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Record-breaking awards in the Cendant securities fraud case were approved by a federal judge yesterday in New Jersey: a $3.1 billion settlement amount and $262 million in fees to attorneys for the plaintiffs’ class. Cendant, a conglomerate that includes Avis car rental agencies and Ramada Inn Hotels, had agreed to pay $2.8 billion in December to settle security fraud charges stemming from the collapse of its stock price after accounting irregularities were disclosed in April 1998. Ernst & Young, the accounting firm that had certified Cendant’s financial statement, also agreed to contribute $335 million toward the settlement. The most controversial component of yesterday’s ruling by U.S. District Judge William H. Walls of Newark, N.J., was his rejection of New York City’s contention that the fees of the injured investors’ lawyers should have been cut by $76 million, to $186 million. The two lead law firms for the plaintiffs were Bernstein Litowitz Berger & Grossman in Manhattan and Barrack, Rodos & Bacine in Philadelphia. The firms had been chosen by the three institutional plaintiffs selected by the judge to control the litigation as lead plaintiffs: the pension systems for California, New York State, and New York City. But rather than simply accepting the lead plaintiffs’ choice of counsel, Walls in August 1998 conducted an auction and gave the two retained counsel the option of meeting the lowest responsible bid submitted. The two firms both opted to meet the lowest acceptable bid. The $262 million fee amount was calculated on the formula contained in the winning bid, which was matched by the two firms. New York City challenged the $262 million fee, claiming that the formula in the retainer contract negotiated between the two firms and the three pensions systems would have produced a fee of $186 million, or $76 million less than the auction amount. Neither the California nor the New York pension systems joined New York City’s fee motion. In Cendant Corp. Litigation, 98-1664, Walls rejected New York City’s argument, concluding that the fee amount was reasonable because the auction had functioned as a surrogate for the marketplace. Pointing out that 15 firms, most of them prominent and operating nationwide, had participated in the auction, Walls wrote, “The court has no reluctance to accept and find the auction’s lowest qualified bid as representative of the market.” Senior Assistant Corporation Counsel Lorna Goodman, who argued New York City’s case, disputed Walls’ conclusion, saying that because the lead counsel had diligently negotiated a fee there was “no need for an auction in the first place.” New York City, in challenging the fee request, pointed out that the $262 million figure broke down to an hourly rate of $10,861 for each of the 24,123 hours that the two firms had devoted to the case. The retainer formula would have yielded an hourly rate of $7,710, the City contended. The award approved by Wall amounted to 8.3 percent of the recovery, as opposed to New York City’s contention that the retainer would have limited that percentage to 5.8 percent. The $3.1 billion settlement was more than twice as large as the previous largest settlement in a securities fraud case: the $1.4 billion that Prudential Securities paid in 1994 to settle claims by its investors, many of them elderly, that they had lost money on high-risk investments they could ill afford. The $262 million in attorneys’ fees set a record for an award in a securities fraud case. FORTY-SIX PERCENT PLUNGE Cendant’s stock plummeted by 46 percent on April 16, 1998, following the company’s disclosure of accounting irregularities affecting one of two companies that merged in 1997 to form Cendant. The price of Cendant’s stock plunged from $34.62 a share to $19. In the aggregate, the paper value of the company declined by $14.4 billion that day. In August 1998, Cendant announced that the pre-merger company, CUC International, had overstated its income by $640 million during the three years prior to the December 1997 merger.

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