In re Warner Communications Securities Litigation

• Decision Date: 20 August 1985
• Docket Number: No. 82 Civ. 8288 (JFK).,82 Civ. 8288 (JFK).
• Citation: 618 F. Supp. 735
• Parties: In re WARNER COMMUNICATIONS SECURITIES LITIGATION. This Document Relates to All Actions.
• Court: U.S. District Court — Southern District of New York

618 F. Supp. 735

In re WARNER COMMUNICATIONS SECURITIES LITIGATION This Document Relates to All Actions.

No. 82 Civ. 8288 (JFK).

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

August 20, 1985.

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Wolf Haldenstein Adler Freeman & Herz by Daniel W. Krasner, Fred T. Isquith and Milberg, Weiss, Bershad, Specthrie & Lerach by Melvyn I. Weiss, Jerome M. Congress, New York City, Berger & Montague, P.C. by Sherrie R. Savett, Stephen A. Whinston, Philadelphia, Pa., for plaintiffs.

Paul, Weiss, Rifkind, Wharton & Garrison by Arthur L. Liman, Leslie Gordon Fagen, C. William Phillips, New York City, for Corporate defendants Warner Communications, Inc. and Atari, Inc.

Skadden, Arps, Slate, Meagher & Flom by Barry H. Garfinkel, Timothy A. Nelsen, Jeremy A. Berman, Daniel F. DeVita, New York City, for individual defendants.

Elliott J. Weiss, New York City, for objector Stephen J. Gross.

OPINION and ORDER

KEENAN, District Judge:

The parties to this action seek an order, pursuant to Rule 23(e) of the Federal Rules of Civil Procedure ("FRCP"), approving their proposed settlement of this class action. In addition, plaintiffs' counsel have applied for an order awarding them attorneys' fees for services rendered and reimbursement of expenses. For the reasons stated below, the Court approves the proposed settlement and grants plaintiffs' counsels' application for the award of fees and expenses.

BACKGROUND

This action is a consolidation of 19 actions, most of which were begun in December 1982. Eighteen were brought on behalf of persons who, during the period from March 3, 1982 through December 8, 1982, purchased Warner Communications Inc. ("Warner") common stock, common stock purchase warrants, call options on Warner shares, or who sold put options covering Warner shares. In addition, one plaintiff sued derivatively on behalf of Warner.¹

The Consolidated Amended Complaint ("Complaint"), filed, in July, 1983, alleges that certain defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), Rule 10b-5 promulgated thereunder, and the common law by engaging in a common scheme or conspiracy, the purpose of which was to cause the market prices of Warner securities to be artificially inflated during the class period. Defendants allegedly issued a series of false and misleading public statements that led the investing public to believe that Warner's operations would continue their unbroken pattern of dramatic growth and increasing profits and that Warner's competitive position would be maintained or improved. In particular, the Complaint alleges that materially misleading information was disseminated about the performance of Warner's former subsidiary, Atari, Inc. ("Atari"), which manufactured and marketed home video games and cartridges as well as coin-operated video arcade games. Warner allegedly stated that Atari's spectacular and highly profitable growth during 1981 was expected to continue in 1982. Misleading statements were also alleged with respect to the operations of two other Warner divisions, Warner Amex Cable Communications ("Warner Cable") and Knickerbocker Toy Company, Inc. ("Knickerbocker").

Plaintiffs alleged that defendants failed to disclose during the class period that Atari's market share in the home video game market was sharply diminished due to increasing competition, that its growth rate was slowing, that its products were no longer state of the art, that its rate of sales and profitability were declining, that its home video game segment was experiencing a serious sales slowdown, particularly in sales of game cartridges, and that it was experiencing cancellations in orders for its products at unprecedented rates. Plaintiffs further alleged that defendants had no reasonable basis for making statements during the class period that Warner would achieve record 1982 profits of between $5.00 and $5.75 per share. Plaintiffs contended further in their Complaint that certain individual defendants were selling large portions of their Warner holdings while in possession of this material adverse information about Warner which had not been publicly disclosed.

On December 8, 1982, the true status of Warner's operations and financial position became public. Warner announced that Atari's sales were disappointing, and that cancellations of sales of cartridges and a write-off exceeding $20 million in connection with Warner's Knickerbocker unit would result in Warner's fourth quarter earnings being approximately 50% less than they had been in the prior comparable period and its 1982 fiscal results would be considerably less than previously represented to the investing public. The price of Warner common stock dropped, falling over 16 points the next day. Other Warner securities were similarly affected.

