Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-04293/USCOURTS-cand-3_04-cv-04293-6/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 CHIRON CORPORATION

SECURITIES LITIGATION

 /

No C-04-4293 VRW

ORDER

“[A] bad settlement is almost always better than a good

trial,” In re Warner Communications Securities Litigation, 618 F

Supp 735, 740 (SDNY 1985) (Keenan, J), affirmed 798 F2d 35 (2d Cir

1986). But a good epigram could, in this case at least, make for a

bad result.

Four features of the class action settlement at bar make

the point and lead the court to deny preliminary approval of the

settlement: (1) the settlement proposes to pay class counsel fees

that, for the amount of time worked, are eight to ten times typical

hourly attorney fees; (2) the proposed notice omits a material term

of the settlement; (3) facts in the record or subject to judicial

notice raise question whether lead plaintiff can “fairly and

adequately protect the interests of the class”; and (4) a web of

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Gregory v Chiron Corp, 04-4293; Nach v Chiron Corp, 04-4346;

Kramer v Chiron Corp, 04-4416; Jaroslawicz v Bryson, 04-4474; Judith

Fisher v Chiron Corp, 04-5137; and Jerome Fisher v Chiron Corp, 05-

0246.

2

relationships on both sides of this case, and in particular that

between defendants’ counsel and one of class counsel’s former

partners, raises concerns about the adequacy of the disclosures in

the proposed class notice and even a concern about the possibility

of an appearance of impropriety. 

The case stems from the highly publicized events

surrounding the United States influenza (“flu”) vaccine shortage in

2004. Plaintiffs seek recovery for violations of sections 10(b)

and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 on

behalf of a class of purchasers of Chiron Corporation stock between

July 23, 2003 through October 5, 2004, inclusive, on grounds that 

defendants misrepresented and failed to disclose adverse facts

concerning Chiron’s ability to produce the Fluvirin influenza virus

vaccine for the United States market.

 Twelve different law firms appeared on behalf of the

various plaintiffs in the six cases that form this litigation.1

 Of

the various plaintiffs in these actions, only two appear to have

sought to serve as lead plaintiff and appoint lead counsel pursuant

to 15 USC § 78u-4(a)(3): (1) International Union of Operating

Engineers Local No 825 Pension Fund sought to appoint Milberg Weiss

Bershad & Shulman, LLP (counsel originally filing the Nach case)

and (2) Pipefitters Locals 522 and 633 Pension Trust Fund sought to

appoint Lerach Coughlin Stoia Geller Rudman & Robbins, LLP (counsel

originally filing the Gregory case). Five months prior to the

commencement of this litigation, the Lerach firm split from Milberg

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Weiss. On February 4, 2005, counsel in Jaroslawicz sought to

dismiss that action. Then, on February 24, 2005, Pipefitters

Locals 522 and 633 Pension Trust Fund withdrew its application to

serve as lead plaintiff, leaving only the Local 825 fund’s

application, which was granted on March 23, 2005. The appointment

of the lead plaintiff and its selection of Milberg Weiss as lead

counsel were thus made without open competition and Gregory,

although initiated by the Lerach firm, became the lead case,

presumably because it was the first filed action. 

The amended consolidated complaint, Doc #50, followed on

April 14, 2005. About five weeks or so after the amended

consolidated complaint, on May 26, 2005, Chiron and the individual

defendants separately filed motions to dismiss the complaint. Doc

##57, 60. The motions to dismiss were heard on June 29, 2005. At

the hearing, the court expressed concern about the clarity of the

factual theory plaintiff had alleged in the consolidated amended

complaint. See Doc #82, Hrg Tr, June 29, 2005, at 63-64. After

some discussion, plaintiffs’ counsel agreed to file either a

supplemental brief explaining the allegations of the existing

pleading or alternatively a further amended consolidated complaint. 

See Doc #82, Hrg Tr, June 29, 2005, at 67-72. On July 29,

plaintiff filed a supplemental brief, Doc #84, to which defendants

responded on August 19, 2005. Doc #90. 

While the motions were pending the parties entered into

settlement discussions and executed a settlement understanding on

June 6, 2006. Doc #103, ¶19 at 5-6. In the meantime, in February

2006, the SEC informed Chiron that it was terminating its

investigation of Chiron with respect to potential violations of

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federal securities laws. Doc #103, ¶22. In addition, although

investigations of Chiron had been announced by the United States

Attorney’s Office for the Southern District of New York and the

United States House of Representatives, Energy and Commerce

Committee, Subcommittee on Oversight and Investigations, neither

entity took any action against Chiron. Doc #103, ¶22.

On April 19, 2006, Chiron’s shareholders approved a

merger with Novartis AG. Doc #103, ¶23. Novartis owned 42% of

Chiron prior to executing the merger agreement. Doc #103, ¶23. As

a result of the merger, Chiron became an indirect wholly owned

subsidiary of Novartis, and Chiron’s common stock ceased trading on

NASDAQ. Doc #103, ¶23.

As a result of the provisions of 15 USC § 78u-4(b)(3)(B)

and the early settlement discussions conducted by counsel, it

appears that little, if any, discovery was conducted into the

merits of plaintiffs’ allegations. The litigation thus appears to

have proceeded almost directly from pleading to settlement with no

ruling on the pleading or merits discovery. The final terms of the

stipulated settlement were not agreed to until March 29, 2007. 

The proposed settlement provides that defendants will pay $30

million in cash plus an amount equivalent to interest at the

thirty-day Treasury Bill rate from June 6, 2006 to the date of

payment. Doc #100, ¶4. The settlement amount will be paid into a

common fund to be distributed to class members. Doc #100, ¶¶9-11.

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I

A

The allegations of the amended consolidated complaint,

briefly summarized here, concern defendants’ statements and alleged

misstatements about Fluvirin, an injectable flu vaccine whose

distribution in the United States is licensed by

the Food and Drug Administration (FDA), following FDA bi-annual

inspections and subject to “good manufacturing practices” (GMP)

regulations. Because the manufacturing facility involved in this

case was located in Liverpool, England (the “Liverpool plant”), it

was also subject to oversight by the Medicines and Healthcare

Products Regulatory Agency (MHRA), the British counterpart to the

FDA. Doc #50, ¶¶49, 50. 

Until January 2000, the Liverpool plant was owned and

operated by Medeva Pharma Ltd. An FDA inspection of the Liverpool

plant in July 1999 uncovered unusually high levels of bacteria and

other microorganisms known as “bioburden” in batches of Fluvirin,

as well as other evidence of failure to comply with GMP and other

requirements. This prompted a warning letter from the FDA

threatening to suspend or revoke Medeva’s license if adequate

corrective measures were not taken. Id ¶¶54, 55. The Liverpool

plant then became something of a hot potato, acquired by Celltech

Chiroscience in January 2000 only to be resold to England-based

PowderJect Pharmaceuticals in October 2000. Doc #50, ¶¶56, 58. 

