Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-05519/USCOURTS-cand-3_03-cv-05519-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE PORTAL SOFTWARE, INC

SECURITIES LITIGATION

 /

No C-03-5138 VRW

ORDER

As described in this court’s preliminary approval order

of June 30, 2007 (Doc #175), plaintiffs in this class action

securities litigation reached a settlement with the defendant,

Portal Software, Inc (“Portal”), on March 9, 2007. Doc #168. In

that order the court preliminarily approved the proposed

settlement, certified the settlement class pursuant to FRCP 23 and

approved notice by publication. Notice having been mailed to

17,937 potential class members, posted on lead counsel’s website,

posted on the claims administrator’s website and a summary notice

published in Investor’s Business Daily on July 5, 2007 (Doc #176 at

2), the parties now move for final approval of the settlement. In

particular plaintiffs seek: (1) final approval of the proposed

settlement; (2) final approval of the plan of allocation; and (3) 

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final approval of plaintiffs’ attorneys’ request for fees and

expenses.

The court held a final settlement approval hearing on

October 25, 2007. For the reasons that follow, the court GRANTS

final approval of the proposed settlement, GRANTS approval of the

plan of allocation and GRANTS an award of expenses and attorneys’

fees. The court will discuss each of the above issues in turn.

I

Portal provides billing and subscriber management

solutions to its clients primarily through its “Infranet” software,

for which Portal charges companies “license fees.” Doc #135 at

¶68. Portal also charges customers “service fees” for system

implementation, consulting, maintenance and training. Doc #135 at

¶68. Following the dot-com market crash of 2001, Portal lost many

of its dot-com startup customers and incurred financial losses that

wiped out more than ninety-six percent of its equity. Doc #135 at

¶69.

Portal subsequently began to market its Infranet product

to more established and sophisticated business customers, including

telecommunications providers. Doc #135 at ¶69. Portal’s new

clients required greater software customization than had the dotcom startups, which in turn affected Portal’s license fee revenue

recognition. Doc #135 at ¶69. Plaintiffs contend that under GAAP,

a software provider cannot recognize licensing revenues for

software that requires customization for a client until a

substantial portion of the modification has been completed. Doc

#135 at ¶¶4, 44(e), 69. Although Portal could recognize revenue

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when it delivered its Infranet product to its dot-com clients, the

greater customization required by Portal’s new, more established

clients required the company to defer recognizing revenue from many

of its contracts until customization was complete. Doc #135 at

¶153. Plaintiffs allege that during the class period, Portal began

to manipulate its license fees to recognize more revenue “upfront.” Doc #135 at ¶¶70-71.

On September 12, 2003, Portal completed a secondary

offering to the public at a price of $13.25 per share, thereby

generating $60 million in net proceeds. Doc #135 at ¶9. On

November 13, 2003, defendants announced that due to contract

delays, revenue recognition deferrals and service execution issues,

Portal expected net losses of $0.36 to $0.40 per share for the

third quarter of fiscal year (FY) 2004. Doc #135 at ¶10. These

losses contrasted with the $0.04 net profits per share that Portal

projected previously for the quarter. Doc #135 at ¶10. After this

announcement, Portal’s common share price plummeted more than 42.5%

to $8.77 in afterhours trading. Doc #135 at ¶113. 

Plaintiffs’ complaint alleges that Portal made the

accounting misstatements described above to inflate reported

revenue numbers. Doc #135. Portal then used those numbers to

create false and misleading statements regarding its financial

health and future business prospects. Doc #135 at ¶3. According

to plaintiffs, these false and misleading statements artificially

inflated Portal’s stock price and allowed Portal to complete the

$60 million secondary offering on September 12, 2003. Doc #135 at

¶¶2, 9. 

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Plaintiffs’ claims for violations of the 1933 Securities

Act (‘33 Act) are based on the alleged false and misleading

statements made in the registration statement and prospectus issued

in connection with the secondary offering. Doc #135 at ¶¶142-65.

Plaintiffs’ claims for violations of the 1934 Exchange Act (‘34

Act) are based on alleged false and misleading statements

disseminated to the investing public via SEC filings and press

releases. Doc #135 at ¶¶166-81. 

On August 17, 2006, the court denied defendants’ motion

to dismiss plaintiffs’ claims under sections 11, 12(a) and 15 of

the ‘33 Act and granted defendants’ motion to dismiss plaintiffs’

claims under sections 10b and 20(a) of the ‘34 Act. Doc #155. 

Additionally, because plaintiffs amended their complaint four times

but still had not satisfied the Private Securities Litigation

Reform Act’s (PSLRA) heightened pleading requirements, the court

dismissed plaintiffs’ claims under the ‘34 Act with prejudice. Doc

#155. Accordingly, the only remaining claims are under sections

11, 12(a) and 15 of the ‘33 Act. 

II

The court first addresses the fairness of the settlement,

consisting of $3.25 million in cash. In making its assessment, the

court must adopt the point of view of the class members, who can no

longer depend on their attorneys’ rigorous adherence to their

fiduciary duties. See Court Awarded Attorney Fees, Report of the

Third Circuit Task Force, Oct 8, 1985, 108 FRD 237, 255 (1985)

(“[T]he court now must monitor the disbursement of the fund and act

as a fiduciary for those who are supposed to benefit from it, since

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typically no one else is available to perform that function — the

defendant has no interest in how the fund is distributed and the

plaintiff class members rarely become involved.”). In assessing

whether a settlement is “fair, reasonable and adequate” under FRCP

23(e)(1)(C), the court is to consider several factors:

(1) the strength of the plaintiffs’ case; (2)

the risk, expense, complexity, and likely

duration of further litigation; (3) the risk

of maintaining class action status throughout

the trial; (4) the amount offered in

settlement [presumably in comparison to

comparable cases]; (5) the extent of discovery

completed and the stage of the proceedings;

(6) the experience and views of counsel; (7)

the presence of a governmental participant;

and (8) the reaction of class members to the

proposed settlement.

Churchill Village v General Electric, 361 F3d 566, 575 (9th Cir

2004), citing Hanlon v Chrysler Corp, 150 F3d 1011, 1026 (9th Cir

1998). To these factors, the court adds (9) the procedure by which

the settlement was arrived at, see Manual for Complex Litigation

(Fourth) § 21.6 (2004), and (10) the role taken by the lead

plaintiff in that process, a factor somewhat unique to the PSLRA.

