In re Pnc Financial Services Group, Inc.

• Decision Date: 13 July 2006
• Docket Number: No. Civ.A. 02-271.,Civ.A. 02-271.
• Parties: In re PNC FINANCIAL SERVICES GROUP, INC., Securities Litigation
• Court: U.S. District Court — Western District of Pennsylvania

440 F.Supp.2d 421

In re PNC FINANCIAL SERVICES GROUP, INC., Securities Litigation

No. Civ.A. 02-271.

United States District Court, W.D. Pennsylvania.

July 13, 2006.

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Alfred G. Yates, Jr., Gerald L. Rutledge, Law Offices of Alfred G. Yates, Jr., Terry K. Leckman, Lipsitz, Nassau, Schwartz & Leckman, Pittsburgh, PA, Marc A. Topaz, Schiffrin & Barroway, Radnor, PA, Samuel H. Rudman, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, Melville, NY, Steven G. Schulman, Milberg, Weiss, Bershad & Schulman, New York, NY, for Johnson, et al.

Alan J. Davis, Raymond A. Quaglia, Ballard, Spahr, Andrews & Ingersoll, Edward M. Posner, Michael F. Brown, Drinker Biddle & Reath LLP, Philadelphia, PA, Traci Sands Rea, W. Thomas McGough, Jr., Patrick G. Barry, Richard R. Nelson, II, Cohen & Grigsby, P.C., Pittsburgh, PA, for PNC Financial Services Group, Inc., Securities Litigation.

OPINION

CERCONE, District Judge.

This action reflects the consolidation of several class action complaints filed in or transferred to this district on or after February 1, 2002. On July 22, 2002, an order was entered (1) consolidating the actions, (2) appointing specialist DPM, LLC, Teamsters Local 272 Labor & Management Pension Fund, Joint Industry-Engineers Union Local No. 30 Pension Fund, and Teamsters Local No. 210 Pension Fund as lead plaintiffs, (3) appointing the law firms of Milberg Weiss, Schiffrin & Barroway, LLP, and Schoengold Sporn Blaitman & Lometti, P.C., as co-lead counsel; and (4) appointing the law offices of Alfred Yates as liaison counsel for lead plaintiffs and the putative class. On October 4, 2002, a consolidated and amended class action complaint was filed seeking relief under the federal securities laws on behalf of all persons who purchased PNC common stock, call options on PNC common stock, or sold put options on PNC stock, from July 19, 2001, through July 18, 2002 ("the securities litigation"). Presently before the court are a motion for final approval of partial settlement of class action and a motion for attorneys fees and expenses in conjunction therewith. For the reasons set forth below, the motions will be granted.

The first consolidated and amended class action complaint specifically alleged that PNC Financial Services Group, Inc., and three of its former officers ("the PNC defendants"), with the assistance of Ernst & Young ("E & Y"), engaged in a deceptive scheme to remove volatile, troubled and non-conforming loans and venture capital investments from PNC's financial statements in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 3240.10b-5. The averments of the complaint asserted that over the course of three consecutive quarters defendants implemented and maintained a devise whereby the troubled and non-performing loans and investments were removed without disclosure to investors, banking regulators or the Security & Exchange Commission ("SEC") for the purpose of concealing the losses and thereby maintaining PNC's stock price. It was alleged that E & Y, working with AIG Financial Products Corporation, created an accounting structure for PNC to transfer the non-performing assets to special purpose entities in order to effectuate the concealment ("the SPE Transactions" or "PAGIC Transactions"). Through this vehicle defendants were alleged to have misrepresented: the amount PNC's non-performing assets in the second, third and fourth quarters of 2001; PNC's net income and earnings per share for the third and fourth quarters of 2001 and its net income and earnings per share for 2001; key financial ratios related to asset quality and loan levels for the second, third and fourth quarters of 2001; and PNC's compliance with generally accepted accounting principles ("GAAP") and/or the presentation of PNC's financial status. The first amended complaint was based on an extensive factual investigation by co-lead counsel after consultation with experts regarding the transactions at issue, the governing accounting, auditing and regulatory requirements, and PNC's public disclosures along with publicly available information relating thereto.

