Cohn v. Nelson
| Decision Date | 30 June 2005 |
| Docket Number | No. 4:03-CV-177-CAS.,4:03-CV-177-CAS. |
| Citation | 375 F.Supp.2d 844 |
| Parties | Arthur J. COHN, Derivatively on Behalf Nominal Defendant Charter Communications, Inc., Plaintiff, v. Ronald L. NELSON, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William D. Savoy, John H. Tory, Carl E. Vogel, and Larry W. Wangberg, Defendants, and Charter Communications, Inc., Nominal Defendant. |
| Court | U.S. District Court — Eastern District of Missouri |
Albert S. Watkins, Kodner Watkins Muchnick Dunne & Weigley, L.C., St. Louis, MO, Nancy M. Watkins, Kodner and Watkins, Clayton, MO, Charles J. Piven, Baltimore, MD, Robert I. Harwood, Samuel K. Rosen, Joshua D. Glatter, Wechsler and Harwood, LLP, New York, NY, for Plaintiff.
Barry A. Short, Lewis and Rice, St. Louis, MO, Timothy J. Filer, Foster and Pepper, Seattle, WA, Sherri C. Strand, Roman P. Wuller, Thompson Coburn LLP, St. Louis, MO, Craig Varnen, David A. Schwarz, David Siegel, Irell and Manella, LLP, Los Angeles, CA, for Defendants.
This stockholder's derivative action came before the Court on May 23, 2005 for final approval of the settlement and on plaintiff's counsels' application for attorneys' fees and reimbursement of expenses. As discussed below, the proposed settlement will resolve the derivative claims in their entirety in this action and in three shareholder derivative actions filed in the Circuit Court for City of St. Louis ("state court actions").
The proposed settlement ("Settlement") consists of: (1) Charter's adoption of new corporate governance policies that will benefit both the corporation and its shareholders in the years to come; (2) the preservation and advance payment to Charter of funds from Charter's insurers for settlement of a corresponding Federal securities class action ("Securities Action") and for payment of defense costs in the Securities Action and government investigations and prosecution that otherwise may have been borne by Charter, including negotiation of a settlement with Charter's directors and officers liability insurance carriers of certain policy defenses and claims asserted by them; (3) the achievement of a meaningful modification to the equity portion of the consideration to be paid to the Class in connection with the Securities Action settlement, thereby preserving Company assets; and (4) ensuring that the Securities Action settlement provided the possibility of a financial benefit to the Company in the event that Charter's stock price increases above the valuation that was used for purposes of pricing the equity portion of the settlement consideration for that action. Stated another way, the institution and prosecution of the derivative actions preserved substantial Company assets, including cash.
The value of the Settlement must be considered in the context of the global resolution of all of the securities-related actions that embroiled Charter and its officers and directors. The Settlement attempts to balance the interests of Charter as a going concern while at the same time contributing to the resolution of complex litigation.
More than 75,700 notices have been disseminated to the Charter stockholders. Three objections were received, holding 600 shares in the aggregate.1 As discussed herein, these objections do not address the merits of the Settlement.
Charter is the third largest broadband communications company in the United States. The Company provides analog video, digital video, cable modem, and telephony services to more than 6.1 million customers residing in 37 different states. Charter, incorporated in Delaware, is headquartered in St. Louis, Missouri.
On July 18, 2002, a Merrill Lynch analyst issued a report that questioned several of Charter's accounting practices, including the capitalization of certain customer service representative costs. The following day, the price of Charter's common stock declined from $4.06 per share to $3.50 per share.
On August 16, 2002, Charter announced that the U.S. Attorney's Office for the Eastern District of Missouri had initiated a grand jury investigation into certain of Charter's operations. The day after this announcement, the price of Charter's common stock declined from $2.71 per share to $2.53 per share.
On April 1, 2003, Charter announced that it was restating its financial reports for 2000 and 2001, and the first three quarters of 2002.
On July 24, 2003, a federal grand jury indicted Charter executives David G. Barford, Kent Kalkwarf, David L. McCall, and James H. Smith, III, for a conspiracy allegedly carried out from May 2001 through March 2002 to inflate Charter's subscriber numbers and subscriber growth numbers. The Indictment charged these individuals with entering into allegedly sham agreements with Scientific-Atlanta, Inc. and Motorola, Inc. in the fall of 2000. All of the indicted individuals eventually entered guilty pleas.
