In re Equity Funding Corp. of America Securities Litigation

• Decision Date: 29 September 1977
• Docket Number: No. M.D.L.-142-MML.,M.D.L.-142-MML.
• Citation: 438 F. Supp. 1303
• Court: U.S. District Court — Central District of California
• Parties: In re EQUITY FUNDING CORPORATION OF AMERICA SECURITIES LITIGATION.

438 F. Supp. 1303

In re EQUITY FUNDING CORPORATION OF AMERICA SECURITIES LITIGATION.

No. M.D.L.-142-MML.

United States District Court, C. D. California.

September 29, 1977.

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ATTORNEYS (PETITIONERS): Schwartz, Alschuler & Grossman and Corinblit & Shapero, Los Angeles, Cal.; Wolf, Popper, Ross, Wolf & Jones and Kreindler & Kreindler, New York City; David B. Gold, San Francisco, Cal.; Feinerman, Furman & Klein, Beverly Hills, Cal.; Milberg & Weiss, New York City; Kohn, Savett, Marion & Graf, P. C., and Fine, Kaplan & Black, Philadelphia, Pa.; Sachnoff, Schrager, Jones & Weaver, Ltd., Chicago, Ill.; Kass, Goodkind, Wechsler & Gerstein, New York City; Diamond, Tilem & Colden and Irsfeld, Irsfeld & Younger, Los Angeles, Cal.; Bader & Bader, New York City; Joseph A. Ruskay, Woodmere, N. Y.; Nemser & Nemser and Phillips & Mushkin, P. C., New York City; State Teachers Retirement Board of Ohio, c/o Attorney General of Ohio, Columbus, Ohio; Arter & Hadden, Cleveland, Ohio; Shatzkin, Cooper, Labaton, Rudoff & Bandler, New York City; Katz, Hoyt & Bell, Los Angeles, Cal.; Samuel Sebba, London E. C. 2, England; McDermott, Will & Emery, Chicago, Ill.; Kirsch, Arak & Bulmash and Frieman, Rosenfeld & Zimmerman, Beverly Hills, Cal.; Steinhaus & Hochhauser, Lake Success, N. Y.; Pryor, Cashman, Sherman & Flynn, New York City; James Chapman and Much, Shelist, Freed, Denenberg & Ament, P. C., Chicago, Ill.; Phillips, Nizer, Benjamin, Krim & Ballon and DiFalco, Field & Lomenzo and Demov, Morris, Levin & Shein, New York City; Chapman & Cutler, Chicago, Ill.; Bachner, Tally & Mantell, New York City; Alvin B. Green and Jones, Day, Reavis & Pogue, Los Angeles, Cal.; Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va.

MEMORANDUM OPINION AND ORDER DIRECTING PAYMENT OF ATTORNEYS' FEES AND COSTS

LUCAS, District Judge.

After a duly noticed evidentiary hearing during the two days of May 10 and 11, 1977, the Court is prepared to fix and direct the payment of attorneys' fees in this class action securities litigation.

I. BACKGROUND FACTS

The history of this multi-district, securities litigation has been well-documented in the press,¹ in books,² in special reports,³ and in numerous judicial opinions.⁴ It would be imprudent as well as impossible to repeat in this short space what has consumed volumes; however, before making an evaluation and award on the fees requested, a brief review of the history and nature of this litigation is in order. While a detailed history of this case is unnecessary, some background information is essential to an understanding of the Court's conclusions that follow.

The litigation arose out of a massive securities fraud perpetrated through Equity Funding Corporation of America (hereinafter "EFCA") and its subsidiaries. In March, 1973 more than eight years of public trading in EFCA securities was halted by the New York Stock Exchange and the Securities and Exchange Commission. Soon thereafter, in an action brought by the SEC in the Central District of California, EFCA consented to a decree enjoining the continuation of the scheme to defraud investors.

Following numerous press reports in April, 1973 disclosing the fraud at EFCA, numerous investor suits were filed throughout the country. More than 110 class action complaints and more than 15 private actions were filed relating to the alleged EFCA fraud.⁵ The majority of these actions were filed either in the Central District of California or the Southern District of New York.

Although these actions were based on the same underlying set of operative facts, the complaints and the theories for recovery they contained were as diverse as the parties and counsel who pressed the actions. The list of defendants totaled more than 260 and included EFCA, its officers, its inside and outside directors, the accountants, investment banking firms which acted as underwriters, a host of tippee defendants who allegedly sold after learning of the EFCA fraud, New York banks, brokerage houses, the New York and American stock exchanges, and the Illinois and California insurance departments.