Factor (1), the strength of plaintiffs’ case, somewhat

favors settlement because plaintiffs’ remaining claims are tenuous. 

Plaintiffs assert that establishing liability and damages at trial

would be difficult because of the uncertainties associated with

proving its claims, which are “exacerbated by the unpredictability

of a lengthy and complex jury trial.” Doc #176 at 6. 

Additionally, the heightened pleading requirement of the PSLRA and

the application of Dura Pharms, Inc v Broudo, 544 US 336 (2005),

which poses significant risks to plaintiffs’ ability to survive the

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pending summary judgment and prevailing at trial, suggest that

settlement here is prudent. Further, because the ‘34 Act claims

were dismissed with prejudice, plaintiffs’ case is relatively weak.

Similarly, the risk, expense, complexity and likely

duration of further litigation, factor (2), favor settlement

because further litigation would entail substantial risk to the

class of recovering nothing. Any further litigation would likely

be complex, expensive and a favorable outcome improbable. 

Additional consideration of increased expenses of fact and expert

discovery and the inherent risks of proceeding to summary judgment,

trial and appeal also support the settlement. See Doc #178 at 10. 

Also, the court’s ruling on the ‘34 Act claims effectively barred

class members with ‘34 Act claims from recovery if the case

proceeded to trial. Accordingly, the risk, expense, complexity and

likely duration of further litigation favor settlement. 

Factor (3) does not weigh in favor of settlement because

class treatment is generally appropriate in such litigation and any

risk in maintaining the class is low.

The amount offered in settlement, addressed in factor

(4), also favors the settlement. Plaintiffs contend the potential

aggregate damages at trial for the ‘33 Act claims is approximately

$13 million — a four-fold increase from the $3.25 million

settlement. Doc #176 at 7-8. The settlement therefore represents

twenty-five percent of plaintiffs’ estimated maximum recovery at

trial. The Ninth Circuit has held that “a cash settlement

amounting to only a fraction of the potential recovery will not per

se render the settlement inadequate or unfair.” Officers for

Justice, 688 F2d 615, 628 (9th Cir 1982); see In re Mego Financial

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Corp, 213 F3d 454, 459 (9th Cir 2000). And the Ninth Circuit has

upheld percentage recoveries lower than the twenty-five percent

recovery here. See In re Mego Financial Sec Litig, 213 F3d at 459

(noting that a settlement of $2 million out of a potential $12

million, or 16.66%, was fair and adequate). The settlement also

exceeds median percentages for all securities class actions in 2005

and 2006, which were approximately 3.1% and 2.4% respectively. See

Laura E Simmons & Ellen M Ryan, Securities Class Action

Settlements: 2006 Review and Analysis, at 5 (Cornerstone 2007). 

For securities class action settlements below $50 million, median

settlements as a percentage of estimated damages were 10.5% through

year end 2005 and 8.8% in 2006. Simmons & Ryan, supra, at fig 5. 

Accordingly, the amount here favors settlement. 

The extent of discovery completed and the stage of the

proceedings, factor (5), also supports settlement. By the time the

settlement was reached, the litigation had proceeded to a point in

which both plaintiffs and defendants “ha[d] a clear view of the

strengths and weaknesses of their cases.” In re Warner

Communications Sec Litig, 618 F Supp 735, 745 (SDNY 1985) aff’d 798

F2d 35 (2d Cir 1986). The settlement reflects three and a half

years of completed work including pre-filing investigation,

locating and interviewing over twenty-one witnesses, four amended

complaints, substantial research, opposing defendant’s motion to

dismiss and plaintiff’s analysis of defendant’s motion for summary

judgment. Doc #176 at 5. As a result, the true value of the

class’s claims was well-known. Plaintiffs’ counsel possessed an

accurate and sufficient understanding of the strengths and

weaknesses of the case.

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The views of counsel, factor (6), support settlement as

well. While some courts have indicated that such views are

entitled to deference, see, for example, Williams v Vukovich, 720

F2d 909, 922–23 (6th Cir 1983), this court is reluctant to put much

stock in counsel’s pronouncements, given their pecuniary interest

in seeing the settlement approved. Here, plaintiffs’ counsel are

experienced in complex class action and securities litigation. The

court is well acquainted with the views of plaintiffs’ counsel and

considered their memoranda in support of the settlement approval. 

See Doc ##176, 178. Further, the court knows of no objections by

defendant’s counsel which would indicate anything other than

support for the settlement. While the court is disinclined to give

counsels’ views too much weight, those views do support settlement. 

Factor (7) does not support settlement, inasmuch as there

is no government participant present.

Factor (8) considers the reaction of class members to the

proposed settlement and supports the settlement because no

objections and only one opt-out was made from the class of roughly

17,937 members. The Ninth Circuit has approved settlements over

objections if the settlement otherwise meets the fairness

requirements. See, for example, Churchill Village, 361 F3d at 577

(500 opt-outs and 45 objections out of approximately 90,000

notified class members); In re Mego Financial Sec Litig, 213 F3d at

459 (one objection out of a potential class of 5400); Marshall v.

Holiday Magic, Inc, 550 F2d 1173, 1178 (9th Cir 1977) (one percent

of the class disapproved). Accordingly, the reaction of the class

members as a whole supports the settlement.

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9

Factor (9), the procedure by which the settlement was

arrived, supports the settlement. The arms-length, contentious

negotiations that culminated in the settlement agreement indicate

that the settlement was reached in a procedurally sound manner. 

Doc #176 at 4. There is nothing in the record indicating any

collusion or bad faith by the parties. Additionally, in its

preliminary approval order the court found that “the procedure for

reaching this settlement was fair and reasonable * * *. 

Experienced counsel on both sides, each with a comprehensive

understanding of the strengths and weaknesses of each party’s

respective claims and defense, negotiated this settlement over an

extended period of time in early 2007.” Doc #175 at 10.

Finally, factor (10), the role taken by the lead

plaintiff in the settlement process, supports settlement because

lead plaintiff was intimately involved in the settlement

negotiations. See Doc #178 at ¶57. Congress sought to foster such

involvement through the PSLRA’s lead plaintiff provisions. 

