In re Fleet/Norstar Securities Litigation

• Court: U.S. District Court — District of Rhode Island
• Writing for the Court: FRANCIS J. BOYLE, Senior
• Citation: In re Fleet/Norstar Securities Litigation, 935 F.Supp. 99 (D. R.I. 1996)
• Decision Date: 31 July 1996
• Docket Number: CA No. 90-0173B.
• Parties: In re FLEET/NORSTAR SECURITIES LITIGATION.

935 F. Supp. 99

In re FLEET/NORSTAR SECURITIES LITIGATION.

CA No. 90-0173B.

United States District Court, D. Rhode Island.

July 31, 1996.

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COPYRIGHT MATERIAL OMITTED

Richard Schiffrin, Schiffrin & Craig, Bala Cynwyd, PA, Thomas S. Shapiro, Shapiro, Grace & Haber, Boston, MA, Steven J. Toll, Cohen, Milstein, Hausefeld & Toll, Washington, D.C., Robin P. Zwerling, Zwerling, Schacter & Zwerling, New York City, Michael Gottsch, Burt & Pucillo, Haverford, PA, Robert M. Kornreich, Wolf, Popper, Ross, Wolf & Jones, New York City, Daniel J. Schatz, Dept. of Business Reg., Providence, RI, Ralph Ellis, Abbey & Ellis, New York City, Rochelle Rottenstein, Stull, Stull & Brody, New York City, Richard Greenfield, Haverford, PA, for Plaintiffs.

Patricia Sullivan, Michael Levin, Edwards & Angell, Providence, RI, Roger P. Fendrich, Scott B. Schreiber, Arnold & Porter, Washington, D.C., for Defendants.

OPINION

FRANCIS J. BOYLE, Senior District Judge.

I. Introduction

Pursuant to Fed.R.Civ.P. 23.1 and 23(e), the Court's task is to approve or reject a settlement agreement reached by the litigants in both a class action and a derivative action suit. The settlement agreement additionally requests the Court to award appropriate attorney fees for Plaintiffs' counsel. Therefore, part and parcel with the settlement decision, the Court must fashion attorney fees for both the class action and derivative suit.

II. Background

In 1990, the plaintiffs Joseph Weitzman and Stanford Wynn brought a securities fraud class action suit against the defendant Fleet/Norstar Financial Group, Inc. ("Fleet" or the "Company"), its Chief Executive officer, Terrence Murray, Chief Financial Officer, John Flynn, and twenty additional individual defendants.¹ The plaintiffs were purchasers of Fleet common stock and allegedly suffered losses in 1990 after purchasing or reinvesting in Fleet stock due to the defendants' alleged violations of securities laws and common law.

The plaintiffs allege that during the class period of March 14, 1989, through April 3, 1990, the defendants materially misrepresented the financial condition of Fleet. The alleged effect was to inflate the market price of the corporation's stock. According to the plaintiffs, the purpose was to increase defendants Murray's and Flynn's renumeration, because part of their compensation was tied to Fleet's stock price. The action is brought pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a) (West 1981 & Supp.1996), and Rule 10b-5, 15 C.F.R. § 240.10b-5 (1995), and principles of common law.

In a second suit, Plaintiffs Rodney Shields, Micheal Abramsky, Arthur Brooks and Richard Rosenberg brought a shareholder derivative action on behalf of Fleet/Norstar Financial Group, Inc. The plaintiffs' claims were based on Defendants' alleged gross mismanagement of Fleet's loan portfolios and upon the alleged misrepresentation and omission of material information from Fleet's 1990 proxy statement. The Derivative Action Complaint alleged violations of § 14(a) of the Exchange Act, 15 U.S.C. § 78n, Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240.14a-9, as well as breach of fiduciary duty, corporate waste, and negligent misrepresentation under Rhode Island common law. It also repetitively includes the class action claims under §§ 10(b) and 20 of the Exchange Act.

The origin of both actions is the serious deterioration of real estate values in the New England area that occurred in the second half of 1989 and continued into 1990. One of the consequences was an increase in the number and amount of delinquent bank loans to developers and purchasers of real estate. According to the Amended Class Action Complaint, government regulators also became more active and conservative in their treatment of performing bank loans at this time, having learned from their experiences of dealing with bank failures in Texas in the early 1980's. As a result of this new activism, several New England banking organizations underwent bank examinations and were required to reclassify numerous loans as nonperforming assets. Fleet was one such organization.

