Intervenor v. Viray
| Decision Date | 30 September 2010 |
| Docket Number | Docket No. 08-3860-cv. |
| Citation | 622 F.3d 188 |
| Parties | D. David COHEN, Intervenor-Appellant, v. Alvin VIRAY, Derivatively on Behalf of DHB Industries, Inc., Plaintiff-Appellee, David H. Brooks, DHB Industries Inc., Sandra Hatfield, Dawn M. Schlegel, Jerome Krantz, Gary Nadelman, Cary Chasin, Barry Berkman, Larry Ellis, David Brooks International Inc., Terry Brooks, Elizabeth Brooks International Inc., Andrew Brooks International Inc., Jeffrey Brooks, Tactical Armor Products, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
OPINION TEXT STARTS HERE
Gary D. Sesser (William F. Sondericker, Laura Anne Reeds, and Christopher J. Young, on the brief), Carter Ledyard & Milburn LLP, New York, NY, for Intervenor-Appellant D. David Cohen.
Thomas G. Amon, Law Offices of Thomas G. Amon, New York, NY, and Brian J. Robbins, and Gregory E. Del Gaizo, on the brief, Robbins Umeda LLP, San Diego, CA, for Plaintiff-Appellee Alvin Viray, Derivatively on Behalf of DHB Industries, Inc.
Eric Rieder (David P. Kasakove and Chris M. LaRocco, of counsel, on the brief), Bryan Cave LLP, New York, NY, for Defendant-Appellee DHB Industries, Inc., now known as Point Blank Solutions, Inc.
Mark Holland (Mary K. Dulka, on the brief), Goodwin Procter LLP, New York, NY, for Defendants-Appellees Barry Berkman, Cary Chasin, Gary Nadelman, and Jerome Krantz.
Jerome Gotkin, Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., New York, NY, for Defendant-Appellee David H. Brooks.
Steven G. Kobre (Francisco J. Navarro, on the brief), Kobre & Kim LLP, New York, NY, for Defendant-Appellee Dawn M. Schlegel.
Rachel Penski, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, for Defendants-Appellees David Brooks International, Inc., Elizabeth Brooks International, Inc., and Andrew Brooks International, Inc.
Edward Himmelfarb (Thomas M. Bondy, attorney, Appellate Staff Civil Division, Department of Justice, and David M. Becker, General Counsel, Richard M. Humes, Associate General Counsel, and Sarah E. Hancur, Senior Counsel, Securities and Exchange Commission, on the brief), for Tony West, Assistant Attorney General, Civil Division, United States Department of Justice, Washington, D.C. and Benton J. Campbell, United States Attorney, Eastern District of New York, Brooklyn, NY, for amicus curiae United States.
Ira A. Schochet (Nicole M. Zeiss and Mindy S. Dolgoff, on the brief), Labaton Sucharow LLP, New York, NY, and Samuel Rudman, Keith Park, and Sanford Svetcov, on the brief, Coughlin Stoia Geller Rudman & Robbins LLP, New York, NY, for amici curiae NECA-IBEW Pension Fund, RS Holdings Group, and George Baciu.
Before: HALL, LIVINGSTON, and CHIN, * Circuit Judges.
On appeal, intervenor-appellant argues principally that the district court erred by approving the settlement of the shareholders' derivative litigation brought on behalf of DHB Industries, Inc. against a number of its former officers and directors because the settlement agreement impermissibly releases and indemnifies DHB's former Chief Executive Officer and Chief Financial Officer against all liability arising under § 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7243. 1 We agree.
We recount only such facts as are necessary to explain our decision. In the fall of 2005, DHB Industries, Inc.'s (“DHB”) stock price plummeted following revelations that the body armor manufactured by the company contained an inferior material prone to rapid deterioration. Numerous derivative and class action lawsuits were subsequently filed against DHB and a number of its former officers and directors. In January 2006, the United States District Court for the Eastern District of New York (Seybert, J.) consolidated the derivative actions and class actions and appointed derivative counsel and class counsel. The settlement of the consolidated derivative action (“the Settlement”) is the subject of this appeal, though the Settlement is a joint settlement that settled both the consolidated derivative action and the consolidated class action.
In the district court, intervenor-appellant D. David Cohen and the Department of Justice Civil Litigation Division (“DOJ”), in consultation with the Securities and Exchange Commission (“SEC”), (DOJ and SEC collectively, the “United States”), presented objections to the Settlement. As relevant to our decision, Cohen and the United States objected to the provisions in which DHB agreed to release David H. Brooks, DHB's former Chairman and Chief Executive Officer (“CEO”), and Dawn M. Schlegel, DHB's former Chief Financial Officer (“CFO”), from any liability under § 304 of the Sarbanes-Oxley Act (“SOX”), 15 U.S.C. § 7243 2 (“ § 304”), and to indemnify them against any liability they may incur under § 304. 3 Over these objections, on July 8, 2008, the district court entered final judgment approving the Settlement. The court subsequently entered an order granting derivative counsel's application for attorneys' fees and rejecting Cohen's application for attorneys' fees. This appeal followed.
