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IN RE SAFETY COMPONENTS
September 27, 2001
IN RE: SAFETY COMPONENTS, INC. SECURITIES LITIGATION.
The opinion of the court was delivered by: Lechner, District Judge.
This was a consolidated class action brought on behalf of all
purchasers of the common stock of Safety Components International, Inc.
("SCII") during the period 28 May 1997 to 10 April 2000, inclusive (the
"Class Period") against defendants SCII, Robert A. Zummo ("Zummo"),
Jeffrey J. Kaplan ("Kaplan"), George D. Papadopoulos ("Papadopoulos"),
and Francis X. Suozzi ("Suozzi") (collectively, the "Defendants").
The consolidated amended complaint (the "Complaint") alleged violations
of Section 10(b), as amended 15 U.S.C. § 78j(b), and Section 20, as
amended 15 U.S.C. § 78t, of the Securities Exchange Act of 1934 and
Rule 10b-5; promulgated thereunder, 17 C.F.R. § 240.10b-5;. A
proposed second consolidated amended class action complaint (the "Proposed
Amended Complaint"), which was not filed, would have alleged violations
of Federal securities laws by Arthur Andersen LLP ("Arthur Andersen").
A settlement (the "Settlement") was agreed to on or about 16 April 2001
by lead plaintiffs Joseph LaMotta and Jay Langner (the "Lead
Plaintiffs"), the Defendants and Arthur Andersen. The Settlement was
preliminarily approved by way of order, dated 10 May 2001 (the "10 May
Currently pending is an unopposed motion to approve the Settlement and
to approve the application for an award of attorney's fees and
reimbursement of expenses (the "Application for Attorneys' Fees")
(collectively, the "Motion for Approval").*fn1 For the reasons set forth
below, the Motion for Approval is granted, except to the extent the
Application for Attorneys' Fees is modified below.
Facts and Procedural History
A. The Purchase of Vatentec
SCII is a low-cost supplier of fabric and cushions used in automotive
airbags with operations in North America, Europe and Asia. Complaint,
¶ 3; Fleischman Decl., ¶ 17. Zummo, Kaplan, Papadopoulos, and
Suozzi (the "Individual Defendants") are current or former officers
and/or directors of SCII. Complaint, ¶ 12; Fleischman Decl., ¶
19. Zummo was the Chairman of
the Board, Chief Executive Officer and President of SCII from January
1994 until March 1999. Fleischman Decl., ¶ 19. Kaplan was the
Executive Vice President and Chief Financial Officer of SCII. Id.
Papadopoulos was the Corporate Controller and Principal Accounting
Officer of SCII. Id. Suozzi was a director of SCII. Id. Arthur Andersen
was the outside auditor of SCII during the Class Period. Id., ¶ 3.
During the Class Period, SCII stock traded as high as $19 per share.
Complaint, ¶ 5; Fleischman Decl., ¶ 17. By the close of the
Class Period, however, SCII stock had been de-listed by NASDAQ and was
traded on the "pink sheets" for approximately $.50 per share. Complaint,
¶ 5; Fleischman Decl., ¶ 17. Lead Plaintiffs allege the sharp
drop in the price of SCII stock resulted largely from the Individual
Defendants' pursuit of their personal financial interests to the
detriment of the interests of SCII and its shareholders. Complaint,
¶ 27; Fleischman Decl., ¶ 18. Lead Plaintiffs allege that the
Individual Defendants pursued their own interests by effecting the
purchase of Valentec International Corporation ("Valentec"), a related
entity controlled by Zummo, despite their knowledge of its poor financial
condition. Fleischman Decl., ¶ 18; Transcript of 14 September 2001
Hearing (the "Fairness Hearing Transcript") at 7:23-24.