On April 3, 1990 Fleet announced that it expected its nonperforming assets to increase by at least 50%, from approximately $400 million in December, 1989, to $600 million in March, 1990. Furthermore, the announcement stated that this total might well be further increased as a result of continuing examination by state and federal regulators. On the same day, there was unusually heavy trading in Fleet's common stock with a volume of 1.8 million shares and a fall of the stock's price of $0.625 per share to close at $21.25, a drop in value of 2.85%. The stock traded in the range of $25-30 during 1989 and in the $23-27 range in early 1990.

On May 3, 1990, Fleet reported results for the first quarter of 1990. In contrast to its $92.4 million net income in the first quarter of 1989, Fleet reported a net loss of $98 million in 1990, in spite of $90 million of nonrecurring gains. Nonperforming loans and losses had more than doubled in the three month period from December 31, 1989, to March 31, 1990, and foreclosed real estate assets had increased from $80 million to $275 million over the same period.

As of March 31, 1990, total nonperforming assets stood at $928 million, of which $552 million was related to commercial real estate. This figure compares with $222 million of commercial real estate related nonperforming assets, and $399 million total nonperforming assets as of December 31, 1989.

The substance of both actions is the assertion that Fleet's management misrepresented to the investing public that the Company was a highly successful banking operation which had deftly managed to avoid the abyss of the deteriorating New England real estate market into which other banks had fallen. Plaintiffs in the class action alleged they were damaged by the amount of decline in value of Fleet stock during the class period. Plaintiffs claim that during that period Fleet stock was depressed in value due to the defendants' improper actions. Members of the class are those individuals or entities that purchased or sold Fleet stock during the class period.

Plaintiffs in the derivative action claimed that the corporation was damaged in two ways. First, it was allegedly damaged in an unknown amount but at a minimum, totals many millions of dollars, measured by the write-offs Fleet took with respect to its increase in nonperforming loans due to the alleged mismanagement. Second, Fleet was damaged due to a downgrade in Fleet's credit rating by Moody's, Standard and Poor's Index ("S & P"), and Fitch in March of 1990 as a result of the increase in Plaintiffs' nonperforming assets. The plaintiffs claim that the corporation was damaged in the amount of higher borrowing costs it would have to incur because of Fleet's imprudent lending practices.

III. Procedural History

The Court and the parties expended a great deal of effort on the issue of whether the derivative and class complaints sufficiently stated a claim upon which relief could be granted. The Court first referred to a Magistrate Judge the defendants' Motion to Dismiss Plaintiffs' Amended Consolidated Class Action Complaint and Consolidated Derivative Action Complaint. On June 5, 1991 the Magistrate Judge returned his recommendation that the defendants' motion be granted and that both complaints be dismissed pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b). The Magistrate observed that the original consolidated class complaint alleged only conclusory allegations of fraud, failing to make the claim with the requisite particularity.

Subsequently, the Court remanded the matter to a Magistrate Judge for a determination of the questions of whether the Magistrate Judge had been authorized to submit findings, whether diversity existed in the instant shareholder derivative suit, and whether a derivative suit could be brought under § 14(a) of the Exchange Act. The Court's referral order did not include a request for findings. On July 15, 1991, the Magistrate Judge reported affirmative answers to all three questions and for a second time, recommended dismissal of the complaints.

On November 7, 1991, the Court granted class plaintiffs' Motion for Leave to file an amended class complaint. On November 18, 1991, the plaintiffs filed their Second Amended Class Action Complaint, whereupon defendants renewed their Motion to Dismiss. The Court again referred the class and derivative complaints to a Magistrate Judge for a recommendation on Defendants' Motion to Dismiss. On January 3, 1992, after hearing extensive oral argument, the Magistrate Judge reiterated his recommendation that the derivative complaint be dismissed, but recommended that the Motion to Dismiss the Amended Class Action Complaint be denied. The Magistrate concluded (with no explanation whatsoever) that, "the Second Amended Class Complaint ... explicitly plugs the fatal gap with the plaintiffs prior pleadings." (Second Supplemental Report and Recommendations at 7). No reason was given for this turnabout.

On January 22, 1992, the Court heard argument on Plaintiffs' objections to the recommendations of the Magistrate. The Court had the matter under consideration and had applied extensive efforts towards a motion to dismiss sua sponte, when a settlement was reached in both proceedings. At that time the Court had arrived at an unannounced conclusion.

In settlement of the class action, Defendants deposited $5,875,000 in a jointly administered escrow account in July, 1992. It has accrued interest since then. As part of the proposed settlement, the parties agreed that reasonable attorney fees for class counsel would be paid out of the fund, but the fees must not exceed 30% of the value of the fund.

The Stipulation of Settlement for the derivative action, proposes that "the Plaintiffs and their counsel agree that...