For the reasons discussed above and in its preliminary

approval order, the court finds that, on balance, the settlement is

fair, reasonable and adequate to the class within the meaning of

FRCP 23(e)(1)(C). Accordingly, the court GRANTS the motion for

final approval of the settlement.

III

A

The court turns next to the proposed plan of allocation,

which must be fair, reasonable and adequate. Class Plaintiffs v

Seattle, 955 F2d 1268, 1284 (9th Cir 1992).

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10

 Plaintiffs’ counsel submitted a plan of allocation which

they developed from consultations with lead plaintiffs,

representative plaintiffs and representative plaintiffs’ outside

counsel. Plaintiffs also consulted a damages expert named Bjorn

Steinholt. Doc ##170, 176 at 13. Plaintiffs hired Steinholt to

draft a plan of allocation to ensure a fair distribution of the

available settlement proceeds. Steinholt’s proposed plan

distinguishes between class members asserting ‘34 Act claims, which

were dismissed with prejudice, and those asserting ‘33 Act claims,

which remain active. Doc #170.

 The proposed plan provides that each authorized claimant

shall be allocated a percentage of the net settlement fund

according to their recognized claim. The plan allocates ninetyfive percent of the net settlement fund to the ‘33 Act class

members and five percent of the net settlement to the ‘34 Act class

members. Doc #178 at 14-15. 

The ‘33 Act claims, representing ninety-five percent of

the net settlement fund, will take as follows:

For shares of Portal securities that were purchased or

acquired in the September 12, 2003, Secondary Offering,

and

(a) sold on or before November 13, 2003, the claim

per share is $0; 

(b) retained at the close of trading on November

13, 2003, the claim per share is the difference

between the $13.25 offer price per share and the

$8.40 per share (November 14, 2003 closing price).

Doc #178 at ¶67.

The ‘34 Act claims, representing five percent of the net

settlement fund, will take as follows:

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For shares of Portal securities that were purchased or

acquired from May 20, 2003 through November 13, 2003,

and

(a) sold on or before November 13, 2003, the claim

per share is $0; 

(b) retained at the close of trading on November

13, 2003, the claim per share is equal to the

lesser of: (i) the purchase price per share less

$8.40 per share (November 14, 2003 closing price),

or (ii) $6.86 per share (November 14, 2003 price

decline). 

Doc #178 at ¶67.

Under this plan, the estimated average payment to the ‘34

Act class members is approximately $0.01 per share before deduction

of fees and expenses. Doc #178 at ¶68. The estimated average

payment to the ‘33 Act class members is $1.10 for each share before

deduction of fees and expenses. Doc #178 at ¶68. 

Plaintiffs’ counsel reasons that because the ‘34 Act

claims were dismissed with prejudice and are likely to fail on

appeal, those claims had little weight during settlement

negotiations and should, therefore, be limited to five percent of

the net settlement proceeds. Doc #176 at ¶69. Counsel further

asserts that it was in the best interest of the ‘34 Act class

members to pool their claims with the ‘33 Act class members, and

the plan was designed to allocate fairly and rationally the

proceeds of the settlement among the class. Doc #176 at ¶69. 

Courts endorse distributing settlement proceeds according

to the relative strengths and weaknesses of the various claims. 

See In re Warner Communications Sec Litig, 618 F Supp 735, 745

(SDNY 1985), aff’d, 798 F2d 35 (2d Cir 1986); In re Agent Orange

Prod Liab Litig, 611 F Supp 1396, 1411 (EDNY 1985) (“[I]f one set

of claims had a greater likelihood of ultimate success than another

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set of claims, it is appropriate to weigh ‘distribution of the

settlement * * * in favor of plaintiffs whose claims comprise the

set’ that was more likely to succeed.”), quoting In re Corrugated

Container Antitrust Litigation, 643 F2d 195, 220 (5th Cir 1981);

Petrovic v AMOCO Oil Co, 200 F3d 1140, 1152 (8th Cir 1999)

(upholding distribution plan where class members received different

levels of compensation and finding that no subgroup was treated

unfairly). Distinguishing between the ‘33 and ‘34 Act claims seems

appropriate here, because the court dismissed the ‘34 Act claims

with prejudice. Accordingly, the court cannot conclude that the

plan of allocation is obviously deficient or is not “within the

range of possible approval.” Schwartz v Dallas Cowboys Football

Club, Ltd, 157 F Supp 2d 561, 570 n12 (ED Pa 2001). 

B

While the plan of allocation is likely fair and

reasonable, the court finds it appropriate in light of the Ninth

Circuit’s recent opinion In re Veritas Software Corp Sec Litig, 496

F3d 962 (9th Cir 2007), to examine whether the class notice

properly disclosed the amount of recovery and the amount of

expenses for each claimant. 

1

Veritas involved a class action lawsuit alleging that

Veritas Software Corporation (“Veritas”) “falsely represented that

it had entered a $50 million deal with AOL, structured to appear as

if Veritas had sold $50 million in software and services to AOL and

had purchased $20 million in online advertising from AOL. This

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‘round-trip’ transaction allowed both companies to artificially

inflate their revenues and earnings.” In re Veritas, 496 F3d at

965. The class, consisting of individuals and entities who

purchased securities of Veritas between January 3, 2001 and January

16, 2003, claimed that because of the false representations the

price of Veritas securities was inflated artificially and the

individuals purchasing Veritas securities were therefore harmed. 

In re Veritas, 496 F3d at 965. 

The parties settled, and lead counsel sent notice of the

proposed settlement to the class members in March 2005, stating

that the “estimated average recovery per share will be

approximately $0.25.” In re Veritas, 496 F3d at 965. Michael

Malone, a class member, objected to the initial notice because it

unfairly excluded four classes of Veritas securities from the

settlement. In re Veritas, 496 F3d at 965-66. Accordingly, the

court required a revised notice to be sent out, which again stated

that “estimated average recovery per share of common stock will be

approximately $0.25.” In re Veritas, 496 F3d at 966. 

