In re Safety Components, Inc. Securities Lit.
| Decision Date | 27 September 2001 |
| Docket Number | No. CIV. A. 00-0082(AJL).,CIV. A. 00-0082(AJL). |
| Citation | 166 F.Supp.2d 72 |
| Parties | In re SAFETY COMPONENTS, INC. SECURITIES LITIGATION. |
| Court | U.S. District Court — District of New Jersey |
Keith M. Fleischmann, Milberg Weiss Bershad, Hynes & Lerach LLP, New York, NY, Robert J. Berg, Bernstein Liebhard & Lifshitz, LLP, Fort Lee, NJ, Samuel B. Sporn, Shoengold & Sporn, P.C., New York, NY, Paul Geller, Shepard & Geller L.L.C., Boca Raton, FL, Jules Brody, Stull Stull & Brody, New York, NY, Leo Desmond, The Desmond Law Firm, Palm Beach, FL, Joseph H. Weiss, Weiss & Yourman, New York, NY, Brian Murray, Rabin & Peckel, New York, NY, Lionel Z. Glancy, The Law Offices of Lionel Z. Glancy, Los Angeles, CA, for plaintiffs.
Michael R. Young, Willkie Farr & Gallagher, New York, NY, William B. McGuire, Tompkins, McGuire, Wachenfeld & Barry, Newark, NJ, for Defendants Safety Components International, Inc., George D. Papadopoulos Jeffrey Kaplan, and Francis X. Suozzi.
Lanny J. Davis, Patton Boggs LLP, Washington, DC, for Robert A. Zummo.
Sallie G. Smylie, Kirkland & Ellis, Chicago, IL, for Arthur Andersen LLP.
This was a consolidated class action brought on behalf of all purchasers of the common stock of Safety Components International, Inc. ("SCII") during the period 28 May 1997 to 10 April 2000, inclusive (the "Class Period") against defendants SCII, Robert A. Zummo ("Zummo"), Jeffrey J. Kaplan ("Kaplan"), George D. Papadopoulos ("Papadopoulos"), and Francis X. Suozzi ("Suozzi") (collectively, the "Defendants").
The consolidated amended complaint (the "Complaint") alleged violations of Section 10(b), as amended 15 U.S.C. § 78j(b), and Section 20, as amended 15 U.S.C. § 78t, of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. A proposed second consolidated amended class action complaint (the "Proposed Amended Complaint"), which was not filed, would have alleged violations of Federal securities laws by Arthur Andersen LLP ("Arthur Andersen").
A settlement (the "Settlement") was agreed to on or about 16 April 2001 by lead plaintiffs Joseph LaMotta and Jay Langner (the "Lead Plaintiffs"), the Defendants and Arthur Andersen. The Settlement was preliminarily approved by way of order, dated 10 May 2001 (the "10 May 2001 Order").
Currently pending is an unopposed motion to approve the Settlement and to approve the application for an award of attorney's fees and reimbursement of expenses (the "Application for Attorneys' Fees") (collectively, the "Motion for Approval").1 For the reasons set forth below, the Motion for Approval is granted, except to the extent the Application for Attorneys' Fees is modified below.
SCII is a low-cost supplier of fabric and cushions used in automotive airbags with operations in North America, Europe and Asia. Complaint, ¶ 3; Fleischman Decl., ¶ 17. Zummo, Kaplan, Papadopoulos, and Suozzi (the "Individual Defendants") are current or former officers and/or directors of SCII. Complaint, ¶ 12; Fleischman Decl., ¶ 19. Zummo was the Chairman of the Board, Chief Executive Officer and President of SCII from January 1994 until March 1999. Fleischman Decl., ¶ 19. Kaplan was the Executive Vice President and Chief Financial Officer of SCII. Id. Papadopoulos was the Corporate Controller and Principal Accounting Officer of SCII. Id. Suozzi was a director of SCII. Id. Arthur Andersen was the outside auditor of SCII during the Class Period. Id., ¶ 3.
During the Class Period, SCII stock traded as high as $19 per share. Complaint, ¶ 5; Fleischman Decl., ¶ 17. By the close of the Class Period, however, SCII stock had been de-listed by NASDAQ and was traded on the "pink sheets" for approximately $.50 per share. Complaint, ¶ 5; Fleischman Decl., ¶ 17. Lead Plaintiffs allege the sharp drop in the price of SCII stock resulted largely from the Individual Defendants' pursuit of their personal financial interests to the detriment of the interests of SCII and its shareholders. Complaint, ¶ 27; Fleischman Decl., ¶ 18. Lead Plaintiffs allege that the Individual Defendants pursued their own interests by effecting the purchase of Valentec International Corporation ("Valentec"), a related entity controlled by Zummo, despite their knowledge of its poor financial condition. Fleischman Decl., ¶ 18; Transcript of 14 September 2001 Hearing (the "Fairness Hearing Transcript") at 7:23-24.
SCII originated as a wholly owned subsidiary of Valentec. Fleischman Decl., ¶ 20. Valentec spun off SCII as a separate entity through an initial public offering in May of 1994. Id.; Fairness Hearing Transcript at 7:18-19. Lead Plaintiffs allege that, even after the spin-off, SCII and Valentec continued to function as one entity and employees believed the two entities to be divisions of the same company. Complaint, ¶ 19; Fleischman Decl., ¶ 20.
