citigroup fees order
TRANSCRIPT
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UNITEDSTATESDISTRICTCOURT
SOUTHERNDISTRICTOFNEWYORK
INRECITIGROUPINC.SECURITIES
LITIGATION
09MD
2070
(SHS)
Thisdocumentrelatesto:
07Civ.9901(SHS)
OPINION
SIDNEYH.STEIN,U.S.DistrictJudge.
I. IntroductionandSummary................................................................. 2II. Background............................................................................................ 5
A. TheAllegedFraudSummarized...................................................... 5B. PreSettlementProceduralHistory.................................................. 6
1. ConsolidationofSimilarSuitsandAppointmentofInterimLeadPlaintiffsandCounsel.......................................................... 6
2. ConsolidatedClassActionComplaintandMotiontoDismiss............................................................................................................ 7
3. DiscoveryandMotionforClassCertification............................ 8C. SettlementNegotiationandtheApprovalProcess.......................9
1. NegotiationsandPreliminaryApproval.................................... 92. ObjectionsandtheFairnessHearing......................................... 12
III. FinalApprovalofClassActionSettlement.................................. 14A. ProperNoticeofClassCertificationandtheSettlement............14B. FairnessoftheSettlement............................................................... 15
1. TheStandardforApprovingaProposedClassActionSettlement...................................................................................... 15
2. ProceduralFairness:ArmsLengthNegotiations...................153. SubstantiveFairness:TheGrinnellFactors.............................. 164. OverallFairnessEvaluation........................................................ 21
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IV. FinalApprovalofthePlanofAllocation...................................... 23V. FeeAward............................................................................................ 26
A. PercentageoftheFundMethodwithLodestarCrossCheck....26B. AssessingReasonablenessPursuanttoGoldberger......................27
1. TimeandLaborExpendedbyCounsel:TheLodestar...........272. TheMagnitudeandComplexitiesoftheLitigation................443. TheRiskoftheLitigation............................................................ 444. TheQualityofRepresentation................................................... 455. TheRequestedFeeinRelationtotheSettlement....................456. PublicPolicyConsiderations...................................................... 46
C. TheLodestarCrossCheckandtheAppropriateAward...........46VI. ReimbursementofLitigationExpenses........................................ 48VII. Conclusion........................................................................................ 48
I. INTRODUCTIONANDSUMMARYPlaintiffsbringthissecuritiesfraudactiononbehalfofaclassof
purchasersofCitigroup,Inc.commonstockagainstthatcompanyand
certainofitsofficials.PlaintiffsallegethatCitigroupmisledinvestorsby
understatingtherisksassociatedwithassetsbackedbysubprimemortgagesandoverstatingthevalueofthoseassets,inviolationof
Sections10(b)and20(a)oftheSecuritiesExchangeActof1934;asaresult,
allthosewhopurchasedCitigroupcommonstockbetweenFebruary26,
2007andApril18,2008paidanallegedlyinflatedprice.Thepartieshave
nowreachedasettlementoftheirdisputefor$590milliontobepaidtothe
class.TheCourtmustdeterminewhetherthatsettlementisfair,
reasonable,andadequateandwhatareasonablefeeforplaintiffs
attorneysshouldbe.
Onplaintiffs
unopposed
motion
pursuant
to
Federal
Rule
of
Civil
Procedure23,theCourtpreliminarilyapprovedthatproposedsettlement,
certifiedtheclassforsettlementpurposes,andprovidedfornoticetothe
classoftheproposedsettlement.Incertifyingtheclass,theCourt
appointedtheproposedrepresentativesasclassrepresentativesand
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appointedKirbyMcInerneyLLPasleadcounselfortheclass(Kirby,
LeadCounsel,orCounsel).NowbeforetheCourtaretwomotions:(1)
plaintiffs
motion
for
final
approval
of
the
class
action
settlement
and
approvaloftheplanofallocation(Dkt.No.164)and(2)LeadCounsels
motionforanawardofattorneysfeesandreimbursementoflitigation
expenses(Dkt.No.165).TheCourtconsideredwrittensubmissionsboth
supportingandopposingthesettlementandheldafairnesshearingon
April8,2013pursuanttoRule23(e)(2).
TheCourtfindsthattheproposedsettlementisfair,reasonable,and
adequateandshouldbeapproved.Classmembersreceivedadequate
noticeandhadafairopportunitytoobjectorexcludethemselves;veryfew
havevoicedtheiropposition.Thesettlementisprocedurallysound
becauseit
was
negotiated
at
arms
length
by
qualified
counsel.
The
Court
alsoconcludesthatthesettlementissubstantivelyfair.Althoughthe$590
millionrecoveryisafractionofthedamagesthatmighthavebeenwonat
trial,itissubstantialandreasonableinlightoftherisksfacediftheaction
proceededtotrial.
TheCourtalsoapprovestheproposedplanofallocation,subjecttoa
clarificationsoughtbycertainobjectingclassmembers.Specifically,the
issuewashowtotreatpurchasesofCitigroupstockmadethroughan
employeestockpurchaseplaninwhichemployeescommittedto
purchases
on
one
date,
determined
their
price
on
another
date
based
on
six
datesspreadoversixmonths,andthenreceivedtheirsharesonyet
anotherdate.TheCourtagreeswiththeobjectorsthatthesubstance,rather
thantheform,ofthosetransactionsshoulddeterminehowthepurchasers
arecompensatedinconnectionwiththesettlement.Forpurposesofthe
allegedsecuritieslawviolations,planmemberspurchasedsharesasthe
moneywasdeductedeachmonth,andtheplanofallocationshouldreflect
thatthesharepriceinflationattheendofeachmonthapproximatestheir
harm.
TheCourtalsoconcludesthatLeadCounselisentitledtoafeeaward,
albeitasmaller
one
than
it
has
proposed,
as
well
as
reimbursement
of
the
requestedlitigationexpenses.Becauseofthesizeofthesettlement,the
Courtplacesparticularemphasisonthelodestarcrosscheck.Lead
Counselundoubtedlysecuredanimpressiverecoveryfortheclassand
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legitimatelyexpendedmillionsofdollarsinattorneyandstaffhoursdoing
so.ButtheCourtfindsthatCounselsproposedlodestarissignificantly
overstated.
TheCourtmakesthefollowingdeductionsinthelodestar:
1) $4millionintimethatoneplaintiffsfirmexpendedinanunsuccessfulattempttobecomeLeadCounselandnowwants
theclasstopayforthatunsuccessfuleffort;
2) $7.5millionfor16,292hoursofattorneystimespentinpursuingdiscoveryafterthepartiesreachedanagreementto
settletheirdispute.Thattimewasspentlargelyondocument
reviewbycontractattorneys,afulltwentyofwhomwere
hired
for
the
first
time
on
or
about
the
same
day
the
parties
notifiedtheCourtthatanagreementinprinciplehadbeen
reached;
3) A$12millionreductionbyapplyingareasonableblendedhourlyrateforthelargenumberofcontractattorneysof$200
ratherthantheblendedratesubmittedbyLeadCounselof
$466perhourforthe45,300hoursworkedbycontract
attorneys;and
4) A10%cutfromtheremainingbalancetoaccountforwasteandinefficiencywhich,theCourtconcludes,areasonable
hypothetical
client
would
not
accept.
One
such
unfortunate
exampleisthe157.5hoursfor$66,937.50inrequestedtime
spentdigestingasingledaysdeposition.
Theseadjustmentsresultinalodestarof$51.4million,resultingina
revisedlodestarof$25.1million.Factoringtheproperlodestarintothe
Courtsanalysisoftherequested$97.5millionfeepursuanttoGoldbergerv.
IntegratedResources,Inc.,209F.3d43(2dCir.2000),theCourtinstead
awards$70.8millioninattorneysfees,whichis12%ofthe$590million
commonfundandrepresentsamultiplierof2.8onthereducedlodestar.
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II. BACKGROUNDA. TheAllegedFraudSummarizedAbriefsummaryofplaintiffsclaimsframestheCourtsdiscussionof
thesemotions.TheallegationsatissueconcernCitigroupsinvestmentin,
andexposureto,risksassociatedwithanowinfamousspeciesofcomplex
financialinstruments:collateralizeddebtobligations(CDOs)thathave
assomeoralloftheircollateralresidentialmortgagebackedsecurities
(RMBS).FollowingdismissalbytheCourtofavarietyofadditional
claims,theonlyclaimsthathavesurvivedconcernCitigroupsexposureto
potentialmortgagebackedCDOlosses.SeeInreCitigroupInc.Sec.Litig.,
753F.Supp.2d206(S.D.N.Y.2010).
Thegravamen
of
the
surviving
allegations
is
that
Citigroups
public
statementspaintedamisleadingportraitofCitigroupasrelativelysafe
fromthemarketsconcernsaboutpotentiallossesresultingfromfalling
CDOvalues.FromFebruary26,2007toNovember4,2007,defendants
allegedlygavetheimpressionthatCitigrouphadminimal,ifany,
exposuretoCDOswhen,infact,ithadmorethan$50billioninexposure,
id.at235CDOsthatwerebackedbysubprimemortgagesandwrongly
valuedatpardespiteobjectiveindicationsthatsuchmortgagebacked
CDOshadlostvaluebyFebruary2007.OnNovember4,2007,Citigroup
disclosedthatitheld$43billionofsuperseniorCDOtranches
simultaneouslywiththefactoftheirwritedownbyanexpected$8$11
billion.Id.at23940.Thatdisclosure,plaintiffsallege,omitted$10.5
billioninhedgedCDOsthatwerepurportedlyinsuredagainstloss,andit
alsooverstatedtheCDOsvalue,thusunderreportinglosses.Id.at240.
Plaintiffscontendthatdefendantscontinuedtooverstatethevalueofthe
CDOsuntilafinalcorrectivedisclosureonApril18,2008.
Asrelevanthere,theoveralleffectoftheseallegedmisstatementswas
thatthemarketovervaluedCitigroupsassets,orundervaluedits
liabilities,andthusovervaluedCitigroupcommonstock.Classmembers,
purchasingbased
on
the
market
price,
thus
paid
too
much
for
the
Citigroupstocktheypurchased,andsoplaintiffsclaimasdamagesthe
amountbywhichtheyallegedlyoverpaid.
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B. PreSettlementProceduralHistory1. ConsolidationofSimilarSuitsandAppointmentofInterim
LeadPlaintiffsandCounsel
Variousplaintiffsfiledanumberofseparatecomplaintsagainst
defendantsindistinctclassactions,eachpurportingtorepresenttheclass
ofinvestorsinCitigroupthatwereallegedlyharmedbydefendants
misstatementsoromissions.Becauseofthesimilarityoftheclaims,the
Courtconsolidatedtheactionsfiledbytheseandotherplaintiffsintoa
singleconsolidatedclassaction,No.07Civ.9901.(SeeOrderdatedAug.
19,2008,Dkt.No.59.)