On March 9, 2001, FDA inspectors visited the Liverpool

plant and once again found the production of Fluvirin to be

deficient in several respects. At the conclusion of the

inspection, the FDA issued a Form FDA 483 noting “significant

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objectionable conditions.” Doc #50, ¶58. In June 2003, the FDA

conducted another inspection of the Liverpool plant. Once again,

inspectors discovered pervasive quality-control problems and

symptoms thereof, including (1) “potentially lethal bacteria” 

after “ultrafiltration” and “sterile filtration,” points in the

process by which all bacteria should have been eliminated, (2) poor

sanitation practices, including improper maintenance of “curtains”

separating sterile areas from non-sterile areas and (3) a

susceptibility to contamination in the aseptic connections between

tanks of vaccine in the “formulation area” of the plant. Doc #50,

¶¶72-73. As in 2001, the FDA inspectors issued a Form FDA 483 and,

according to the CAC, although the inspectors initially recommended

that official enforcement action be taken due to the “pervasiveness

and severity” of the GMP deficiencies at the Liverpool plant, this

recommendation was later downgraded to a request that PowderJect

take voluntary corrective action. Doc #50, ¶¶78-79. 

Enter Chiron. On July 8, 2003, Chiron acquired

PowderJect (and the Liverpool plant) for $878 million, giving

Chiron immediate access to the lucrative flu vaccine market in the

United States. Doc #50, ¶¶43, 45. In 2003, Chiron realized $219

million in revenues from the sale of 40 million Fluvirin doses

worldwide. 

In October 2003, Chiron began publicly forecasting that

(1) it would top its 2003 Fluvirin production by manufacturing

approximately 50 million Fluvirin doses for the 2004-2005 flu

season and (2) its 2004 pro forma earnings per share (EPS) would be

in the range of $1.80-$1.90. CAC ¶¶119-141. With some minor

alterations, these representations continued well into 2004. 

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On August 26, 2004, Chiron announced that it would delay

shipments of Fluvirin pending additional testing, after internal

tests identified a small number of lots with sterility problems. 

Doc #100, Ex A-1 at 7. Chiron announced that the additional

testing would delay the Fluvirin shipment until early October and

would prevent the company from recognizing revenue from Fluvirin in

the third quarter of 2004. Doc #119 at 7. Following the

announcement, Chiron’s stock price declined from $47.49 per share

on August 26, 2004 to $43.41 per share on August 27, 2004. Doc

#119 at 7.

On October 5, 2004 Chiron issued a press release

announcing that the MHRA 

has asserted that Chiron’s manufacturing process

does not comply with UK Good Manufacturing Practices

regulations and has suspended [Chiron’s] Liverpool

facility license to manufacture influenza vaccine

for three months. * * * As a result of the license

suspension, Chiron does not expect to record any

sales of Fluvirin for the 2004-2005 season. Chiron

disaffirms its previous full-year 2004 pro-forma

earnings guidance of $1.80-$1.90 per share (a range

of $1.50-$1.60 per share on a GAAP basis), including

its August 2004 guidance of being in the low end of

this range. 

Doc #50, ¶142.

In essence, MHRA concluded that the manufacturing process at the

Liverpool plant did not conform to accepted manufacturing practices

and had consequently produced a notable number of contaminated

Fluvirin doses. MHRA’s Inspection Action Group concluded that it

would simply be too risky to allow Chiron to release potentially

contaminated vaccines and thus MHRA suspended Chiron’s license. 

Following the announcement, Chiron’s trading stock price dropped

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from $45.42/share to close at $37.98/share, a one-day drop of

16.3%. Doc #50, ¶142. A week later, this litigation commenced.

Plaintiffs contend that Chiron’s projections regarding

its (1) expectation to ship approximately 50 million Fluvirin doses

worldwide and (2) 2004 pro-forma EPS of $1.80-$1.90 were false and

misleading when made because Chiron omitted material information 

known to it at the time of the statements, regarding manufacturing

deficiencies at the Liverpool plant. Based on these allegations,

plaintiffs sought relief against Chiron, Pien (former Chiron CEO),

Smith (former Chiron CFO) and Lambert (former President of Chiron

Vaccines).

B

 Federal Rule of Civil Procedure 23(e) requires court

approval for the settlement of any class action. In order to be

approved, a settlement must be “fundamentally fair, adequate and

reasonable.” Torrisi v Tucson Elec Power Co, 8 F3d 1370, 1375 (9th

Cir 1993) (quoting Class Plaintiffs v Seattle, 955 F2d 1268, 1276

(9th Cir 1992), cert denied, 506 US 953 (1992)), cert denied, 512

US 1220 (1994). At least four features of this settlement appear

to fail that test and indeed suggest that the settlement was

negotiated under questionable circumstances. A discussion of these

features follows.

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II

A

Class counsel seek $7,500,000 (25% of the settlement

fund) in fees. Doc #102 at 16-24.

“Attorneys’ fees provisions included in proposed class

action settlement agreements are, like every other aspect of such

agreements, subject to the determination whether the settlement is

‘fundamentally fair, adequate, and reasonable.’” Staton v Boeing

Co, 327 F3d 938, 963 (9th Cir 2003), quoting FRCP 23(e). The court

is obligated to conduct an independent inquiry into the

reasonableness of any attorney fee provisions of a class action

settlement even in the face of an agreement between the parties

regarding the payment and amount of attorney fees and costs.

Common fund cases create a situation in which normal

reliance on the adversary process to police the appropriateness of

a fee award is unavailing. Report of the Third Circuit Task Force,

Court Awarded Attorney Fees (Task Force Report), 108 FRD 237, 251

(3rd Cir 1985). The prospect of a sizeable attorney fee award can

drive a wedge between the class and class counsel, the former

interested in the largest settlement obtainable for the class and

the latter in the largest fee award obtainable. Unsurprisingly, a

class action defendant has little or no incentive to contest the

amount allocated to attorney fees in a proposed settlement,

provided the total amount of the settlement is acceptable. “Since

the defendant is interested only in the total size of its

liability, so long as the settlement is accepted, it will often be

indifferent as to the division of the fund between the plaintiffs’

recovery and the attorneys’ fees.” Task Force Report at 266. 

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“[T]o avoid abdicating its responsibility to review the

agreement for the protection of the class, the Ninth Circuit

requires that a district court must carefully assess the

reasonableness of a fee amount spelled out in a class action

settlement agreement.” Staton, 327 F3d at 963 (citing Piambino v

Bailey, 610 F2d 1306, 1328 (5th Cir 1980); Strong v BellSouth

Telecomms, 137 F3d 844, 848-50 (5th Cir 1998); Jones v Amalgamated

Warbasse Houses, Inc, 721 F2d 881, 884 (2nd Cir 1983)). This

obligation is especially strong if the fee award appears high.

