In re Telik, Inc. Securities Litigation

• Decision Date: 10 September 2008
• Docket Number: No. 07 Civ. 4819(CM).,07 Civ. 4819(CM).
• Citation: 576 F.Supp.2d 570
• Parties: In re TELIK, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

576 F.Supp.2d 570

In re TELIK, INC. SECURITIES LITIGATION.

No. 07 Civ. 4819(CM).

United States District Court, S.D. New York.

September 10, 2008.

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Joseph R. Seidman, Bernstein Liebhard & Lifshitz, LLP, New York City, Darren J. Robbins, David Avi Rosenfeld, Learch, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, Melville, NY, Marc S. Henzel, Law Offices of Marc S. Henzel, Bala Cynwyd, PA, Mary K. Blasy, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, San Diego, CA, for Plaintiff.

Elizabeth Ann Schmid, Brower Piven, New York City, for Defendants.

DECISION AND ORDER APPROVING THE SETTLEMENT, CERTIFYING THE CLASS FOR SETTLEMENT PURPOSES, APPROVING THE PLAN OF ALLOCATION OF THE NET SETTLEMENT FUND, DISALLOWING THE OBJECTIONS, AND AWARDING ATTORNEYS' FEES

McMAHON, District Judge:

PRELIMINARY STATEMENT

The core allegation in the Complaint is that the Telik Defendants¹ received data about Phase 3 clinical tests on Telik's leading new drug candidate, TELCYTA, on a "rolling basis" from the "interim looks" that Defendants Wick and Buttita stated were built into the study. Plaintiffs alleged that, based on their receipt of negative interim data concerning the TELCYTA Phase 3 trials, the Telik Defendants knew that their contemporaneous positive statements concerning the Phase 2 and 3 trial results were materially misleading. In addition, Plaintiffs alleged the Telik Defendants knew that an increasing number of participants in the lung cancer arm of the tests, eventually totaling 25% of the enrolled patients, were prematurely withdrawn from the study, compromising the data and rendering it unusable for FDA purposes.

However, Lead Counsel learned during the settlement discussions and mediation, and later confirmed through discovery, that the Telik Defendants were actually blinded to all substantive data during the conduct of the Phase 3 trials. The "interim looks" referenced by Defendants Wick and Buttita were, in fact, periodic reports to the independent Data Monitoring Committees overseeing those tests—not to Telik. (See Dkt. # 72, 8/29/2008 MacFall Deck ¶¶ 3, 28-29.) Lead Counsel reviewed thousands of pages of documents, including the FDA-approved Protocols governing the tests and the charters of the independent DMCs overseeing each of the tests, which demonstrated that the Telik Defendants were, in fact, blinded to all substantive data from the Phase 3 tests. This was further corroborated by the testimony of Defendant Telik CFO Cynthia Buttita and Telik Chief Medical Officer Dr. Gail Brown.

Plaintiffs believe that they could have successfully amended their claims, based on the foregoing, to allege that the Telik Defendants' statements concerning the interim looks were, themselves, materially false and misleading because the Phase 3 tests were blinded. Plaintiffs, however, were mindful that even such amended claims might be susceptible to substantial defenses with respect to scienter and loss causation. The Settlement presents an excellent result for the investor Class.

Plaintiffs estimate that the Settlement represents recovery of approximately 25% of the recoverable damages that Plaintiffs could have proved if this action went to trial. While Plaintiffs' damages expert estimated the aggregate loss of market value subsequent to relevant disclosures about TELCYTA at $449 million, he opined that much of this market loss is attributable to market forces. Specifically, most of the market loss represents investors' reaction to the fact that the Company's primary new drug candidate, TELCYTA, failed FDA testing, as opposed to the disclosure of any fraud.² This should come as little or no surprise to anyone.

To assess the extent to which the loss in market value was attributable to market forces as opposed to fraud, Lead Counsel analyzed 10 comparable biotechnology companies. These companies were selected because each had a primary drug candidate that failed Phase 3 FDA testing, no allegations of fraud were made, and no securities fraud litigation was filed, in connection with such failure. (See MacFall Declaration ¶ 33 and Ex. C.³) These companies lost between 40% and 87.83% of their market value, for an average loss of 67.21% of market value, upon disclosure of the Phase 3 test failures.

Here, Telik lost 71.77% of its market value upon the corrective disclosures of December 26, 2006, and June 3 and 4, 2007.⁴ Thus, assuming that Plaintiffs believe that they could establish that the maximum recoverable damages in this litigation are approximately $20.47 million, or 4.56% of Telik's aggregate market value loss, the $5 million cash recovery provided by the proposed Settlement represents approximately 25% of the maximum recoverable damages that Lead Plaintiff believes it could establish at trial.

