Dunleavy v. Nederlander
| Citation | 213 F.3d 454 |
| Decision Date | 19 June 2000 |
| Docket Number | No. 99-15361,99-15361 |
| Parties | (9th Cir. 2000) In re MEGO FINANCIAL CORPORATION SECURITIES LITIGATION Christopher Dunleavy; A. Peyser, Plaintiffs-Appellees, v Michael NADLER, Plaintiff-Appellant, v. Robert Nederlander; Jerome J. Cohen; Herbert B. Hirsch; Wilbur L. Ross, Jr.; Deloitte & Touche, Defendants-Appellees |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
[Copyrighted Material Omitted] Mark E. King, David B. Kahn & Associates, Northfield, Illinois, for the plaintiff-appellant.
Patricia I. Avery, Wolf, Popper, Ross, Wolf & Jones, New York, New York, for plaintiffs-appellees Dunleavy and Peyser.
Andrew C. Houston, Wachtell, Lipton, Rosen & Katz, New York, New York, for defendants-appellees Nederlander, Ross, Hirsch, and Cohen.
Donn P. Pickett, McCutchen, Doyle, Brown & Enersen, San Francisco, California, for defendant-appellee Deloitte & Touche.
Appeal from the United States District Court for the District of Nevada
Before: Joseph T. Sneed, Mary M. Schroeder, and A. Wallace Tashima, Circuit Judges.
Appellant Michael Nadler challenges the district court's approval of a $1.725 million (plus accrued interest) settlement agreement (the "Settlement") and plan of allocating the Settlement (the "Plan of Distribution") in a securities class action litigation. This litigation was brought on behalf of investors who purchased Mego common stock from January 14, 1994 through and including November 9, 1995 (the "Class Period") against Mego Financial Corp. ("Mego"), Deloitte & Touche, LLP ("Deloitte"), and a number of individuals 1 (collectively, Mego, Deloitte & individual defendants are referred to as "Defendants").
Nadler argues that the district court abused its discretion by: (1) approving the Settlement; (2) approving the Plan of Distribution; (3) certifying the class for Settlement; (4) awarding a substantial fee award to counsel for plaintiffs ("Class Counsel"); and (5) awarding an additional incentive award to the representatives of the class.
We have jurisdiction pursuant to 28 U.S.C. S 1291 and we affirm.
Defendant Mego is a financial services company that specializes in financing timeshare land sales and Title I home improvement loans insured by HUD. The individual defendants were officers and/or directors of Mego. Deloitte was Mego's independent auditor prior to and during the Class Period.
On November 10, 1995, before the opening of the market, Mego, with Deloitte's concurrence, issued a press release stating, inter alia, that it would be making certain adjustments to previously issued financial statements and that further review would likely result in additional material adjustments. Mego's stock immediately fell from $9.25 and closed that day at $6.125 (a 34% decline). The price of the stock slightly rebounded the next day and shortly thereafter traded in the $78 range. In March 1996, Mego disclosed the full details of the restatement of its financial condition. The final disclosure did not cause a negative reaction in the price of Mego stock and in fact the share price actually increased soon thereafter.
Almost immediately after the initial press release, Dunleavy and Peyser (collectively, "Class Representatives" or "Plaintiffs") filed separate actions based on the overstatement of Mego's earnings and the trading by one of the individual defendants. These complaints asserted claims against the Defendants for violations of SS 10(b) and 20(a) of the Securities and Exchange Act of 1934, Rule 10b-5, and certain supplemental state law claims. In June 1996, the district court consolidated the Plaintiffs' actions, appointed lead counsel for the litigation, and directed that discovery be conducted through them.
In July 1996, Nadler filed a motion to intervene in the litigation as a putative class representative. In December 1996, Nadler filed a class action complaint asserting substantially the same claims as the Plaintiffs' previously consolidated actions. In March 1997, the district court denied without prejudice Nadler's motion to intervene pending the outcome of settlement negotiations between the lead counsel and Defendants. In May 1997, the Plaintiffs and Defendants in the consolidated actions entered into a memorandum of understanding ("MOU") setting forth an agreement-inprinciple to settle the litigation.
