In re Citigroup Inc.

• Citation: 965 F.Supp.2d 369
• Decision Date: 01 August 2013
• Docket Number: Nos. 09 MD 2070(SHS), 07 Civ. 9901 SHS.,s. 09 MD 2070(SHS), 07 Civ. 9901 SHS.
• Parties: In re CITIGROUP INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

965 F.Supp.2d 369

In re CITIGROUP INC. SECURITIES LITIGATION.

Nos. 09 MD 2070(SHS), 07 Civ. 9901 SHS.

United States District Court,
S.D. New York.

Aug. 1, 2013.

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Bradley Syfrett Odom, Odom & Barlow PA, Pensacola, FL, Martin Bruce Sipple,

[965 F.Supp.2d 372]

Ausley & McMullen, P.A., Robert N. Clarke, Ausley & McMullen, Tallahassee, FL, for Plaintiffs.

Victor H. Polk, Jr., Greenberg Traurig LLP, Boston, MA, Michael B. Cosentino, Seegel, Lipshutz & Wilchins, P.C., Wellesley, MA, for Defendants.

OPINION
SIDNEY H. STEIN, District Judge.

I.	Introduction and Summary	372
II.	Background	374

A.	The Alleged Fraud Summarized	374
B.	Pre–Settlement Procedural History	374

1.	Consolidation of Similar Suits and Appointment of Interim Lead Plaintiffs and Counsel	374
2.	Consolidated Class Action Complaint and Motion to Dismiss	375
3.	Discovery and Motion for Class Certification	376

C.
Settlement Negotiation and the Approval Process
377

1.	Negotiations and Preliminary Approval	377
2.	Objections and the Fairness Hearing	379

III. Final Approval of Class Action Settlement
379

A.	Proper Notice of Class Certification and the Settlement	379
B.	Fairness of the Settlement	380

1.	The Standard for Approving a Proposed Class Action Settlement	380
2.	Procedural Fairness: Arm's–Length Negotiations	381
3.	Substantive Fairness: The Grinnell Factors	381
4.	Overall Fairness Evaluation	385

IV.	Final Approval of the Plan of Allocation	385
V.	Fee Award	387

A.	Percentage of the Fund Method with Lodestar Cross–Check	387
B.	Assessing Reasonableness Pursuant to Goldberger	388

1.	Time and Labor Expended by Counsel: The Lodestar	388
2.	The Magnitude and Complexities of the Litigation	399
3.	The Risk of the Litigation	399
4.	The Quality of Representation	400
5.	The Requested Fee in Relation to the Settlement	400
6.	Public Policy Considerations	400

C.
The Lodestar Cross–Check and the Appropriate Award
400

VI.	Reimbursement of Litigation Expenses	401
VII.	Conclusion	401

I. Introduction and Summary

Plaintiffs bring this securities fraud action on behalf of a class of purchasers of Citigroup, Inc. common stock against that company and certain of its officials. Plaintiffs allege that Citigroup misled investors by understating the risks associated with assets backed by subprime mortgages and overstating the value of those assets, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; as a result, all those who purchased Citigroup common stock between February 26, 2007 and April 18, 2008 paid an allegedly inflated price. The parties have now reached a settlement of their dispute for $590 million to be paid to the class. The Court must determine whether that settlement is fair,

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reasonable, and adequate and what a reasonable fee for plaintiffs' attorneys should be.

On plaintiffs' unopposed motion pursuant to Federal Rule of Civil Procedure 23, the Court preliminarily approved that proposed settlement, certified the class for settlement purposes, and provided for notice to the class of the proposed settlement. In certifying the class, the Court appointed the proposed representatives as class representatives and appointed Kirby McInerney LLP as lead counsel for the class (“Kirby,” “Lead Counsel,” or “Counsel”). Now before the Court are two motions: (1) plaintiffs' motion for final approval of the class action settlement and approval of the plan of allocation (Dkt. No. 164) and (2) Lead Counsel's motion for an award of attorneys' fees and reimbursement of litigation expenses (Dkt. No. 165). The Court considered written submissions both supporting and opposing the settlement and held a fairness hearing on April 8, 2013 pursuant to Rule 23(e)(2).

The Court finds that the proposed settlement is fair, reasonable, and adequate and should be approved. Class members received adequate notice and had a fair opportunity to object or exclude themselves; very few have voiced their opposition. The settlement is procedurally sound because it was negotiated at arm's length by qualified counsel. The Court also concludes that the settlement is substantively fair. Although the $590 million recovery is a fraction of the damages that might have been won at trial, it is substantial and reasonable in light of the risks faced if the action proceeded to trial.