SCII originated as a wholly owned subsidiary of Valentec. Fleischman
Decl., ¶ 20. Valentec spun off SCII as a separate entity through an
initial public offering in May of 1994. Id.; Fairness Hearing Transcript
at 7:18-19. Lead Plaintiffs allege that, even after the spin-off SCII and
Valentec continued to function as one entity and employees believed the
two entities to be divisions of the same company. Complaint, ¶ 19;
Fleischman Decl., ¶ 20.
Lead Plaintiffs allege that Valentec was experiencing severe financial
difficulties by 1997. Complaint, ¶ 20; Fleischman Decl., ¶ 21.
These difficulties included a history of losses, a retained earnings
deficit, an excess of liabilities over assets and a working capital
deficiency. Complaint, ¶ 20; Fleischman Decl., ¶ 21. Lead
Plaintiffs further allege that Valentec had undisclosed contingent
liabilities stemming from a Department of Justice investigation and a
pending civil suit. Complaint, ¶¶ 44-46; Fleischman Decl., ¶ 21.
The Department of Justice investigation, Lead Plaintiffs assert,
concerned bid-rigging and kick-back antitrust violations committed by
Valentec. Complaint, ¶¶ 44-46; Fleischman Decl., ¶ 21. Lead
Plaintiffs further allege that SCII advanced $5.6 million to Valentec by
May of 1997 to address these financial difficulties. Complaint, ¶
23; Fleischman Decl., ¶ 21.
Lead Plaintiffs allege that the Defendants orchestrated the purchase by
SCII of Valentec (the "Transaction") at a grossly inflated price that
could not have been obtained in the open market through arm's length
negotiations. Complaint, ¶ 24; Fleischman Decl., ¶ 22. Lead
Plaintiffs argue that the Transaction was effected to prevent Zummo from
losing his interest in SCII and to avoid substantial financial losses on
the part of the Individual Defendants. Complaint, ¶ 24; Fleischman
Decl., ¶ 22. Lead Plaintiffs further allege that the debt load of
Valentec had grown to the point where SCII's lenders, in the absence of
the Transaction, would have required a debt pay-down by Valentec.
Complaint, ¶ 24; Fleischman Decl., ¶ 22. Valentec could have
accomplished this pay-down only by selling its sole asset —
1,379,200 shares of SCII common stock. Complaint, ¶ 24; Fleischman
Decl., ¶ 22.
1. The Defendants filed financial statements that did not conform to
Generally Accepted Accounting Principles ("GAAP"). Complaint, ¶¶
32-51; Fleischman Decl., ¶ 23.
2. The Defendants artificially inflated net sales and net income on the
financial statements of SCII for the fiscal years 1998 and 1999 and for
the first quarter of fiscal year 2000 by "double-booking' approximately
$4.6 million worth of its purported revenue. Complaint, ¶¶ 47-51;
Fleischman Decl., ¶ 23.
3. The Defendants made statements about the benefits of the acquisition
of Valentec, concerning cost efficiencies and economies of scales, that
were. false and misleading because the two companies were already
operating as one entity. Complaint, ¶¶ 47-51; Fleischman Decl.,
4. The Defendants attributed $19.9 million of goodwill to the purchase of
Valentec despite their knowledge that the company was worthless.
Complaint, ¶¶ 40-43; Fleischman Decl., ¶ 23.
5. The Defendants concealed, until after the transaction, material
contingent liabilities, including the Department of Justice investigation
and a pending civil claim. Complaint, ¶¶ 44-46; Fleischman Decl.,
6. The Defendants shipped products that they knew would be returned for
non-conformity with customer specifications in order to recognize
improperly revenue with respect to those shipments. Complaint, ¶¶
33-35; Fleischman Decl., ¶ 23.
7. The Defendants back dated contracts and shipping documents to report
improperly revenue in the quarter prior to that in which it should have
been reported. Complaint, ¶ 36; Fleischman Decl., ¶ 23.
8. The Defendants overbilled and overaccrued the revenue of SCII with
respect to a contract with a major customer, resulting in an
overstatement of revenue and the carrying of fictitious receivables.