It was in December 2006 that the district court was first presented with the proposed Settlement, which had been agreed to by derivative counsel, class counsel, the named defendants, and DHB. The following month, Cohen moved to intervene in the consolidated class and derivative actions pursuant to Federal Rule of Civil Procedure 24(a)(2) and, inter alia, objected to preliminary approval of the proposed Settlement. Cohen subsequently filed a memorandum of law in opposition to that approval and, in May 2007, appeared at a court hearing held to review it. The court made a preliminary finding in favor of the Settlement and subsequently entered an order to that effect.
In September 2007, Cohen filed objections to final approval of the Settlement.
On October 1, 2007, DHB filed restated financial statements for 2003, 2004, and the first three quarters of 2005. Three days later, on October 4, 2007, the DOJ petitioned the district court pursuant to the Class Action Fairness Act, 28 U.S.C. § 1715 et seq., for an extension of time to evaluate the proposed Settlement.
The following month, the United States filed objections to the Settlement, principally on the grounds that it: (i) limited the remedies available to the government in pending criminal cases against the individual defendants, and (ii) undermined efforts by the SEC to hold the individual defendants liable for disgorgement under § 304. In letters to the district court in December 2007 and June 2008, the United States Attorney for the Eastern District of New York expressed concern regarding its ability to seek restitution in connection with pending criminal cases and noted that Brooks' contribution to the Settlement was funded at least in part with the proceeds of insider trading.
In response to the United States' objections, the settling parties offered to add the following language to the Settlement: “Nothing contained in this Settlement is intended to limit the United States' ability to pursue forfeiture, restitution or fines in any criminal, civil or administrative proceeding.” Brooks conditioned his acceptance of the proposed language on the addition of the phrase “except that ¶ 4.7 of the [Settlement] shall remain in full force and effect,” thus seeking to ensure that Brooks and Schlegel were indemnified against liability under § 304. See n. 3, supra. Cohen and the United States continued to object to the Settlement.
In June 2008, the district court held a hearing for final approval of the Settlement. Cohen and the United States each appeared in opposition to the Settlement, and each reiterated the objections relating to § 304. As already noted, the court granted final approval of the Settlement, and on July 8, 2008, entered final judgment to that effect. Paragraph twelve of the final judgment provides that the Settlement includes a new paragraph 4. 10, which states, in part, that “[n]othing contained in this Stipulation is intended to limit the United States' ability to pursue forfeiture, restitution or fines in any criminal, civil or administrative proceeding, except that Paragraph 4.7 of this Stipulation [regarding indemnification for § 304 liability] shall remain in full force and effect.”
On August 16, 2006, the United States Attorney for the Eastern District of New York filed a criminal indictment against Schlegel (DHB's former CFO) and Sandra Hatfield (DHB's former Chief Operating Officer) on charges that they inflated corporate earnings and profit margins, and then profited on those inflated earnings through the sale of DHB stock. United States v. Dawn Schlegel, et al., No. CR-06-550, 2006 WL 4969569 (E.D.N.Y.2006). The next day, on August 17, 2006, the SEC filed a civil complaint against Schlegel and Hatfield in the Southern District of Florida based on the same underlying acts as were charged in the criminal matter. SEC v. Dawn M. Schlegel, et al., No. CV-06-61251 (S.D.Fla.2006). 4
On October 23, 2007, Schlegel pled guilty to conspiracy to commit securities and tax fraud. Schlegel, No. CR-06-550, Dkt. No. 82 (Oct. 23, 2007). The next day, on October 24, 2007, the United States Attorney for the Eastern District of New York filed a superceding indictment against Brooks and Hatfield related to the same underlying facts as were previously charged. Id. Dkt. No. 51 (Oct. 24, 2007). 5 One day later, on October 25, 2007, the SEC brought a civil action against Brooks in the Southern District of Florida seeking disgorgement of $186 million under § 304. SEC v. David H. Brooks, No. CV-07-61526 (S.D.Fla.2007). 6
On appeal, Cohen principally asserts that the district court erred by approving the Settlement, awarding attorneys' fees to derivative plaintiffs' counsel, and denying his application for attorneys' fees. Because we hold that the indemnification and release provisions of the Settlement violate § 304, our discussion is limited...
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