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Rejecting a handful of objections by investors, a federal judge has granted final approval for a $7 million settlement of a class action shareholders’ suit against Corel Corp., the Canadian software company whose products include WordPerfect. In a 24-page memorandum, U.S. District Judge Anita B. Brody of the Eastern District of Pennsylvania also awarded more than $2.3 million in attorney fees — one-third of the settlement fund — to a team of plaintiffs lawyers led by Paul J. Scarlato of Weinstein Kitchenoff Scarlato Karon & Goldman and Robert P. Frutkin and Deborah R. Gross of the Law Offices of Bernard M. Gross. In the suit, investors alleged that Corel’s stock price plunged in late 1999 and early 2000 when the company belatedly revealed the truth about its financial health. The suit said Corel had hidden the truth about its financial problems for several months — all the while misleading investors with positive statements. According to the suit, Corel had historically operated in the Windows market, generating all of its revenue from the sale of software for use on the Microsoft Windows operating system. But in 1999, the suit said, Corel announced that it was destined to become a major force in developing products for the new Linux operating system, which was billed as a competitor to Microsoft Windows. According to plaintiffs lawyers, Corel led investors to believe that its Windows business was a “cash cow” that would support its entry into the Linux marketplace. The positive comments led investors to expect that Corel would report profits for the final quarter of 1999, the suit said. But “in a dramatic about-face,” the suit said, Corel announced in late 1999 that it would be posting a loss for the quarter that had ended the month before. The news led to a drop in Corel’s stock price — from $18.56 to $13.18 in a single day, the suit said. And the misleading statements continued, the suit alleged, as Corel told investors to discount the expected loss because it was related to Corel’s “old” Windows business. “Defendants told investors to focus instead on Corel’s leadership position in the burgeoning Linux market and to view Corel as a Linux company,” plaintiffs lawyers alleged. The suit said Corel claimed that its “financial future rested on the shoulders of its Linux business.” As a result, Corel “falsely and misleadingly conditioned the market to expect … a small loss in its first quarter of fiscal 2000.” But in late March 2000, plaintiffs alleged, Corel “again shocked the market by reporting a large loss” for the first quarter and announced that its results “would not improve for the foreseeable future.” The news led to another plunge in the stock price — from $13.38 to $10.37. Early in the litigation, Brody referred lawyers to attorney Arlin M. Adams, a former 3rd Circuit judge, for settlement talks. But two mediation sessions before Adams, in March and October 2002, were unsuccessful. Near the end of discovery, Brody referred the lawyers to attorney Nicholas Politan, a former federal district judge in New Jersey, whose recommendation of a $7 million settlement was accepted by both sides. In their brief seeking approval of the settlement, plaintiffs lawyers said a damages expert estimated that investors suffered losses of $46.3 million. The $7 million settlement, they said, therefore represents about 15 percent of the maximum provable damages. Plaintiffs lawyers argued that a 15 percent recovery was fair and reasonable considering the risks of losing at trial or winning a larger judgment they would be unable to collect. Now Brody has approved the settlement, finding that the strongest factor weighing in favor of court approval is Corel’s current financial picture. Although the “ability to withstand greater judgment” is the last of the factors listed by the 3rd Circuit in Girsh v. Jepson, Brody said she addressed it first because it was the dominant factor in her decision. “Due to significantly declining revenues and losses, Corel has sold its Linux business and has been unable to sustain operations from the sale of its products. As a result, Corel has had to depend on outside financing to sustain operations,” Brody wrote. “Throughout this litigation, defendants have maintained that if judgment is entered against them, they will seek the protection of the Canadian bankruptcy court. If this were to occur, there would be a significant question regarding whether or not Corel’s insurance policies would still be available to fund a judgment for plaintiffs,” Brody wrote. Weighing the other Girsh factors, Brody found that the $7 million settlement was fair and adequate because it is “within the range of settlement agreements approved by other courts in this district.” The risks of taking the case to trial also weighed in favor of approval, Brody found, because “assuming plaintiffs could prevail at trial, lengthy appeals would likely prolong this case for years” and because “plaintiffs face the significant possibility that a judgment would not be collectable, or would be limited to the available insurance coverage.” Brody also found that the plaintiffs would have faced significant risks in establishing damages at trial. “Although plaintiffs would most likely have used the decline in Corel’s common stock as the basis for their damage claims, defendants have argued that this decline merely reflected a general industry trend in Linux-based technology companies,” Brody wrote. “To succeed at trial, plaintiffs would have had to distinguish between the impact of the fraud on the price of Corel stock and the impact of such other, non-actionable forces.The conflicting damage theories of defendants and plaintiffs would likely have resulted in an expensive battle of the experts, and it is impossible to predict how a jury would have responded.” Finally, Brody rejected objections by one class member, who complained that the allocation of the settlement was unfair and that Brody should have designated sub-classes with separate lawyers to protect the interests of investors who purchased stock later in the class period. Brody ordered the plaintiffs lawyers to submit an additional brief addressing the challenge to the allocation plan. After reviewing the brief, Brody concluded that the allocation plan is fair. “Although the plan of allocation was structured after the settlement was reached, it was based on plaintiffs’ expectations regarding how they intended to present their damages case at trial,” Brody wrote. The expert, Brody said, concluded that the inflation of Corel’s stock price was significantly higher in the first period because there were two different types of alleged misstatements. In the first period, Brody said, Corel stated that it expected to report a profit in the fourth quarter of 1999, when, in reality, Corel allegedly knew it expected to report a loss. In the second period, Brody found, the only alleged misstatements related to Corel’s prospects in the emerging Linux business. Brody said she was “satisfied that plaintiffs’ counsel fairly and adequately protected the interests of class members in both periods.” But even if she had ordered sub-classing, Brody said, “I believe that the result would be similar, except that additional funds from a relatively small settlement would be depleted in additional attorneys’ fees. This would not be a beneficial result for the class.”

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