TheCourtalsoresolvedacontentiousbattlebetweencompeting
plaintiffsand
counsel
to
be
appointed
as
interim
lead
plaintiffs
and
interimleadcounselthoughthecompetitionwasprimarilybetweenthe
lawfirmsandonlyderivativelybetweentheirclients.Twomaingroupsof
stockpurchaserswerevyingfortheappointment.First,JonathanButler,
M.DavidDiamond,DavidWhitcombandHenriettaWhitcomb (theATD
Group)werefourformerownersofAutomatedTradingDesk,Inc.
(ATD);theyacquiredtheirCitigroupstockpursuanttoamergerin
whichCitigrouppurchasedATDinexchangeforamixofcashand
Citigroupstock.Second,agroupoffiveinstitutionalinvestmentfunds(the
Funds)comprisedofthreeforeignentities,aswellasthePublic
EmployeesRetirementAssociationofColorado(COPERA)andthe
TennesseeConsolidatedRetirementSystem(TCRS),whichall
purchasedCitigroupstockaspartoftheirinvestments.Kirbyrepresented
theATDGroup,andEntwistle&CappucciLLPrepresentedtheFunds.
TheCourtfoundthat,pursuanttothePrivateSecuritiesLitigation
ReformAct(PSLRA),theATDGroupwasthepresumptiveleadplaintiff
becauseit(1)timelymovedforappointment,(2)hasthelargestfinancial
interestinthereliefsoughtbytheclass,and(3)madeapreliminary
showingthatitmetthetypicalityandadequacyrequirementsofFederal
Ruleof
Civil
Procedure
23(a).
See
15
U.S.C.
78u
4(a)(3)(B)(iii)(I).
The
Courtfoundthattheothermovantsforappointmentasleadplaintiff,
includingtheFunds,failedtorebutthepresumptionthatATDwasthe
mostadequateleadplaintiff.(SeeTr.ofAug.19,2008PretrialConference
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at1112,Dkt.No.11124.)TheCourtappointedtheATDGroupasinterim
leadplaintiffsandKirby,itscounsel,asinterimleadcounsel.
COPERAand
TCRS
moved
to
reconsider
that
appointment.
(Dkt.
No.
60.)TheCourtgrantedthemotiontotheextenttheFundssoughtlimited
discoveryonwhethertheATDGrouppossessednonpublicinformationat
thetimeoftheirstockacquisition;theCourt,however,stayeddiscovery
pendingresolutionofdefendantsthenpendingmotiontodismiss.(Order
datedAug.31,2009,Dkt.No.85.)Asexplainedbelow,COPERAand
TCRSsubsequentlywithdrewtheirmotiontoreconsider.
2. ConsolidatedClassActionComplaintandMotiontoDismissFollowingtheappointmentoftheATDGroup,plaintiffsfileda
consolidatedamended
complaint
(Dkt.
No.
69),
and
then
amended
once
more,resultingintheAmendedConsolidatedClassActionComplaint
(theComplaint)(Dkt.No.74).Defendantsmovedtodismissthe
Complaint,andtheCourtgrantedthatmotioninpartanddenieditin
part.SeeInreCitigroupInc.Sec.Litig.,753F.Supp.2d206,212(S.D.N.Y.
2010).
Asexplainedabove,theCourtpermittedonlytheclaimsconcerning
CitigroupsexposuretoCDOrelatedlossestoproceed,albeitfora
narrowertimeperiodandagainstanarrowergroupofdefendantsthan
allegedin
the
Complaint.
Id.
at
249.
The
Court
in
its
opinion
described
the
dismissedclaimsandthegallimaufryoffinancialinstrumentsinvolved
indetailandsummarizesthoseclaimsheretoillustratethebreadthofthe
claimsinitiallyasserted.Seeid.at214.Thedismissedclaimsconcern
misstatementsandomissionsinthefollowingcategories:
1) thatCitigroupmisleadinglydescribedandovervalueditsinvestmentinsocalledAltARMBS,whichareRMBSbacked
bymortgagesonecutabovesubprime,seeid.at22728,24143;
2) thatCitigroupconcealeditsexposuretorisksassociatedwithpurportedlyindependentstructuredinvestmentvehiclesand
overvaluedtheassetsthosevehiclesheld,id.at22829,24344;3) thatdefendantsmisrepresentedCitigroupsmortgagelending
businessinanumberofways,id.at244;
4) thatdefendantsconcealed,andthenovervalued,Citigroups
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auctionratesecuritiesholdings,id.at230,24546;
5) thatCitigroupsimilarlymisledinvestorsaboutitsexposuretolosses
from
leveraged
loans
and
collateralized
loan
obligations,
id.at231,24647;and
6) finally,thatCitigroupbroadlymisrepresenteditsoverallfinancialhealthandsolvency,id.at231,24748.
Overall,plaintiffsallegedthatdefendantscouldseethefinancialcrisis
writingonthewallsinmultipleareasofCitigroupsoperationsandsought
toobscureordownplaytheextantandfuturelosses.TheCourtfoundthe
allegationssufficienttoproceedasamatteroflawonlyforclaims
regardingCitigroupsexposuretoCDOrelatedlosses.Id.at249.
3. DiscoveryandMotionforClassCertificationFollowingtheCourtsdecisionondefendantsmotiontodismiss,the
partiesconducteddiscoveryrelatedtoclasscertificationandthemeritsof
thesustainedCDOrelatedclaims.Thatdiscovery,whichoverlappedwith
theclasscertificationmotionandthenegotiationandfinalizationofthe
settlement,wasvoluminous.Inall,LeadCounselandthefirmsthatwere
assistingitobtainedandreviewedapproximately40millionpagesof
documents.Defendantsproducedapproximately35millionpages,and
thirdpartiesproduced5millionadditionalpages.(JointDecl.ofIraM.
Press&PeterS.LindendatedDec.7,2012(JointDecl.)68,Dkt.No.
171.)LeadCounselalsodeposedthirtythreedefensewitnessesand
defendeddepositionsofsixteenwitnesses.(SeeJointDecl.75,87.)
PursuanttotheCourtsdecisiononEntwistle&Cappuccismotionto
reconsidertheappointmentoftheATDGroupasinterimleadplaintiffs,
COPERAandTCRSwerepermittedtoconductdiscoveryintotheATD
Groupsfitnesstoserveasclassrepresentativesfollowingthedecisionon
themotiontodismiss.Instead,thosefundsreachedanagreementwiththe
ATDGroupthatthemotionwouldbewithdrawnandthetwosidestothe
appointmentdisputewouldjoinforcestoseekclasscertificationwithallof
themas
class
representatives.
Thus,
following
class
discovery,
the
ATD
Group,COPERA,TCRS,andfiveotherindividualstogethermovedfor
classcertificationandproposedtheentiregroupasclassrepresentatives.
ThoseaddedindividualswereJohnA.BadenIII,WarrenPinchuck,
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AnthonySedutto,EdwardClaus,andCarolWeil,allofwhompurchased
sharesofCitigroupstockontheopenmarketduringtheclassperiod.
Themotion
for
class
certification
was
heavily
contested.
The
parties
submittedlegalmemorandaaswellasfiveattorneydeclarations
appendinghundredsofexhibitsandfourexpertdeclarationsfromthree
differentexperts.Defendantschallengedthecommonalityoftheclassand
thetypicalityandadequacyoftheproposedrepresentativespursuantto
Rule23(a).Theyfurthercontendedthatcommonquestionsdidnot
predominateoverindividualizedquestionspursuanttoRule23(b)(3).
Muchofthedisputeturnedontwomainissues:(1)whethertheunique
circumstancesoftheATDGroupsstockacquisitionviamergeragreement
rendereditunfittorepresenttheclass,and(2)whetherplaintiffshad
demonstratedthat
the
alleged
misrepresentations
were
material,
a
showingdefendantscontendedwasrequiredforplaintiffstoinvokea
classwidepresumptionofrelianceonthemarketpricesuchthatcommon
questionswouldpredominate.1
PriortotheCourtsrenderingadecisionontheclasscertification
motion,thepartiesenteredintoasettlementagreement.
C. SettlementNegotiationandtheApprovalProcess1. NegotiationsandPreliminaryApproval
Inearly2012,thepartiesjointlyretainedLaynR.Phillips,aretired
federaldistrictjudge,tomediatetheirsettlementnegotiations.Theparties
participatedintwofulldaymediationsessionsandalsosubmitted
extensivewrittenmaterials.(JointDecl.9697.)Thatprocessculminated
inthemediatorsultimateproposalthatthepartiessettletheactionfor
$590million;thepartiesonMay8,2012agreedtoacceptthatproposalas
thebasisforaformalstipulationtobesubmittedtotheCourtforapproval.
1
The
U.S.
Supreme
Court
has
since
held
that
securities
fraud
plaintiffs
need
not
provethatthemisrepresentationsarematerialattheclasscertificationstage.Amgen
Inc.v.Conn.Ret.Plans&TrustFunds, U.S. ,133S.Ct.1184,1191(2013)
(abrogatingInreSalomonAnalystMetromediaLitig.,544F.3d474,486n.9(2dCir.
2008)).
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(Id.98.)AsLeadCounselhassetforthinitsfeerequest,[s]hortly
thereafter,LeadCounselinformedtheCourtoftheproposedSettlement.
(Id.
99.)
Intheensuingmonths,thepartieshashedoutthedetailsoftheformal
stipulation.Themainoutstandingissuewasthesocalledexclusion
thresholdorblowupprovision.Defendantswereempoweredto
withdrawfromthesettlementiftheaggregateclaimvalueofpotential
classmemberswhoexcludedthemselvesfromthesettlementreacheda
certainthreshold.Alowerthresholdmeantagreaterchancethat
defendantswouldhavethediscretiontonullifyorblowupthe
settlement.InMay,plaintiffsanddefendantsinitiallydisagreedonthe
correctthreshold,buttheyagainsoughtthemediatorsassistanceand
agreedon
the
threshold
by
mid
July.
(Supp.
Joint
Resp.
Decl.
of
Ira
M.
Press&PeterS.LindendatedMarch25,2013(Supp.JointResp.Decl.)
54,Dkt.No.233.)
Thepartiesfinalizedthedetailsofthesettlementandenteredintothe
StipulationandAgreementofSettlementdatedAugust28,2012;plaintiffs
thenmovedforpreliminaryapprovalofthesettlementandcertificationof
theclassforsettlementpurposes.Havinghadthebenefitoftheparties
earlierreportsonthesettlementtermsandproposedapprovalprocedures,
aswellasextensivesubmissionsonconsiderationofthemotionforclass
certification,
the
Court
granted
that
motion.
(Order
Preliminarily
ApprovingProposedSettlementandProvidingforNoticedatedAug.29,
2012(PreliminaryApprovalOrder),Dkt.No.156.)Indoingso,the
Courtcertifiedaclassof[a]llpersonswhopurchasedorotherwise
acquiredcommonstockissuedbyCitigroupduringtheperiodbetween
February26,2007andApril18,2008,inclusive.(Seeid.)TheCourtset
forthascheduleforprovidingnoticetotheclassandproceduresbywhich
classmemberscould,interalia,submitclaimforms,objecttotheproposed
settlementorLeadCounselsfeerequest,excludethemselvesfromthe
class,andappearatafairnesshearing.2(Id.)Atthepartiesrequests,the
2 BecauseCitigroupinitiallyinadvertentlyprovidedanincompletelistof
stockholderstotheappointedclaimsadministrator,theCourtadjournedthefairness
hearingandorderedextendeddeadlinesandadditionalnoticeforclassmembers
(footnotecontinuesonnextpage)
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CourtinSeptember2012mademinormodificationstothePreliminary
ApprovalOrder,includingtheclassdefinitionandnoticeprocedures,in
two
orders.