Lead Plaintiffs allege that Valentec was experiencing severe financial difficulties by 1997. Complaint, ¶ 20; Fleischman Decl., ¶ 21. These difficulties included a history of losses, a retained earnings deficit, an excess of liabilities over assets and a working capital deficiency. Complaint, ¶ 20; Fleischman Decl., ¶ 21. Lead Plaintiffs further allege that Valentec had undisclosed contingent liabilities stemming from a Department of Justice investigation and a pending civil suit. Complaint, ¶¶ 44-46; Fleischman Decl., ¶ 21. The Department of Justice investigation, Lead Plaintiffs assert, concerned bid-rigging and kick-back antitrust violations committed by Valentec. Complaint, ¶¶ 44-46; Fleischman Decl., ¶ 21. Lead Plaintiffs further allege that SCII advanced $5.6 million to Valentec by May of 1997 to address these financial difficulties. Complaint, ¶ 23; Fleischman Decl., ¶ 21.
Lead Plaintiffs allege that the Defendants orchestrated the purchase by SCII of Valentec (the "Transaction") at a grossly inflated price that could not have been obtained in the open market through arm's length negotiations. Complaint, ¶ 24; Fleischman Decl., ¶ 22. Lead Plaintiffs argue that the Transaction was effected to prevent Zummo from losing his interest in SCII and to avoid substantial financial losses on the part of the Individual Defendants. Complaint, ¶ 24; Fleischman Decl., ¶ 22. Lead Plaintiffs further allege that the debt load of Valentec had grown to the point where SCII's lenders, in the absence of the Transaction, would have required a debt pay-down by Valentec. Complaint, ¶ 24; Fleischman Decl., ¶ 22. Valentec could have accomplished this pay-down only by selling its sole asset — 1,379,200 shares of SCII common stock. Complaint, ¶ 24; Fleischman Decl., ¶ 22.
Lead Plaintiffs allege that the Defendants actively concealed, from the public and the SCII shareholders, their knowledge of the financial difficulties facing Valentec. Complaint, ¶ 27; Fleischman Decl., ¶ 23. Lead Plaintiffs further allege that the Defendants employed the following practices to hide the probable financial condition of SCII following the transaction:
1. The Defendants filed financial statements that did not conform to Generally Accepted Accounting Principles ("GAAP"). Complaint, ¶¶ 32-51; Fleischman Decl., ¶ 23.
2. The Defendants artificially inflated net sales and net income on the financial statements of SCII for the fiscal years 1998 and 1999 and for the first quarter of fiscal year 2000 by "double-booking" approximately $4.6 million worth of its purported revenue. Complaint, ¶¶ 47-51; Fleischman Decl., ¶ 23.
3. The Defendants made statements about the benefits of the acquisition of Valentec, concerning cost efficiencies and economies of scales, that were false and misleading because the two companies were already operating as one entity. Complaint, ¶¶ 47-51; Fleischman Decl., ¶ 23.
4. The Defendants attributed $19.9 million of goodwill to the purchase of Valentec despite their knowledge that the company was worthless. Complaint, ¶¶ 40-43; Fleischman Decl., ¶ 23.
5. The Defendants concealed, until after the transaction, material contingent liabilities, including the Department of Justice investigation and a pending civil claim. Complaint, ¶¶ 44-46; Fleischman Decl., ¶ 23.
6. The Defendants shipped products that they knew would be returned for non-conformity with customer specifications in order to recognize improperly revenue with respect to those shipments. Complaint, ¶¶ 33-35; Fleischman Decl., ¶ 23.
7. The Defendants back dated contracts and shipping documents to report improperly revenue in the quarter prior to that in which it should have been reported. Complaint, ¶ 36; Fleischman Decl., ¶ 23.
8. The Defendants overbilled and over-accrued the revenue of SCII with respect to a contract with a major customer, resulting in an overstatement of revenue and the carrying of fictitious receivables. Complaint, ¶ 37; Fleischman Decl., ¶ 23.
9. The Defendants materially overstated SCII's assets by failing to accurately account for depreciation of equipment. Complaint, ¶ 38; Fleischman Decl., ¶ 23.
10. The Defendants instructed the controllers of SCII to manipulate SCII's results. Complaint, ¶ 39; Fleischman Decl., ¶ 23.
On 9 November 1999, SCII issued a press release announcing that it would re-state its financial reports for two fiscal years and one quarter of another fiscal year. Complaint, ¶ 102; Fleischman Decl., ¶ 24. On 10 November 1999, SCII was delisted from NASDAQ. Complaint, ¶ 105; Fleischman Decl., ¶ 24. Lead Plaintiffs assert SCII acknowledged, on 8 February 2000, it had improperly accounted for the goodwill attributed to Valentec. Complaint, ¶ 105; Fleischman Decl., ¶ 24. By 8 February 2000, SCII stock was trading, via the "pink sheets," at approximately $.50 per share. Id. SCII filed for Chapter 11 bankruptcy protection on 10 April 2000. Complaint, ¶ 105; Fleischman Decl., ¶ 24.
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