Federal banking regulators notified PNC that its treatment of the SPE Transactions did not comply with the applicable regulations. Thereafter, PNC announced on January 29, 2002, that it would reinstate its earnings for the second and third quarters of fiscal year 2001 and revise its fourth quarter and year-end 2001 earnings to reflect the consolidation of the three special purpose entities ("the restatement announcement"). The restatement announcement did not disclose the specific circumstances surrounding the creation and purpose of the PAGIC Transactions, PNC's essential ownership of the special purpose entities, the reasons for creating and utilizing them, and so forth. Allegedly it was not until July 18, 2002, some five months later, that all of the artificial inflation resulting from the alleged concealment was undone and the market price for PNC's stock was no longer influenced by defendants' actions. On that date the SEC announced that as a result of "accounting improprieties" and in particular the "misuse of special purpose entities," it had issued a Cease and Desist Order against PNC.¹ That same day federal regulators announced they had entered into an agreement with PNC to address matters needed to bring about compliance with GAAP and the consolidation of the PAGIC Transactions on PNC's regulatory reports and public financial statements. Allegedly, the market's reaction to these disclosures caused PNC's stock price to decline dramatically, dropping 15 percent on July 18, 2002, and an additional 6.55 percent on July 19, 2002.

The PNC defendants and E & Y each filed motions to dismiss the first amended complaint on December 6, 2002. Defendants contended, among other things, that the complaint failed to allege scienter with sufficient specificity under the applicable heightened pleadings standards and the public disclosures of January 29, 2002, were sufficient to cure any purported misrepresentations as a matter of law. Their accompanying briefs were lengthy and raised separate intricate and complex legal challenges to the theories of liability advanced. Plaintiffs' opposition to the motions was contained in a 72 page brief filed on January 10, 2003. Reply briefs were filed on February 11, 2003. Notwithstanding the posture of the litigation at that juncture, plaintiffs' counsel continued to investigate the underlying transactions and occurrences. During the course of this investigation co-lead counsel identified, analyzed and explored claims against other potential defendants. Additional information and disclosures became available in connection with the government's ongoing investigation into the PAGIC transactions.

On July 31, 2003, PNC's insurers filed an action under Declaratory Judgment Act seeking to establish that PNC's policies of insurance do not provide coverage for the type of conduct alleged in the first amended complaint. That action was assigned to this member of the court and docketed as Federal Ins. Co. v. PNC Financial Services and PNC ICLC Corp., Civil Action No. 03-1114 ("the coverage action").

In November of 2003, co-lead counsel for the putative class, the PNC defendants and PNC's insurance carriers jointly sought and obtained leave to hold in abeyance the pending motions to dismiss in the securities action while they attempted to mediate the securities claims ("the mediation parties"). Mediation was conducted through the services of the Honorable Nicholas H. Politan, a retired federal judge specializing in mediating complex litigation. The mediation parties periodically reported on the progress of their efforts. During this time they engaged in numerous sessions with Judge Politan and attended several conferences with this court.

On December 17, 2004, the mediation parties entered into a memorandum of understanding ("MOU"). Therein, the PNC defendants (with the consent of certain of their carriers) and AIG Financial Products agreed with lead plaintiffs to settle the claims that had been or could have been asserted in the securities litigation which arise out of, relate to or are based on the allegations of the first amended complaint and relate to the acquisition or ownership of shares of PNC common stock during the period of July 19, 2001, through July 18, 2002. In consideration of the settled claims, PNC agreed to cause its insurers to deposit the sum of $30 million for the benefit of the class and AIG Financial Products agreed to pay the sum of S4 million to the class, all of which was placed in escrow as a qualified settlement fund.

The parties contemplated that ultimate distribution of the settlement fund would be combined and coordinated with administration of the restitution fund, thereby greatly reducing any administrative costs. PNC agreed to pay the reasonable costs and expenses for notice and administration of the settlement and restitution funds. PNC further agreed to assign to the putative class any and all claims it and its subsidiaries have against E & Y and any other non-settling persons or entities which arise from or relate to the subject matter of the securities litigation. Lead plaintiffs agreed to obtain PNC's consent to settle any assigned claims. They also agreed to release the settling parties for all claims arising out of the acts and transactions underlying the securities litigation. PNC and AIG Financial Products also agreed to provide to lead plaintiffs all documents previously produced to the SEC and the United States Department of Justice in connection with the securities litigation. Based on these tenants the parties to the MOU executed an appropriate stipulation of settlement and thereafter sought preliminary and final approval...