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Newark, N.J.-In July 2002, after 30 months of litigation, U.S. District Judge Joel Pisano stepped in to mediate the Lucent Technologies Inc. securities class action. The result was his approval of a settlement worth about $650 million, the third-largest securities settlement ever. Now comes the hard part for the judge: deciding how much to pay the plaintiffs’ lawyers, who collectively are seeking $107 million in fees for their efforts in In re Lucent Technologies Inc. Securities Litigation, No. 00-CV-621 (D.N.J.). The co-lead counsel for the biggest of five consolidated cases-Milberg Weiss Bershad Hynes & Lerach and Bernstein Litowitz Berger & Grossman, both of New York-are asking for 17% of the $517 million they negotiated for in the class action, almost $88 million. While the two firms would get the bulk of the fees, some would be shared with dozens of firms nationally that have filed claims. The balance would go to the legal teams that represented claimants in the four other cases-employees, bond and note holders, and shareholders of another company, Winstar, harmed by Lucent’s alleged wrongdoing. Those plaintiffs’ lawyers are seeking a higher-percentage reward, which is not unusual, as fees are usually lower for the bigger settlements. When Pisano approved the settlement, only 36 claimants out of a possible 3 million had objected to the deal and decided to opt out, thus reserving the right to sue on their own. All fees and expenses-the co-lead counsel also seek $3.5 million in expenses-will come out of the five funds set up for the claimants. Those 36 claimants all made the same point: The fees are excessive compared with the payout, which amounts to no more than 15 cents a share and possibly as low as 11 cents, for anyone who bought Lucent stock before it crashed. Typical was T. Tucker Hobgood, who bought 100 shares at $74 a week before it dived to the mid-50s, at which point he bought another 50 shares. All told, the price of Lucent stock dropped from almost $80 in 1999 to 55 cents by the fall of 2002 after disclosures of inflated revenue reports and accounting irregularities. “I’ll get $15, with the plaintiffs’ lawyers making about $4.50 off me and getting reimbursed another $1.50,” Hobgood wrote to Pisano. “Not to unduly hammer only one side of the equation. The company I still own part of paid untold sums to its lawyers to grind the plaintiffs under their feet. I lost virtually my entire investment of $10,000. There is nothing fair about this process or this settlement to me. It is a complete waste of time to recover less than one-fifth of one percent of a loss.” Hobgood, an Atlanta lawyer, was backed by John Pentz of the Class Action Fairness Group in Sudbury, Mass., who weighed in on behalf of another claimant. Pentz said the plaintiffs’ fee should be 10%. He pointed to two other huge class actions in New Jersey federal court, In re Cendant Corp. Prides Litigation and In re Prudential Ins. Co. Sales Practice Litigation. In the Cendant settlement of $3.19 billion in 2000, the fee came to 1.7%. In the Prudential case, which settled in excess of $2 billion, the 3d U.S. Circuit Court of Appeals pegged the fee at 6.7%. Lawyers defend fees But the lead plaintiffs’ lawyers say the fee request is fair and justified, particularly in light of what shareholders may receive down the road if Lucent bounces back. That’s because much of the settlement is in the form of stock and, more important, warrants. “The settlement is extraordinary for two reasons,” said Daniel Berger of Bernstein Litowitz. “First, the settlement allows Lucent to continue as a viable company and get back on its feet without a trial that it would have been facing, in bankruptcy. Under that scenario, equity holders would have received zero. Second, it’s a large amount if Lucent does well,” Berger explained. The approved global settlement for the five major cases calls for claimants to receive $315 million in stock; $24 million in the stock of Lucent spinoff Avaya Inc.; $148 million in cash from the company’s directors-and-officers liability policy; and 200 million warrants. Lucent also will pay up to $5 million cash to cover the expenses of the claims administrator, the only cash coming from the company. One lawyer in the case, not on the plaintiffs’ side, points out that the trio of carriers holding the directors-and-officers policies put the composite $148 million policy limit on the table relatively early. He said the fee seems high in light of how easy it was to get the cash part of the settlement. The warrants allow a one-for-one purchase of Lucent stock at $2.75 a share. When the deal was approved in principle last March, the stock was well below $2.75 but has since climbed above that level, closing on Dec. 30 at $2.86 after rising as high as $3.45 in November. The fluctuations of the stock of Lucent and Avaya, and thus the value of Lucent warrants, make the valuation of the settlement a floating number. When the deal was initially agreed to, it was valued at $620 million, but by the settlement hearing on Dec. 12 it was worth more than $650 million as Lucent’s stock price rose. Lucent’s lawyers are taking no position on the main fee application of the co-lead counsel. They do, however, object to the fee request of the plaintiffs’ lawyers in one of the five cases. That is the class action involving employees who held Lucent stock in their 401(k) or through stock-purchase programs. Those claimants will receive $69 million, almost all in stock, based on the valuation earlier this year. The fee request for the employees’ lawyers, Philadelphia’s Berger & Montague, is 20%. Todd Collins, the firm partner handling the matter, did not return phone calls seeking a comment. Lucent’s near collapse is among the more spectacular in American history. In 2000, the company, which designs, builds and sells communications, data networking and business telephone systems, reported revenues of $33.81 billion and net income of $1.22 billion. After shedding more than 100,000 employees, Lucent’s revenues were down to $8.47 billion for its fiscal year that ended Sept. 30, 2003. During the three years ending last September, the company reported net losses totaling close to $29 billion, fueled not just by a loss of business but by charges to correct several inflated quarterly reports, including a $679 million write-down for improperly recognized revenues taken in December 2000. However, Lucent reported a small profit for its last quarter and projects a profitable fiscal 2004. Moreover, earlier this year, it also settled the charges brought by the Securities and Exchange Commission, without having to pay a financial penalty. To bolster their fee request, Milberg Weiss partner David Bershad and Berger of Bernstein Litowitz retained Columbia Law School Professor John Coffee. He submitted a 27-page certification supporting the $88 million payout to the two class action firms. He said there were “significantly greater legal and economic risks” than in similar cases, partly because the case did not settle quickly and was so vigorously litigated by Lucent for almost four years. Coffee said it’s unfair to compare this case to the Cendant case’s “relatively quick and easy settlement.” He pointed to the 3d Circuit’s observation that Cendant’s management “virtually conceded liability,” which Lucent has not. The professor listed the 22 largest fee awards for class actions, which showed that 17 were above the 17% being sought in the Lucent case, with only five falling below that figure. Coffee said that according to a study by a consulting firm, Logan, Moshman and Moore, the average fee award for the largest 64 class actions, those topping $100 million, is 15.1%. The average fee jumps to 20.9% when the 26 cases that settled for $75 million to $100 million are considered. It rises to 23.6% for those cases valued at $50 million to $75 million.

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