Malone objected to the revised notice, this time

questioning the calculation of the $0.25 in damages. In re

Veritas, 496 F3d at 966. As a result, the district court ordered

subsequent briefing to explain how the estimate of $0.25 was

calculated. Lead plaintiff then explained that $0.25 stemmed from

an assumption, based on a NERA Economic Consulting study, that only

43% of the class members would actually file claims. In re

Veritas, 496 F3d at 966. Malone responded that if all eligible

shares filed claims, the recovery per share would be $0.085. In re

Veritas, 496 F3d at 966. Despite the objections, the district

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court approved the settlement and plan of allocation. In re

Veritas, 496 F3d at 967-68.

On appeal, Malone argued that the “revised notice of

proposed settlement was inadequate because it failed to meet the

PSLRA requirement that it provide a calculation of the amount of

settlement proposed to be distributed on a per share basis.” In re

Veritas, 496 F3d at 969. Additionally, Malone asserted that

“because [the revised notice] calculated the estimated average

recovery per share of common stock at $0.25 based on an undisclosed

assumption that only 43% of class members would file a claim,” the

notice failed the notice requirements under the PSLRA. In re

Veritas, 496 F3d at 969. 

The PSLRA requires disclosure of “[t]he amount of

settlement proposed to be distributed to the parties to the action,

determined in aggregate and on an average per share basis.” 15 USC

§ 78u-4(a)(7)(A). Additionally, the PSLRA requires a statement of

“the average amount of damages per share that would be recoverable

if the plaintiff prevailed on each claim alleged.” 15 USC § 78u4(a)(7)(B). The purpose of the PSLRA’s notice requirement is “to

allow class members to evaluate a proposed settlement” because

“[w]ith sufficient notice, class members can * * * weigh the risks

and rewards of proceeding to trial or participating in the proposed

settlement.” In re Veritas, 496 F3d at 969. 

The Ninth Circuit noted the PSLRA’s policy of providing

transparency to class members and, interpreting the PSLRA’s notice

requirement under 15 USC § 78u-4(a)(7)(A)-(B) as “a question of

first instance in this and all other circuits,” held that “the

estimated average recovery per share must be based on all of the

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shares in the class.” In re Veritas, 496 F3d at 971. The notice

may also include an “estimated average per share recovery,” but it

must be “based on explicitly disclosed projections of how many

class members are likely to file claims.” In re Veritas, 496 F3d

at 971. Accordingly, because the notice in Veritas implied that

the calculations were based on 100% of the class filing claims but

were actually based on undisclosed assumptions “significantly less

than 100%,” the notice “clearly did not satisfy the requirements of

the PSLRA.” In re Veritas, 496 F3d at 970-71. The Ninth Circuit

vacated and remanded to the district court to issue a new class

notice.

2

Considering the overarching policy concern of fair,

accurate disclosure to class members, the court turns to: (a)

whether plaintiffs’ counsel complied adequately with the disclosure

requirement of Veritas; and (b) whether the estimated settlement

amounts per share for the ‘33 Act ($1.10/share) and ‘34 Act

($0.01/share) sufficiently disclose attorneys’ fees and expenses. 

a

At first glance, it is unclear whether the notice in this

case complies with the disclosure requirement in Veritas. The

notice is silent on the key fact that warranted vacatur in Veritas

– the precise assumptions behind the estimated average recovery per

share. The notice is ambiguous, stating that claimants “could get

more money” if fewer than the “anticipated” class members send in

claim forms. Doc #179 Ex A at 4. The notice does not define what

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1

 162500 / 13155060 = 0.012

2

 3087500 / 2881701 = 1.07

16

the “anticipated” number is, failing the Ninth Circuit’s

requirement that estimates must be based on “explicitly disclosed

projections of how many class members are likely to file claims.” 

In re Veritas, 496 F3d at 971.

After examining the matter in greater detail, the court

concludes that the notice substantially satisfies the rule in

Veritas. To illustrate counsel’s substantial compliance with

Veritas, some simple calculations are necessary. 

Taking the ‘34 Act claims first, the notice appears to

comply with Veritas. The total recovery allocated to those claims

before deducting fees and expenses is five percent of $3,250,000,

or $162,500. Counsel declared that the total number of damaged

shares in the ‘34 Act claims is 13,155,060. See Doc #176 at 14. 

Thus the gross recovery per share is $0.012.1

 That amount rounds

down to $0.01 per share, which is consistent with the recovery

stated in the notice. These calculations demonstrate that counsel

assumed that one hundred percent of the 13,155,060 damaged shares

would submit a claim.

For the ‘33 Act claims, the picture is less clear. The

total recovery allocated to those claims before fees and expenses

is ninety-five percent of $3,250,000, or $3,087,500. Counsel

declared that the total number of damaged shares in the ‘33 Act

claims is 2,881,701. See Doc #176 at 14. Thus the gross recovery

per share is $1.07.2

 That amount directly contradicts the stated

recovery per share of $1.10 that was advertised to the class. 

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 3087500 / 2806818 = 1.10.

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The $1.07 amount suggests that counsel did not assume

that one hundred percent of eligible shares would submit a claim;

if fewer than one hundred percent of the 2,881,701 shares submit a

claim, then the per share recovery would rise from $1.07 to a

higher number, such as $1.10. To illustrate this point, one must

calculate backwards from the stated recovery of $1.10. If the

stated recovery of $1.10 is correct, and if the recovery for the

‘33 Act claims is $3,087,500, then the number of damaged shares

should be 2,806,818.3

 That number of damaged shares is 74,883 less

than counsel’s stated number of damaged shares. Counsel offers no

explanation for that discrepancy.

The following table summarizes the above calculations. 

Counsel’s proffered arithmetic (3087500 / 2881701 = 1.10) does not

compute.

Recovery Amount $3,087,500 $3,087,500

Number of Damaged

Shares

2,881,701 2,806,818

Recovery per Share $1.07 $1.10

Difference from

Stated Number of

Damaged Shares

0 74,883

Rounding does not account for the discrepancy. A

recovery per share of $1.095 (which would round up to 1.10) implies

a damaged number of shares of 2,819,635, for a discrepancy of

62,066.4

 A recovery per share of $1.104999 (which would round down

to 1.10) implies a damaged number of shares of 2,794,118, for a

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discrepancy of 87,583.5 Accordingly, if the $1.10 per share

recovery stated in the notice is correct, then the actual number of

damaged ‘33 Act shares is somewhere between 2,794,118 and

2,819,635, rather than counsel’s declared number of 2,881,701. The

following table summarizes the range of possible damaged shares and

recoveries per share.