Complaint, ¶ 37; Fleischman Decl., ¶ 23.
9. The Defendants materially overstated SCII's assets by failing to
accurately account for depreciation of equipment. Complaint, ¶ 38;
Fleischman Decl., ¶ 23.
10. The Defendants instructed the controllers of SCII to manipulate
SCII's results. Complaint, ¶ 39; Fleischman Decl., ¶ 23.
On 9 November 1999, SCII issued a press release announcing that it
would restate its financial reports for two fiscal years and one quarter
of another fiscal year. Complaint, ¶ 102; Fleischman Decl., ¶
24. On 10 November 1999, SCII was delisted from NASDAQ. Complaint,
¶ 105; Fleischman Decl., ¶ 24. Lead Plaintiffs assert SCII
acknowledged, on 8 February 2000, it had improperly accounted for the
goodwill attributed to Valentec. Complaint, ¶ 105; Fleischman
Decl., ¶ 24. By 8 February 2000, SCII stock was trading, via the
"pink sheets," at approximately $.50 per share. Id. SCII filed for Chapter
11 bankruptcy protection on 10 April 2000. Complaint, ¶ 105;
Fleischman Decl., ¶ 24.
B. Investigation and Commencement of Suit by the Plaintiffs
Prior to the filing of the Individual Actions, counsel for the
plaintiffs ("Plaintiffs' Counsel") conducted an extensive investigation of
the facts surrounding the Transaction. Fleischman Decl., ¶ 25; see
also Desmond Aff., ¶ 2(a); Tullman Aff., ¶ 2; Brody Aff.,
¶ 3. This investigation continued after the filing of the Individual
Actions, permitting the filing of a detailed and particularized class
complaint. Fleischman Decl., ¶ 25.
Plaintiffs' Counsel reviewed a wide variety of publicly available
information, including relevant press releases, financial statements,
Securities Exchange Commission (the "SEC") filings, analyst reports and
news reports. Id., ¶¶ 25, 26; Fairness Hearing Transcript at
14:10-14. Plaintiffs' Counsel also sought to identify and interview
former SCII employees with relevant information. Fleischman Decl.,
¶ 26; Fairness Hearing Transcript at 14:14-19. Plaintiffs' Counsel
interviewed and consulted with several non-SCII employees familiar with
the airbag component industry. Fleischman Decl., ¶ 26.
Plaintiffs' Counsel hired a forensic accountant to analyze the
available data in order to determine whether SCII's accounting practices
violated Federal secunties laws. Id., ¶ 27; Fairness Hearing
Transcript at 7:6-8. Lead Plaintiffs allege that the forensic accountant
helped identify precisely the nature of the accounting improprieties that
resulted in the false and misleading nature of the public statements of
SCII. Fleischman Decl., ¶ 27; Fairness Hearing Transcript at
15:24-25. Lead Plaintiffs further allege that the forensic accountant
assessed the possible liability of Arthur Andersen, as a result of its
audits of the SCII financial statements for 1998 and 1999. Fleischman
Decl., ¶ 27.
C. Reaction to the Complaint
On 3 April 2000, Defendants informed Plaintiffs' Counsel by letter of
their intention to file a motion to dismiss the Complaint (the "Motion to
Dismiss"). Id., ¶ 30. The Defendants intended to argue in the Motion
to Dismiss that (1) the Complaint did not adequately plead scienter, (2)
the Complaint improperly lumped all the Defendants together, (3) facts
alleged as omitted were actually disclosed, (4) the Complaint improperly
attempted to convert "mismanagement" claims into "fraud" claims, (5) no
claims could be stated based upon forward-looking statements, (6) the
Complaint did not adequately allege claims "on information and belief,"
and (7) the Complaint did not adequately allege causation. Id., ¶
30. Although the Defendants never filed the Motion to Dismiss,
Plaintiffs' Counsel assert they were prepared to respond to each argument
raised by the Defendants. Id., ¶ 31.