[If] the amount of fees [a defendant] agreed to pay in

the settlement agreement [is] distinctly higher than the

fees class counsel could have been awarded by the

district court using the lodestar method, the court would

almost surely [have] to find the fees unreasonable. 

Absent some unusual explanation, a defendant would not

agree in a class action settlement to pay out of its own

pocket fees measurably higher than it could conceivably

have to pay were the fee amount litigated, unless there

was some non-fee benefit the defendant received thereby.

Staton, 327 F3d at 966. 

This settlement illustrates that looking only at the

percentage of the common fund sought as fees is insufficient. The

Ninth Circuit has noted that a fee of “25 percent has been a proper

benchmark figure, which [the district court] can then adjust upward

or downward to fit the individual circumstances” of the case. 

Paul, Johnson, Altom & Hunt v Graulty, 886 F2d 268, 273 (9th Cir

1989). The “individual circumstances” warranting this adjustment

have been described in a variety of ways, most of them highly

subjective and not very illuminating. See the twelve criteria

outlined in Kerr v Screen Extras Guild, 526 F2d 67, 70 (9th Cir

1975); Johnson v Georgia Highway Express, Inc, 488 F2d 714, 717-19

(5th Cir 1974). If “[r]easonableness is the goal, and mechanical

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or formulaic application * * * where it yields an unreasonable

result, can be an abuse of discretion,” In re Coordinated Pretrial

Proceedings, 109 F3d 602, 607 (9th Cir 1997), a percentage-only

test here would strain the limits of discretion. For although a 25

percent fee seems to fall in line with other class action fee

awards, see Theodore Eisenberg and Geoffrey P Miller, Attorneys

Fees in Class Action Settlements: An Empirical Study, 1 J Empirical

Legal Stud 27 (2004), an assessment of the percentage of the common

fund claimed by class counsel does not tell the full story. As

Judge Sneed noted, “[l]odestar calculations may be required under

circumstances in which a percentage recovery would be either too

small or too large in light of the hours devoted to the case.” Six

(6) Mexican Workers v Arizona Citrus Growers, 904 F2d 1301, 1312

(9th Cir 1990) (concurring). 

The circumstances at bar demonstrate vividly the wisdom

of Judge Sneed’s observation and why the court “rejects reliance

solely on a comparison of the percentage fee requested here with

other percentage awards or with a so-called benchmark percentage.” 

In re HPL Technologies, Inc Sec Litig, 366 F Supp 2d 912, 914 (ND

Cal 2005); See also Vaughn R Walker & Ben Horwich, The Ethical

Imperative of a Lodestar Cross-Check: Judicial Misgivings about

“Reasonable Percentage” Fees in Common Fund Cases, 18 Georgetown J

Legal Ethics 1453 (2005). A lodestar cross-check poses serious

doubt about the reasonableness of the present fee request. After

submission of the proposed settlement, and only as a result of the

court’s request, class counsel conducted a lodestar cross-check,

that is a submission of the hours worked on the case by various

attorneys and paralegals multiplied by their “respective billing

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rates.” Doc #121, Ex 1 (Decl Jeff S Westerman). This produced a

lodestar fee claim of $1,126,338.50. See Doc #121, Exs 1-4. But

included in this claim was $227,209.25 for so-called “professional

support staff,” including investigators, library service, economic

analysts and others. While at least some of these costs may be

attorney/paralegal overhead, attorney and paralegal overhead costs

are compensated through the attorney and paralegal hourly charges.

Costs such as those included in class counsel’s “support staff”

costs are more properly treated as reimbursable expenses.

The vice of including “support staff” costs in a claim

for attorney fees is quite simple. The latter are subject to the

possibility of a multiplier whereas the reimbursable expenses are

not. To the extent that an out-of-pocket expense is characterized

as compensation for attorney effort, and multiplied, the class is

overcharged to the extent of any multiplier the court chooses to

award. Looking then only at class counsel’s claim for attorney

fees, class counsel’s attorney/paralegal lodestar amounts to

$899,129.25 and a 25 percent fee, $7,500,000 here, results in an

implied multiplier of 8.34. 

But even this understates the magnitude of class

counsel’s fee request. Just as a fee claim can be padded by

including under its rubric what are more properly reimbursable

expenses, the multiplier itself can be understated by use of overly

generous attorney/paralegal hourly rates. While the court is not

unaware of published reports of eye-popping hourly attorney rates

(See Nathan Koppel, Lawyers Gear Up Grand New Fees, Wall St J, B1

(Aug 22, 2007)), anecdotal evidence of this kind is plainly

unreliable for purposes of court ordered fee awards. In their

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2

http://www.usdoj.gov/usao/dc/Divisions/Civil_Division/Laffey_Matrix

_7.html, visited October 1, 2007.

13

submission in response to the court’s request for lodestar data,

class counsel submitted “sample billing rates” obtained from a

website that collects rates for attorney fee requests filed in

bankruptcy courts, Doc #127 Exs 5-6, and some sample rates for

attorneys of various years of experience. Doc #127, Ex 7. Counsel

failed to make a case that these rates were truly representative

and, still less, systematically compiled. And differences in

hourly rates can make a big difference in the multiplier.

A widely recognized compilation of attorney and paralegal

rate data is the so-called Laffey matrix, so named because of the

case that generated the index. In Laffey v Northwest Airlines,

Inc, 572 F Supp 354 (DDC 1983), aff’d in part, rev’d in part on

other grounds, 746 F2d 4 (DC Cir 1984), the court employed a

variety of hourly billing rates to account for the various

attorneys’ different levels of experience. The Laffey matrix has

been regularly prepared and updated by the Civil Division of the

United States Attorney’s Office for the District of Columbia and

used in fee shifting cases, among others.2 The Laffey matrix is

especially useful when the work to be evaluated consists of that by

a mix of senior, junior and mid-level attorneys, as well as

paralegals. 

Under the 2007 Laffey matrix, attorneys bill at the

following rates according to experience:

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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, however, tailored for the District of

Columbia, which has a lower cost of living than New York and Los

Angeles (the cities in which class counsel operates). Accordingly,

some adjustment appears appropriate here. To make the adjustment,

the court will use the federal locality pay differentials based on

federally compiled cost of living data. See

http://www.opm.gov/oca/07tables/indexGS.asp; 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). A

review of the pay tables shows the Washington-Baltimore area has a

+18.59% locality pay differential; the New York area has a +24.57%

locality pay differential; and the Los Angeles area has a +24.03%

locality pay differential. Adjusting the Laffey matrix figures

accordingly will yield appropriate rates for the respective

geographical regions: +5% for New York and +4.6% for Los Angeles.

