally Accepted Auditing Standards ("GAAS") and review standards established by the American Institute of Certified Public Accountants (the "AICPA"). Am. Compl. ¶ 7. Plaintiffs claimed that E&Y's misrepresentations included: its assertions in its certifications that it had audited CUC's financial statement in accordance with GAAS; that it had planned and performed those audits to obtain reasonable assurance that the financial statements were free of material misstatements; that in its opinion, CUC's financial statements presented CUC's financial position fairly, in conformity with GAAP; and that its audits provided a "reasonable basis" for its opinions. Am. Compl. ¶ 134.

Plaintiffs plead that all defendants violated § 11 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77k; that Cendant violated § 12(a)(2) of the Securities Act, 15 U.S.C. § 77l(a)(2); that defendants Walter Forbes, Shelton, McLeod, and Corigliano violated § 15 of the Securities Act, 15 U.S.C. § 77o; that defendants Cendant, Walter Forbes, Shelton, McLeod, Corigliano, Pember, Silverman, Snodgrass, Monaco, Buckman, Scott Forbes, and E&Y violated § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5; that defendants Walter Forbes, Shelton, McLeod, Corigliano, Pember, Silverman, Snodgrass, Monaco, Buckman, and Scott Forbes violated § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); that defendants Walter Forbes, Shelton, McLeod, Corigliano, Silverman, Snodgrass, and Buckman violated § 20A of the Exchange Act, 15 U.S.C. § 78t-1; and that Cendant, the HFS Individual Defendants except Scott Forbes, and the CUC Individual Defendants except Pember violated § 14(a) of the Exchange Act, 15 U.S.C. § 78n(a) and Rule 14a-9, 17 C.F.R. § 240.14a-9.

Lead Plaintiffs successfully defended this Amended Complaint against defendants' motions to dismiss. In July 1999, the Court denied all motions except for E&Y's to dismiss plaintiffs' Section 10(b) and Rule 10b-5 claims against it for stock purchases made after April 15, 1998. See In re Cendant Corp. Litig., 60 F. Supp. 2d 354 (D.N.J. 1999).

B. Lead Plaintiffs' Argument In Support of Settlement

1. The Settlements

Cendant's $2.8 billion payment represents approximately 37% of Lead Plaintiffs' estimate of reasonable compensation damages of $8.5-8.8 billion, *fn2 and over 58% of Cendant's estimated damages. Joint Decl. ¶ 131. This settlement provides for potential additional recovery for the class of 50% of any net recovery that Cendant or the HFS Defendants receive in any litigation against E&Y. Further, through the settlement Cendant is bound to institute significant corporate governance improvements. In exchange, the class agrees to release: "all claims that were, or could have been, brought against the CUC Defendants (who were not parties to the Stipulation), Cendant, and the HFS Individual Defendants." Lead Counsel continue:

Inclusion of the CUC Individual Defendants was a non-negotiable condition of the Cendant Settlement. Cendant insisted that (i) it did not want lingering cross- or indemnity claims against the Company made by any CUC Individual Defendant; and (ii) it was necessary to preserve claims against those individuals, who are not settling parties, and against the liability insurance policies covering those individuals, to the maximum extent allowed by law. Lead Plaintiffs and Lead Counsel believe that such a condition was reasonable, and agreed to it in order to obtain the outstanding recovery for the Class.

The entire amount of the Cendant settlement will earn interest for the class beginning on the earlier of August 20, 2000 or five days after settlement approval. The amount will be paid into an escrow account within 120 days after the approval becomes final.

The E&Y settlement of $335 million "is the largest amount ever paid by an accounting firm in a securities class action." Brf. at 1. It earns interest for the benefit of the class as of April 14, 2000. The settlement amount and any interest will be deposited into escrow no later than 90 days after settlement approval.

2. The Plan of Allocation

The plan calculates loss amounts per Cendant share, note, or option for each day in the class period, based on the amount of artificial inflation caused by CUC and Cendant's issuance of materially false and misleading financial statements and other financial information. Each shareholder's settlement payment, then, depends on the date his or her shares were acquired (and, if applicable, sold). See Section G, below.

Those who obtained Cendant's publicly traded securities after April 15, 1998 will not receive payment from the E&Y settlement amount because the Court has dismissed all claims against E&Y for class members who purchased after this date. These purchasers, however, will receive payment from the Cendant settlement.