Following the investigative efforts of Plaintiffs' Counsel, the
Proposed Amended Complaint was drafted; it would have further alleged
that Arthur Andersen violated Federal securities laws in connection with
its audits of the financial statements of SCII for the fiscal years 1998
and 1999. Id., ¶ 32. As mentioned, the Proposed Amended Complaint
was not filed. Id. Arthur Andersen informed Lead Plaintiffs that it would
assert numerous defenses to the Proposed Amended Complaint, including a
statute of limitations defense and a defense on the merits. Id., ¶
D. Informal Discovery, Negotiation and Settlement
Settlement discussions commenced after the filing of the Complaint and
the parties were able to reach an agreement before the commencement of
formal discovery. Fleischman Decl., ¶ 35; Fairness Hearing
Transcript at 5:9-13. Prior to the Settlement, Lead Plaintiffs
interviewed many former employees of SCII. Fleischman Decl., ¶ 39;
Fairness Hearing Transcript at 14:14-15. Plaintiffs' Counsel also
requested, and received, from the Defendants various documents relevant
to the reasonableness of any proposed settlement. Fleischman Decl.,
¶ 39; see also Stipulation and Agreement of Settlement, dated 16
April 2001 (the "Stipulation of Settlement"), at 3. These documents
included, inter alia, minutes of SCII board meetings during the Class
Period, written consents relating to the Class Period, and documents
related to the 22 May 1997 purchase agreement entered into in connection
with the Transaction. Id. Plaintiffs' Counsel also interviewed Zummo
prior to the Settlement. Id.
E. Class Certification and Notice of the Settlement
By way of the 10 May 2001 Order, the Settlement was preliminarily
approved and this matter was certified to proceed as a class action
pursuant to Rule 23 of the Federal Rules of Civil Procedure. 10 May 2001
Order at 1-2; Fleischman Decl., ¶ 44. The class was defined as "all
persons who purchased the common stock of SCII during the period between
May 28, 1997 and April 10, 2000, inclusive" (the "Class"). 10 May 2001
Order at 2; Fleischman Decl., ¶ 42. The 10 May 2001 Order excluded
from the Class (1) the Defendants and Arthur Andersen, (2) the heirs and
member of the immediate family of any [I]ndividual [D]efendant, (3) the
subsidiaries, affiliates, officers and directors of SCII, (4) the
partners, principals and employees of Arthur Andersen, and (5) the
successors and assignees of any Defendant or Arthur Andersen. 10 May 2001
Order at 2; Fleischman Decl., ¶ 42.
The 10 May 2001 Order scheduled a hearing on the fairness of the
Settlement (the "Fairness Hearing") for 14 September 2001. Id. at 3. The
10 May 2001 Order stated that objections and comments to the Settlement
as well as any requests to optout of this class action, had to be filed
no later than 14 August 2001. Id. at 6, 7. The 10 May 2001 Order also
required Lead Plaintiffs to mail a notice of settlement (the "Notice of
Settlement") and a proof of claim (the "Proof of Claim") to all members
of the Class on or before 24 May 2001. Id. at 4. On 24 May 2001, Lead
Plaintiffs mailed 4,430 copies of the Notice of Settlement and the Proof
of Claim to all those members of the Class who could be identified on or
before that date. Fleischman Decl., ¶ 44; Garr Aff., ¶ 3. A
summary notice of the pendency of the class action (the "Summary
Settlement Notice") was also published in the national edition of The
Wall Street Journal on 4 June 2001. Fleischman Decl., ¶ 44; Garr
Aff., ¶ 4.
The Notice of Settlement described the Settlement in detail. Fleischman
Decl., ¶ 44. The Notice of Settlement also explained that
Plaintiffs' Counsel would apply for attorney's fees not to exceed
one-third of the Settlement Fund, plus reimbursement of their expenses
not to exceed $190,794.63, together with interest from the date the
Settlement was funded. Id. The Notice of Settlement contained the
deadlines for the filing of objections, comments and requests to
No objections to the Settlement or the Application for Attorneys' Fees
were received by the 14 August 2001 deadline or to date. Memorandum in
Support of the Settlement at 4; Fairness Hearing Transcript at 4:7-11.