(See
Orders
dated
Sept.
6,
2012
&
Sept.
28,
2012,
Dkt.
Nos.
158,
159.)3
potentiallyprejudicedbytheerror.(SeeOrderdatedJan.2,2013,Dkt.No.183;seealso
Supp.Aff.ofStephenJ.CiramidatedMar.25,2013(CiramiSupp.Aff.),Ex.36to
Supp.JointResp.Decl.)
3 Thefullclassdefinition,asamendedbyorderdatedSeptember28,2012(Dkt.
No.159),readsasfollows:
Allpersonswhopurchasedorotherwiseacquiredcommonstockissuedby
CitigroupduringtheperiodbetweenFebruary26,2007andApril18,2008,
inclusive, or their successor in interest, and who were damaged thereby,
excluding (i) thedefendantsnamed in theComplaint, (ii)membersof the
immediate familiesof the individualdefendantsnamed in theComplaint,
(iii) any firm, trust, partnership, corporation, present or former officer,
director or other individual or entity in which any of the Citigroup
Defendantshasacontrollinginterestorwhichisrelatedtooraffiliatedwith
anyof theCitigroup Defendants, and (iv) the legal representatives, heirs,
successorsininterest or assigns of any such excluded persons or entities.
The Settlement Class includes persons or entities who acquired shares of
CitigroupcommonstockduringtheClassPeriodbyanymethod,including
but not limited to in the secondary market, in exchange for shares of
acquiredcompanies
pursuant
to
aregistration
statement,
or
through
the
exerciseofoptions includingoptionsacquiredpursuant toemployeestock
plans, and persons or entities who acquired shares ofCitigroup common
stockaftertheClassPeriodpursuanttothesaleofaputoptionduringthe
Class Period. Regardless of the identity of the person or entity that
beneficially owned Citigroup common stock in a fiduciary capacity or
otherwiseheldCitigroupcommonstockonbehalfof thirdpartyclientsor
anyemployeebenefitplans,such thirdpartyclientsandemployeebenefit
plans shall notbe excluded from the Settlement Class, irrespective of the
identityoftheentityorpersoninwhosenametheCitigroupcommonstock
werebeneficiallyowned,except thatanybeneficiariesof such thirdparty
clients,or
beneficiaries
of
such
benefit
plans
who
are
natural
persons
and,
who are otherwise excluded above will not share in any settlement
recovery. Notwithstanding any other provision of this Agreement, the
Citibuilder401(k)Plan forPuertoRicoand theCitigroup401(k)Planshall
qualifyasmembersoftheSettlementClass.Inaddition,apersonwhoowns
(footnotecontinuesonnextpage)
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2. ObjectionsandtheFairnessHearinga. Fewclassmembersobjectorexcludethemselves
Theclaimsadministratorsentnoticestoover2.4millionpotentialclass
members.(CiramiSupp.Aff.17.)Excludingafewobjectionsfrom
individualswhodidnotprovidetherequiredevidenceofclass
membershiporwhoprovidedevidenceindicatingtheywerenotclass
members,theCourtreceivedonlyelevenwrittenobjections.Further,only
294recipientsofthe2.4millionnoticestimelysubmittedexclusion
requests,ofwhichonly134providedevidenceofmembershipintheclass.
(Id.21.)Andtwentythreeofthe134exclusionscamefrominvestorswho
hadalreadycommencedseparateactions.(Supp.JointResp.Decl.5.)
Citigroup common stock shall notbe excluded from the settlement class
solelybecausethatcommonstockisheld(i)inaregisteredorunregistered
investment company (including a unit investment trust) in which any
defendantintheActionhasacontrollinginterest,orservesasaninvestment
manager, investment adviser, or depositor; or (ii)(a) in a life insurance
company separate account, or (b) in a segment or subaccount of a life
insurance companys general account to the extent associated with
insurancecontractsunderwhich the insurersobligation isdeterminedby
the investment return and/or market value of the assets held in such
segmentor
subaccount
of
alife
insurance
companys
general
account
to
the
extent associated with insurance contracts under which the insurers
obligation isdeterminedby the investment returnand/ormarketvalueof
theassetsheldinsuchsegmentorsubaccount.Adefendantshallbedeemed
to have a controlling interest in an entity if such defendant has a
beneficialownershipinterest,directlyorindirectly,inmorethan50%ofthe
totaloutstandingvotingpowerofanyclassorclassesofcapitalstock that
entitletheholdersthereoftovoteintheelectionofmembersoftheBoardof
Directors of such entity. Beneficial ownership shall have the meaning
ascribed to such termunderRule13d3of theSecuritiesExchangeActof
1934, as amended, or any successor statute or statutes thereto.
Notwithstandingthe
foregoing,
the
Settlement
Class
shall
not
include
PersonswhoseonlyacquisitionofCitigroupcommonstockduringtheClass
Period was via gift or inheritance if the Person from which the common
stockwasreceiveddidnotthemselvesacquirethecommonstockduringthe
ClassPeriod.
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Twoobjectionsmeritdiscussion.Thefirstsuchobjectionwasfiledby
sixpurchasersofCitigroupstockthroughthecompanysvoluntary
employee
stock
purchase
planthe
FA
Capital
Accumulation
Program
(FACAP).TheseFACAPobjectorsarealsointerimleadplaintiffsina
parallelputativeclassactionconcerningCitigroupemployeesstock
purchasesthroughtheFACAP,whichiscurrentlypendingbeforethis
Court:Brecherv.Citigroup,Inc.,No.09Civ.7359.Here,theFACAP
objectorscontendthattheCourtcannotapprovethesettlementbecause,
interalia,theFACAPparticipantclassmemberswouldreleasecertain
claimswithoutcompensationandbecausetheproposedplanofallocation
doesnotproperlycompensatethem.
TheseconddetailedobjectionwasfiledprosebyTheodoreH.Frank,
anindividual
investor
in
Citigroup
who
is
also
an
attorney
and
the
founderoftheCenterforClassActionFairness.FrankobjectstoLead
Counselsfeerequest.Hecontends,interalia,thatthefeesrequested
nearly$100millionareunreasonablyhighwhencomparedwith
similarlysizedsettlementsandthatLeadCounselhasimproperlyinflated
itslodestarcalculationinavarietyofways.FrankfocuseslargelyonLead
Counselsextensiveuseofcontractattorneysbothonwhethertheir
assertedhourlybillingratesareconsistentwithmarketratesandon
whetherareasonableclientwouldpayforallofthehoursincludedinthe
lodestar.
b. ThefairnesshearingAfterpropernoticetotheclass,theCourtheldahearingonthe
fairnessofthesettlementandthereasonablenessofthefeerequeston
April8,2013.Thesettlingparties,theFACAPobjectors,andFrank
appeared,witheacharguingitspositionregardingthependingmotions.
TheCourtalsoheardfromplaintiffsdamagesexpertontheplanof
allocation,andfromLeadCounselsexpertonthereasonablenessofthe
lawyershourlyratessubmittedintherequestforattorneysfees.
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III. FINALAPPROVALOFCLASSACTIONSETTLEMENTA. ProperNoticeofClassCertificationandtheSettlementRule23requiresnoticetotheclassbothwhentheclassiscertified
pursuanttoRule23(b)(3)andwhenaclassactionsettlementhasbeen
proposedforcourtapproval.SeeRule23(c)(2)(B),(e)(1).TheCourt
providedforcombinednoticeofbotheventsinordertosavetheclassthe
expenseofasecondroundofclasswidenotice.AsRule23(e)snotice
requirementsarelessspecificthanthatofRule23(c)s,theCourtwillfocus
onRule23(c)srequirements.InreGlobalCrossingSec.&ERISALitig.,225
F.R.D.436,448(S.D.N.Y.2004)(citationomitted).Thenoticemustdescribe
(i)thenatureoftheaction;(ii)thedefinitionoftheclasscertified;
(iii)the
class
claims,
issues,
or
defenses;
(iv)
that
aclass
member
may enter an appearance through an attorney if themember so
desires;(v)thatthecourtwillexcludefromtheclassanymember
who requestsexclusion; (vi) the timeandmanner forrequesting
exclusion; and (vii) the binding effect of a class judgment on
membersunderRule23(c)(3).
Rule23(c)(2)(B).Further,dueprocessandtheFederalRulesrequire
individualnotice[]toallclassmemberswhosenamesandaddressesmay
beascertainedthroughreasonableeffort.InreGlobalCrossing,225F.R.D.
at448
(quoting
Eisen
v.
Carlisle
&
Jacquelin,
417
U.S.
156,
173
(1974)).
ThenoticesdistributedincludealloftheinformationthattheRules
require,aswellastheadditionaldisclosuresrequiredinsecuritiescases.
SeeInreIMAXSec.Litig.,283F.R.D.178,185(S.D.N.Y.2012)(citing15
U.S.C.78u4(a)(7)).TheCourtfurtherfindsthattheclaimsadministrator
providedindividualnoticetothoseclassmemberswhocouldbe
identifiedthroughreasonableeffort.SeeFed.R.Civ.P.23(c)(2)(B).The
CourtfindsthatthenoticeherecompliedwithRule23anddueprocess.
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B. FairnessoftheSettlement1. TheStandardforApprovingaProposedClassAction
Settlement
Settlementoftheclaimsofacertifiedclassrequirescourtapproval.
Fed.R.Civ.P.23(e).Acourtmayapproveaclassactionsettlementifitis
fair,adequate,andreasonable,andnotaproductofcollusion.WalMart
Stores,Inc.v.VisaU.S.A.Inc.,396F.3d96,116(2dCir.2005)(quotingJoelA.
v.Giuliani,218F.3d132,138(2dCir.2000)).Thus,theCourtmust
scrutinizeboththesettlementstermsandthenegotiatingprocessleading
tosettlement.WalMartStores,396F.3dat116(citingDAmatov.Deutsche
Bank,236F.3d78,85(2dCir.2001)).
TheCourt
must
exercise
its
discretion
to
approve
or
reject
asettlement
inlightofthegeneraljudicialpolicyfavoringsettlement.Weinbergerv.
Kendrick,698F.2d61,73(2dCir.1982);seealsoWalMartStores,396F.3dat
116(citingInrePaineWebberLtd.PshipsLitig.,147F.3d132,138(2dCir.
1998)).Nonetheless,thepolicyfavoringsettlementsgenerallywillnot
substituteforrigorousscrutinyofthissettlement.[T]heCourtmustserve
asafiduciarytoprotecttheinterestsofabsentclassmembersaffectedby
thesettlement.McBeanv.CityofNewYork,233F.R.D.377,382(S.D.N.Y.
