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A federal judge has refused to approve a $193 million settlement in a class action shareholders’ suit against Rite Aid Corp. after finding that its “bar order” is too broadly worded and would improperly limit the rights of several former top executives who were not included in the settlement. But federal Judge Stewart Dalzell of the U.S. District Court for the Eastern District of Pennsylvania also strongly suggested that he will approve the settlement — the largest ever in a securities case in the district — once the bar order is modified, saying “plaintiffs’ co-lead counsel have … won the best possible settlement available under these very difficult circumstances.” Dalzell denied court approval “without prejudice” and said he will allow the lawyers to “resubmit an amended version [of the bar order] that addresses the [court's] reservations.” Neither lead plaintiffs’ attorney Sherrie Savett of Berger & Montague nor Rite Aid’s lawyer, Alan Davis of Ballard Spahr Andrews & Ingersoll, could be reached for comment on how the plaintiffs and Rite Aid will modify the proposed settlement. But the ruling also includes a major victory for the plaintiffs’ lawyers — led by Savett and David Bershad of Milberg Weiss Bershad Hynes & Lerach in New York — because Dalzell has ruled that once it is approved, they are entitled to a fee of one-third or more than $63 million. In his 60-page opinion, Dalzell also rejected many of the arguments raised by the former executives including their objection that Rite Aid acted unfairly by settling without them and using up all of the available insurance funds. But Dalzell said he was forced to reject the settlement due to his “technical concerns” about the scope of the bar order. If not for those concerns, he said, the settlement would “warrant unhesitating approval.” Although a bar order is a common element in a class action settlement, in Rite Aid’s case it came under attack by the three former executives, who said it prejudices their rights by prohibiting them from pursuing claims they may have against the company. In its most basic sense, a bar order is designed to ensure that a settlement is final and will mark an end to the litigation for the settling defendants. The three former executives who objected to the settlement — CEO Martin Grass; chief financial officer Frank Bergonzi; and president and chief operating officer Timothy Noonan — lost their jobs in the wake of revelations that Rite Aid had grossly overstated its income and earnings. Rite Aid was hit with a slew of lawsuits soon after its March 1999 announcement of disappointing earnings. The market had reacted swiftly, with Rite Aid stock plummeting from $37 to $23, losing more than $3.7 billion in market capitalization in one day. Within weeks of the first shareholder suit, new suits added additional Rite Aid executives as defendants, including Bergonzi and Noonan. In October 1999, dramatic developments at Rite Aid led to Grass’ resignation when the company announced that its 1997, 1998 and 1999 financial statements would have to be restated, resulting later that month in a $500 million reduction of Rite Aid’s previously represented pretax earnings. An internal audit was begun, and its report faulted Grass and Bergonzi for “serious breaches of their fiduciary duties,” both before and after the lawsuits were filed. In the settlement, Rite Aid agreed to pay $43.5 million in cash — nearly all of its available insurance — as well as at least 20 million shares of Rite Aid common stock promised to be worth at least $149.5 million and possibly more if the stock performs well in the immediate future. Rite Aid also promised to cooperate with the plaintiffs as they pursue their remaining claims against the nonsettling defendants — the three executives and the auditing firm KPMG. Dalzell noted that none of the 300,000 members of the class has objected to the economic aspects of the settlement and that only a tiny fraction — 73 — have opted out of it. The judge also said he agreed with an outside expert — Columbia University law professor John C. Coffee Jr. — who praised the settlement as one of the largest and one of the highest percentage recovery of losses. Coffee said a recent study shows that settlements since 1995 of securities class actions have recovered between 5.5 percent and 6.2 percent of the class members’ estimated losses. Since the Rite Aid shareholders lost an estimated $2 billion, he said, their recovery is about 65 percent better than the average settlement. Dalzell also found that the shareholders “could not realistically ever collect anything approaching $2 billion in damages.” Pushing for more might push the company into bankruptcy, Dalzell said, and “no rational plaintiff would push Rite Aid into that condition, because to do so would, quite literally, kill the goose that once laid golden eggs and may, some day, do so again.” As a result, Dalzell said, the settlement “leaves open the possibility of such a happy conclusion to this so far unhappy financial story. The continued distraction and hemorrhaging of litigation, and the possibility of a bankruptcy-inducing catastrophic judgment, would not.” BAR ORDER Turning to the objections to the bar order, Dalzell rejected many of the arguments from the former executives. First, he rejected the argument that the only permissible bar order would be the one included in the Private Securities Litigation Reform Act and that the “complete bar order” in the Rite Aid settlement will deprive them of legal rights without due process. Although the executives agreed that bar orders can properly bar a claim for contribution, they should not also bar claims for indemnification. But Dalzell said he had to be careful to avoid rendering an “advisory opinion” and that he could therefore consider only the “outlines” of the former executives’ possible claims. “In order to avoid rendering an advisory opinion, we must instead begin our analysis at the other end of the problem, and examine the language of the proposed bar order and inquire as to its provenance and propriety, without regard to its effect on specific hypothesized claims that the non-settling defendants may some day assert,” Dalzell wrote. Although Dalzell said he approved of the language of the complete bar order, he said there were “several aspects of it that we do find objectionable.” One problem, he said, was that it is “not reciprocal.” “We find it proper that to the extent the non-settling defendants are barred from bringing related actions against the released parties, part of the consideration for this bar must, for reasons of fairness, be a similar bar to claims against the non-settling defendants by the released parties.” The extent of that reciprocity, Dalzell said, will be limited by Rite Aid’s promise in the settlement to assign its claims against the former executives to the plaintiffs. Dalzell said that while that fact “may well swallow up some of the benefit of reciprocity, but if it does, then our sense of fairness is not offended.” But Dalzell sided firmly with the executives in holding that the bar order should not include the executives’ potential defamation claims against Rite Aid. Grass and Bergonzi said they have possible defamation claims against Rite Aid and others based upon “the lies being disseminated by Rite Aid and its present or former employees, officers or directors, and attorneys.” Dalzell ruled that “the putative defamation claims should be excluded from any bar order.” Likewise, Dalzell ruled that Grass’s claims relating to his separation from Rite Aid should be also excluded from the bar order. Although Grass had no written separation agreement, he contends that he had an oral agreement, and his lawyer, James J. Rodgers, said Grass may have a cause of action. Dalzell agreed that it should be excluded from the bar order, saying, “We cannot see any principled way to distinguish this putative cause of action from actions by Bergonzi or Noonan on their written separation agreements, which the settling defendants have agreed to except.” But on perhaps the most important aspect of the bar order, Dalzell sided with Rite Aid and held that the bar order may validly prohibit the former executives from suing for indemnification. The case is In Rite Aid Corp. Securities Litigation.

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