Only one request to optout of the class action has been received to
date. Memorandum in Support of the Settlement at 4; Fairness Hearing
Transcript at 4:7-11.
As a result, a telephone conference was arranged with counsel on the
scheduled hearing date. Id. The conference call was conducted from
chambers and was delayed until 10:30 A.M. to provide any objectors who
were traveling additional time to arrive at Court, or otherwise
communicate with the Court. Id. at 4:7-8. No class members or objectors
arrived at the courthouse, or otherwise communicated with the Court
before the commencement of, or during, the telephone conference. Id.
At approximately 10:35 A.M., the Fairness Hearing commenced via
conference call. Id. at 4:2. The Fairness Hearing lasted approximately an
hour, during which time the Settlement was thoroughly discussed. Counsel
were questioned on the fairness of the Settlement and provided an
in-depth response to all matters discussed. At the conclusion of the
Fairness Hearing, counsel were requested to provide additional briefing
regarding the requested attorneys' fees. Id. at 30:9-11. Discussion
A. Approval of the Settlement
Lead Plaintiffs seek final approval of the Settlement as agreed to in
the Stipulation of Settlement, signed 16 April 2001. Memorandum in
Support of the Settlement at 1. Federal Rule of Civil Procedure 23(e)
provides the basic framework for approval of a class action settlement.
Fed. R. Civ. Pro. 23(e). The Rule provides: "A class action shall not be
dismissed or compromised without the approval of the court, and notice of
the proposed dismissal or compromise shall be given to all members of the
class in such manner as the court directs." Id. This rule requires a
court to "`independently and objectively analyze the evidence and
circumstances before it in order to determine whether the settlement is
in the best interest of those whose claims will be extinguished.'" In re
Cendant Corp. Litig., 264 F.3d 201, 231 (3d Cir. 2001) (quoting In re
General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liability Litig.,
55 F.3d 768, 782 (3d Cir. 1995)). In conducting this inquiry, "the
District Court acts as fiduciary guarding the rights of absent class
members, and must determine that the proffered settlement is `fair,
reasonable, and adequate.'" Id. (quoting In re General Motors, 55 F.3d at
Determining whether a settlement is fair, reasonable and adequate
requires the application of the nine-factor test articulated in Girsh v.
Jepson, 521 F.2d 153 (3d Cir. 1975). Id. (citing Girsh, 521 F.2d at
157); see e.g. Lazy Oil Co. v. Witco Corp., 166 F.3d 581, 588 (3d Cir.
1999) (court appropriately analyzed the settlement under the Girsh
factors). The nine Girsh factors are:
(1) the complexity, expense and likely duration of the
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings and the amount of discovery
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining the class action through the
(7) the ability of the defendants to withstand a greater
(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 in
light of all the attendant risks of litigation.
Girsh 521 F.2d at 157; In re Cendant, 264 F.3d at 232. The proponents of
a settlement bear the burden of demonstrating that the Girsh factors
weigh in favor of approval of the settlement. In re Cendant, 264 F.3d at
264; In re General Motors, 55 F.3d at 785.
The Circuit has explained that "[i]n order for the determination that
the settlement is fair, reasonable, and adequate to survive appellate
review, the [D]istrict [C]ourt must show it has explored comprehensively
all relevant factors." Lazy Oil 166 F.3d at 588. However, "[t]he decision
of whether to approve a proposed settlement of a class action is left to
the sound discretion of the [D]istrict [C]ourt." In re Prudential Ins.
Co. of Am. Sales Practices Litig., 148 F.3d 283, 317 (3d Cir. 1998). In
general, an award of attorneys' fees will be reviewed "for an abuse of
discretion, although there are clear error and plenary aspects in a
review including examination of factual findings and legal conclusions."