2006)(quotingGrantv.BethlehemSteelCorp.,823F.2d20,22(2dCir.1987)).
Moreover,[w]henasettlementisnegotiatedpriortoclasscertification,as
isthecasehere,itissubjecttoahigherdegreeofscrutinyinassessingits
fairness.DAmato,236F.3dat85;seealsoWeinberger,698F.2dat73.
TheCourtfirstassessesthenegotiatingprocess,examinedinlightof
theexperienceofcounsel,thevigorwithwhichthecasewasprosecuted,
andthecoercionorcollusionthatmayhavemarredthenegotiations
themselves.Malchmanv.Davis,706F.2d426,433(2dCir.1983)(citing
Weinberger,698F.2dat73).TheCourtthenconsidersthesubstantive
termsofthesettlementcomparedtothelikelyresultofatrial.Id.
2. ProceduralFairness:ArmsLengthNegotiationsThefirstindicatorofthesettlementsfairnessiswhetheritwas
negotiatedatarmslengthbytheparties.Aslongastheintegrityofthe
negotiatingprocessisensuredbytheCourt,itisassumedthattheforcesof
selfinterestandvigorousadvocacywilloftheirownaccordproducethe
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bestpossibleresultforallsides.InrePaineWebberLtd.PshipsLitig.
(PaineWebber),171F.R.D.104,132(S.D.N.Y.1997).Further,a
presumption
of
fairness,
adequacy,
and
reasonableness
may
attach
to
a
classsettlementreachedinarmslengthnegotiationsbetween
experienced,capablecounselaftermeaningfuldiscovery.WalMartStores,
396F.3dat116(quotingManualforComplexLitigation(Third)30.42
(1995)).Thenegotiationsherebeareachofthosehallmarks.TheCourthas
nodoubtsabouttheexperienceorabilityofcounsel.Nor,asexplained
furtherbelow,didtheylackforknowledgeofthiscase.Andthehistoryof
thenegotiationsandtheroleofthemediatorsuggestthattheparties
actuallydealtwithoneanotheratarmslengthgoingsofarasaccepting
themediatorsproposeddollaramount.Fromhisfrontrowseat,the
mediatorconcluded
that
negotiations
in
this
case
were
hard
fought
and
at
armslengthatalltimes.(Decl.ofLaynR.PhillipsdatedNov.19,2012
5,Dkt.No.168.)TheCourtagrees.Accordingly,theCourtconcludes
thattheprocesswasfairandfreefromcollusionandthatapresumptionof
thesettlementsfairnessarises.
3. SubstantiveFairness:TheGrinnellFactorsTheCourtmustnextconsiderwhetherthesubstantivetermsofthe
settlementsupportorrebutthepresumptionoffairnessarisingfromthe
armslengthnegotiations.CourtsinthisCircuitanalyzesubstantive
fairnessthrough
the
lens
of
the
nine
factors
set
forth
in
City
of
Detroit
v.
GrinnellCorp.,495F.2d448,463(2dCir.1974):
(1)thecomplexity,expenseandlikelydurationofthelitigation;(2)thereactionoftheclasstothesettlement;(3)the stage of the proceedings and the amount of discovery
completed;
(4)therisksofestablishingliability;(5)therisksofestablishingdamages;(6)therisksofmaintainingtheclassactionthroughthetrial;(7)theabilityofthedefendantstowithstandagreaterjudgment;
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(8)therangeofreasonablenessof thesettlement fund in lightofthebestpossiblerecovery;
(9)therangeofreasonablenessofthesettlementfund[compared]to a possible recovery in light of all the attendant risks of
litigation.
WalMartStores,396F.3dat117(quotingGrinnell,495F.2dat463).In
weighingtheGrinnellfactors,[t]heCourtmusteschewanyrubberstamp
approvalinfavorofanindependentevaluation,yet,atthesametime,it
muststopshortofthedetailedandthoroughinvestigationthatitwould
undertakeifitwereactuallytryingthecase.Grinnell,495F.2dat462.
a. Thecomplexity,expenseandlikelydurationofthelitigationAsageneralmatter,themorecomplex,expensive,andtime
consumingthefuturelitigation,themorebeneficialsettlementbecomesas
amatterofefficiencytothepartiesandtotheCourt.McBean,233F.R.D.
at385.Factdiscoveryherewasnearlycomplete,andcounselforthe
partieshadloggedtensofthousandsofhours.Butbecauseofthescope
andcomplexityofthiscase,whatremainedwasfarfromsimpleorbrief,
andcertaintobecostly.Ofthistherecanbenodoubt.
Afterthecompletionoffactdiscovery,thepartieswouldundoubtedly
pursueexpertdiscovery,summaryjudgmentmotions,andpretrial
motionsprior
to
trial.
A
trial
would
then
consume
substantial
resources,
anditsresultwouldbeappealable.Insum,theexpenseanddurationof
continuedlitigationweighsinfavorofapprovingthesettlement.
b. ThereactionoftheclasstothesettlementAfavorablereceptionbytheclassconstitutesstrongevidencethata
proposedsettlementisfair.Grinnell,495F.2dat462.Ifonlyasmall
numberofobjectionsarereceived,thatfactcanbeviewedasindicativeof
theadequacyofthesettlement.WalMartStores,396F.3dat118(quoting
Alba
Conte
&
Herbert
B.
Newberg,
Newberg
on
Class
Actions
11:41,
at
108
(4thed.2002)).Thenumbershereoverwhelminglysupportapprovalofthe
settlement:amereelevenobjectionsinresponsetonearly2.5million
notices,withonlysixobjectionschallengingthesettlementitselfrather
thanthefeerequestornoticeprocedures.Inaddition,notasingle
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objectionwasreceivedfromanyoftheinstitutionalinvestorsthatholdthe
majorityofCitigroupstock.(SeeSupp.JointResp.Decl.4.)Further,only
134
class
members
submitted
exclusion
requests.
Cf.
DAmato,
236
F.3d
at
8687(findingclassresponseofeighteenobjectionsandseventytwo
exclusionsfrom28,000noticesweighsinfavorofapproval).TheCourt
concludesthattheclasssreactionweighsheavilyinfavorofapproval.
c. Thestageoftheproceedingsandtheamountofdiscoverycompleted
Althoughdiscoveryhadlargely,butnotyetfully,concluded,
plaintiffsenteredintosettlementonlyafterathoroughunderstandingof
theircase.SeeWalMartStores,396F.3dat118.Thepartiescompleted
extensivediscovery
that
included
millions
of
pages
of
documents
and
depositionsofkeywitnessesonbothsides.Thepartieshadalsoconducted
apreliminarybattleoftheexperts,includingdepositions,regardingthe
materialityoftheallegedmisstatementsinconnectionwiththeclass
certificationmotion.Thatdisputeeffectivelyforeshadowedaloss
causationdebateinsofarasCitigroupcontestedtheallegedeffectofthe
misrepresentationsonthemarketpriceforCitigroupstock.LeadCounsel
hadampletime,documents,andinformationfromCitigrouptodevelop
itsknowledgeofthestrengthsandweaknessesoftheclasssclaims;in
filings,CounselprovidedtheCourtwithadequatefactualinformation
uponwhich
to
evaluate
the
fairness,
reasonableness,
and
adequacy
of
the
proposedsettlement.Plaintiffs,inshort,hadmorethanenough
informationtomakeaninformedandintelligentdecision.Accordingly,
thisthirdGrinnellfactoralsoweighsinfavorofapproval.
d. Therisksofcontinuedlitigationassociatedwithmaintainingtheclassthroughtrialandestablishingliabilityanddamages
Theroadtorecoverybymeansotherthansettlementwaslongand
lackedaguardrail;thefourth,fifth,andsixthGrinnellfactorsallconcern
theobstaclesplaintiffsfacedinpursuingafinaljudgmentintheirfavor.
Alllitigationcarriesrisk.SeePaineWebber,171F.R.D.at126.Indeed,[i]fsettlementhasanypurposeatall,itistoavoidatrialonthemeritsbecause
oftheuncertaintyoftheoutcome.InreIraHaupt&Co.,304F.Supp.917,
934(S.D.N.Y.1969).Itisnocoincidencethatthepartiessettlementtalks
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rampedupspecificallytoavoidthefirstoftheseuncertainties:thatthe
Courtmightdenyclasscertification.Intheclasscertificationmotion,the
parties
disputed,
inter
alia,
the
materiality
of
the
alleged
misstatementsa
meritsissueonwhichplaintiffswouldhavehadtoagainprevailat
summaryjudgmentandtrial.SeeEricaP.JohnFund,Inc.v.HalliburtonCo.,
563U.S. , ,131S.Ct.2179,2185(2011).
Themostsignificantrisks,however,concernedliability.Plaintiffsstill
hadtoprovethattheallegedmisstatementswerefalseormisleadingand
thatdefendantshadadutytodiscloseinformationtheyhadomittedfrom
theirpublicstatements.Theallegationsherelargelyhingedondefendants
failuretoprovidethedetailsofCitigroupsexposuretothesupersenior
tranchesofCDOs,butthedutytoprovidethosedetailshadnotbeen
established.Further,
plaintiffs
would
ultimately
have
to
show
that
defendantshadactedwithfraudulentintentwhenmakingthealleged
misstatements.Plaintiffsatsummaryjudgmentandtrialwouldhaveto
overcomedefendantsargumentsthatCitigroupvaluedtheCDOsingood
faith,relyinginpartontheirauditorsandtakingwritedownswhen
marketdatatheratingagencydowngradesrequiredit.Thatisnosmall
obstacle.TheU.S.SecuritiesandExchangeCommissionelectednotevento
allegescienterbasedfraudclaimsinitscivilenforcementactionagainst
CitigroupformisleadinginvestorsaboutCDOsduringthisclassperiod.
SeeComplaint,SECv.CitigroupInc.,No.10cv1277ESH(D.D.C.July29,
2010);see
also
SEC
v.
Stoker,
No.
11
Civ.
7388
(JSR)
(S.D.N.Y.
July
31,
2012),
Dkt.No.118(juryfindingforCitigroupmanageraccusedoffraudin
connectionwith2007CDOtransactions).
Finally,plaintiffswouldhavehadtoshowlosscausationinorderto
establishbothliabilityanddamages.SeegenerallyInreOmnicomGrp.,Inc.
Sec.Litig.,597F.3d501,509(2dCir.2010)(citingDuraPharms.,Inc.v.
Broudo,544U.S.336,34142(2005)).Toproveliability,plaintiffshadto
provethatthelosswasforeseeableandcausedbythematerializationof
theriskconcealedbythefraudulentstatement.InreOmnicom,597F.3dat
513(citation
omitted).
Here,
plaintiffs
would
have
had
to
show
that
Citigroupsstockpricefellspecificallybecausethemarketlearnedthe
truththatdefendantshadconcealedbytheirmisstatementsand
omissionsnotbecausethemarketlearnedofanyofthemyriadother
developmentsinCitigroupsoperationsandtheworldfinancialsystem.
