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A federal judge has given a preliminary green light on a settlement for hundreds of class actions alleging the fraudulent inflation of technology stocks by companies bringing their shares to market for the first time. Judge Shira Scheindlin of the Southern District of New York last week tentatively approved, with some changes, a settlement reached in June 2003 between lawyers for investors and issuers for some 300 companies making initial public offerings at the height of Wall Street’s high-tech boom. The companies and 55 investment banks were named in more than 800 suits filed in the wake of the collapse of the stock market. Plaintiffs claimed that the process of going public for Internet start-up companies, such as Corvis and DrKoop.com, was corrupted by analyst conflicts and improper tie-in agreements. The cases consolidated before Scheindlin for pretrial supervision under In re Initial Public Offering Securities Litigation, No. 21 MC 92, also accused the investment banks of requiring favored customers interested in shares of certain hot initial offerings to participate in the scheme and help propel the price upward by agreeing in advance to buy blocks of stock in those companies. Some customers were allegedly asked to buy blocks of stock in other companies. And the issuing companies themselves, as well as more than 1,000 individual directors and officers, allegedly benefited from the scheme by using the artificially inflated stock prices to raise capital for the company or to sell their own personal holdings at higher prices. The settlement reached in June 2003 sets a $1 billion ceiling for investor recovery from the issuing companies, reduced by any amount the investors win from the banks, and it assigns any claims the issuing companies might have against the securities firms. “Despite the apparent magnitude of the billion dollar guarantee, this settlement is not solely-or even primarily-about monetary recovery,” Scheindlin said in her 52-page opinion. Instead, she said, the “real” value of the settlement is the assignment of claims and the promise by the issuers to help investors pursue those claims. For the most part, the claims focus on excess compensation. Plaintiffs’ lawyers, led by New York firms Milberg Weiss Bershad & Schulman and Bernstein Liebhard & Lifshitz, charge that the securities firms required kickbacks of profits earned by their favored clients in the initial offerings, compensation that allegedly exceeded by a good measure the customary 7% investment fees. In fact, Scheindlin noted, “there is a substantial likelihood that there will be no monetary value to this settlement.” She continued, “Given the sheer number of class actions governed by this proposed settlement and the magnitude of damages alleged in each, the actual monetary value of this proposed settlement will almost certainly be either” $1 billion or nothing. “The value of these benefits should not be understated,” she said. Class counsel fees “Although the potential monetary payout from the billion dollar guarantee is uncertain (and may, in fact, amount to nothing at all if recovery from the underwriters exceeds one billion dollars), the guarantee of some recovery confers a distinct benefit to the classes,” she said. “In addition to affording a minimal recovery for class members, the billion dollar guarantee provides a reliable source of future revenue for class counsel. In proceedings as complex as these, the potential risk for plaintiffs’ counsel is enormous.” Scheindlin said the outlay of expenses and attorney time over the last four years since the cases were first filed “must already be astronomical,” and will keep growing as the suits against the underwriters proceed. “The presence of a guaranteed monetary payout to the class-and, through calculation of fees, to its attorneys-ensures that counsel will receive some compensation for their efforts,” she said. “In litigation as potentially draining as these coordinated cases, providing a reasonable fallback source of recovery ensures that class counsel will retain the capacity and zeal to pursue the classes’ claims against the remaining defendants, which is, in itself, a benefit to the class.” In a 148-page opinion in October 2004, Scheindlin certified six class actions in the litigation against the defendant securities firms. The certifications in the six class actions, which involved VA Linux Inc. and five other companies, were meant to provide “strong guidance” as to class status in the hundreds of other cases against the securities firms. In last week’s opinion, Scheindlin objected to a clause in the stipulation of settlement that bars the underwriters from claims against the issuers. She called the clause a “one-sided arrangement” between the plaintiffs and the issuing companies, and said she had “no authority” to deviate from the Private Securities Litigation Reform Act’s settlement discharge provision, which “both mandates a mutual bar order and limits the scope of that bar order to contribution claims.” The judge said her preliminary approval of the proposed settlement was conditioned on the parties drafting a bar order that will be limited to the “express wording of the statute.”

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