Pursuant to the Preliminary Order, copies of the Court-approved Notice of Pendency and Proposed Settlement of Class Action ("Notice") were sent to over 54,000 Class members, and a Summary Notice was published in the national edition of The Wall Street Journal on June 20, 2008. In the Notice, Class members were advised that the deadline for objections was August 8, 2008. (See Keough Aff., MacFall Decl. Ex. D, ¶¶ 7, 8.)

To date, only three Class members have objected to the Settlement and three Class members have opted to exclude themselves from the Settlement. The percentage of objecting Class members is below .006%.

Lead Counsel, who are very experienced in prosecuting securities class action litigation, have concluded that the Settlement is in the best interests of the Class.

I. STANDARDS FOR APPROVAL OF CLASS ACTION SETTLEMENTS

There is a "strong judicial policy in favor of settlements, particularly in the class action context." In re Paine Webber Ltd. P'ships Litig., 147 F.3d 132, 138(2d Cir. 1998). "Settlement approval is within the Court's discretion, which `should be exercised in light of the general judicial policy favoring settlement.'" In re EVCI Career Colleges Holdings Corp. Sec. Litig., No. 05 Civ. 10240(CM), 2007 WL 2230177, at *3 (S.D.N.Y. July 27, 2007) (citation omitted); accord Maley v. Del Global Techs. Corp., 186 F.Supp.2d 358, 361 (S.D.N.Y.2002); In re Am. Bank Note Holographics, 127 F.Supp.2d 418, 424 (S.D.N.Y.2001). As this Court has stated: "In its exercise of that discretion, the Court must engage in a careful balancing act: `The Court must eschew any rubber stamp approval in favor of an independent evaluation, yet, at the same time, it must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case.'" Am. Bank, 127 F.Supp.2d at 424 (citing City of Detroit v. Grinnell Corp., 495 F.2d 448, 462 (2d Cir.1974)).

Courts determine the fairness of a settlement by looking both at the terms of the settlement and the negotiation process leading up to it. See Wal-Mart Stores, Inc., v. Visa U.S.A., Inc., 396 F.3d 96 at 116 (2d Cir.2005) (citing D'Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir. 2001)). With respect to process, a class action settlement enjoys a "presumption of correctness" where it is the product of arm's-length negotiations conducted by experienced, capable counsel. In re Union Carbide Corp. Consumer Prods. Bus. Sec. Litig., 718 F.Supp. 1099, 1103 (S.D.N.Y. 1989) (Brieant, J.) (citing Wellman v. Dickinson, 497 F.Supp. 824, 830 (S.D.N.Y. 1980), aff'd, 647 F.2d 163 (2d Cir.1981)); see also In re Global Crossing Sec. & Erisa Litig., 225 F.R.D. 436, 461, (S.D.N.Y.2004).

With respect to the substantive terms of a settlement, the standards governing approval are well established. Courts in this Circuit examine the fairness, adequacy and reasonableness of a class action settlement according to the "Grinnell factors:"

(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; and (9) the range of reasonableness of the settlement fund in light of all the attendant risks of litigation.

Wal-Mart, 396 F.3d at 117 (quoting Grinnell, 495 F.2d at 463, abrogated on other grounds, Goldberger v. Integrated Res., Inc., 209 F.3d 43, 48 (2d Cir.2000)).

In finding that a settlement is fair, reasonable and adequate, not every factor must weigh in favor of the settlement, but "`rather the court should consider the totality of these factors in light of the particular circumstances.'" Global Crossing, 225 F.R.D. at 456 (quoting Thompson v. Metro. Life Ins. Co., 216 F.R.D. 55, 61 (S.D.N.Y.2003)). Moreover, in applying these factors, the court should not substitute its judgment for those of the parties who negotiated the settlement, or conduct a "mini-trial" of the merits of the action. See Weinberger v. Kendrick, 698 F.2d 61, 74 (2d Cir.1982); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288(DLC), 2004 WL 2591402, at *10 (S.D.N.Y. Nov.12, 2004). As such, the court should assess the settlement as presented, without modifying its terms, and without substituting its "`business judgment for that of counsel, absent evidence of fraud or overreaching.'" Global Crossing, 225 F.R.D. at 455 (quoting In re McDonnell Douglas Equip. Leasing Sec. Litig., 838 F.Supp. 729, 737 (S.D.N.Y.1993)).

II. THE PROPOSED SETTLEMENT IS PROCEDURALLY AND SUBSTANTIVELY FAIR, ADEQUATE AND REASONABLE

A. The Settlement Is Entitled to a Strong Presumption of Fairness Because It Is the Product of Arm's-Length Negotiations Among Experienced Counsel

As noted above, a strong presumption of fairness attaches to a class action settlement reached in arm's-length negotiations among able counsel. See Wal...