DeJulius v. New England Health Care Emp. Pension

• Decision Date: 28 October 2005
• Docket Number: No. 04-3091.,04-3091.
• Citation: 429 F.3d 935
• Parties: Franklin Lee DeJULIUS and Susan M. DeJulius, Movants-Appellants, v. NEW ENGLAND HEALTH CARE EMPLOYEES PENSION FUND, on behalf of itself and all others similarly situated, Amalgamated Bank, as Trustee for the Longview Collective Investment Fund, Employer-Teamster Local Nos. 175 & 505 Pension Trust Fund, Pace Industry Union-Management Pension Fund, Plumbers & Pipefitters National Pension Fund, and United Brotherhood of Carpenters Pension Fund, Plaintiffs-Appellees, v. Sprint Corporation, William T. Esrey, Ronald T. Lemay, Kevin E. Brauer, Arthur B. Krause, Andrew J. Sukawaty, John E. Berndt, Theodore H. Schell, Thomas E. Weigman, Don A. Jensen, Bruce Branyan, William E. McDonald, Martin J. Kaplan, Gene M. Betts, James Richard Devlin, Michael B. Fuller, Len J. Lauer, John P. Meyer, Arthur Allan Kurtze, I. Benjamin Watson, III, Linda Koch Lorimer, Dubose Ausley, Warren L. Batts, Michael Bon, Irvine O. Hockaday, Jr., Harold S. Hook, Charles E. Rice, Louis W. Smith, Ron Sommer, and Stewart Turley, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

429 F.3d 935

Franklin Lee DeJULIUS and Susan M. DeJulius, Movants-Appellants, v. NEW ENGLAND HEALTH CARE EMPLOYEES PENSION FUND, on behalf of itself and all others similarly situated, Amalgamated Bank, as Trustee for the Longview Collective Investment Fund, Employer-Teamster Local Nos. 175 & 505 Pension Trust Fund, Pace Industry Union-Management Pension Fund, Plumbers & Pipefitters National Pension Fund, and United Brotherhood of Carpenters Pension Fund, Plaintiffs-Appellees, v. Sprint Corporation, William T. Esrey, Ronald T. Lemay, Kevin E. Brauer, Arthur B. Krause, Andrew J. Sukawaty, John E. Berndt, Theodore H. Schell, Thomas E. Weigman, Don A. Jensen, Bruce Branyan, William E. McDonald, Martin J. Kaplan, Gene M. Betts, James Richard Devlin, Michael B. Fuller, Len J. Lauer, John P. Meyer, Arthur Allan Kurtze, I. Benjamin Watson, III, Linda Koch Lorimer, Dubose Ausley, Warren L. Batts, Michael Bon, Irvine O. Hockaday, Jr., Harold S. Hook, Charles E. Rice, Louis W. Smith, Ron Sommer, and Stewart Turley, Defendants-Appellees.

No. 04-3091.

United States Court of Appeals, Tenth Circuit.

October 28, 2005.

Appeal from the United States District Court for the District of Kansas, Carlos Murguia, J Kenneth E. Nelson, Nelson Law Firm, P.C., Kansas City, MO, for Movants-Appellants.

Joseph D. Daley, (William S. Lerach, Keith F. Park, and Randall J. Baron; David R. Scott, Scott & Scott, LLC, Colchester, CT, with him on the brief) Lerach Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, for Plaintiffs-Appellees.

Eric J. Gorman, (Christina M. Tchen and Russell S. Jones, Jr., Shughart Thompson & Kilroy P.C., Kansas City, MO; J. Emmett Logan, Stinson Morrison & Hecker LLP, Kansas City, MO, with him on the brief) Skadden Arps Slate Meagher & Flom LLP, Chicago, IL, for Defendants-Appellees.

Before EBEL, HOLLOWAY and LUCERO, Circuit Judges.

EBEL, Circuit Judge.

This case deals with the legal and constitutional sufficiency of the class action notice program under Fed.R.Civ.P. 23 and the Due Process Clause. Appellants are unnamed class plaintiffs in an action against Appellee Sprint Corporation. The class action concerns alleged instances of securities fraud surrounding Sprint's failed merger attempt with WorldCom, Inc. Appellants received notice of a class settlement two weeks after the deadline for filing objections to the settlement and on the same day as the final fairness hearing on the settlement. After the district court approved the settlement between Sprint and its shareholders, Appellants moved to intervene, arguing that the attorneys' fees to be paid to class counsel pursuant to the settlement were excessive and that the notice afforded to class members of the settlement was insufficient under the Due Process Clause and Fed.R.Civ.P. 23. Appellants claim that since they held their shares in "street name" (meaning that they held only beneficial title to the shares while legal title was vested in their broker's name), the thirty-two-day period between the initial mailing of the settlement notice and the deadline for objections did not sufficiently account for the delays involved in forwarding notice packets to beneficial stock owners.

The district court held that the notice program was sufficient under Rule 23 and due process and denied the motion to intervene. For the reasons outlined below, we AFFIRM the judgment of the district court.

BACKGROUND

I. The parties

Defendant-Appellee Sprint Corporation ("Sprint") is in the telecommunications business, offering hardline and wireless long-distance service.¹ At the relevant time, Sprint was the third largest long-distance carrier in the United States and had annual revenues in excess of $17 billion. Sprint's common stock ("FON") and its wireless tracking stock ("PCS") are publicly held.