A characterization and classification with exactitude of all the original claims in this litigation would be impossible; however, the Judicial Panel on Multidistrict Litigation (hereinafter "the JPML"), in its opinion consolidating and transferring these actions to this Court, fairly and accurately described the claims as follows:

"A. Primary or Underlying Fraud Claims

The primary or underlying fraud claims relate to an alleged scheme by Equity Funding and its subsidiaries to inflate assets and earnings by, among other things, creating and selling to reinsurers bogus life insurance policies in order to present to the investing public an image of a successful, growing and prosperous enterprise. The alleged fraud, facilitated by the use of computers, enabled Equity Funding to overstate its assets and record non-existent assets, which eventually appeared in its financial statements. The defendants in the fraud actions typically include Equity Funding, its officers, directors and subsidiaries, and its accountants and auditors who prepared the financial statements and reports which concealed the alleged fraud.

"B. Trading or So-Called `Tippee' Claims

These claims are asserted by purchasers of Equity Funding's securities against parties who allegedly possessed material, non-public information concerning Equity Funding and traded in the securities of the corporation without making such information generally available to the investing public. Plaintiffs typically allege that in March, 1973 a former Equity Funding employee informed a securities analyst for a research oriented brokerage firm that a massive fraud was being perpetrated at the company; that the analyst conducted his own investigation and passed information he gathered to certain investors and agents for investors in Equity Funding's securities; and that those in possession of this inside information used it to their advantage until trading in all securities of Equity Funding was suspended. Plaintiffs also necessarily allege the facts of the primary or underlying fraud.

Some of the complaints which contain trading or `tippee' claims name as defendants not only parties which allegedly traded securities when in possession of inside information but also party-defendants to the primary fraud claims.

"C. Combination Primary Fraud-Trading Claims

Some of the complaints contain a single claim for relief based upon allegations of both primary fraud and trading on inside information.

"D. Underwriting Claims

These claims are asserted by purchasers of debentures of Equity Funding and focus upon the financial statements in the separate registration statements and prospectuses disseminated with respect to the public offerings of the debentures. The claims necessarily contain allegations to the underlying fraud at Equity Funding.

"E. Rescission Claims

Claims for rescission and damages are made arising out of Equity Funding's acquisition of Bankers National Life Insurance Company and Liberty Savings & Loan Association. Plaintiffs were stockholders in the corporations at the time of the acquisitions and received Equity Funding stock in exchange for their shares. They allege that the financial statements used by Equity Funding in connection with the acquisitions were false and misleading. But included in plaintiffs' claim for rescission are allegations concerning facts relevant to the primary fraud.

"F. Miscellaneous Claims

. . . . .

2. Indenture Trustee Actions

Independent Investor Protective League has filed two actions in the Southern District of New York against the indenture trustees of the Equity Funding debentures, alleging that the trustee violated its fiduciary duties to protect the rights of the bondholders. Plaintiff is opposed to transfer of either of the actions. The complaints on their face, however, raise questions of fact common to the other actions and we find that these parties will to some extent benefit from participation in the coordinated or consolidated pretrial program in California.

3. Broker-Dealer Actions

Individuals who purchased Equity Funding securities before trading was suspended have filed actions against their brokers and representative agents alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These actions necessarily involve the primary fraud at Equity Funding and, in order to eliminate the possibility of duplicative discovery and inconvenience to the parties and witnesses, they should be transferred to the Central District of California and placed under the general supervision of the transferee judge."

In re Equity Funding Corporation of America Securities Litigation, 375 F.Supp. 1378, 1381-82 (Jud.Pan.Mult. Lit.1974), (citations omitted).

Prior to the consolidation and transfer of the claims to this Court pursuant to the above-quoted opinion, groups of counsel in New York and California attempted to organize their respective aspects of the litigation. Counsel in each city met and elected Steering Committees. Pursuant to pretrial orders entered in this Court and the Southern District of New York, attempts were made to draft unified and consolidated complaints. Plaintiffs in California filed a single unified and consolidated complaint containing requests for definition of four separate classes encompassing the primary fraud, trading or tippee, underwriting and rescission claims. These same efforts at coordination among New York counsel resulted in the filing of four separate consolidated class action complaints.⁶ It is clear that the delayed action of the JPML and the inability of California and New York counsel to agree upon a...