Applying these adjustments the court obtains the

following rates:

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Experience New York Rate Per

Hour (+5%

Adjustment) 

Los Angeles Rate Per

Hour (+4.6%

Adjustment)

20+ Years 462.00 460.24

11-19 Years 409.50 407.94

8-10 Years 330.75 329.49

4-7 Years 267.75 266.73

1-3 Years 225.75 224.89

Paralegals & Law

Clerks

131.25 130.75

The following table reflects the court’s adjusted

lodestar calculations for attorneys and paralegals working on the

case:

Attorney/

Paralegal

Location Years

Experience

2007 

Laffey

Rate

Total

Hours

Total

Lodestar

Bauer, G NY 27 462.00 91.25 $42,157.50

Bershad, D NY 42 462.00 1.25 $577.50

Graziano, S NY 15 409.50 7.5 $3,071.25

Kartapoulos,

A

NY 25 462.00 177.25 $81,889.5

Kusel, E NY 12 409.50 72.25 $29,586.38

Rogers, K LA 11 407.94 6.5 $2,651.61

Schulman, S NY 26 462.00 2.75 $1,270.50

Seidman, P NY 12 409.50 66.75 $27,334.13

Weiss, M NY 47 462.00 31.4 $14,506.80

Westerman, J NY 27 460.24 211.75 $97,455.84

Andrejkovis,

P

NY 11 409.50 1.00 $409.50

Furukawa, M LA 3 224.89 20.00 $4,497.80

Lin, E LA 13 407.94 755.25 $308,096.69

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Lipton, A NY 6 267.75 0.25 $66.94

Long, B DE 9 313.43 0.75 $235.07

McCulloch, K LA 12 407.94 24.3 $9,912.94

Mills, J NY 4 267.75 2.5 $669.38

Quinn, MJ NY 15 409.50 0.25 $102.38

Rado, A NY 7 267.75 75.5 $20,215.13 

Chowdhury, I LA 9 329.49 9.25 $3047.78

Kroll, A NJ 33 200.00 4.6 $920.00

Giblin, V NJ 11 175.00 30.5 $5,337.50

Finnell, L NJ 3 135.00 0.1 $13.50

Glancy, L LA 19 407.94 0.75 $305.96

Goldberg, M LA 11 407.94 12.0 $4,895.28

MacDiarmid,

D

LA 4 266.73 1.2 $320.08

Murray, B NY 17 409.50 8.0 $3,276.00

Belfi, E NY 11 409.50 8.5 $3,480.75

Donders, L NY 5 267.75 1.0 $267.75

Hinton, C NY 4 267.75 0.5 $133.88

Patton, A NY 4 267.75 1.6 $428.40

Summer

Clerks

NY - 131.25 6.25 $820.31

Paralegals

(LA)

- 130.75 11.2 $1,464.40

Paralegals

(NY)

- 131.25 370.35 $48,608.44

Paralegals

(NJ)

- 70.00 3.0 $210.00

Totals

2017.25 $718,236.81

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This table reflects the following: only categories

covered by the Laffey matrix are included; consolidated paralegal

work is based on geographical region; New York rates are used for

lead counsel summer clerks and paralegals; requested rates below

Laffey matrix rates are unadjusted; and Mr Long’s billing rate

reflects a downward adjustment for Delaware. 

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

entails evaluation of the multiplier implied by lead counsel’s

requested fee (25% percent of a $30 million settlement, or $7.5

million) and lead counsel’s lodestar fee (computed above as

$718,236.81). The lodestar calculation under the Laffey

methodology results in a multiplier of 10.44. 

Either the 8.34 or the 10.44 multiplier far exceeds the

multipliers the court has, in its experience, encountered and

observed in other common fund securities class actions. In almost

every scenario, the multiplier is greater than one and often in the

order of two to four. See, e g, 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 Enterprises, Inc, 118 FRD

534, 549 (SD Fla 1988) (“[The] range of lodestar multiples in large

complicated class actions [varies from] a low of 2.26 to a high of

4.5.”). These judicial observations are borne out in a more

systematic study of common fund class action fee awards compiled a

few years ago. Beverly C Moore, et al, 24 Class Action Reports, no

2 (March-April 2003). This study included 877 securities class

actions, 391 of which reported multiplier data. Of these 391

cases, 353 involved class recoveries of $50 million or less. The 

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multipliers observed in these cases charted against the amounts of

recovery are displayed in the following chart:

Linear and non-linear regressions show the multiplier in these

cases to fall in the range of 0.5 to 3.0. This chart shows that

negative multipliers – those below 1.0 – are more common than the

court previously perceived. See Doc #190 in 03-5138 VRW (In re

Portal Software, Inc Sec Litig). This chart also shows that courts

make some effort to provide incentives for greater recovery. For

purposes of this case, however, this study demonstrates that, as

compared to other common fund securities class action, the

multiplier implied by class counsel’s fee request is patently

unreasonable. 

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Note further that the difference between class counsel’s

claimed lodestar and the lodestar produced using the Laffey matrix

is $180,892.44. Hence, although the claimed hourly rates of some

attorneys in class counsel’s firm are substantially more than

Laffey rates (e g, class counsel’s most senior lawyer’s claimed

hourly rate of $925 versus an adjusted Laffey rate for an attorney

of 20+ years of experience of $462), the Laffey matrix generates a

total fee over all attorneys that is approximately 80 percent of

class counsel’s claimed rates. As class counsel’s claimed rates

undoubtedly include some amount to compensate for the risk of noncollection – class counsel work on a contingency basis, after all –

while the Laffey rates are fees actually paid, the Laffey matrix

cannot be criticized as representing bargain basement attorney

fees. But relatively small differences in rates can be blown out

of proportion by the multiplier. For example, class counsel’s most

senior lawyer billed 31.4 hours to the litigation, which at his

claimed hourly rate represents 3.2 percent of class counsel’s

lodestar. On the assumption that this lawyer’s work contributed

that percentage of the value of class counsel’s services, a 25

percent fee award would compensate this lawyer’s work at over

$7,715 per hour.

 The court harbors no doubt that a multiplier of some

kind should apply in this litigation for any recovery obtained by

class counsel. The action was prosecuted on a contingency basis. 

Class counsel confronted a risk of non-recovery. But that risk

puts an outer limit on the multiplier, e g, a 50 percent chance of

recovery implies a multiplier of 2, a 25 percent chance of recovery

implies a multiplier of 4 and so on. The multipliers sought here

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imply a chance of recovery of 1 out of 8 or 1 out of 10. To be

sure, able class action lawyers do not need to show that they lose

7 out of every 8 cases to justify an eight multiplier. Careful

case selection cuts down these odds and should not be penalized. 