Lead Plaintiff-Appellee² New England Health Care Employees Pension Fund ("New England") is a large institutional investor that purchased publicly-traded Sprint securities. Pursuant to Section 101(b) of the Private Securities Litigation Reform Act of 1995,³ the district court appointed New England to be the lead plaintiff in a consolidated class action against Sprint seeking damages suffered by investors as a result of Sprint's failed merger attempt with WorldCom, Inc. See In re Sprint Corp. Sec. Litig., 164 F.Supp.2d 1240, 1242, 1244 (D.Kan.2001) ("Sprint I"). Sprint and New England eventually reached a $50 million settlement, which the district court approved.

Movants-Appellants Franklin and Susan DeJulius are members of the class who filed a motion to intervene, claiming that the notice of settlement to class members was inadequate and that the fee requested by class counsel was excessive.

II. Factual background

On October 4, 1999, after several months of intense negotiations, Sprint and WorldCom, Inc., agreed to the terms of a merger whereby WorldCom would acquire Sprint for $129 billion. See In re Sprint Corp. Sec. Litig., 232 F.Supp.2d 1193, 1201 (D.Kan.2002) ("Sprint II"). At the time, both companies had massive market shares in the domestic and international telecommunications markets: Sprint was the nation's third largest provider of long distance telephone services while WorldCom was the second largest provider of international long distance lines to American customers and the largest provider of domestically-connected international private voice and data lines. Id. The combination of the two companies was to be the largest corporate merger in history. Id.

Sprint and WorldCom shareholders approved the merger proposal on April 28, 2000. Id. However, on June 27, 2000, the Justice Department filed an antitrust suit to block the merger; the European Commission followed suit the next day. Id. By July 13, 2000, Sprint and WorldCom officially terminated the merger agreement. Id. at 1201-02.

Although the announcement of the merger initially had a positive impact on the value of PCS and FON shares, once the deal fell apart, stock values significantly decreased, causing investors to lose billions of dollars. Id. at 1210. Some investors felt that the proposed merger was simply a ruse designed to allow certain Sprint executives prematurely to exercise stock options. Id. at 1202. Under Sprint's long-term compensation plan, certain high-level executives were given stock options to buy millions of shares of Sprint FON/PCS common stock at prices well below market value. Id. In 1998, however, most of these options had not yet vested, which meant that Sprint executives could not yet exercise them. Id. According to Plaintiffs, Sprint executives were worried that Sprint stock prices would continue to fall, further decreasing the potential value of their unvested options. Id.

The incentive plan did, however, provide that should Sprint undergo a "change-in-control," the options would immediately vest and become exercisable. Id. Thus, the plaintiff class alleges that Sprint executives pushed for the WorldCom merger with full knowledge that it would never ultimately stand up to an antitrust challenge. Id. Once the shareholders approved the merger, stock prices would rise, the options would vest, and the executives could cash in their stock options at a substantial profit. Id. In fact, this is exactly what happened. William T. Esrey, the chairman and CEO of Sprint (and a named individual defendant in this suit), made over $300 million alone from his stock options. Id. The plaintiff class alleges that the total windfall for all stock option participants was in excess of $1.7 billion. Id. The downside was that once the merger failed, Sprint share prices tumbled. Id. at 1210. PCS shares dropped to $33.25, a forty-nine percent decrease from its high point of $65.50 after the merger agreement was announced. Id. Similarly, FON shares fell to $26.81, a sixty-one percent decrease from its high point of $68.76 after the merger agreement was announced. Id.

III. Procedural history

A. Consolidated complaint and dismissal of some claims

These events gave rise to three separate shareholder class actions, which were later consolidated into one complaint over which New England was the lead plaintiff. The consolidated complaint alleged that Sprint made false and misleading statements in connection with the WorldCom merger, in violation of Section 10(b) of the Securities and Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b) (2000), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (2000), promulgated thereunder. The complaint also alleged Sprint and WorldCom violated Section 20(a) of the Act (codified at 15 U.S.C. § 78t(a)), a provision which provides for joint and several liability for any person who controls another that has violated the Act or any regulation promulgated thereunder.

Prior to class certification, Sprint filed a motion to dismiss the suit. Sprint II, 232 F.Supp.2d at 1199. In a lengthy opinion, the district court agreed to dismiss nearly all of the plaintiff class' allegations, except for three paragraphs in the complaint dealing with misstatements and omissions made to the Department of Justice and the European Commission. Id. at 1230.

B. Settlement agreement

After the district court dismissed the bulk of the claims against Sprint, the parties entered into negotiations and, on April 7, 2003, agreed to settle the claims for $50 million. Under the terms of the agreement, the $50 million would be placed in a common settlement fund for class members and would be distributed to class members after attorneys' fees and other expenses were deducted. On October 29, 2003, the district court preliminarily approved the agreement, conditionally certifying a settlement class and scheduling the final settlement hearing for December 16, 2003.

C. Notice & dismissal

The district court's preliminary approval mandated a number of procedures aimed at notifying absent class members of the settlement agreement and their rights to opt-out, object, or intervene in the proceedings before the...