Recovery Amount $3,087,500 $3,087,500 $3,087,500

Number of

Damaged Shares

2,819,635 2,806,818 2,794,118

Recovery per

Share

$1.095 $1.10 $1.104999

Difference from

Stated Number

of Damaged

Shares

62,066 74,883 87,583

Percentage

Difference from

Stated Number

of Damaged

Shares

2% 2.5% 3%

The foregoing calculations imply that counsel did not

assume that one hundred percent of the stated number of damaged

shares would submit a claim. Instead, the numbers reflect an

implicit assumption that ninety-seven to ninety-eight percent of

the stated number of damaged shares would submit a claim.6

Nonetheless, a small discrepancy of this scale does not

run afoul of Veritas, which stated that “what matters is that the

assumption [of class members who would submit claims] was

undisclosed and significantly less than 100%.” In re Veritas, 496

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F3d at 970. The two to three percent difference is not a

significant departure, and there is no indication that counsel made

a specific assumption that less than one hundred percent of damaged

shares would submit a claim, as did counsel in Veritas. The more

likely explanation for the discrepancy is that counsel should be

taken literally when they claim that the number of damaged ‘33 Act

shares is “approximately 2,881,701.” Doc #176 at 14. A

differential of two or three percent satisfies any common sense

definition of “approximately.” The three-cent difference between

$1.10 and $1.07, while not insignificant, is not so large that the

notice “overstated the likely recovery per share [in a way that]

may have discouraged other objectors from speaking up.” In re

Veritas, 496 F3d at 972. The notice here was in line with the

purpose of the PSLRA’s notice requirement, which is to allow class

members to evaluate a proposed settlement effectively and fairly. 

In re Veritas, 496 F3d at 969-70. Accordingly, the notice here

substantially satisfies the rule in Veritas.

In future motions to approve final settlements, counsel

should provide to the court spreadsheets containing the above

calculations. Such calculations, supported by declarations, are

the best way for district courts to ensure compliance with Veritas.

b

The court next turns to the estimated recovery amounts

listed in the notice for the ‘33 Act ($1.10/share) and ‘34 Act

($0.01/share). Specifically, the court notes the failure to

include estimated attorneys’ fees and expenses in the recovery

estimates. Considering the goals of providing transparency and

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accurate information to the class, the court finds it appropriate

to analyze whether failing to include attorneys fees in the

calculation of estimated recovery amounts complies with the text

and structure of the PSLRA as well as the spirit of Veritas. 

The “Notice of Pendency and Proposed Settlement of Class

Action” published and mailed to the class states:

[T]he estimated average recovery per share of securities

purchased or acquired in the Secondary Offering will be

approximately $1.10 before deduction of Court-approved

fees and expenses and the average recovery per share of

securities not purchased or acquired in the Secondary

Offering will be approximately $0.01 before deduction of

Court-approved fees and expenses. 

Doc #179 Ex A. Three paragraphs later the notice states that if

the requested expenses and attorneys fees are approved by the

court, those funds will total “20% of the Settlement Fund,” and

“the average cost per share of securities will be $0.04.”

The $1.10 and $0.01 amounts fail to include costs and

expenses, creating inflated estimates. The notice discloses that

those estimates were calculated “before deduction of Court-approved

expenses,” but under the PSLRA after Veritas, it is questionable

whether the notice provides clarity to the potential class members

so that they could accurately weigh the risks of accepting or

rejecting the settlement. 

The notice may technically violate the PSLRA, which

requires disclosure of “[t]he amount of the settlement proposed to

be distributed to the parties to the action.” 15 USC § 78u4(a)(7)(A). Here, for example, “the amount” to be “distributed” to

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 $1.10 minus twenty percent ($0.22) is $0.88.

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the ‘33 Act claimants is only $0.88 instead of $1.10,7

 but the

notice does not say that explicitly. The ordinary meaning of the

statutory language is that the notice must disclose a single amount

that the class member can multiply by his number of shares and then

take to the bank, as it were. While the notice discloses that

expenses and fees are not included in the per share amount, the

PSLRA requires more. The amounts disclosed – $1.10 per share and

$0.01 per share – do not reflect the net distribution to the class

members, which should account for attorneys’ fee and expenses. 15

USC § 78u-4(a)(7)(A). 

Even though the expenses deduction comes only three

paragraphs later and the class members can calculate for

themselves, the concern is with the initial false impression of the

amount of recovery. And as a rule of law, due to the PSLRA’s

concern with transparency and clarity, a per se rule requiring a

single disclosure of the final amount of recovery is more desirable

than a flexible inquiry into the complexity of the algebraic

calculations that settlement notices might impose upon class

members in the future. 

Moreover, the notice is not exactly clear what the amount

of expenses is. The notice states that costs will total “20% of

the Settlement Fund,” while the next sentence states that “the

average cost per share of securities will be $0.04.” The latter

number is grossly misleading because it does not explain that the

cost per share of securities for the ‘33 Act claims is over one

hundred times larger than the cost per share for the ‘34 Act

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claims. The cost per share for the ‘33 Act claims is $0.22,

whereas the cost per share for the ‘34 Act claims is $0.002. 

Because that information is not spelled out, a ‘33 Act claimant

might read the notice and conclude that she will receive $1.06 per

share ($1.10 minus $0.04), while she will in fact receive only

$0.88. A difference that large might affect a class member’s

decision whether to accept or reject the settlement.

Even if the notice tries to avoid that problem by listing

expenses as “20% of the Settlement Fund,” the $0.04 figure is

listed in the same unit as the average recovery – dollars per share

– and more easily invites calculation. After looking at the

notice, the understandable if not natural reaction would be to

subtract 0.04 from 1.10 instead of multiply 1.10 by (100% minus

20%). The notice is confusing because it lists multiple different

numbers each requiring a different calculation, even though the

PSLRA requires a single, bottom line number. 