Further, the plan recognizes Section 11 claims of those who acquired Cendant common stock in exchange for HFS shares at merger. The interests of these class members will be calculated under the damages provision of Section 11. See n.10. If Section 11 damages are greater than losses determined under Section 10(b), a plaintiff will receive Section 11 statutory damages, if not, he or she will receive Section 10(b) damages.

3. Assessment

Lead Plaintiffs assert that the proposed settlements are fair, reasonable and adequate and should be approved by the Court. See In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir. 1995). Factors to be considered are:

(1) the complexity, expense, and likely duration of the litigation . . . ; (2) the reaction of the class to the settlement . . . ; (3) the stage of the proceedings and the amount of discovery completed . . . ; (4) the risks of establishing liability . . . ; (5) the risks of establishing damages . . . ; (6) the risks of maintaining the class action through the trial . . . ; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery . . . ; [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation. Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975); see also Coffee Decl. ¶ 17.

In regard to the first factor, Lead Plaintiffs assert that the claims "involve[] numerous complex legal and technical accounting issues." Additionally, "because this case settled prior to the taking of depositions and pre-trial preparation, there is no question that continued litigation would have greatly increased the expense and duration of this action." Brf. at 13; see also In re IKON Office Solutions, Inc. Securities Litig, 194 F.R.D. 166, 2000 WL 567104 (E.D. Pa. May 9, 2000), cited in Coffee Decl. ¶ 17 ("in the absence of a settlement, this action will likely extend for months or even years longer"). Finally, even if a larger judgment were received at trial, additional delay would likely occur through the appellate process.

The second factor is linked to the number of objectors to settlement. Here, out of 478,000 notices of settlement sent, three class members object to the settlements (Tere Throenle, Betty Duncan (to the E&Y settlement) and Robert and Janice Davidson (objecting on behalf of themselves and various trusts)). An additional class member objects to the Plan of Allocation (Ann Mark). Two other objections by non-class members were filed, one by Martin Deutch, derivative action plaintiff, and the other by the State Board of Administration of Florida. Lead Plaintiffs state that the four class member objectors "collectively have losses constituting less than 1/10,000 of 1% of the Class's damages." Reply Brf. at 2. The objectors' holdings are described:

§ Tere Throenle purchased 100 shares of Cendant stock on April 17, 1998 and lost approximately $600;

§ Betty Duncan, trustee of the Esther J. Johnston Trust, bought an unspecified number of CUC 3% Notes and claims a $1,294 loss;

§ The Davidsons, as individuals and trustees, received CUC stock in July 1996 when their business was merged into the company, "and by year end had sold over 80% of it for $635 million-- most of that profit";

§ Ann Mark exchanged 100 HFS shares for 240 CUC shares in the merger and also purchased 400 shares in the open market.

Lead Plaintiffs add "[p]erhaps most telling is the reaction of institutional investors to the settlements. . . . Here, not one of the over 1,700 institutional investors [who owned between 78% and 98% of Cendant stock during the class period] in the Class has objected to the Settlements." Id. at 3. Lead Plaintiffs conclude: "The class's near unanimous support of the Settlements confirms the superior results achieved by Lead Plaintiffs and Lead Counsel." Id. at 3; see also Miller Decl. ¶ 16. The objections and Lead Plaintiffs' responses are discussed below.

The third factor looks to the stage of the proceedings. Here, Lead Counsel contend that they "conducted a thorough and efficient investigation and analysis" of all claims. As example, they hired a damages expert and an investment banking expert to evaluate Cendant's ability to contribute to settlement. See Joint Decl. ¶¶ 112-17. They conclude "this case had advanced to a stage where the parties `certainly [had] a clear view of the strengths and weaknesses of their cases.'" Brf. at 16 (quoting In re Warner Communications Securities Litig., 618 F. Supp. 735, 745 (S.D.N.Y. 1985), aff'd, 798 F.2d 35 (2d Cir. 1986)).

Lead Plaintiffs next address the fourth factor--the risks of establishing liability:

While Lead Counsel believe there is substantial evidence to support the Class's claims . . . the complexities and uncertainties of this litigation clearly warrant approval of the Settlements. In particular . . . the claims against E&Y and all but two of the Individual Defendants were less [strong]. Brf. at 16-17.