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Thatlosscausationanalysisalsohighlightstheriskthatplaintiffs
mightnotestablishdamagesatthelevelsalleged.Inotherwords,evenif
plaintiffs
could
have
maintained
class
action
status,
and
established
defendantsliability,thequestionremained:couldtheyprovethatthis
fraudcausedenoughdamagestojustifytheriskandexpenseof
participatinginatrialonthemerits?
Insum,theriskthattheplaintiffsmightnotprevailwassignificant.
TheCourtconcludesthatthefourthGrinnellfactorweighsheavilyinfavor
ofapproval,andthefifthandsixthfactorsalsosupporttheconclusionthat
thesettlementisfairandreasonable.
e. TheabilityofthedefendantstowithstandagreaterjudgmentAlthough
plaintiffs
initially
conceded
that
there
is
no
basis
to
believe
thatDefendantsareincapableofwithstandingagreaterjudgment,they
nowsuggestthatCitigroupssolvencyshouldnotbeconcededso
cavalierly.(ComparePls.Mem.inSupp.ofPreliminaryApprovalat11,
Dkt.No.154,withPls.Mem.inSupp.ofFinalApprovalat18,Dkt.No.
169.)However,plaintiffsignorethatCitigroupcarriesinsuranceof
unknownlimitsforthisliability,andtheyfailtomentiontheabilityofthe
individualdefendantstopaymorethanthesettlementrequiresthemto
paywhichis$0.Butwhilethedefendantsabilitytopaymoresuggestsa
settlementmightbeunfair,thisfactor,standingalone,doesnotsuggest
thatthesettlementisunfair.DAmato,236F.3dat86(citingPaineWebber,
171F.R.D.at129).
f. Therangeofreasonablenessofthesettlementfundinlightofthebestpossiblerecoveryandallattendantrisksoflitigation
Finally,essentialtoanalyzingasettlementsfairnessistheneedto
comparethetermsofthecompromisewiththelikelyrewardsof
litigation.Weinberger,698F.2dat73(quotingProtectiveComm.forIndep.
StockholdersofTMTTrailerFerry,Inc.v.Anderson,390U.S.414,42425
(1968)).The
U.S.
Court
of
Appeals
for
the
Second
Circuit
has
emphasized
that[t]hereisarangeofreasonablenesswithrespecttoasettlementa
rangewhichrecognizestheuncertaintiesoflawandfactinanyparticular
caseandtheconcomitantrisksandcostsnecessarilyinherentintakingany
litigationtocompletion.WalMartStores,396F.3dat119(quotingNewman
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v.Stein,464F.2d689,693(2dCir.1972)).Inotherwords,thequestionfor
theCourtisnotwhetherthesettlementrepresentsthehighestrecovery
possiblewhich
it
does
notbut
whether
it
represents
a
reasonable
one
in
lightofthemanyuncertaintiestheclassfaceswhichitdoes.Thebest
possiblerecoveryestimatedat$6.3billionisanastronomicalsum,but
$590millionmorethanhalfabilliondollarsisnosmallsumitself,and
theriskthattheclasswouldrecovernothingorwouldrecoverafractionof
themaximumpossiblerecoverymustfactorintothedecisionmaking
calculus.
Plaintiffscontendthat,takingintoaccountanumberofvariables,this
isatrulyimpressiverecovery.Thosevariablesincludethefollowing:that
theactionconcernedexposuretoparticularlycomplexrisksassociated
withCDOs;
that
only
one
corporate
defendant,
Citigroup,
can
contribute
tothefund;thatnoparallelSECinvestigationorearningsrestatement
precededtheinitiationofthissuit;thatrelatedsuitsagainstsomeofthe
samedefendantshavefailedorsettledforfarless;and,mostofall,thatthe
claimshererequireproofofscienter.(SeePls.Mem.inSupp.ofMot.for
FinalApprovalat1922.)Further,plaintiffsexpertspointoutthat,for
classactionswithroughlyequivalentallegeddamages,investorshave
recoveredamuchsmallerfractionoftheamountclaimedameanof2.2%
andmedianof1%comparedtoroughly9.4%here.(SeeDecl.ofJohnC.
Coffee,Jr.datedDec.6,201220,Dkt.No.167;Decl.ofGeoffreyP.Miller
datedDec.
6,
2012
28,
Dkt.
No.
166
(discussing
Jordan
Milev,
Robert
Patton&SvetlanaStarykh,NationalEconomicResearchAssociates,Recent
TrendsinSecuritiesClassActionLitigation:2011MidYearReview,(2011)).)
TheCourtneednotheapsuperlativesontheoutcomeinorderto
concludethatthesetwoGrinnellfactorstogetherweighheavilyinfavorof
approval.Thisrecoverystandsoutinthecrowd,andiswellwithinthe
rangeofreasonablenesswhencomparingthebestpossiblerecoverytothe
risksofcontinuedlitigation.Accordingly,nearlyalloftheGrinnellfactors
stronglysupportapproval.
4. OverallFairnessEvaluationTheCourthaspressedthepartiestoexplainwhytheyhaveagreed
thattheindividualsallegedlyresponsibleforCitigroupswrongswillpay
nothinginthissettlementwhileCitigroupthatis,itscurrent
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shareholders,includingmanyofthoseallegedlydefraudedby
defendantsfootsthebill.Afterall,corporationsonlyactthroughhuman
beings.
Indeed,
the
Courts
concerns
align
with
the
scholarly
work
of
one
ofLeadCounselsownexperts,ProfessorCoffee,andothers.See,e.g.,John
C.CoffeeJr.,ReformingtheSecuritiesClassAction:AnEssayonDeterrence
andItsImplementation,106Colum.L.Rev.1534(2006).TheCourtshares
ProfessorCoffeesconcernthatsecuritiesclassactionsinwhichthe
corporationanditsinsurerspayforthereleaseofclaimsagainstits
corporateofficersandexecutiveshaveessentiallynodeterrentvaluefor
thoseexecutivestheoneswhoseactionsmatter.TheCourtalsolaments
thattheshareholders,asowners,effectivelypaytheinsurancepremiums
andanysettlementamountsovertheinsurancecoverage,suchthatmost
settlementsare
essentially
transfers
of
wealth
from
all
present
shareholderstoasubsetofpastandpresentshareholders,withsignificant
sumssiphonedoffintheformoflawyersfeesandlitigationcosts.Id.at
155657.
TheCourt,however,concludesthattheRule23settlementapproval
processpresentsnooccasionfortheCourttoconsiderwhetherplaintiffs
decisionnottoseekpaymentfromtheindividualdefendantsand
Citigroupsdecisiontouseonlycorporateassetstopayforthereleaseof
allclaimsagainsthighrankingformeremployeesanddirectorsisfairto
Citigroupsshareholders.AstheSecondCircuithasexplained,district
courtsare
to
consider
only
whether
total
compensation
to
class
members
isfair,reasonable,andadequate,nothowthedefendantsapportion
liabilityforthatcompensationamongthemselves.InreWarnerCommcns.
Sec.Litig.,798F.2d35,37(2dCir.1986).Inotherwords,[t]headequacyof
thesettlementdoesnotdependupontheallocationofthatamountamong
theDefendants.InreNASDAQMkt.MakersAntitrustLitig.,184F.R.D.
506,512(S.D.N.Y.1999)(citingWarnerCommcns.,798F.2dat37)(denying
classmemberaccesstosealeddocumentdetailingapportionmentof
defendantspayments).Thattheapportionmentofliabilityhereandin
similarcasesmightnotserveasadeterrenttofuturecorporate
wrongdoingisaconcernforCongressandtheSEC,notforadistrictcourt
reviewingasecuritiesclassactionsettlement.SeeWarnerCommcns.,798
F.2dat37;NASDAQMkt.Makers,184F.R.D.at512.
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Withthatclarification,theCourtconcludesthatnearlyevery
traditionalindicatorofasettlementsfairnesspointsinfavorofapproval
of
this
settlement.
The
Court
finds
that
it
is
certainly
fair,
reasonable,
and
adequate.Accordingly,theCourtgrantsthemotionforfinalapprovalof
thesettlement.
IV. FINALAPPROVALOFTHEPLANOFALLOCATIONAsageneralrule,theadequacyofanallocationplanturnson
whethercounselhasproperlyappriseditselfofthemeritsofallclaims,
andwhethertheproposedapportionmentisfairandreasonableinlightof
thatinformation.PaineWebber,171F.R.D.at133.Anallocationformula
needonlyhaveareasonable,rationalbasis,particularlyifrecommended
byexperienced
and
competent
class
counsel.
In
re
WorldCom,
Inc.
Sec.
Litig.,388F.Supp.2d319,344(S.D.N.Y.2005)(citationsandquotation
marksomitted).Areasonableplanmayconsidertherelativestrengthand
valuesofdifferentcategoriesofclaims.InreTelik,Inc.Sec.Litig.,576F.
Supp.2d570,580(S.D.N.Y.2008)(citingInreGlobalCrossingSec.&ERISA
Litig.,225F.R.D.436,462(S.D.N.Y.2004)).
Theplanofallocationinthisaction(thePlan)derivesfromthe
allegedcorrectivedisclosuresandthemarketsreactiontothose
disclosures.Plaintiffsexpertestimatedtheportionofthedropinprice
followingeachcorrectivedisclosurethatisattributabletorevelationofthe
informationthatthemisstatementsconcealedpursuanttothelaw
governinglosscausation.ThePlanthentreatsthatportionoftheprice
dropastheestimatedinflationinthepriceofCitigroupstockforthe
periodbetweenthepriorcorrectivedisclosure(orthestartoftheclass
period)andthatcorrectivedisclosure.Theresultingscheduleofestimated
sharepriceinflationisthefoundationforthePlan:
TransactionDate PerSharePriceInflation
2/26/0711/4/07 $4.94
11/5/07
$3.38
11/6/0711/18/07 $1.72
11/19/071/14/08 $1.15
1/15/08 $0.71
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1/16/084/18/08 $0.10
Theinflationatthetimeofeachclassmemberspurchaseisthepershare
harmshe
initially
sustained
due
to
the
alleged
fraud.
If,
however,
the
class
membersoldbeforethefinalcorrectivedisclosure,thePlanthensubtracts
fromtheharmatthetimeofpurchasetheinflationinthepriceshe
receivedatthetimeofsale.Theresultthetotalharmatpurchaseminus
gainatsaleiseachclassmembersRecognizedLoss.Onceallclass
membersRecognizedLossesaredetermined,thePlanprovidesfora
proportionalallocationofthenetsettlementfund.Inotherwords,ifthe
totalRecognizedLossofallclassmembersistripletheamountofthe
settlementfundthatremainsafterdeductingcostsandfees,eachclass
memberwillreceiveonethirdoftheirRecognizedLoss.Noonehasfiled
anysubstantive
objection
to
the
fairness
of
that
formula.