Counsel’s failure to list separately the cost per share

of securities for each specific class of claims (i e $0.22 and

$0.002) may itself violate the PSLRA. The statute requires the

class notice to disclose “the amount of [attorneys’] fees and costs

determined on an average per share basis.” 15 USC § 78u4(a)(7)(C). At first glance, the notice complies with that

provision perfectly by stating that “the average cost per share of

securities will be $0.04.” Doc #179 Ex A. That seeming compliance

is inadequate in this case because the class was bifurcated into

two classes asserting different claims, whereas the text and

structure of the PSLRA contemplate only a single class. See 15 USC

§ 78u-4(a)(7) (referring to “the class” in the singular); see also

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15 USC § 78u-4(a)(5)-(8) (same). Because the statute was written

with only a single class in mind, the provision requiring

disclosure of costs “on an average per share basis” is

unobjectionable on its face. It makes little sense, however, to

apply that provision unthinkingly to a settlement with more than

one discrete group of claimants. In such an instance, the best

reading of the statute is that costs must be disclosed on an

average per share basis for each group. A requirement along those

lines would give each shareholder a clear idea of what her

individual claim is worth. Particularly in this case, where the

cost per share for one group is one hundred times the cost per

share for the other group, the increased clarity would have been

appropriate. Accordingly, because the notice included a useless

and misleading figure of $0.04 per share, the notice may have run

afoul of the PSLRA’s requirement that cost per share information be

“clearly summarized.” 15 USC § 78u-4(a)(7)(C). Instead, a

separate statement of the cost per share for the ‘33 Act claimants

and the cost per share for the ‘34 Act claimants would have been

more in line with the statute. The ‘33 Act claimants could have

seen more clearly that their net recovery was not $1.06 but $0.88.

Overall, the ambiguity in the class notice here fails to

satisfy the “clear purpose of the notice requirement” which is “to

allow class members to evaluate [the] proposed settlement.” In re

Veritas, 496 F3d at 969. Providing estimated per share recovery in

one location and fees and expenses in a separate location fails the

notice requirement because seemingly the only purpose of breaking

up those two pieces of information is to make the per share

recovery appear higher than it actually is. The PSLRA requires a

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statement of the net amount to be distributed. Listing the cost

per share for all claims together also fails the notice requirement

because it does not properly differentiate between distinct claims

that may have substantially different costs per share.

The Ninth Circuit did not address the cost disclosure

issue despite similar language in the disputed notice in Veritas. 

There, the notice stated that “the estimated average payment for

common stock will be approximately $0.25 for each share before

deduction of court approved fees and expenses.” In re Veritas, 496

F3d at 970 (emphasis added). Veritas confined its discussion to

“undisclosed assumptions” only, but the notice there “overstated

the likely recovery per share” and “may have discouraged other

objectors from speaking up,” thus adversely impacting the overall

fairness of the settlement. In re Veritas, 496 F3d at 972. 

Despite the possibility that the notice here fails to

satisfy the PSLRA, the court does not find the notice utterly

deficient. Because the Ninth Circuit did not address this issue

and because guidance is lacking on the matter, the court does not

reject the notice. Rather the court suggests that because the

PSLRA and Veritas require the notice to be as clear and accurate as

possible, including attorneys’ fees and expenses in the estimated

recovery amounts is not only a more appropriate way of attaining

clarity, but is a reasonable step for plaintiffs’ attorneys to

take. The court understands that the costs of finalizing a class

action recovery cannot be known with certainty at the time notice

is given. Attorney fees may have to be incurred in shepherding the

settlement through the approval process subsequent to the notice

and certain out-of-pocket expenses incurred in the administration

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of the fund. But plaintiffs’ attorneys, not the class members,

understand the nuances of the settlement and are the best providers

of reasonable estimates of these costs and can be expected to make

cautious estimates of what class members should expect lest they

give rise to disappointments that might further complicate

resolution of the litigation. Accordingly, future class notices

should provide a single number showing the actual amount of takehome recovery for each share, using reasonable estimates of any

future expenses of class administration. 

IV

Although the settlement amount is fair, the court must

scrutinize class counsel’s request for expenses and attorneys’

fees. Under the proposed fee award, plaintiffs’ counsel would

receive an award of 20% of the common fund inclusive of expenses,

with an expenses cap of $95,000. Doc #179 Ex A. This translates

to a total of $650,000, reflecting $83,274.81 for expenses and

$566,725.19 for attorneys’ fees. Doc #177 at 1. After the award,

$2.6 million will remain for the class members. 

A

The court first turns to the request for expenses in the

amount of $83,274.81, accounting for 2.56% of the total fund. Doc

##181-83. The expenses represent costs incurred by plaintiffs’

counsel over three and a half years of litigation, and the largest

expenses are attributed to “experts, consultants and investigators”

(44%), “meals, hotels and transportation” (22%) and “shareholder

notice” (21%). Doc ##181-83. Facially the expenses raise no

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indication of unreasonableness. Class action securities litigation

is complex. Considering the 1700-plus hours spent on the

litigation, awarding expenses in the amount of $83,274.81 seems

reasonable. Further, the current proposal bundles expenses with

fees, which is consistent with the court’s preference. See

Wenderhold v. Cylink Corp, 189 FRD 570, 573 (ND Cal 1999).

B 

In addition to expenses, plaintiffs’ counsel are entitled

to compensation for bringing the case and obtaining a fair

settlement. See Boeing Co v Van Gemert, 444 US 472 (1980). 

Plaintiffs’ counsel requests fees of 17.44% of the common fund, or

$566,725.19. 

Plaintiffs’ counsel assert that the attorneys’ fee

request is reasonable because of the extent of the litigation; the

risks of litigation and the need to ensure the availability of

competent counsel in high-risk, contingent securities cases; the

standing and expertise of plaintiffs’ counsel; and the standing and

caliber of oppositions’ counsel. See Doc #178 at 17, 20. In

addition, plaintiffs’ counsel note that the requested 17.44% fee is

below the Ninth Circuit’s 25% benchmark, and the fee request

represents a reduction from an ex ante negotiated fee agreement of

25% of recovery plus expenses. See Doc #177 at 5, 10 n8.

The 17.44% fee appears at first impression reasonable. 