The MOU provided for a fund in the amount of $1.725 million plus accrued interest to be distributed as follows: (1) the cost of administering and distributing the fund to the class, (2) up to 33 1/3 % to pay Plaintiff's counsel's contingency fees, (3) a $5,000 incentive award to each Plaintiff, (4) reasonable costs incurred in preparation of tax returns, and (5) the remainder to the class pursuant to the Plan of Distribution. On June 10, 1998, the district court certified the class for settlement and preliminarily approved the Settlement and Plan of Distribution.
Subsequently, over 5,400 notices were mailed to potential members of the class advising them of the litigation and the terms of the proposed Settlement and Plan of Distribution. The notice also advised class members that they could remain a member of the class, opt-out of the class, or object to the proposed settlement at a settlement hearing before the court.
Nadler chose not to opt-out but filed objections to the proposed Settlement and Plan of Distribution in August 1998. Only one member of the proposed class chose to opt-out while a handful chose to join Nadler in objecting to the proposed Settlement and Plan of Distribution. The objectors were heard during a fairness hearing in September 1998. In October 1998, the district court, notwithstanding the objections, approved the Settlement and Plan of Distribution as proposed. Nadler then brought this timely appeal.
It is basic to an understanding of this proceeding to observe that Plaintiffs filed their actions in November 1995, before the effective date of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). There were no other actions filed before the effective date of the PSLRA. Nadler filed his action in December, 1996, after the effective date of the PSLRA.
We hold that the district court did not abuse its discretion in (1) finding that the Settlement amount of $1.725 million was fair, adequate and reasonable given the difficulties in proving the case; (2) approving the Plan of Distribution's methodology for allocating the Settlement given that it was similar to the methodology Congress has endorsed; and (3) certifying the class for Settlement. We discuss each in turn.
Review of the district court's decision to approve a class action settlement is extremely limited. See Linney v. Cellular Alaska Partnership, 151 F.3d 1234, 1238 (9th Cir. 1998); Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1276 (9th Cir. 1992). The district court's "decision to approve or reject a settlement is committed to the sound discretion of the trial judge because he is exposed to the litigants, and their strategies, positions, and proof." Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998) (internal quotations and citations omitted). Thus, we will affirm if the district court judge applies the proper legal standard and his findings of fact are not clearly erroneous. See In re Pacific Enter. Sec. Litig., 47 F.3d 373, 377 (9th Cir. 1995).
Federal Rule of Civil Procedure 23(e) provides that:
A class action shall not be dismissed or compro mised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to all members of the class in a manner as the court directs.
Rule 23(e) has been interpreted to require the district court to determine whether a proposed settlement is fundamentally fair, adequate, and reasonable. See Hanlon, 150 F.3d at 1026 (citations omitted). Settlements that take place prior to formal class certification require a higher standard of fairness. See id.
"Assessing a settlement proposal requires a district court to balance a number of factors: the strength of the plaintiffs' case; the risk, expense, complexity, and likely duration of further litigation; the risk of maintaining a class action status throughout the trial; the amount offered in settlement; the extent of discovery completed and the stage of the proceedings; the experience and views of counsel; . . . and the reaction of the class members to the proposed settlement." Hanlon, 150 F.3d at 1026 (citations omitted). The district court must show that it has explored these factors comprehensively to survive appellate review. See Hanlon , 150 F.3d at 1026; Linney, 141 F.3d at 1242. In addition, the settlement may not be the product of collusion among the negotiating parties. Class Plaintiffs, 955 F.2d at 1290.
In this case, the district court held a hearing in which it preliminarily approved the Settlement and Plan of Distribution. Thereafter, following class-wide notice, the district court held a fairness hearing in which Nadler raised all of the issues that he now raises on appeal. The district court properly addressed the relevant issues during the fairness hearing and in the court's final order approving the Settlement and Plan of Distribution.
The district court properly found that the Plaintiffs' case was weak and the risk, expense, and complexity of trial weighed against them. Specifically, it found:
The heart of plaintiff's case is that defendants profited by artificially inflating the price of Mego stock. However, none of the insider defendants sold any of their shares of Mego stock, or profited from the alleged inflation during the relevant period. While one of the outside defendants is alleged to have sold 1.7 percent of his Mego...
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