Defendants in this action include Warner, Atari and certain present and former officers and directors of Warner and Atari. In essence, all the defendants are charged with a classic fraud-on-the-market and the individual defendants are charged with insider trading. They deny the allegations of the Complaint.

After lengthy negotiations, the parties stipulated to certification of the alleged class, without waiver of defendants' rights to later challenge that certification, and this Court so ordered that stipulation on February 17, 1984. The class as certified consisted of all persons or entities who, during the period from March 3, 1982 to and including December 8, 1982: (i) purchased Warner common stock, (ii) purchased warrants to purchase Warner common stock, (iii) purchased call options to acquire Warner common stock that remained unexpired on December 8, 1982, or (iv) sold put options to dispose of Warner common stock which were open positions as to them on December 8, 1982. Pursuant to this Court's Order, notice of the pendency of these class actions was subsequently mailed to approximately 100,000 potential class members, and was published in summary form in both The Wall Street Journal and The New York Times.

Extensive discovery was had in this case. During the second half of 1983, plaintiffs reviewed over 80,000 pages of documents produced, pursuant to discovery demands, by defendants and numerous third parties. Plaintiffs also reviewed depositions of Warner and Atari officials taken during the course of a Securities and Exchange Commission ("SEC") investigation. Only after substantial discovery was completed did settlement negotiations commence. Those negotiations ultimately yielded the settlement proposal described below.

DISCUSSION

A. Settlement Proposal

The proposed settlement provides that defendants shall pay $17,250,000.00, plus accrued simple interest at the rate of 8% per annum from January 1, 1985. The settlement fund shall also include $290,000.00, plus accrued interest, which represents the amounts paid by defendants Groth and Kassar, officials of Atari, to the SEC as disgorgement of their profits on insider sales. The settlement agreement also requires defendant Warner to bear the cost of providing notice to the class members and settlement administration, which represents a benefit to the class of at least $200,000.00. The total value of the settlement, as of July 23, 1985, the date of the settlement hearing, is approximately $18,600,000.00.

The particulars of the complex method of allocation of the settlement fund among the class members need not be explained at length in this opinion. Suffice it to say, however, that the proposal recognizes that the potential for recovery varies among class members depending on whether they continued to hold their Warner securities at the end of the class period and when during the class period they effected their Warner securities transactions. Discovery indicated that more information was available to defendants concerning Warner's and Atari's earnings prospects as 1982 drew to a close than was available in earlier periods. For this reason, class members purchasing between March 3 and August 1, 1982 can expect recovery of up to 5% of their claims. Purchasers during the third and early fourth quarters, from August 2 through November 4, will receive up to 25% of their claims. Late 1982 purchasers— those who bought between November 5 and December 8, when more information about 1982 prospects was available—will receive up to 75% of their claims.

B. Judicial Review of the Settlement Proposal

In deciding whether to approve this settlement proposal, the court starts from the familiar axiom that a bad settlement is almost always better than a good trial. This case is an exception to that rule only to the extent the settlement is a very good one. There is little doubt that the law favors settlements, Jones v. Amalgamated Warbasse Houses, Inc., 97 F.R.D. 355, 358 (E.D.N.Y.1982), aff'd, 721 F.2d 881 (2d Cir. 1983), cert. denied, ___ U.S. ___, 104 S.Ct. 1929, 80 L.Ed.2d 474 (1984), particularly of class action suits, Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir.1982), cert. denied, 464 U.S. 818, 104 S.Ct. 77, 78 L.Ed.2d 89 (1983). To withstand judicial scrutiny, the settlement need only be "fair, reasonable and adequate." Weinberger, 698 F.2d at 73; West Virginia v. Chas. Pfizer & Co., 440 F.2d 1079, 1085 (2d Cir.), cert. denied sub nom. Cotler Drugs, Inc. v. Chas. Pfizer & Co., 404 U.S. 871, 92 S.Ct. 81, 30 L.Ed.2d 115 (1971). In making this determination, the Court's role is to compare the terms of the compromise with the likely rewards of litigation. Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968); Weinberger, 698 F.2d at 73; In Re "Agent Orange" Product Liability Litigation, 597 F.Supp. 740, 762 (E.D.N.Y. 1984); Kaye v. Fast Food Operators, Inc., 99 F.R.D. 161, 163 (S.D.N.Y.1983). In City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir.1974), the Second Circuit provided...