See In re HPL, 366 F Supp 2d 912, 918 (ND Cal 2005) (noting that a

fee of 15% of the common fund appeared reasonable). In assessing a

percentage-based fee, the court looks to the Ninth Circuit’s

benchmark of 25% as a starting point. See Paul, Johnson, Alston &

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Hunt v Graulty, 886 F2d 268, 272 (9th Cir 1989). This percentage

may then be adjusted based on a number of circumstances, including

the size of the settlement, the risk undertaken by counsel in

pursuing the case and the extent to which this case precluded

counsel from taking other matters. See Vizcaino v Microsoft Corp,

290 F3d 1043, 1048–50 (9th Cir 2002); Six (6) Mexican Workers v

Ariz Citrus Growers, 904 F2d 1301, 1311 (9th Cir 1990). 

But “[r]elying on percentages without reference to * * *

other factors can be, like blind reliance on benchmarks, an ‘all

too tempting substitute for the searching assessment that should

properly be performed.’” In re HPL, 366 F Supp 2d at 918, quoting

Goldberger v Integrated Resources, Inc, 209 F3d 43, 52 (2d Cir

2000). Accordingly, it is the court’s practice to assess a

percentage fee award not only by using the usual litany of factors

bearing on the reasonableness of a fee (see, for example, Vizcaino,

290 F3d at 1047-50), but also by cross-checking the percentage fee

award against a rough fee computation under the lodestar method. 

See, for example, In re HPL, 366 F Supp 2d at 919-25. The court’s

view that a lodestar cross-check is appropriate in setting a fee

award mirrors its concern that even a modest percentage fee

recovery may represent a windfall to lead counsel. Even though it

is unlikely a lodestar calculation here would suggest an award far

below the percentage fee, the court believes a cross-check is

appropriate. 

In conducting a lodestar cross-check, the court must

first determine the dollar value of the proposed percentage-based

fee award. Here that amount is $566,725.19, representing a

requested 17.44% fee out of the $3.25 million settlement. 

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The second step is to cross-check the proposed percentage

fee against the lodestar figure. “Three figures are salient in a

lodestar calculation: (1) counsel’s reasonable hours, (2)

counsel’s reasonable hourly rate and (3) a multiplier thought to

compensate for various factors” such as unusual skill or experience

of counsel, or ex ante risk of nonrecovery. In re HPL, 366 F Supp

2d at 919. The multiplier is computed from the ratio of the

proposed percentage fee to the computed lodestar fee and will be

assessed for reasonableness. In re HPL, 366 F Supp 2d at 919. 

“Accordingly, the court need only consider counsel’s reasonable

hours and counsel’s reasonable hourly rate in computing the

lodestar.” In re HPL, 366 F Supp 2d at 919. 

 Plaintiffs’ counsel provided calculations of lodestar

figures (Doc ##181-83) and sworn declarations from the lead

attorneys in charge of billing records for the case attesting to

(1) the experience and qualifications of the attorneys who worked

on the case (Doc #177); (2) those attorneys’ customary billing

rates during the pendency of the case; and (3) the hours reasonably

expended by those attorneys in pursuing the case. Doc ##181-83. 

But plaintiffs’ counsel failed to provide detailed experience

levels sufficient for proper analysis. Plaintiffs’ counsel merely

distinguished between partners and associates, with no

specification of the respective years of experience each attorney

possesses. Accordingly, in computing its own lodestar, the court

assumes that attorney experience is measured from the year of law

school graduation or the year admitted to the bar. See In re Rite

Aid Corp Sec Litig, 396 F3d 294, 306 (3d Cir 2005) (“The lodestar

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cross-check calculation need entail neither mathematical precision

nor bean-counting.”). 

The court will conduct its own assessment based on

reasonable billing rates. See In re HPL, 388 F Supp 2d at 919;

Vaughn R Walker & Ben Horwich, The Ethical Imperative of a Lodestar

Cross-Check: Judicial Misgivings About “Reasonable Percentage” Fees

in Common Fund Class Actions, 18 Georgetown J Legal Ethics 1453,

1455 (2005). To determine appropriate hourly rates, it is the

practice of the court to rely on official data. One reliable

official source for rates that vary by experience levels (and used

by the court in In re HPL), is the Laffey matrix used in the

District of Columbia. See http://www.usdoj.gov/usao/dc/Divisions/

Civil_Division/Laffey_Matrix_6.html, citing Laffey v Northwest

Airlines, Inc, 572 F Supp 354 (D DC 1983), aff’d in part, rev’d in

part on other grounds, 746 F2d 4 (DC Cir 1984). 

Under the 2007 Laffey matrix, attorneys bill at the

following rates according to experience: 

Experience Rate Per Hour

20+ Years $440

11-19 Years $390

8-10 Years $315

4-7 Years $255

1-3 Years $215

Paralegals & Law Clerks $125

These figures are tailored for the District of Columbia,

which has a lower cost of living than both San Diego (the city in

which lead counsel for lead plaintiffs firm operates) and the San

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[(120.34 - 118.59)/118.59] = 0.01475 = +1.5%

9

[(130.33 - 118.59)/118.59] = 0.0989 = +10%

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Francisco Bay area, but a higher cost of living than Crestwood,

Kentucky (a suburb of Louisville, where representative plaintiffs’

counsel’s firm operates). The court will adjust the Laffey figures

accordingly based on the locality pay differentials within the

federal courts. See 2007 General Schedule (GS) Locality Pay

Tables, at http://www.opm.gov/oca/07tables/indexGS.asp; see also In

re HPL, 366 F Supp 2d at 921 (adjusting locality pay differentials

based on the geographical region in which lead counsel’s firm

operated). The Washington-Baltimore area has a +18.59% locality

pay differential; the San Diego area has a +20.34% locality pay

differential; the San Francisco-Oakland-San Jose area has a +30.33%

locality pay differential; and the Louisville, Kentucky area has a

+17.38% locality pay differential. Adjusting the Laffey matrix

figures accordingly will yield appropriate rates for the respective

geographical regions: +1.5% for San Diego8 and +10% for San

Francisco-Oakland-San Jose.9 No adjustment is made for Louisville,

which, for simplicity, will be compensated at the Laffey DC rates.