Moreover, because of the Private Securities Litigation Reform Act's prohibition against collection of damages in excess of a defendant's determined liability, "a key factor for Lead Plaintiffs and Lead Counsel was the proportion of liability a jury was likely to assess against Cendant, E&Y and the 28 Individual Defendants." See 15 U.S.C. § 78u-4(f); see generally 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. Lead Plaintiffs add that the difficulty of establishing E&Y's liability is even greater due to defenses accorded to accounting firms under the PSLRA. See Coffee Decl. ¶ 17(c). As for the director-defendants, "of the 28 Individual Defendants, 18 were non-employee, or `outside' directors of Cendant who were named as defendants only on claims charging violations of Section 11 of the Securities Act and Section 14 of the Securities Exchange Act." Brf. at 18. And these outside director-defendants possess a "due diligence" defense. Joint Decl. ¶ 131. Moreover, the HFS inside directors could assert this defense to Section 11 and Section 14 claims. Finally, "[o]f the five CUC Individual Defendants who were not outside directors . . . only [two] were identified by the Investigation as having played an active role" in the fraud. Brf. at 19.

With reference to the fifth factor, the risks of establishing damages, Lead Plaintiffs remark that Cendant and E&Y vigorously disputed plaintiffs' expert's conclusion that the maximum class damages total approximately $8.5 billion. Plaintiffs conclude that proof of damages at trial would, at best, result in a battle of experts with unpredictable results.

Although Lead Plaintiffs detail why defendants would be unable to withstand a greater judgment (the seventh settlement factor), their position can be summed up in three words--"Pennzoil vs. Texaco." In 1985, Pennzoil obtained an $11.1 billion judgment in Texas state court against Texaco for interference with contract. Texaco was unable to post bond for appeal equal to the entire amount. It instead sought bankruptcy protection and Pennzoil eventually agreed to accept a $3 billion settlement. Lead Plaintiffs allege that even if the maximum recovery were obtained at trial, Cendant would be unable to post the necessary bond for appeal, let alone pay the amount to the class.

Lead Plaintiffs next address the final factors concerned with the range of reasonableness of the settlement(s). They repeat that the current recovery is 37% of their expert's maximum recoverable damages, which could rise if Cendant or the HFS Defendants obtain additional recovery from E&Y. They add that the recovery includes corporate governance reforms that "would not have been available remedies . . . under the federal securities laws . . . and were obtained without sacrificing any monetary award." Brf. at 24.

Plaintiffs' reply brief expands their argument that 37% of the maximum damages is a "superior result." Reply Brf. at 5. They refer to a study of 377 securities class action settlements between January 1991 and June 1996 made by the National Economic Research Association, Inc. ("NERA"), which "revealed that the average settlement comprises between 9% and 14% of plaintiffs' claimed damages." 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). See also In re Prudential Securities, Inc. L.P. Litig., MDL No. 1005, 1995 WL 798907 (S.D.N.Y. 1995) (approving settlement of between 1.6% and 5% of claimed damages); In re Crazy Eddie Securities Litig., 824 F. Supp. 320 (E.D.N.Y. 1993) (settlement of between 6% and 10% of damages); In re Michael Milken & Assocs. Securities Litig., 150 F.R.D. 57 (S.D.N.Y. 1993) (7.5%).

Alternatively, they propose that reasonableness of settlements may be evaluated by determining the corporate payor's contribution as a percentage of its market capitalization. According to plaintiffs, Cendant's $2.85 billion contribution represents 21% of its 1999 average capitalization and 27% of its July 19, 2000 market capitalization. (Plaintiffs' full amount of damages--between $8.5 billion and $8.8 billion--represents approximately 95% of Cendant's market capitalization of $9.21 billion as of the close of trading August 10, 2000.) By contrast, mega-fund settlements which involved companies with capitalizations of over $1 billion ranged from 1% (In re Waste Management, Inc., No. 97-7709 (N.D. Ill. 1999)) to 7.6% (In re Informix Corp. Securities Litig., No. 97-1289 (N.D. Cal. 1999)) of total capitalization. Reply Brf. at 6-7. A securities case in the Eastern District of Pennsylvania, In re IKON Office Solutions, Inc. Securities Litig., 194 F.R.D. 166, 2000 WL 567104 (May 9, 2000), recently settled for 6.2% of IKON's average 1999 market capitalization of $1.8 billion and between 5.2% and 8.7% of over $1 billion in claimed damages.

Lead Plaintiffs add "a final yardstick in considering the quality of a settlement is how much was available from insurance to cover the claims." Here, they state that the $3.18 billion total settlement is 12 times available insurance coverage. In contrast, the NERA report determined that class actions settlements typically amount to 3.4 times total insurance proceeds. Reply Brf. at 7.