TheprincipalobjectiontothePlancomesfromtheFACAPobjectors
andrelatestotheapplicationofitsunderlyingformulatoFACAP
participantspurchases.ClassmemberswhoacquiredtheirCitigroup
stockthroughtheFACAPsemployeestockpurchaseplandidnot
purchasetheirsharesintraditionalopenmarkettransactions,andsothe
CourtmustclarifytheapplicationofthePlantotheirpurchases.
TheFACAPoperatedasfollows:InDecember,beforethestartofeach
calendaryear,employeeseligibletoparticipateintheFACAPdecided
whetherto
receive
part
of
their
compensation
for
the
year
in
the
form
of
Citigroupstock.Theparticipantagreedtohaveacertainamountofhis
pretaxpaycheckdeductedeachmonthtobeappliedtothepurchaseof
stock.Butthestockwasawardedaftercompletingeachsixmonthblockof
employmentbasedonanaverageoftheclosingpriceattheendofeachof
thosesixmonths,lessa25%discount.Forexample,theemployeewould
electtoparticipatethroughout2007inDecember2006.Eachmonth,money
wasdeductedfromhispaycheck.InearlyJuly,hereceivedanaward
basedonhiscontributionsoverthepriorsixmonthsandanaverageofthe
closingpriceonthelasttradingdayofeachmonthfromJanuarytoJune.If
theparticipant
had
committed
$1,000
per
month
and
the
average
of
the
six
closingpriceswas$40,suchthatthepriceafterdiscountwas$30,the
participantinJulywasawarded200shares($6,000dividedby$30).That
cyclerepeatedforJuly2007throughDecember2007basedonthesame
December2006election,withsharesthenawardedinJanuary2008.Thus,
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foreachaward,theparticipantcommitsinDecember,thepriceis
determinedusingmarketpricesfromsixdifferentdaysspreadoversix
months
(January
to
June
or
July
to
December),
and
the
shares
are
then
awardedshortlyafterthefinalpriceinputisdetermined.
ThepartiescontendthatonlytheJuly2007andJanuary2008awards
shouldbecompensatedunderthePlanbecausethosearetheonlyawards
thatoccurredduringtheclassperiod:February26,2007April18,2008.
TheFACAPobjectorscontendthattheJuly2008awardshouldalsobe
includedtotheextentthatparticipantscommittedduringtheclassperiod,
paidintotheFACAPduringtheclassperiodintheformofbothlaborand
payrolldeductions,andpaidapricedeterminedinpartbyclassperiod
marketprices.Insubstance,objectorscontend,thetransactionoccursin
monthlyinstallments
even
if
the
shares
are
awarded
in
semi
annual
blocks;thosemonthlywithdrawalsandpriceinputsdeterminedtheeffect
ofthefraudontheirpurchasesandsoshoulddeterminetheir
compensationhere.
TheCourtagreeswithobjectors.Thesettlingpartiesformalisticview
isinconsistentwiththeflexib[ility]requiredwhenapplyingSection
10(b)oftheExchangeAct.SeeSECv.Zandford,535U.S.813,819(2002);
SuperintendentofIns.v.BankersLife&Cas.Co.,404U.S.6,12(1971).Section
10(b)broadlyprohibitsfraudinconnectionwiththepurchaseorsaleof
any
security.
15
U.S.C.
78j(b).
The
employees,
having
already
committedtoparticipate,eachmonthhadmoneytakenfromtheirsalaries
topurchasesharesbasedonthemarketpriceattheendofeachmonth.
TheallegedfraudaffectedFACAPparticipantspurchaseofthesecurity
inmonthlyincrements,andsotooshouldtheirremedybecalculatedin
monthlyincrements.Treatingthepurchaseasoccurringinmonthly
installmentsforpurposesofthePlanbetteraccordswiththesubstanceof
thetransactionsandsobettereffectuate[s][thestatutes]remedial
purposes.SeeZandford,535U.S.at819.Ofcourse,theFACAP
participantscannothaveitbothways.IftheJanuary,February,andMarch
installmentsof
the
July
2008
award
are
included,
then
the
January
installmentoftheJuly2007awardmustbeexcludedbecauseitprecedes
thestartoftheclassperiod.
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Insum,theCourtconcludesthatthebasisforthePlanisrational,and
thatthePlanisfairandadequate.Thesharepriceinflationschedule
reflects
that
the
injuries
claimed
by
different
class
members
have
been
sustainedundersignificantlydifferent...factualcircumstances.See
PaineWebber,171F.R.D.at133.Theeffectofthefraudonthemarketprice,
andthustheharmsufferedbypurchasers,changedeachtimethemarket
learnedmoreofthetruth.TheCourtinterpretsthePlantoapplytotheFA
CAPobjectorsinpreciselythemannertheypropose.Accordingly,the
Courtgrantsthemotionforfinalapprovaloftheproposedplanof
allocation.
V. FEEAWARDA. PercentageoftheFundMethodwithLodestarCrossCheckCourtstraditionallyawardplaintiffscounselfeesinclassactions
basedoneitherareasonablepercentageofthesettlementfundoran
assessmentbythecourtofthemarketvalueoftheworkplaintiffs
attorneysperformed.Theformerisknownasthepercentageofthefund
method,andthelatteristhelodestarmethod.Incomplexsecuritiesfraud
classactions,courtshavelongobservedthatthethetrendinthisCircuit
hasbeentowardtheuseofapercentageofrecoveryasthepreferred
methodofcalculatingtheawardforclasscounselincommonfundcases.
Inre
Beacon
Assocs.
Litig.,
No.
09
Civ.
777
(CM),
2013
WL
2450960,
at
*5
(S.D.N.Y.May9,2013);seealso,e.g.,InreAvonProds.,Inc.Sec.Litig.,No.89
Civ.6216(MEL),1992WL349768(S.D.N.Y.Nov.6,1992).Infact,the
trendofusingthepercentageofthefundmethodtocompensate
plaintiffscounselinmajorsecuritiesfraudclassactionsisnowfirmly
entrenchedinthejurisprudenceofthisCircuit.
Butthatmethoddoesnotrenderthelodestarirrelevant.Itbears
emphasisthatwhethercalculatedpursuanttothelodestarorthe
percentagemethod,thefeesawardedincommonfundcasesmaynot
exceedwhatisreasonableunderthecircumstances.Goldbergerv.
IntegratedRes.,Inc.,209F.3d43,47(2dCir.2000)(citationomitted).Partof
thereasonablenessinquiryisacomparisonofthelodestartothefees
awardedpursuanttothepercentageofthefundmethod[a]sacross
check.WalMartStores,396F.3dat123(quotingGoldberger,209F.3dat
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50).Moreover,asLeadCounselsownexpertrecognizes,thelodestar
crosscheckisparticularlyimportantinsocalledmegafundsettlements
such
as
this
one.
(Miller
Decl.
32.)
The
cross
check
is
crucial
because
economiesofscalecouldcausewindfallsincommonfundcaseswith
largefunds,againsuchasthisone.SeeWalMartStores,396F.3dat121
(citingGoldberger,209F.3dat52).Forthatsamereason,courtshave
traditionallyawardedfeesforcommonfundcasesinthelowerrangeof
whatisreasonable.Id.Withthatbackground,theCourtconsidersthe
reasonablenessofKirbysrequestfor$97.5millioninattorneysfeesan
awardofroughly16.5%ofthe$590millionfund.
B. AssessingReasonablenessPursuanttoGoldbergerCourts
in
this
Circuit
determine
reasonableness
by
reference
to
the
factorssetforthinGoldbergerv.IntegratedResources,Inc.,andknownasthe
Goldbergerfactors:
(1)thetimeandlaborexpendedbycounsel;
(2)themagnitudeandcomplexitiesofthelitigation;
(3)theriskofthelitigation...;
(4)thequalityofrepresentation;
(5)therequestedfeeinrelationtothesettlement;and
(6)publicpolicyconsiderations.
WalMartStores,396F.3dat121(quotingGoldberger,209F.3dat50).The
Courtwillconsidereachfactorinturn.
1. TimeandLaborExpendedbyCounsel:TheLodestarAssessingtheextentoftimeandlaborexpendedeffectivelyentailsan
estimateofLeadCounselslodestar.SeeFebusv.GuardianFirstFunding
Grp.,LLC,870F.Supp.2d337,339(S.D.N.Y.2012)(citationomitted).The
lodestarisbaseduponthenumberofhoursreasonablyexpendedby
counselon
the
litigation
multiplied
by
areasonable
hourly
rate.
Reiter
v.
MTANewYorkCityTransitAuth.,457F.3d224,232(2dCir.2006)(citing
Blanchardv.Bergeron,489U.S.87,94(1989)).
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LeadCounselandthelawfirmsthatworkedwithitexpendedvast
numbersofhoursandshouldbecompensatedfortheirefforts.Whatisin
dispute
is
whether
all
of
those
hours
and
the
hourly
rates
profferedto
translatethosehoursintoahypotheticalfeearereasonable.Becausethe
lodestarisbeingusedmerelyasacrosscheck,itisunnecessaryforthe
Courttodelveintoeachhourofworkthatwasperformedbycounselto
ascertainwhetherthenumberofhoursreportedlyexpendedwas
reasonable.InreIPOSec.Litig.,671F.Supp.2d467,506(S.D.N.Y.2009)
(citingGoldberger,209F.3dat50).Similarly,theCourtneednotdetermine
withprecisionareasonablehourlyrateforeachattorney.Butthelodestar
serveslittlepurposeasacrosscheckifitisacceptedatfacevalue.
TheCourtfirstidentifieshoursthatitconcludeswerenotreasonably
expendedfor
purposes
of
Lead
Counsels
lodestar.
The
hours
at
issue
includethefollowing:(1)Entwistle&Cappuccisworkunsuccessfully
seekingappointmentasleadcounsel;(2)vastnumbersofhoursspenton
discoveryaftersettlementwasreached,largelybycontractattorneys;and
(3)instancesofwasteandinefficiencythatrequireanacrosstheboard
lodestarcut.TheCourtnextdeterminesthatareasonableclient,on
balance,wouldaccepttheratessubmittedforassociates,counsel,partners
andsupportstaff,butwouldnotpaytheprofferedassociatelevelratesfor
theservicesofcontractattorneystoreviewdocuments.
a. HoursreasonablyexpendedTheCourtstaskistoprobethevalidityoftherepresentationsthata
certainnumberofhourswereusefullyandreasonablyexpended.Lunday
v.CityofAlbany,42F.3d131,134(2dCir.1994).
i. The$4millioninlodestarthatEntwistle&Cappucciexpendedunsuccessfullyattemptingtobecomelead
counselisnotcompensable.
Noteveryhourworkedbyeveryattorneywhoseekstorepresenta
classis
due
compensation
from
the
class.
Lead
Counsel
has
included
in
the
lodestarthehoursincurredbyattorneysatotherfirmsthatwereassisting
Kirbyinprosecutingthisaction,includingthehoursofEntwistle&
Cappucci.ButEntwistle&Cappuccishoursarenotlimitedtoitswork
assistingLeadCounsel;thosehoursinclude$4millionEntwistle&
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Cappuccispentattemptingtosecureappointmentasleadcounselfor
itselfincludingitsmotiontoreconsidertheCourtsappointmentofKirby
as
lead
counsel.