But class counsel’s efforts should not be rewarded with undue

lavishness. The point is simply this: class counsel need to

justify both the application of a multiplier and its level as much

as they need to show that their hourly rates are in line with

competitive norms. Class counsel here have failed to do so.

The court recognizes that the Seventh Circuit takes a

somewhat different approach than the Ninth Circuit to assessing the

reasonableness of class counsel fees. The former circuit takes a

somewhat more prospective or ex ante approach. See In re Synthroid

Mktg Litig, 264 F3d 712 (7th Cir 2001); where attorney fees are not

determined up front in a case (and they usually are not), the

Seventh Circuit instructs that the district court “undertake an

analysis of the terms to which the private plaintiffs and their

attorneys would have contracted at the outset of the litigation

when the risk of loss still existed.” Sutton v Bernard, – F3d -,

2007 WL 2963940 (7th Cir 2007).

Because a prospective fee negotiation occurs without the

plaintiffs and the attorneys knowing what the recovery will be, if

any, and how much of the attorney’s time and expense will be needed

to produce a recovery, the Seventh Circuit’s approach is likely to

take the form of a percentage approach. But this by no means

suggests that a lodestar cross-check is inappropriate or

unnecessary. Indeed, a lodestar cross-check is extremely useful in

that context, because a reasonable percentage fee is not

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necessarily a flat or straight percentage. A prudent plaintiff

negotiating in advance of litigation with contingent fee counsel

should take account of the economies of scale inherent in large

recoveries and require that counsel share those economies by

demanding a sliding scale percentage. A lodestar cross-check can,

therefore, assist a court attempting to find the reasonable

percentage no less than the court attempting to find reasonable

hourly compensation. 

B

Paragraph 28(b) of the Stipulation and Agreement of

Settlement, Doc #100, permits defendants to terminate the

settlement “in the event that valid and timely requests for

exclusion are received which exceed the amount set forth in the

Memorandum of Understanding dated June 6, 2006.” Doc #100, ¶28(b). 

At the August 2, 2007 hearing, counsel provided the court with a

copy of a “supplemental agreement” showing the number of shares of

Chiron common stock that– if held by opt-outs– would trigger

defendants’ right to terminate the settlement. Counsel requested

leave to file the supplemental agreement under seal and to issue a

class notice that excluded any reference to the said number of

shares, which they referred to as “the magic number.” 

Counsel for both sides argue that the purpose of keeping

the “magic number” from class members is to ensure that class

members decide whether to request exclusion based on the merits of

the settlement, not their ability to leverage themselves into a

better deal. Defendants’ counsel put it this way: “[L]et’s say a

group of shareholders were to get together and decide ‘Let’s try

and collect as many people as we can to try and opt out just to see

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if we can leverage a better position and get a better deal.’” See

Hrg Tr, Aug 2, 2007, at 16. But counsel failed to explain how the

number is separate from the settlement and its merits. The

memorandum of understanding between counsel and the merits of the

settlement agreement are not so easily distinguished because class

counsel represents the class or, at any rate, are supposed to do

so. Moreover, the “magic number” necessarily speaks to defendants’

views of the settlement as that is the only explanation for

defendants’ reservation of termination rights. Specifically, the

“magic number” provides defendants with an opportunity to determine

the potential number of claims that may remain unresolved before

proceeding with the settlement. The number may also suggest

defendants’ belief that if enough people opt out, defense counsel

should have a chance to defend the case more vigorously. 

There’s another aspect of not disclosing the “magic

number” that the court finds troubling. Class counsel’s comments

in support of non-disclosure hinted at the problem: “[T]here’s

generally been a concern that a shareholder with the magic number

[of shares] or near the magic number, if such a shareholder exists,

could try to use that as leverage for personal gain as opposed to a

benefit for the class.” See Hrg Tr, Aug 2, 2007, at 18-19. The

point class counsel seemed to be making although obviously not

putting it in those terms is that the interests of the class are

not entirely congruent. A shareholder with the “magic number” of

shares might well have interests different from other shareholders. 

It is by no means unheard of in corporate affairs that the number

of shares matters. Assuming arguendo some incongruity in the

interests of the class based on how close to the magic number a

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class member’s shares come, the court is hard-pressed to discern

why that shareholder should not be told that he has the leverage to

skuttle the settlement. In sum, the number reflects the parties’

bargained-for expectations and, as a consequence, is part and

parcel of the merits of the settlement. 

Frustrating the settlement is exactly what class members

are entitled to do, if they think the settlement is not fair. The

class’ “frustration rights” should not themselves be frustrated. 

Counsel’s fears of the extortion value to the class in disclosing

the “magic number” may well be unfounded. Counsel offered the

court no reason to believe that these events were real

possibilities. Moreover, if they are real possibilities, this

likely says something about the merits of the settlement. If

enough class members find it desirable to torpedo the settlement or

force its renegotiation, the settlement is likely not in the best

interests of the class.

Keeping the class in the dark about the “magic number”

hints at something darker still. “The danger of collusive

settlements * * * makes it imperative that the district judge

conduct a careful inquiry into the fairness of a settlement to the

class members.” Mars Steel Corp v Continental Illinois Nat Bank

and Trust Co of Chicago, 834 F2d 677, 681-82 (7th Cir 1987)

(Posner). And the court should be party to nothing that fails

fully to inform the class of the settlement terms.

C

The third aspect of this settlement that leads the court

to suspect that its approval may not be in the best interests of

the class is the questionable adequacy of lead plaintiff and

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purported class representative, Local 825. “Fair and adequate”

representation requires that the class representative be both

willing and able to monitor closely the conduct of class counsel

during settlement negotiations. The great risk of settlements such

as the one currently before the court is that the settlement terms

will serve more the interests of class counsel than the needs of

class members. This risk arises because “[s]hareholders with welldiversified portfolios or small holdings lack the incentive and

information to police settlements-the cost of policing typically

outweigh any pro rata benefits to the shareholder.” Bell Atlantic

Corp v Bolger, 2 F3d 1304, 1309 (3d Cir 1993).

Christine Medich, the Administrator of Local 825,

submitted a declaration in support of the motion for preliminary

settlement approval. Doc #104. Therein, Ms Medich states that she

has been “intimately involved with this litigation since its

filing.” Doc #104, ¶4. Ms Medich states that she was “personally

involved with the settlement negotiations” and “was present at all

face to face negotiations which took place in this matter, and in

several break-out sessions.” Doc #104, ¶5. Ms Medich also

approved of a fee range of 25 to 40 percent at the time of

retention of counsel and states that she endorses counsel’s current

25 percent fee request. Doc #104, ¶7. In light of the above

discussion on the excessiveness of a 25 percent fee award, it does

not appear that Ms Medich has made an effort to maximize the net

recovery of absent class members. Nor does it appear that Ms

Medich negotiated a fee agreement in a way that reflects the market

value of lawyer services. Rather, lead plaintiff’s involvement

\\

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seems to have been confined to an endorsement of lead counsel’s

proposed fee.