Applying these adjustments the court obtains the

following rates: 

San Diego:

+1.5% Adjustment

San Francisco -

Oakland -

San Jose:

+10% Adjustment

20+ Years 446.60 484.00

11-19 Years 395.85 429.00

8-10 Years 319.72 346.50

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4-7 Years 258.82 270.50

1-3 Years 218.22 236.50

Paralegals & Law Clerks 126.87 137.50

Substituting the values above and correlating them to the

appropriate attorney or paralegal, the following table reflects the

court’s adjusted lodestar calculations:

Attorney Experience 2007 Billing

Rate (per hr)

Total

Hours

Total

Lodestar

Alba (SD) 5 years 258.82 14.75 $3,817.60

Alexander 20+ years 446.60 11.00 $4,912.60

Bull 19 years 395.85 110.00 $43,543.50

Cauley 13 years 395.85 4.00 $1,583.40

Daley 11 years 395.85 5.0 $1,979.25

Geller 14 years 395.85 0.25 $98.96

Gunyan 12 years 395.85 111.00 $43,939.35

Reid Avallone 5 years 258.82 1.75 $452.94

Reise 20+ years 446.60 2.75 $1,228.15

Robbins 5 years 258.82 0.25 $64.71

Rosenfeld 7 years 258.82 2.75 $711.76

Rothman 13 years 395.85 463.75 $183,575.44

Rudman 15 years 395.85 10.25 $4,057.47

Stein 13 years 395.85 13.00 $5,146.06

Svetcov 20+ years 446.60 354.75 $158,431.35

Wilens 11 years 395.85 250.25 $99,061.46

Green (SF) 20+ years 484.00 37.05 $17,932.20

Pillette unknown unknown 0.50 unknown

Jigarjian 20+ years 484.00 12.00 $5,808.00

Sharma 3 years 236.50 18.21 $4,306.67

Welling 7 years 270.50 0.50 $135.25

Case 3:03-cv-05519-VRW Document 12 Filed 11/26/07 Page 31 of 34
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Roelandt (KY) 20+ years 435.60 31.70 $13,808.52

Stewart 20+ years 435.60 45.09 $19,641.20

Law Clerk (SF) - 137.50 1.00 $137.50

Paralegals(KY) - 123.75 0.25 $30.94

Paralegals(SD) - 126.87 206.50 $26,198.67

Paralegals(SF) - 137.50 4.98 $684.75

Total 1713.28 $684,287.65

Only categories covered by the Laffey matrix are included

in the above tabulation, and consolidated paralegal work is based

on geographical region. 

The court now turns to the lodestar cross-check, which

entails evaluation of the multiplier implied by lead counsel’s

requested fee (17.44% percent of a $3.25 million settlement, or

$566,725.19) and lead counsel’s lodestar fee (computed above as

$684,287.65). These data imply a multiplier of 0.83. 

Here, the lodestar amount ($684,397.65) exceeds the

percentage-based award ($566,725.19), reflecting a somewhat unusual

situation. See Walker and Horwich, supra, at 1470 n71. The

resulting so-called negative multiplier suggests that the

percentage-based amount is reasonable and fair based on the time

and effort expended by class counsel. Although multipliers are

frequently greater than one and often on the order of two to four,

see, for example, Van Vranken v Atlantic Richfield Corp, 901 F Supp

294, 298 (ND Cal 1995) (“Multipliers in the 3-4 range are common in

lodestar awards for lengthy and complex class action litigation.”);

Behrens v Wometco Enters, Inc, 118 FRD 534, 549 (SD Fla 1988)

(“[The] range of lodestar multiples in large complicated class

Case 3:03-cv-05519-VRW Document 12 Filed 11/26/07 Page 32 of 34
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actions [varies from] a low of 2.26 to a high of 4.5.”), in a case

such as this, a negative multiplier is appropriate to ensure at

least some recovery for the class and to reflect the very modest

achievement of counsel in this case. Even if the court accepted

the unadjusted lodestar from plaintiffs’ counsel ($922,884.75), the

correlating multiplier of 0.74 would still reflect a negative

multiplier, further suggesting that the requested percentage based

fee is fair and reasonable.

C 

Although the court’s role is to make a fair ex post

allocation of the settlement fund, the essential inquiry is: What

kind of fee and expenses arrangement would the class have struck

with class counsel ex ante? See, for example, In re Wells Fargo

Sec Litig, 156 FRD 223, 225–26 (ND Cal 1994). Such an approach

admittedly has its difficulties in a class action “because no

member of the class has a sufficient stake to drive a hard — or any

— bargain with the lawyer.” Matter of Continental Ill Sec Litig,

962 F2d 566, 572 (7th Cir 1992); see also Goldberger v Integrated

Resources, Inc, 209 F3d 43, 53 (2d Cir 2000). Nevertheless, “some

guides are available,” including “data from large common-pool cases

where fees were privately negotiated; and information on

class-counsel auctions, where judges have entertained bids from

different attorneys seeking the right to represent a class.” In re

Synthroid Marketing Litig, 264 F3d 712, 719 (7th Cir 2001). 

Here, plaintiffs’ counsel asserts that an ex ante

negotiated agreement was reached with plaintiffs, which would

entitle plaintiffs’ counsel to a fee award of 25% plus expenses. 

Case 3:03-cv-05519-VRW Document 12 Filed 11/26/07 Page 33 of 34
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Doc #177 at 10 n8. If such an agreement does exist the court will

give it weight assuming the agreement was the product of

procedurally sound, arms-length negotiations. While the negotiated

fee is instructive, the parties failed to provide any information

to ensure the fee agreement’s reasonableness, fairness and

accuracy. Because of the lack of evidentiary support and the

possibility that the 25% figure may have been boilerplate rather

than an economically sound, reasonably calculated fee, the court is

reluctant to give the agreement too much weight. On the other

hand, if the fee agreement resulted from arms-length bargaining,

the court might well find this persuasive in determining the

reasonableness of the attorneys’ fees, because of the reduction

from 25% to 17.44%. But no such documentation was provided here,

and the resolution of this litigation should not be further

delayed.

V

The court GRANTS the motion for final approval of the

settlement. The court GRANTS approval of the plan of allocation

and GRANTS an award of costs and attorneys’ fees. 

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

Case 3:03-cv-05519-VRW Document 12 Filed 11/26/07 Page 34 of 34