The
hours
Entwistle
&
Cappucci
spent
unsuccessfully
seekingappointmentshouldnotyieldcompensationfromaclassthey
werenotappointedtorepresent.LeadCounselcannot,bylaterchoosing
Entwistle&Cappuccitoassistitsefforts,convertthehoursEntwistlespent
unsuccessfullyattemptingtobecomeleadcounselintocompensabletime.
Itiswellestablishedthatthecommonfunddoctrinepermits
attorneyswhoseworkcreatedacommonfundforthebenefitofagroupof
plaintiffstoreceivereasonableattorneysfeesfromthefund.Victorv.
ArgentClassicConvertibleArbitrageFundL.P.,623F.3d82,86(2dCir.2010).
Althoughcourtshavetypicallyappliedthatdoctrinetocompensate
attorneyswho
performed
work
in
the
early
stages
of
aclass
action
but
werenotselectedasleadcounsel,suchworkiscompensableonlytothe
extenttheattorneysworkconfer[red]substantialbenefitsontheclass.
Id.at87.Asinterimleadcounsel,Kirbywasfreetoseekassistancefrom
otherfirms,includingfromrecentlycompetingmovantsforthesame
position,andtoincludeinthelodestartheworkthosefirmsreasonably
performedunderKirbyssupervisioninprosecutingthecase.Butthe
decisionbyKirbytoseektheassistanceofEntwistle&Cappuccicannot
turn$4millionintimeEntwistle&CappuccispentopposingKirbys
appointmentasleadcounselintocashforthelawyers.
KirbysargumentsinfavorofincludingEntwistle&Cappuccishours
priortothealliancebetweenthosefirmsarethefollowing:(1)that
Entwistle&Cappucciwasattemptingtobenefittheclassbecausethatfirm
wasattemptingtobeappointedinterimleadcounselandrepresentthe
class;(2)thatthecontestationoftheinterimappointmentisitselfabenefit
totheclassinsofarascompetitionyieldsthebestrepresentative;and(3)
thatsomeofEntwistle&Cappuccishoursbenefittedtheclassinsofaras
theultimateconsolidatedcomplaintincorporatedatleastinpartEntwistle
&Cappuccispriorworkproduct.
LeadCounsels
first
argument
is
premised
upon
an
untenable
read
of
thecaselawthatconfusesintentionswithimpact;theworkmusthave
actuallybenefitedtheclass.SeeInreElanSec.Litig.,385F.Supp.2d363,
374(S.D.N.Y.2005)(strikingfromlodestarunappointedcounselshours
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30
becausetheireffortsdonotappearappreciablytohavebenefittedthe
Class).AcceptingLeadCounselspositionwouldpermitvarious
competing
firms
to
extract
compensation
for
duplicative
work.
Further,
it
wouldencourageappointedcounseltochoosetheircocounselnotfor
theirskillorknowledgebutfortheportfoliooflodestarinflatingwork
alreadycompleted.
LeadCounselssecondargumentactuallysupportstheinclusionof
Kirbyshours,butnottheinclusionofEntwistle&Cappuccis.TheCourt
agreesthattheinterimappointmentprocessisnecessarytotheprogressof
theaction,andthattheclassbenefitsfromtheselectionofcapablecounsel.
TheCourtselectedKirby,theactionproceeded,andtheclassthus
benefitedfromKirbyseffortstosecureappointment.ButtheCourt
rejectedEntwistle
&
Cappuccis
arguments
on
behalf
of
the
Funds
against
Kirbysappointment;Entwistle&Cappuccianditsclientseven
abandonedthoseargumentsinwithdrawingtheirmotionfor
reconsideration.Kirbycannotseriouslyarguethatthoseunsuccessful
effortstoremoveKirbyconferredsubstantialbenefitsontheclass.Seeid.
(unappointedcounselhadnotestablish[ed]whytheyshouldbe
compensatedfor,amongotherthings,seekingbutfailingtobeappointed
leadcounsel).
Finally,thethirdargumentismeritoriousasamatterofdoctrinebut
not
supported
on
this
record.
Courts
have
invoked
the
common
fund
doctrinetoawardunappointedcounselreasonablecompensationfor
uniqueworkthatinfactbenefitedtheclass.SeeVictor,623F.3dat87.But
nonleadcounselisnotautomaticallyentitledtoanawardfroma
commonfundeachtimeoneofitsclaimsisutilizedinthecomplaintthat
leadcounselultimatelyfiles.Id.Entwistle&Cappuccihasarguedthatits
workontheFundscomplaintwasincorporatedintotheoperative
consolidatedcomplaintandthusbenefittedtheclass.NeitherEntwistle&
CappuccinorKirbyhasidentifiedanyspecificallegationsthatwouldnot
havebeenincludedbutforEntwistlespreappointmentefforts;theyhave
onlyidentified
many
allegations
that
were
included
in
both
the
Funds
complaintandtheconsolidatedcomplaint.Nor,morespecifically,have
theyshownthattheireffortsaddedtothecomplaintaclaimthatsurvived
themotiontodismiss.Workthatisotherwisenoncompensablecannotbe
billedtotheclassbasedonlyonCounselssaysothattheworkconferred
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31
anunspecifiedbenefit.LeadCounselhavefailedtocarrytheirburdenof
demonstratingthatEntwistle&Cappuccisworkpriortothosefirms
union
as
co
counsel
conferred
a
substantial
benefit
on
the
class.
Accordingly,theCourtwillstrikefromthelodestarEntwistle&
CappuccishoursthatwerenotundertakenatKirbysdirection.The
impermissiblehoursareanotinsignificantfractionofthetotallodestar.
Indeed,Entwistle&Cappuccispreappointmentlodestardwarfseven
thatofLeadCounselforthesametimeperiod.(SeePre andPostLead
PlaintiffAppointment,Ex.DtoPls.Resp.toCourtsMar.1,2013Order
(FeeApp.Supp.),Dkt.No.211.)TheCourtstrikes$4millionfromthe
lodestar,whichisEntwistle&Cappuccistimeforprecomplaint
investigation,draftingitscomplaint,andopposingtheappointmentof
Kirby.(See
Entwistle
Attorney
Time
Details,
Ex.
A
to
Fee
App.
Supp.
(all
entriesupthroughJan.18,2011).)Toputthesehoursinperspective,that
partofEntwistle&Cappuccislodestarsimplydedicatedtoseeking
appointmentandopposingKirbysappointment$1.5millionismore
thandoublethelodestarthatallplaintiffsfirmsspentopposing
defendantslatermotiontodismissthecomplaint.(SeeCourtHearing
Preparation&Attendance,Ex.FtoFeeApp.Supp.;BriefingTime&
LodestarDetail,Ex.KtoFeeApp.Supp.)
ii. Thepostsettlementhoursunrelatedtosettlementmatters,
totaling
$7.5
million
in
lodestar,
were
not
reasonablyexpended.
ObjectorFrankcorrectlychallengesthereasonablenessofthousandsof
hoursexpendedondocumentreviewanddiscoveryrelatedtasksafterthe
partiesreachedasettlementagreementinprinciple.LeadCounseldonot
disputethatateamofcontractattorneysspentmanyhoursreviewing
documentsaftertheagreementinprinciplewasarrivedat.Norcanthey
evendisputethatmanyoftheseattorneysbegantheirworkonthecaseat
thesametimethepartiesreachedtheagreementonthesettlementamount
on
or
about
May
8,
2012.4
Now,
however,
Counsel
contends
that
they
had
4 Inresponsetocontentionsthatithadfailedtoidentifycontractattorneysand
improperlybilledforhoursundertakenaftersettlementwasreached,LeadCounsel
(footnotecontinuesonnextpage)
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32
notreachedadefinitive,bindingagreementandthushadtobereadyto
concludediscoveryonashorttimetable.Therefore,Counselbroughton
twenty
additional
contract
attorneys
and
had
them
commence
extensive
documentreviewwork.TheCourtconcludesthatareasonablepaying
clientwouldnothaveauthorizedorpaidforthesehours.
Tobegin,uponreachingtheagreementinprinciple,theparties
representedtotheCourtthatsettlementwasessentiallyafaitaccompli.
Further,LeadCounselsownsubmissionsinsupportoftheirfeerequest
similarlyreflectedtheirviewthatthecasehadbeensettled.Counsel
initiallyrepresentedthatatthetimethepartiesreachedtheSettlement,
therewerestillovertwomonthsremainingbeforethediscoverycutoffset
bytheCourt,includingdepositionsofnumerousadditional
witnesseswithall
depositions
after
May
9cancelled.
(Joint
Decl.
77
(emphasisadded);cf.StipulationandRevisedSchedulingOrderdatedFeb.
2,2012,Dkt.No.150(discoverycutoffonJuly13).)TakingLeadCounselat
itsword,thepartiesreachedtheSettlementbyMay8,2012.
Actions,ofcourse,speaklouderthanwords.Savefortheballooningof
contractattorneyhoursatissue,LeadCounselslodestarreportconfirms
thatbyMay2012thepartieshadlittledoubtthatthiscasewassettling.
MostoftheKirbyassociatesandpartners,asdistinctfromseparately
failedtonoteanywhereinitsdetaileddescriptionsoftheworkthatthe
supplementalteamthatperformedmuchofthisworkwasnothireduntilMay
2012.(See,e.g.,JointReplyDecl.106.)TheonlywaytheCourtwasabletodetermine
thatwasbynoticingthatuptotwentynewlyhiredattorneysspentfulldaysreading
thecomplaintinthesameweekthepartiesreportedtheirsettlementtotheCourt.(See,
e.g.,KirbyProjectSpecificAttorneyTimeDetails,Ex.BtoFeeApp.Supp.(attorney
beganreadingtheintroductionandsectionIoftheamendedcomplaintonMay5,
2012andfinishedonMay9;anotherbegantoreadcomplaintonMay14,2012and
finishedonMay17).)Inasimilarvein,Counselfailedtonoteanywherethatthe
contractattorneysatissuewerecontractattorneyshiredonanhourlybasisforthis
project
rather
than
being
firm
associate
attorneys.
(See,
e.g.,
Kirby
McInerney
LLP
LodestarReport,Ex.EtoJointDecl.)Counselthencontended,inresponsetoFranks
objectionandtheCourtsquestions,thatthoseattorneysstatusshouldhavebeen
obviousfromtheabsenceofanyfirmbiographiesforthoseattorneysprovidedwith
thefeerequest.Counselisexpectedtobemoreforthcoming.
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retainedcontractattorneys,spenttheirtimeafterMay8negotiatingastay
ofdiscovery,andthenfinalizingthesettlementanddraftingpreliminary
approval
papers
(all
of
which
is
properly
compensable)or
working
on
othermatters.(SeeKirbyAttorneyTimeDetails,Ex.AtoFeeApp.Supp.
(attorneyTeliasslastentryonMay8);id.(attorneyMasterssentriesafter
May8,2012);id.(entriesofattorneysLinden,Hume,andMcNeelafrom
May10toMay15,2012concerningstayofdiscovery).)