Ms Medich also states that:

In addition to this action, [Local 825] has served as Lead

Plaintiff in other securities litigations, including In re

Diebold Sec Litig, No 05-2873 (ND Ohio), filed December 13,

2005, In re Freescale Semiconductor, Inc Shareholder Lawsuit

(Travis County, Texas), filed October 13, 2006, and Operating

Engineers Local 825 Pension Fund v Aeroflex, Inc, No 07-004181

(Sup Ct Nassau County, 2007).

Doc #104 ¶3. The court’s research shows that lead counsel here is

also lead counsel in all three of these cases. 

The court’s research also uncovered seven other federal

securities/stockholder class actions in which the International

Union of Operating Engineers is listed as a plaintiff: Garber, et

al v Pharmacia Corp, et al, No 03-1519 (DNJ), City of Roseville et

al v Micron Technology, Inc et al, No 06-0085 (D Idaho), Faverman

et al v Doral Financial Corp et al, No 05-4026 (SDNY), Shankar v

Boston Scientific Corporation et al, No 05-11934 (D Mass), In Re:

Doral Financial Corp Securities Litigation, No 05-1706 (SDNY),

Citizens for Consume, et al v Abbott Laboratories, et al, No 01-

12257 (D Mass), Weiss v Friedman, Billings, Ramsey Group, Inc et

al, No 05-4617 (SDNY), Nugent, et al v AFC Enterprises, Inc, et al,

No 03-0817 (ND Ga).

Local 825 is listed as a plaintiff, though not lead

plaintiff, in both Faverman et al v Doral Financial Corp et al, No

05-4026 (SDNY) and In Re: Doral Financial Corp Securities

Litigation, No 05-1706 (SDNY). Milberg Weiss, lead counsel herein

is also listed as counsel in Nos 01-12257, 03-817 and 05-4617. 

Lerach Coughlin Stoia Geller Rudman & Robbins, LLP, which broke off

from Milberg Weiss only five months before this litigation began,

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is listed as counsel in Nos 03-817, 05-1706, 05-4617, 05-11934 and

06-0085. For reasons that will become clear below, the court also

notes that Skadden Arps Slate Meagher & Flom, defendants’ counsel

here, is listed as counsel for certain defendants in Nos 01-12257

and 05-1706.

Class counsel’s use of “serial plaintiffs” raises the

specter of credibility problems and conflicts of interest, among

other issues. See In re Enron Corp Sec Litig, 206 FRD 427, 455 (SD

Tex 2002) (“[S]imultaneous participation in securities class

actions or applications for appointment as lead plaintiff could

result in institutional investor having fewer resources available

and being less able to police counsel’s conduct * * *”). The

potential for these problems exists in any situation in which a

class representative is engaged on many fronts. The problem is

further magnified by any extraordinary distractions of lead

counsel’s attention. Given this, the court lacks sufficient

assurances of Local 825's independence from class counsel. See

Berger v Compaq Computer Corp, 257 F3d 475, 481 (5th Cir 2001)

(PSLRA mandates that “class representatives, and not lawyers, must

direct and control the litigation.”) 

These issues are sufficiently serious to give the court

pause regarding Local 825's ability fairly and adequately to

represent the interests of the class, as required by FRCP 23(a). 

The court recognizes that Local 825 was already appointed lead

counsel under the PSLRA’s “most adequate plaintiff” provision,

which states:

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Rebuttable presumption

(I) In general

Subject to subclause (II), for purposes of clause (i), the

court shall adopt a presumption that the most adequate

plaintiff in any private action arising under this chapter is

the person or group of persons that--

(aa) has either filed the complaint or made a motion in

response to a notice under subparagraph (A)(i);

(bb) in the determination of the court, has the largest

financial interest in the relief sought by the class; and

(cc) otherwise satisfies the requirements of Rule 23 of the

Federal Rules of Civil Procedure.

(II) Rebuttal evidence

The presumption described in subclause (I) may be rebutted

only upon proof by a member of the purported plaintiff class

that the presumptively most adequate plaintiff--

(aa) will not fairly and adequately protect the interests of

the class; or

(bb) is subject to unique defenses that render such plaintiff

incapable of adequately representing the class.

15 USCA § 78u-49(a)(3)(iii).

But as discussed above, selection of lead plaintiff was

made without open competition. More importantly, the inquiry here

is not whether Local 825 can be appointed lead plaintiff. Rather,

the inquiry is whether a settlement class can be certified under

FRCP 23.

The appointment of lead plaintiffs occurring as it does in

advance of class discovery, is not a final ruling on their

appropriateness as Class Representatives. See In re Party

City Sec Litig, 189 FRD 91, 111 n21 (DNJ 1999). The proposed

class and Class Representatives are to be reviewed according

to the standards of Rule 23, without any deference to the

earlier determinations made in the appointment of Lead

Plaintiffs. 15 USC § 78u-4(a)(3)(B)(iii)(I)(cc).

In re Oxford Health Plans, Inc, 191 FRD 369, 373 (SDNY 2000).

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Reading the PSLRA in accordance with its plain meaning, the

Court concludes that being a Lead Plaintiff under the PSLRA is

not the same as being a Class Representative under Rule 23

F.R.Civ.P., although the statute provides that a Lead

Plaintiff must “otherwise satisfy the requirements of Rule

23.” Obviously there will be actions brought under the PSLRA

by multiple plaintiffs which do not qualify for class action

treatment under Rule 23, perhaps for lack of numerosity or for

some other reason. Congress is deemed to have understood this

and must have intended that the function of lead plaintiff

under the PSLRA be different from class representative under

Rule 23. There is no requirement found in the plain meaning

of the statute that a Lead Plaintiff accept designation of

class representative under Rule 23, and the statute does not

provide for any specific action by the Court should it turn

out after a Lead Plaintiff has been appointed; that Lead

Plaintiff should on further examination fail to meet all of

the requirements of Rule 23, * * *

191 FRD at 378-79. See also James Wm Moore, 5 Moore's Federal

Practice § 23.25[6] (3d ed 2000) (“[T]he provisions of the [PSLRA]

do not replace the ordinary requirements of Rule 23.”); House

Conference Report No 104-369, 104th Congress, reprinted in 1995

USCCAN 730, 733 (“The provisions of the bill relating to the

appointment of lead plaintiff are not intended to affect current

law with regard to challenges to the adequacy of the class

representative or typicality of the claims among the class.”);

Hevesi v Citigroup, Inc, 366 F3d 70, 83 (2d Cir 2003) (“[T]here is

no reason to believe that the PSLRA altered the preexisting

standard by which class representatives are evaluated under Rule

23.”). 