They then address approval of the Plan of Allocation, "governed by the same standards of review applicable to the approval of the settlement as a whole: the plan must be fair, reasonable and adequate." In re Oracle Securities Litig., [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,355 at 90,446 (N.D. Cal. June 18, 1994) (Walker, J.). This plan is briefly explained above. Lead Plaintiffs, relying on the work of Forensic Economics, Inc., assert that this plan is fair, reasonable and adequate and should be approved.

C. E&Y's Brief in Support

E&Y's brief in support of settlement focuses mainly on the risks of establishing liability and damages against it. In a preview of what will surely be argued in the Cendant-E&Y suit, the accounting firm stresses that it too was a victim of Cendant's fraud: "Plaintiffs would face daunting, and perhaps insurmountable, hurdles in attempting to prove at trial that E&Y should be liable for Cendant's admitted fraud." E&Y Brf. at 11. It agrees with Lead Plaintiffs that the estimation of damages at trial would lead to a battle of experts. Further, it asserts that "E&Y's proportional share of plaintiffs' damages is exceedingly small." Id. at 13. In all other respects, E&Y agrees with Lead Plaintiffs' assertions regarding the reasonableness of settlement.

D. Objectors to Settlement

Derivative Plaintiff

Derivative plaintiff, Martin Deutch, objects to the settlement both as a current shareholder whose interest in Cendant will allegedly be diminished as a result of settlement and as derivative plaintiff whose derivative claims will arguably be diminished by settlement.

He objects on the following grounds:

§ The notice of settlement is defective because it does not inform shareholders that (a) certain derivative claims will be "compromised" and (b) contribution claims by Cendant against at least the HFS Individual Defendants will be barred.

§ Approval of the settlement violates due process because it compromises certain derivative claims "even though the interests of the Derivative Plaintiff, the Company, and its current shareholders in those claims are not adequately represented in the class action."

§ The settlement fails to allocate Cendant's payment to the class between Section 10(b) claims and Section 11 claims-- critical for determining the value of remaining contribution claims if settlement occurs.

§ The settlement is "grossly unfair to Cendant and its current shareholders because it likely eviscerates pending state law derivative claims and contribution claims against individual defendants, without any payment by the individual defendants for the release of those claims."

§ The settlement is an illegal indemnification.

These objections along with Deutch's motion to intervene to object to settlement under Federal Rule of Civil Procedure 24 are discussed in a separate opinion. See In re Cendant Corp. Securities Litig., No. 98-1664, slip. op. (D.N.J. August 14, 2000).

Davidsons

Class members Janice and Robert Davidson object to the settlement on behalf of themselves and as trustees of various trusts (collectively "the Davidsons"). *fn3

The Davidsons argue that given the size of their holdings, their objections "must be given considerable weight." Dav. Brf. at 4. Their first objection is that Lead Plaintiffs did not adequately represent their interests. They rely on the brief filed by Lead Counsel in a related dispute that contends that Lead Plaintiffs did not believe the Davidsons to be class members. *fn4 They assert that "[t]he failure of Class counsel to represent and protect the Davidsons' interests is reason enough to disapprove this Settlement." Id.. at 6 (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 627-28, 117 S. Ct. 2231, 138 L. Ed. 2d 689 (1997)). Alternatively, they contend that because they acquired shares in connection with the purchase of their business, to effectuate settlement the court must create a subclass to represent their status. Id.

They also argue that the proposed settlement is not fair to the class as a whole because members are treated unequally. Here, the settlements and Plan of Allocation are based upon a fraud on the market theory and awards damages commensurate with such a theory. Damages under this theory, however, "have not been shown by the proponents of this Settlement to be the most appropriate for class members who did not receive their shares as a result of market transactions." Id. at 10. Further, "[t]he Plan of Allocation essentially assumes--without proving--that the fraudulent inflation in CUC's per share stock price increased constantly throughout the Class period. It therefore assumes in and out purchasers and sellers assumed no damages." Id. at 8. Moreover, "Shareholders who acquired their shares early in the class period and retained them are penalized in favor of latecomers." Id. at 11.

Additionally, the Davidsons maintain that the proceedings leading to settlement have been deficient as a matter of law because Lead Plaintiffs were chosen when the class consisted of purchasers between May 1997 and April 1998. The class was later opened to those who received shares as early as May 1995 (encompassing the Davidsons). Yet, the Davidsons were never offered Lead Plaintiff status.