Withthatbackground,thequestioniswhetherahypotheticalpaying
clientwouldhavepaidforthiswork.Inanalogouscircumstances,theInre
AOLTimeWarner,Inc.Securities&ERISALitigationcourtreducedthe
lodestarby5,000associatehoursfordocumentreviewperformedafter
signingamemorandumofunderstandingandbeforeasettlement
agreementwas
signed
because
few
private
clients
paying
hourly
fees
wouldabsorbthecostofsuchunabatedworkoveratwomonthperiod.
No.02Civ.5575(SWK),2006U.S.Dist.LEXIS78101,at*73(S.D.N.Y.Sept.
28,2006)(R&RofSpecialMaster),adopted,2006U.S.Dist.LEXIS77926
(S.D.N.Y.Oct.25,2006).ThisCourthasreachedthesameconclusion
regardingthe16,291.8hoursatissuehere.
TherealitywasthatasettlementwasreachedonMay8andthe
partiestelephonedtheCourttwodayslatertoreportthatintheviewof
theparties,asettlementwasreachedsubjecttotheCourtsapprovaland
draft
documents.
(See
Tr.
of
Hearing
dated
Apr.
8,
2013
at
73:24
74:1,
Dkt.
No.262.)Atthesametime,LeadCounselwashiringascoreofnew
contractattorneysandsettingthemandotherattorneystoworkon
documentreview.ThehoursLeadCounselexpendedfinalizingthe
settlementareappropriatelyincludedinthelodestar.Allotherhoursafter
theMay8agreement,thevastmajorityofwhichconsistofcontract
attorneysperformingbasicdocumentreview,serveonlytoinflatethe
lodestar.5TheCourtconcludesthatthosehourswerenotusefullyand
5
Although
the
evidence
is
clear
that
the
parties
were
confident
that
they
had
settledtheactioninearlyMay,themonthsofMay,June,andJuly2012havethethree
highestcontractattorneylodestartotalsofthisfiveyearlitigation.(SeeKirbyProject
SpecificAttorneyTimeDetails,Ex.BtoFeeApp.Supp.;Decl.ofJohnW.Toothman
datedMar.15,201392.)
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reasonablyexpended.SeeLundayv.CityofAlbany,42F.3d131,134(2d
Cir.1994).Accordingly,theCourtstrikesthose16,291.8hours,
representing
$7.5
million
dollars,
from
the
lodestar.
iii. Thelodestarshouldbereducedforwasteandinefficiency.
Inacaseofthismagnitude,itisinevitablethatattorneyswillspend
morehoursthanturnouttobenecessaryonsomeprojects.Butitis,or
oughttobe,farfrominevitablethatattorneyswillattempttochargethose
hourstotheirclient.SeeHensleyv.Eckerhart,461U.S.424,434(1983)
(counselseekingfeeawardmustexercisebillingjudgment,which
entailsgoodfaithefforttoexcludefromafeerequesthoursthatare
excessive,redundant,
or
otherwise
unnecessary).
And
some
instances
of
wasteandinefficiencyaresoegregiousthattheirinclusioninamotionfor
feescastsashadowoverallofthehourssubmittedtotheCourtjustas
thethirteenthstrokeofaclockcallsintodoubtwhetheranyprevious
strokewasaccurate.
Frankhighlightedtwoexampleswherecontractattorneysspentan
unacceptablenumberofhoursdigestingsingledaydepositions:239hours
(for$89,625)ononeand94.25hoursonanother(for$51,837.50).(SeeSupp.
Decl.ofTheodoreH.FrankdatedMar.15,201311,Dkt.No.218.)Frank
contendsthattheCourtshouldtreattheseexamplesasrepresenting
consistentpracticeanddrasticallycutnotonlythesehours,butallthe
hoursofmanyattorneys.LeadCounselagreesthatthese333hourswere
wastefulandwithdrawsthemfromthelodestarwithoutfurtherdiscussion
ofinefficiency.Neitherapproachisappropriate.
Frankischerrypicking,butCounselcannotagreetotossoutthose
cherriesandpretendnoothersareripeforpicking.Indeed,theCourts
ownreviewrevealsanumberofsimilarinstancesofwaste.Twoother
contractattorneys,forexample,appeartohavespentoverthreeweeksof
eighthourdayseachdigestingaonedaydeposition:157.5hours(for
$66,937.50)for
one
attorney
and
142.5
hours
(for
$53,437.50)
for
the
other.
(SeeKirbyProjectSpecificAttorneyTimeDetails,Ex.BtoFeeApp.Supp
(reviewofBrushammardepositionandMarsiglianodeposition);Pls.
CounselAppearinginDepositions,Ex.EtoFeeApp.Supp.(Investor
RelationHeadArthurTildesley,Jr.beingtheonlytwodaydeposition).)
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Multiplecontractattorneysinthelodestarreportspentmorethana
yearsimplylistingdocumentreviewasthetaskperformedallday,
every
day,
for
approximately
$1.5
million
in
lodestar
for
each
attorney.
(See,e.g.,KirbyProjectSpecificAttorneyTimeDetails(attorneyM.B.s$1.7
millioninlodestarandattorneyD.F.s$1.5million,bothlistingdocument
revieweverydayfromMar.14,2011toJuly19,2012).)Counselasserts
thatdocumentreviewwaslistedmerelyasanadministrative
convenienceinsteadofreproducingmoredetailedhandwrittenrecordsof
contractattorneyshours.(SeePls.Supp.ReplyMem.at26,Dkt.No.232.)
Butwhatevertimetheconveniencesaved,classcounselcannotpresent
effectivelyunreviewablehoursinthenameofconvenience.Ontheother
hand,theCourtfinds,forexample,thestaffingfordepositionsandthe
hoursLead
Counsel
devoted
to
court
filings
and
conferences
are
well
withintherangeofreasonable.
Inbalancingtheevidenceofwasteandunreviewablehoursagainst
themanyinstancesofreasonablecharges,theCourtconcludesthatthe
lodestarshouldbefurthercutby10%toaccountforwasteandinefficiency
thatapayingclientwouldnotaccept.Toavoiddoublecountingthecuts,
theCourtwillmakethisacrosstheboardadjustmentonlyafterallother
cutshavebeenmade.
b. ReasonablehourlyratesThelodestarfigureshouldbebasedonmarketratesinlinewith
those[rates]prevailinginthecommunityforsimilarservicesbylawyersof
reasonablycomparableskill,experience,andreputation.Reiter,457F.3d
at232(quotingBlumv.Stenson,465U.S.886,896n.11(1984)).TheCourt
mustdeterminetherateapayingclientwouldbewillingtopay.See
ArborHillConcernedCitizensNeighborhoodAssnv.Cnty.ofAlbany,522F.3d
182,190(2dCir.2008);seegenerallyMcDanielv.Cnty.ofSchenectady,595
F.3d411,42122(2dCir.2010)(discussinguseofArborHillbasedlodestar
calculationaspartofcrosscheckoncommonfundpercentageaward).
Because
legal
services
are
not
a
commodity
traded
on
an
open
market,
the
priceforsimilarservicescanvarysignificantlybasednotonlyonthe
product,butalsoontheclient.Clientswithgreaterbargainingleverage
thosethatconsumethemostservicesandareabletopayforthemare
generallyabletonegotiatemorefavorablelegalrates.Inconsideringthe
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hypotheticalpayingclient,theSecondCircuitinstructscourtstoconsider
whetherafullyinformedgroupofplaintiffsabletonegotiate
collectively
would
agree
to
a
given
rate.
Goldberger,
209
F.3d
at
52.
In
otherwords,iftheclasswereareasonable,payingclientfreetochooseits
counselandnegotiaterates,whathourlyratewoulditacceptforthe
attorneysandotherprofessionalstaffemployedhere?
TheCourtsfocusisontheprofferedhourlyratesfortheservicesof
contractattorneysattorneyswhoarenotpermanentemployeesofthe
lawfirm,arehiredlargelyfromoutsidestaffingagencies,arenotlistedon
counselslawfirmwebsiteorresume,arepaidbythehour,andarehired
onatemporarybasistocompletespecificprojectsrelatedtoaparticular
action.TheCourtfocusesmorecloselyonthecontractattorneyratesnot
onlybecause
those
rates
are
overstated,
but
also
because
the
total
proposedlodestarforcontractattorneysdwarfsthatofthefirmassociates,
counsel,andpartners:$28.6millionforcontractattorneyscomparedtoa
combined$17millionforallotherattorneys.(Ltr.ofPeterS.Lindendated
Apr.7,2013(LindenLtr.),Dkt.No.264.)TheCourtfindsthat,on
balance,theproposedratesforfirmattorneysarereasonable.Theblended
hourlyrateforassociateshereis$402,andtheblendedrateforpartners
andcounselis$632.(Id.)Theseratesarewithintherangeacceptedinthis
district.See,e.g.,InreTelik,Inc.Sec.Litig.,576F.Supp.2d570,589
(S.D.N.Y.2008).Inaddition,theCourtfindstheratesforsupportstaff,
whotogether
make
up
roughly
$6
million
of
the
proposed
lodestar,
are
reasonable.
Inattemptingtodeterminethemarketratefortheservicesofthe
contractattorneyshere,theCourthasbeenpresentedwithataleoftwo
extremes.Atoneextreme,objectorFranksuggeststhatthemarketratefor
contractattorneyservicesistheratethatthelawfirms,notclients,payfor
theservicesofcontractattorneys,andthatinanyeventnoreasonable
payingclientwouldacceptarateabove$100perhour.LeadCounsel
respondsthatthesecontractattorneysperformedtheworkof,andhave
thequalifications
of,
law
firm
associates
and
so
should
be
billed
at
rates
commensuratewiththeratesofassociatesofsimilarexperiencelevels.The
proposedcontractattorneyratesreachashighas$550,withablended
hourlyrateof$466higherthanthe$402perhourrateforassociates!
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(LindenLtr.)Theprecisetruthisunknown,butwithoutdoubtlies
betweenthesetwoextremes.
i. Courtsagreethatcontractattorneyhoursarenotfactuallyequivalenttoassociatehours.
Frankcontends(1)thatthecontractattorneysshouldbetreatedasa
litigationcostandnotincludedinthelodestaratall,and(2)that,if
included,alodestarmultipliercannotbeappliedtotheirworkbecauseto
dosopermitstoohighamarkup.Neitherargumentprevails.First,courts
routinelyrejectclaimsthatcontractattorneylaborshouldbetreatedasa
reimbursablelitigationexpense.SeeCarlsonv.XeroxCorp.,596F.Supp.2d
400,409(D.Conn.2009)(collectingcases),affd,355F.Appx523(2dCir.).6
Second,courts
have
also
regularly
applied
alodestar
multiplier
to
contract
attorneyshours.TheCourtshouldnomoreattempttodeterminea
correctspreadbetweenthecontractattorneyscostandhisorherhourly
ratethanitshouldpassjudgmentonthedifferentialbetweenaregular
associateshourlyrateandhisorhersalary.InreAOL