In assessing the adequacy of a proposed class

representative, the court must “feel certain that the class

representative will discharge his fiduciary obligations by fairly

and adequately protecting the interests of the class.” Burkhalter

Travel Agency v MacFarms Int’l, Inc, 141 FRD 144, 154 (ND Cal 1991)

(quoting Koenig v Benson, 117 FRD 330, 333-34 (EDNY 1987). See

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also Crawford v Honig, 37 F3d 485, 487 (9th Cir 1994) (“Adequate

representation depends on the qualifications of counsel for the

representatives, an absence of antagonism, a sharing of interests

between representatives and absentees, and the unlikelihood that

the suit is collusive.”) See also Foe v Cuomo, 892 F2d 196, 198

(2d Cir 1989) (The court’s obligation to evaluate the adequacy of

the class representative and counsel continues throughout the

litigation.) As discussed above, the court has reason to doubt

that Local 825 has met its fiduciary obligations. Local 825 and

its international are involved in a number of class actions with

class counsel, Local 825 has failed to negotiate a fee arrangement

able to pass even the most forgiving test of reasonableness and

Local 825 has sought, along with defendants, to omit from the

notice to the class a term of settlement that would appear material

to decision-making of at least some class members, if not all. 

Approving the settlement under these circumstances would

be inconsistent with the interests of absent class members and the

class action process itself. That process presupposes that a

single representative can stand in for, and monitor the litigation

on behalf of, numerous others. This duty is not to be assumed

lightly given that the settlement will extinguish the rights of

absent class members, often without their knowledge. 

D

Finally, and with some hesitancy, the court finds it

necessary to address criminal charges pending against lead counsel.

The events surrounding these charges and related charges against

others have been widely publicized and are well-known to counsel on

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both sides of this case. These charges are also probably wellknown to a large segment of the investing public and thus the class

herein. That widespread knowledge, however, does not eliminate the

need to consider the effect of the charges here. 

Without dwelling on details, lead counsel and several

lawyers who worked on this case have been indicted on a variety of

criminal charges alleging that lead counsel and certain of its

attorneys engaged in the illegal payment of kickbacks to class

action plaintiffs. See CR 05-00587 (CD Cal). Lead counsel and its

most senior lawyer have pleaded not guilty while at least two

lawyers who worked on this case and a former partner in lead

counsel have pled guilty to these charges. Because these admitted

and denied charges relate to payments to individuals who served, or

caused a relative or associate to serve, as a named plaintiff in

class actions, the allegations in the criminal proceedings go to

the very heart of the fiduciary duties owed to absent class members

by a lead plaintiff and lead counsel in a class action. The

conflict that creates this fiduciary duty is well-known and

especially acute when a class action settlement is presented to a

court for approval. In that situation, the court is displaced from

its typical role of parsing opposing positions presented by

adversaries, each incentivized to point up problems in the other’s

respective requests. Instead the parties hand the court a single,

purportedly complete resolution and appear for oral “argument” penin-hand, or more aptly pen-outstretched. Input from absent class

members or third parties is rare, and fully informed input even

rarer, if not impossible. As the court has previously noted in

reference to class actions,

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[o]rdinarily the named plaintiffs are nominees, indeed pawns,

of the lawyer, and ordinarily the unnamed class members have

individually too little stake to spend time monitoring the

lawyer-and their only coordination is through him. The danger

of collusive settlements * * * makes it imperative that the

district judge conduct a careful inquiry into the fairness of

a settlement to the class members before allowing it to go

into effect and extinguish, by the operation of res judicata,

the claims of class members who do not opt out of the

settlement.

In re California Micro Devices Securities Litigation, 168 FRD 257,

261 (ND Cal 1996) (quoting Mars Steel Corp v Continental Illinois

National Bank & Trust, 834 F2d 677, 681-82 (7th Cir 1987)

(Posner)); see also Greenfield v Villager Industries, Inc, 483 F2d

824, 832 n9 (3d Cir 1973) (“Experience teaches that it is counsel

for the class representative and not the named parties, who direct

and manage these actions. Every experienced federal judge knows

that any statement[ ] to the contrary is sheer sophistry.”); Saylor

v Lindsley, 456 F2d 896, 900 (2d Cir 1972) (Friendly) (“There can

be no blinking at the fact that the interests of the plaintiff in a

stockholder’s derivative suit and of his attorney are by no means

congruent”). 

Where approval for settlement and certification are

sought simultaneously, as is the case here, district courts must be

“even more scrupulous than usual” in examining the fairness of the

proposed settlement. In re Warfarin Sodium Antitrust Litig, 391

F3d 516, 534 (3d Cir 2004); see also Hanlon v Chrysler Corp, 150

F3d 1011, 1026 (9th Cir 1998) (“The dangers of collusion between

class counsel and the defendant, as well as the need for additional

protections when the settlement is not negotiated by a court

designated class representative, weigh in favor of a more probing

inquiry than may normally be required under Rule 23(e).”) As the

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Manual for Complex Litigation notes, the nature of the settlement

certification process can “sometimes make meaningful judicial

review more difficult and more important.” Manual for Complex

Litigation Fourth (2004) at § 21.612. A case settled early,

“without sufficient discovery or testing in an adversarial context,

may be next to impossible to assess in terms of the strengths and

weaknesses of the parties’ claims and defenses, the appropriate

definition of the class, and the adequacy of the proposed

settlement.” In re Lupron Marketing and Sales Practices

Litigation, 345 F Supp 2d 135, 137 (D Mass 2004) (citing Manual at

§ 21.612.)

When a district court, as here, certifies for class action

settlement only, the moment of certification requires

“heightene[d] attention,” * * * to the justifications for

binding the class members. This is so because certification

of a mandatory settlement class, however provisional

technically, effectively concludes the proceeding save for the

final fairness hearing. And, as we held in Amchem, a fairness

hearing under Rule 23(e) is no substitute for rigorous

adherence to those provisions of the Rule “designed to protect

absentees,” ibid., among them subdivision (b)(1)(B).

Ortiz v Fibreboard Corp, 527 US 815, 849 (1999) (quoting Amchem

Products, Inc v Windsor, 521 US 591 (1997)). “The district court's

decision must be supported by sufficient findings to be afforded

‘the traditional deference given to such a determination.’” Molski

v Gleich, 318 F3d 937, 946-47 (9th Cir 2003) (quoting Local Joint

Executive Bd Trust Fund v Las Vegas Sands, Inc, 244 F3d 1152, 1161

(9th Cir 2001), cert denied, 534 US 973 (2001)).