Finally, they assert that the corporate governance concessions "are entitled to no weight in this Court's consideration of the Settlement because they provide only illusory benefit to the class members." Id. at 15.

After the hearing of June 28, 2000, the Court allowed the Davidsons to supplement their objections to the Plan of Allocation. They did so. Their objections and Lead Counsel's response are discussed in detail later.

Duncan

Betty Duncan, a member of the settlement class who held CUC Notes purchased on November 14, 1997 and sold on November 28, 1998, for loss of $1,294, objects to the settlement.

She first objects on behalf of non-institutional private purchasers. She claims that these "smaller" investors "have no commonality or identity of interest in terms of their financial capacity to sustain loss, their degree of investment diversification, or their level of sophistication as investors, with the designated Lead Plaintiffs." Dun. Brf. at 2.

She further objects that other than the unsupported declarations of Lead Counsel as to defendants' abilities to sustain larger settlements, "this Court has had no opportunity to receive relevant testimony from Lead Counsel's experts regarding the financial conditions, cash flows, or capacities to withstand greater judgments." Id. at 4. Moreover, she specifically disagrees with class counsel's conclusion that E&Y's payment was reasonable where the firm's "culpability is clear." Id. at 5. She takes issue with the settlement notice for two reasons (1) the notice does not inform class members of the tax consequences of the proposed settlements and (2) the notice is not understandable.

At the fairness hearing on June 28, 2000, the Court allowed Duncan to expand on her objections to the E&Y settlement. In her second submission, Duncan argues that Cendant's amended cross-claim against E&Y conclusively demonstrates the firm's liability to the plaintiff class. *fn5 She further asserts: "If E&Y is involved in this fraud, they are liable for the full $8.5 billion," thus the firm's payment should be at least equal to the $2.8 billion to be paid by Cendant. Dun. Supp. Brf. at 5. She adds that E&Y can and should pay more and attacks plaintiffs' contention that the $335 million is "reasonable in light of the firm's financial resources available to satisfy a judgment." Id. at 6. Finally, she disputes that sufficient discovery into E&Y's alleged wrongdoing was conducted by Lead Counsel and urges the Court to (1) refuse to approve the settlement at this time because new evidence of E&Y's liability may surface as the United States Attorneys' Office conducts its investigation and (2) appoint new class counsel to prosecute the E&Y action.

Throenle

Tere Throenle, a class member who purchased 100 shares of Cendant stock on April 17, 1998, objects to settlement. She initially claims that the Notice of Settlement was defective in that it denied class members access to crucial information. For example, each settling party did not include a statement which listed "issues on which the parties disagree." 15 U.S.C. § 78u-4(a)(7)(B)(ii). The notice only allegedly identified one risk of continued litigation--the PSLRA's proportionate liability restrictions. Throenle asserts that this "risk" is nonsense because proportionate liability restrictions exist only where a defendant has committed no knowing violation of the law. She argues that this case involves defendants' knowing violations of the securities acts.

She further alleges that the notice stated that additional information was on file with the Clerk of the Court but "the district court clerk flatly refused Throenle's requests for the brief supporting the proposed settlements."

In addition, Throenle maintains that Lead Plaintiffs have acted only in their own interests and have abandoned the claims of individual investors. She suggests that Lead Counsel may own interests in Cendant which compromises their ability to represent the class. She also contends that the corporate governance reforms will not benefit those who no longer own Cendant stock. As for the E&Y settlement, she states "Lead plaintiffs thus propose to trade their solid case against E&Y for half of a mediocre case they do not control." Brf. at 26.

She requests permission to conduct discovery focused on adequacy of representation in order to either create a subclass or appoint new Lead Plaintiffs and Counsel. Throenle also objects to the fee request, discussed in a companion opinion.

Mark

Ann Mark objects to the Plan of Allocation on the following grounds:

§ The plan fails to recognize that the Section 11 claims of former HFS shareholders are "materially stronger" than all other claims in the action.

§ The Section 11 claims possessed by the former HFS shareholders are "virtually identical" to claims held by PRIDES shareholders who settled for nearly 100 cents on the dollar.

§ The recent case of Amchem Prods. v. Windsor, mandates a strict analysis of competing interests in a class action settlement.

Florida

The State Board of Administration of Florida and the Teachers Retirement System of Louisiana submit a letter urging the Court to extend the class opt-out deadline. *fn6 (These objecting parties are not included in the class settlement as they have already opted out and are pursuing their own actions against Cendant.) They also ask that in settlement the Court direct all parties to the ...


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