The Court also approves the proposed plan of allocation, subject to a clarification sought by certain objecting class members. Specifically, the issue was how to treat purchases of Citigroup stock made through an employee stock-purchase plan in which employees committed to purchases on one date, determined their price on another date based on six dates spread over six months, and then received their shares on yet another date. The Court agrees with the objectors that the substance, rather than the form, of those transactions should determine how the purchasers are compensated in connection with the settlement. For purposes of the alleged securities law violations, plan members purchased shares as the money was deducted each month, and the plan of allocation should reflect that the share price inflation at the end of each month approximates their harm.

The Court also concludes that Lead Counsel is entitled to a fee award, albeit a smaller one than it has proposed, as well as reimbursement of the requested litigation expenses. Because of the size of the settlement, the Court places particular emphasis on the lodestar cross-check. Lead Counsel undoubtedly secured an impressive recovery for the class and legitimately expended millions of dollars in attorney and staff hours doing so. But the Court finds that Counsel's proposed lodestar is significantly overstated.

The Court makes the following deductions in the lodestar:

1) $4 million in time that one plaintiffs' firm expended in an unsuccessful attempt to become Lead Counsel and now wants the class to pay for that unsuccessful effort;

2) $7.5 million for 16,292 hours of attorneys' time spent in pursuing discovery after the parties reached an agreement to settle their dispute. That time was spent largely on “document review” by contract attorneys, a full twenty of whom were hired for the first time on or about the same day the parties notified the Court

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that an agreement in principle had been reached;

3) A $12 million reduction by applying a reasonable blended hourly rate for the large number of contract attorneys of $200—rather than the blended rate submitted by Lead Counsel of $466 per hour—for the 45,300 hours worked by contract attorneys; and

4) A 10% cut from the remaining balance to account for waste and inefficiency which, the Court concludes, a reasonable hypothetical client would not accept. One such unfortunate example is the 157.5 hours for $66,937.50 in requested time spent digesting a single day's deposition.

These adjustments result in a lodestar of $51.4 million, resulting in a revised lodestar of $25.1 million. Factoring the proper lodestar into the Court's analysis of the requested $97.5 million fee pursuant to Goldberger v. Integrated Resources, Inc., 209 F.3d 43 (2d Cir.2000), the Court instead awards $70.8 million in attorneys' fees, which is 12% of the $590 million common fund and represents a multiplier of 2.8 on the reduced lodestar.

II. BackgroundA. The Alleged Fraud Summarized

A brief summary of plaintiffs' claims frames the Court's discussion of these motions. The allegations at issue concern Citigroup's investment in, and exposure to, risks associated with a now-infamous species of complex financial instruments: collateralized debt obligations (“CDOs”) that have as some or all of their collateral residential mortgage backed securities (“RMBS”). Following dismissal by the Court of a variety of additional claims, the only claims that have survived concern Citigroup's exposure to potential mortgage-backed-CDO losses. See In re Citigroup Inc. Sec. Litig., 753 F.Supp.2d 206 (S.D.N.Y.2010).

The gravamen of the surviving allegations is that Citigroup's public statements painted a misleading portrait of Citigroup as relatively safe from the market's concerns about potential losses resulting from falling CDO values. From February 26, 2007 to November 4, 2007, defendants allegedly “gave the impression that Citigroup had minimal, if any, exposure to CDOs when, in fact, it had more than $50 billion in exposure,” id. at 235—CDOs that were backed by subprime mortgages and wrongly valued at par despite objective indications that such mortgage-backed CDOs had lost value by February 2007. “On November 4, 2007, Citigroup disclosed that it held $43 billion of super senior CDO tranches simultaneously with the fact of their writedown by an expected $8–$11 billion.” Id. at 239–40. That disclosure, plaintiffs allege, omitted “$10.5 billion in hedged CDOs” that were purportedly insured against loss, and it also overstated the CDOs' value, thus underreporting losses. Id. at 240. Plaintiffs contend that defendants continued to overstate the value of the CDOs until a final corrective disclosure on April 18, 2008.

As relevant here, the overall effect of these alleged misstatements was that the market overvalued Citigroup's assets, or undervalued its liabilities, and thus overvalued Citigroup common stock. Class members, purchasing based on the market price, thus paid too much for the Citigroup stock they purchased, and so plaintiffs claim as damages the amount by which they allegedly overpaid.

B. Pre–Settlement Procedural History1. Consolidation of Similar Suits and Appointment of Interim Lead Plaintiffs and Counsel

Various plaintiffs filed a number of separate complaints against defendants in distinct

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class actions, each purporting to represent the class of investors in Citigroup that were allegedly harmed by defendants' misstatements or omissions. Because of the similarity of the claims, the Court consolidated the actions filed by these and other plaintiffs into a single consolidated class action, No. 07 Civ. 9901. ( See Order dated...