It is against this tableau common to all class action

settlement proposals that the criminal charges against lead counsel

pose a concern here, because the kickback arrangements alleged

criminally are that lead counsel gave the paid plaintiffs a greater

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interest in maximizing the amount of attorney fees awarded to lead

counsel than in maximizing the net recovery to absent class

members. The indictment further alleges that lead counsel

attorneys engaged in various fraudulent and deceptive acts,

practices and devices to conceal these kickbacks. 

As noted above, Pipefitters Local 522 and 633 Pension

Trust Fund sought to appoint Lerach Coughlin, counsel originally

filing Gregory, as lead counsel in this action. Doc #16. Local

522 and 633 Pension Trust Fund later withdrew its motion for

appointment of lead plaintiff and lead counsel deferring to Local

825 and lead counsel here. Doc #42. 

Lerach Coughlin has been represented during the pendency

of this litigation by Skadden Arps Slate Meagher & Flom (“Skaden

Arps”). Gabe Friedman, Prosecutors Prepare to File Plea Deal for

Lerach, San Francisco Daily Journal, Sept 19, 2007, at 1. Skadden

Arps also represents defendants in this action. By accepting

representation of Lerach Coughlin in criminal investigations, the

court is troubled whether Skadden Arps is able to probe the

adequacy of lead plaintiff and/or lead counsel lest a rigorous

challenge uncover problems that might be traced back to Lerach

Coughlin. The automatic discovery stay during the pendency of the

motion to dismiss, 15 USC § 78u-4(3)(B), appears to have been in

effect during the entire pendency of this litigation. It would

seem, therefore, that class counsel, lead plaintiff, lead counsel’s

former attorneys now in Lerach Coughlin (since re-named Coughlin

Stoia), defendants and defendants’ counsel – but not the class –

had an interest in avoiding discovery into the adequacy of lead

plaintiff. These circumstances make more stark the extraordinarily

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high compensation that the proposed settlement would reward class

counsel, the effort to avoid disclosure of the “magic number” and

the involvement in numerous securities class actions of lead

plaintiff. In light of the foregoing, the proposed class notice

reference to the criminal charges against class counsel, relegated

to a footnote buried on page 13, seems wholly inadequate:

On May 18, 2006 in the United States District Court for the

Central District of California (Los Angeles), Milberg Weiss

Bershad & Shulman LLP and two of its partners were named as

defendants in an indictment. The indictment alleges that, in

certain cases which are identified in the indictment, portions

of attorneys’ fees awarded to the firm were improperly shared

with certain plaintiffs. The law firm has pled not guilty. 

The indictment does not refer to this action, and makes no

allegations of any impropriety in the conduct of this action.

Doc #119 at 13, n3. The relationships woven amongst the firms

involved here and in other securities class actions brought by the

International Union of Operating Engineers warrant fuller class

notice. 

Court supervision of class actions has over time created

a rich jurisprudence which contains several per se rules whether a

given class representative adequately represents the class. One of

the most fundamental of these rules is that an attorney may not

serve both as class representative and as class counsel. See, e g,

Susman v Lincoln American Corp, 561 F2d 86, 90-92 (7th Cir 1977). 

When class counsel are not effectively monitored by the class

representative, the result is indistinguishable from the situation

in which an attorney serves as both class counsel and class

representative. Lead counsel’s history of using “serial

plaintiffs” and Local 825's willingness to place the proposed

settlement before the court, together suggest that lead counsel has

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effectively made itself the class representative and has assumed

control of this action. 

Lest there be any misunderstanding, the court does not

express an opinion on the merits of the pending unresolved criminal

charges. As stated by Judge Rosenbaum of the District of Minnesota

in disqualifying class counsel to serve as lead counsel at the

outset of another matter:

The step the Court takes in this Order does no violence to the

presumption of innocence. That presumption, which inheres in

the criminal process, is a rule which protects every defendant

criminally charged under our Constitution. That presumption

remains inviolate. To the contrary, however, a Grand Jury's

indictment means that it found probable cause to believe a

criminal act has taken place. It is this determination which

must be of concern to the Court as it labors to protect [the

plaintiffs].

In re Medtronic, Inc Implantable Defibrillator Product Liability

Litigation, 434 F Supp 2d 729, 732 (D Minn 2006).

The court is aware that the case at bar and Local 825 are

not implicated in the criminal proceedings. But given the temporal

proximity of this settlement and the criminal proceedings against

lead counsel, whether the charges bear on this case is a

determination best left to the class following full disclosure. 

The Court's duty to the [plaintiffs] is focused here. That

duty requires the Court to question whether, other things

being equal, and assuming full knowledge, the [plaintiffs]

would select as their counsel an attorney whose law firm had

been indicted for violating its duties to the court and to its

clients. Amongst many highly competent lawyers, the Court

suggests few would select an indicted, as opposed to an

unindicted, law firm. This is the point at which the Court

must, and does, exercise its supervisory authority.

In re Medtronic, Inc, 434 F Supp 2d at 731-32.

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III

 The court’s “supervisory authority” and the expanded role

of the court in the class action context compel this order. FRCP

23 assigns to the courts both broad responsibility and broad power

to monitor the conduct of class actions to ensure their essential

fairness. See especially FRCP 23(a), (e). As mentioned above, the

adversarial process has ended and plaintiffs’ counsel and defense

counsel appear arm-in-arm asking that the claims of absent class

members be preemptively barred. “But judges in our system are

geared to adversary proceedings. If we are asked to do

nonadversary things, we need different procedures.” In re

Continental Illinois Securities Litigation, 962 F2d 566, 573 (7th

Cir 1992) (Posner). 

The court must apprise itself of all the facts necessary

to determine if the settlement is fair and reasonable. The court

cannot make such finding here and hence cannot approve the

settlement. See Molski v Gleich, 318 F3d 937, 955 (9th Cir 2003)

(reversing certification of settlement class due to appearance of

inadequate representation and collusion as well as inadequacy of

class notice); Staton, supra, 327 F3d 938 (reversing district

court’s settlement approval based on considerations relating to

award of attorney fees). The judiciary is not a “rubber stamp” for

settlements that do no reflect the merits of the case. Boyd v

Bechtel Corp, 485 F Supp 610, 617 (ND Cal 1979).

Although the court’s role in reviewing a proposed

settlement is critical, it is also a limited one. The court does

not have the ability to “‘delete, modify or substitute certain

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provisions.’ The settlement must stand or fall in its entirety.”

Hanlon v Chrysler Corp, 150 F3d 1011, 1026 (9th Cir 1998), citing

Officers for Justice v Civil Serv Comm'n of San Francisco, 688 F2d

615, 628, 630 (9th Cir 1982). 

Accordingly, based on the concerns discussed above, the

court DENIES lead plaintiff’s motion for preliminary settlement

approval. The parties shall appear for a case management

conference on December 20, 2007 at 3:30pm.

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

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