Zucker v. Westinghouse Elec. Corp., 265 F.3d 171, 178 (3d Cir. 2001)
(examining an award of attorneys' fees in a derivative suit).
1. The First Girsh Factor Complexity, Expense & Likely Duration of
The first factor to be considered under the Girsh analysis is "the
complexity, expense and likely, duration of the litigation." Girsk 521
F.2d at 157; see also In re Cendant, 264 F.3d at 232; In re Prudential
Ins., 148 F.3d at 317. This factor "captures the probable costs, in both
time and money, of continued litigation." In re Cendant, 264 F.3d at
264. Examining the costs "of continuing on the adversarial path, a court
can gauge the benefit of settling the claim amicably." In re General
Motors, 55 F.3d at 812.
This factor weighs strongly in favor of approval of the settlement as
to both the Defendants and Arthur Andersen. As Lead Plaintiffs
explained, absent settlement, Plaintiffs' Counsel likely would have had
to defeat not one, but two motions to dismiss — one from the
Defendants and one from Arthur Andersen. Fleischman Decl., ¶¶ 31,
34; Memorandum in Support of the Settlement at 14; Fairness Hearing
Transcript at 19:21-23. The Defendants had already informed Lead
Plaintiffs that the Defendants were prepared to argue numerous grounds
for dismissal. Fleischman Decl., ¶ 30. Arthur Andersen had also
indicated that it would argue several defenses in a motion to dismiss.
If Lead Plaintiffs defeated both motions to dismiss, they would then
have faced the task of obtaining class certification. Fairness Hearing
Transcript at 19:21-23. This would have resulted in additional motion
practice and likely require the depositions of the class representatives.
Memorandum in Support of the Settlement at 15.
It also appears there was the strong possibility that some or all of
the Defendants and Arthur Andersen would have moved for summary judgment
at some later point. Memorandum in Support of the Settlement at 16. Lead
Plaintiffs speculate that trial on the issue of liability alone would
have taken several weeks, requiring the introduction of vast amounts of
documentary evidence, deposition testimony, and expert testimony. Id.;
Fairness Hearing Transcript at 17:9-14.
At the Fairness Hearing, Plaintiffs' Counsel argued that this matter is
more complex than the "normal" Rule 10b-5 class action. Fairness Hearing
Transcript at 7:1-4. Plaintiffs' Counsel represented that SCII had
several military contracts that required the application of special
accounting rules. Id. at 8:5-7. Plaintiffs' Counsel also explained that
the military accounting required for these contracts is an arcane subset
of GAAP and would present particular difficulties in its presentation.
Id. at 9:10, 11:12-23.
In addition to the inherent complexity of litigating a class action
alleging Federal securities laws violations, this matter became more
complex due to the fact that SCII filed for bankruptcy under Chapter 11
of the Bankruptcy Code. Fleischman Decl., ¶ 24; Fairness Hearing
Transcript at 26:7-9. SCII's pending bankruptcy petition would have added
further procedural hurdles; Plaintiffs' Counsel would have had particular
difficulty overcoming the automatic stay imposed by the bankruptcy
proceeding. Fleischman Decl., ¶ 24; Fairness Hearing Transcript at
There would have been additional complexity with regard to proving
liability on the part of Arthur Andersen. Fairness Hearing Transcript at
20:15-16. Arthur Andersen would have had the defense that SCII withheld
relevant information. Id. at 20:19-25. Plaintiffs' Counsel represented
that this is a strong defense that is usually available to outside
auditors. Id. Plaintiffs' Counsel likely would have encountered
difficulty demonstrating scienter vis- a-vis Arthur Andersen given this
defense. Id. at 21:5-10. As well, it appears that Arthur Andersen would
have asserted a defense based upon the applicable statute of
limitations. Fleischman Decl., ¶ 33; Fairness Hearing Transcript at
20:11-12. Responding to this ...