On July 27, 2004, the Securities and Exchange Commission ("SEC") filed a formal Order against Charter, charging the Company with the misconduct set forth in the grand jury indictment. The Order did not allege any wrongdoing regarding Charter's accounting, except with respect to the alleged sham agreements with Motorola and Scientific-Atlanta. Charter consented to entry of an order resolving the SEC's investigation, but did not admit any wrongdoing or pay any fine.
The state court actions, captioned Kenneth Stacey, Derivatively on Behalf of Nominal Defendant Charter Communications, Inc. v. Ronald L. Nelson, et al., and Charter Communications, Inc., No. 022-10625, Aaron Cane, Derivatively on behalf of Nominal Defendant Charter Communications, Inc., v. Ronald L. Nelson, et al and Charter Communications, Inc., No. 022-11450, and Thomas Schimmel v. Paul Allen, et al., and Charter Communications, Inc., No. 044-00858, were filed in the fall 2002. On December 17, 2002, the Court consolidated the state court actions and appointed Schiffrin & Barroway, LLP, as lead counsel.
Plaintiff Arthur Cohen filed the stockholders' derivative action in this Court, naming as defendants the directors who served on Charter's board of directors ("Board"), namely Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William D. Savoy, John H. Tory, Carl E. Vogel and Larry W. Wangberg, for breaches of the directors' fiduciary duties of care and for mismanagement.
Those alleged breaches and mismanagement were premised on the conduct and events discussed above, and included the defendants' alleged failure to maintain controls at Charter with respect to the Company's: (1) overstatement of revenue; (2) failure to appropriately account for cable installation costs; and (3) artificial inflation of the reported number of subscribers for the Company's basic cable services, through, among other things, manipulation of "disconnects" (voluntary or involuntary disconnects from cable television service). Subscriber numbers and customer disconnects are key metrics examined by investors and securities analysts when they analyze the fiscal health and growth prospects of companies such as Charter. Plaintiffs sought to recover for the Company, inter alia, damages Charter suffered as a result of the defendants' bad faith and reckless failure to monitor, investigate and oversee Charter's business and accounting practices.
Plaintiffs alleged that the defendants were required to so monitor, investigate, and oversee in order to ensure that the financial reports Charter filed with regulatory authorities and disseminated to the public were accurate. The actions and omissions by defendants Nancy B. Peretsman, Ronald L. Nelson and John H. Tory, all of whom served on Company's Audit Committee, were specifically alleged to be violations of those defendants' fiduciary obligations.
Fourteen federal securities class action complaints, including StoneRidge Investment Partners LLC v. Charter Communications, Inc., No. 4:02-CV-1186 CAS, were filed against Charter and various other defendants, including Paul G. Allen, Jerald L. Kent, Carl E. Vogel, Kent Kalkwarf, David G. Barford, Paul E. Martin, David L. McCall, Bill Shreffler, Chris Fenger, James H. Smith III, Scientific-Atlanta, Motorola, and Arthur Andersen, LLP. ("Andersen"). These complaints were consolidated, pursuant to order of the Multi-District Litigation Panel, in the U.S. District Court for the Eastern District of Missouri, and captioned In re Charter Communications, Inc. Securities Litigation, MDL Docket No. 1506(CAS).
In March 2004, plaintiffs in the state court actions and the instant action agreed to coordinate their litigation efforts. Soon thereafter, plaintiffs commenced a dialogue with defendants' counsel regarding a possible resolution. These discussions lasted throughout the summer of 2004. During the discussions, the parties exchanged certain non-public information with each other. Thereafter, on August 2, 2004, the parties participated in a joint mediation session together with counsel in the securities action. The Honorable Edward A. Infante (Ret.) presided over the joint mediation. At the August 2, 2004 mediation, the parties and Judge Infante discussed, among other things, the respective claims and defenses, expert damages analyses, legal analyses, the discovery and motion practice conducted and expected to be conducted in both the Securities Action and the derivative actions, the evidence expected to be offered by the parties at trial, and other important factual and legal issues and matters relating to the merits of the various claims.
The parties were able to reach an agreement in principle following the August 2, 2004 mediation, which was memorialized in a Memorandum of Understanding ("MOU") dated August 5, 2004. The substance of the MOU is reflected in the Stipulation Of Settlement ("S...
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