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In a hefty opinion brimming with important rulings, the 3rd U.S. Circuit Court of Appeals Tuesday upheld the $3.2 billion settlement of a class action securities suit against New York-based Cendant Corp. and its auditors, Ernst & Young, but ordered that the plaintiffs’ attorneys’ fees must be reduced from $262 million to no more than $187 million and possibly much less. In his 125-page opinion in In Re: Cendant Corp. Litigation, Chief U.S. Circuit Judge Edward R. Becker found that the settlement deserved court approval under the so-called Girsh factors since most weighed heavily in favor of the settlement and only a few weighed moderately against it. But while Becker found that the $335 million portion of the settlement paid by E&Y was clearly fair, he didn’t give Cendant’s $2.8 billion portion of the settlement the ringing endorsement it had received from U.S. District Judge William H. Walls of the District of New Jersey. “In particular, the lack of any serious risk of establishing Cendant’s liability and its probable ability to pay substantially more in settlement raise concerns in our minds concerning the fairness and adequacy of this settlement,” Becker wrote. But after weighing the Girsh factors, Becker said, the appellate court concluded that Walls did not abuse his discretion because “the balance clearly weighed in favor of approval.” The appellate court’s ruling on the issue of the attorneys’ fees stemmed from its decision that Walls erred when he held an auction to select the lead lawyers in the case. Since Walls ultimately allowed the lawyers who were retained by the lead plaintiff to match the low bid, Becker found the error of holding the auction was harmless on the issue of choosing lead counsel. However, since the auction resulted in a fee agreement that differed from the $187 million cap that was placed on the fees in the original retainer, Becker found that the trial judge erred when he awarded larger fee amount. On remand, Becker said, Walls should consider awarding even less than the agreed-upon $187 million to avoid paying a “windfall” to the plaintiffs’ lawyers. “We cannot blind ourselves to the reality that both the fee award of $262 million under the auction and (potentially up to) $187 million under the retainer agreement are staggering in their size, and, on the basis of the evidence in the record, may represent compensation at an astonishing hourly rate,” Becker wrote. Objectors to the settlement argued that the plaintiffs’ lawyers had logged just $8 million at their usual hourly rates. As a result, they said, the $262 million fee award would pay them more than 45 times their usual rate. And even the $187 million in fees would be 24 times their usual rates, they said. But the lead plaintiffs’ lawyers insisted that the $8 million “lodestar” was preliminary and that they had actually logged up to twice that amount. Becker found that even if the lodestar — the lawyers’ hours multiplied by their hourly rates — were doubled, the multiplier “would still be extremely high.” “This was a simple case in terms of liability with respect to Cendant, and the case was settled at a very early stage, after little formal discovery,” Becker wrote. “Thus the possibility of rebuttal of the presumption of reasonableness must be seriously considered by the district court on remand.” On remand, Becker said, Walls should conduct a “lodestar cross-check” and should reduce the $187 million in fees if he finds they are “clearly excessive.” In doing so, Becker said, Walls should calculate the lodestar and “think of it as a floor,” with the $187 million fee under the retainer agreement “as a ceiling” and should then “explain on the record [the] reasons for selecting a fee award at or between these two figures.” In a second opinion, the same three-judge panel rejected objections by a current Cendant shareholder who complained that the trial judge should have considered the conflict of interest that Cendant’s board members had in voting for the settlement since they each risked personal liability. Writing for the court, U.S. Circuit Judge Dolores K. Sloviter found that objector Martin Deutch’s claims were more appropriately waged in a “derivative” suit and that Deutch’s own lawyer has already filed such a suit in the Delaware Chancery Court on behalf of another Cendant shareholder. AUCTIONS STRONGLY DISCOURAGED Perhaps the most important rulings in the two opinions came in Becker’s discussion of Walls’ decision to hold an auction to select the lead plaintiffs’ lawyers. Becker found that when Congress passed the Private Securities Litigation Reform Act, it placed a strong emphasis on the court’s selection of the lead plaintiff. As a result, Becker said, “the power to ‘select and retain’ lead counsel belongs, at least in the first instance, to the lead plaintiff, and the court’s role is confined to deciding whether to ‘approve’ that choice.” Under the PSLRA, auctions are “not generally permissible,” Becker said, because “a court-ordered auction involves the court rather than the lead plaintiff choosing lead counsel and determining the financial terms of its retention.” The PSLRA, he said, “contains detailed procedures for choosing the lead plaintiff … indicating that Congress attached great importance to ensuring that the right person or group is selected.” Under the law, Becker said, the only powers expressly given to the lead plaintiff are to “select and retain” counsel. “If those powers are seriously limited, it would seem odd for Congress to have established such a specific means for choosing the lead plaintiff. But if the powers to ‘select and retain’ lead counsel carry a great deal of discretion and responsibility, it makes perfect sense that Congress attached great significance to the identity of the person or group that would be making those choices,” Becker wrote. The reasoning behind the law, Becker said, was that “large investors would do a better job at counsel selection, retention, and monitoring than judges have traditionally done.” That goal would be undermined, Becker found, if the courts “take decisions involving counsel selection and retention away from the lead plaintiff by ordering an auction.” The lead plaintiffs’ lawyers were Leonard Barrack, Gerald J. Rodos and Jeffrey W. Golan of Barrack, Rodos & Bacine in Philadelphia and Max W. Berger, Daniel L. Berger and Jeffrey N. Leibell of Bernstein Litowitz Berger & Grossman in New York. Harvard law professor Arthur R. Miller represented both of the lead plaintiffs’ firms and argued in defense of the $262 million fee. Cendant was represented by attorneys Carl Greenberg and Michael M. Rosenbaum of Budd Larner Gross Rosenbaum Greenberg & Sade in Short Hills, N.J., along with Samuel Kadet of Skadden, Arps, Slate, Meagher & Flom in New York. Ernst & Young was represented by Alan N. Salpeter, Michele Odorizzi and Caryn L. Jacobs of Mayer, Brown & Platt in Chicago; Douglas S. Eakley and Peter L. Skolnik of Lowenstein Sandler in Roseland, N.J.; and E&Y in-house counsel Kathryn A. Oberly, Robert G. Cohen and William P. Hammer Jr. Attorney Howard B. Sirota of Sirota & Sirota in New York argued that he should have been awarded lead counsel status because his auction bid was the lowest. Lawyers representing objectors to the settlement included Edward W. Cochran of Cochran & Cochran in Shaker Heights, Ohio; Frank H. Tomlinson of Pritchard, McCall & Jones in Birmingham, Ala.; Paul S. Rothstein of Gainesville, Fla.; C. Benjamin Nutley of Kendrick & Nutley in Beverly Hills, Calif.; and Richard Galex of Galex, Tortoreti & Tomes in East Brunswick, N.J. Also Gerald W. Palmer, Ricky L. Shackelford and Eugenia L. Castruccio of Jones, Day, Reavis & Pogue in Los Angeles; Lawrence W. Schonbrun of Berkeley, Calif.; and John Halebian of Wechsler Harwood Halebian & Feffer in New York. The New York City Pension Funds objected to the fees and were represented by Michael D. Hess, Leonard J. Koerner, Lorna B. Goodman, Elizabeth S. Natrella and Leslie Conason of the New York City Law Department.

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