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In July 2002, after 30 months of litigation, U.S. District Judge Joel Pisano stepped in to mediate the Lucent Technologies Inc. securities class action. The result was his Dec. 12 approval of a settlement worth about $650 million, the third-largest securities settlement ever. Now comes the hard part for the judge: Deciding how much to pay the plaintiffs’ lawyers, who collectively are seeking $107 million in fees for their efforts in In Re Lucent Technologies Inc. Securities Litigation, 00-CV-621. The co-lead counsel for the biggest of five consolidated cases — Milberg Weiss Bershad Hynes & Lerach, and Bernstein Litowitz Berger & Grossman, both of New York — are asking for 17 percent of the $517 million they negotiated for in the class action: almost $88 million. While the two firms would get the bulk of the fees, some would be shared with dozens of firms nationally that have filed claims. The balance would go to the legal teams that represented claimants in the four other cases — employees, bond and note holders, and shareholders of another company, Winstar, harmed by Lucent’s alleged wrongdoing. Those plaintiffs’ lawyers are seeking a higher percentage reward, which is not unusual, as fees are usually lower for the bigger settlements. When Pisano approved the settlement, only 36 claimants out of a possible 3 million had objected to the deal and decided to opt out, thus reserving the right to sue on their own. All fees and expenses — the co-lead counsel also seek $3.5 million in expenses — will come out of the five funds set up for the claimants. Those 36 claimants all made the same point: The fees are excessive compared with the payout, which amounts to no more than 15 cents a share, and possibly as low as 11 cents a share, for anyone who bought Lucent stock before it crashed. Typical was T. Tucker Hobgood, who bought 100 shares at $74 a week before it dove to the mid-50s, at which point he bought another 50 shares. All told, Lucent dropped from almost $80 in 1999 to 55 cents by the fall of 2002 after disclosures of inflated revenue reports and accounting shenanigans. “I’ll get $15, with the plaintiffs’ lawyers making about $4.50 off me and getting reimbursed another $1.50. Not to unduly hammer only one side of the equation. The company I still own part of paid untold sums to its lawyers to grind the plaintiffs under their feet,” Hobgood wrote to Pisano. “I lost virtually my entire investment of $10,000. There is nothing fair about this process or this settlement to me. It is a complete waste of time to recover less than one-fifth of one percent of a loss,” he continued. Hobgood, himself an Atlanta lawyer, was backed by John Pentz of the Class Action Fairness Group in Sudbury, Mass., who weighed in on behalf of another claimant. Pentz said the plaintiffs’ fee should be 10 percent. He pointed to two other huge class actions in the New Jersey district, In Re Cendant Corp. Prides Litigation, and In Re Prudential Ins. Co. Sales Practice Litigation. In the Cendant settlement of $3.19 billion in 2000, the fee came to 1.7 percent. In the Prudential case, which settled in excess of $2 billion, the 3rd U.S. Circuit Court of Appeals pegged the fee at 6.7 percent. Michael Rinis, of Rinis Travel Service Inc. in Silver Spring, Md., whose profit-sharing trust held Lucent stock, told Pisano by letter last month that the fee request of the co-lead counsel is “excessive and unreasonable.” He noted there was no trial, and argued that the fees were not warranted by the amount of discovery. Pisano stayed all proceedings in September 2002, two months after he stepped in to mediate. PLAINTIFFS DEFEND FEES But the lead plaintiffs’ lawyers say the fee request is fair and justified, particularly in light of what shareholders may receive down the road if Lucent bounces back. That’s because much of the settlement is in the form of stock and, more important, warrants. “The settlement is extraordinary for two reasons,” says name partner Daniel Berger of Bernstein Litowitz. “First, the settlement allows Lucent to continue as a viable company and get back on its feet without a trial that it would have been facing, in bankruptcy. Under that scenario equity holders would have received zero. Second, it’s a large amount if Lucent does well,” Bernstein explains. The approved global settlement for the five major cases calls for claimants to receive $315 million in stock; $24 million in the stock of Lucent spin-off Avaya Inc.; $148 million in cash from the company’s directors-and-officers liability policy, and 200 million warrants. Lucent also will pay up to $5 million cash to cover the expenses of the claims administrator, the only cash being put out by the company. One lawyer in the case, not on the plaintiffs’ side, points out that the trio of carriers holding the D&O policies put the net $148 million policy limits on the table relatively early. He says the fee seems high in light of how easy it was to get the cash part of the settlement. The warrants allow a one-for-one purchase of Lucent stock at $2.75 a share. When the deal was approved in principle last March, the stock was well below $2.75 but has since climbed above that level, closing on Friday at $2.90 after rising as high as $3.45 last month. The fluctuations of the stock of Lucent and Avaya, and thus the value of Lucent warrants, make the valuation of the settlement a floating number. When the deal was initially agreed to, it was valued at $620 million, but by the settlement hearing on Dec. 12 it was worth more than $650 million as Lucent’s stock price rose. If Lucent were to reach, say, $10 a share by 2006 — the warrants are good for three years and will not be issued for months — their collective value alone would be $1.45 billion, bringing the total settlement value to more than $2 billion. Lucent’s lawyers are taking no position on the main fee application of the co-lead counsel. They do, however, object to the fee request of the plaintiffs’ lawyers in one of the five cases. That is the so-called ERISA class action involving employees who held Lucent stock in their 401(k) or through stock purchase programs. Those claimants will receive $69 million, almost all in stock, based on the valuation earlier this year. The fee request for the employees’ lawyers, Philadelphia’s Berger & Montague, is 20 percent. A call on Friday to Todd Collins, the firm’s partner handling the matter, was not returned. HOW A LUMINARY FELL Lucent’s near collapse is among the more spectacular in American history. In 2000, the company, which designs, builds and sells communications, data networking and business telephone systems, had revenues of $33.81 billion and net income of $1.22 billion. After shedding more than 100,000 employees, Lucent’s revenues were down to $8.47 billion for the fiscal year ended last Sept. 30. During the three years ended last September, the company reported net losses totaling close to $29 billion, fueled not just by a loss of business but by charges to correct several inflated quarterly reports, including a $679 million write-down for improperly recognized revenues taken in December 2000. However, Lucent reported a small profit for its last quarter and projects a profitable 2004. Moreover, earlier this year it also settled the charges brought by the Securities and Exchange Commission, without having to pay a financial penalty. Lead defense attorney, Paul Saunders, a partner with Cravath, Swaine & Moore in New York, echoed his adversaries, saying that the alternative to the deal — trying to squeeze more cash out of Lucent — would have driven the company into bankruptcy, with several more years of litigation before anyone got anything. To bolster their fee request, Milberg Weiss partner David Bershad and Berger of Bernstein Litowitz retained Columbia Law School Professor John Coffee, who concentrates on legal ethics. He submitted a 27-page certification supporting the $88 million payout to the two class-action firms. He said there were “significantly greater legal and economic risks” than in similar cases, partly because the case did not settle quickly and was so vigorously litigated by Lucent for almost four years. Coffee said it’s unfair to compare this case to the Cendant case, “a relatively quick and easy settlement.” He pointed to the 3rd Circuit’s observation that Cendant’s management “virtually conceded liability,” which Lucent has not. Coffee said that the $517 million settlement of the shareholders’ suits is second only to the Cendant case since enactment of the Securities Litigation Reform Act of 1995. Overall, he continued, the Lucent settlement ranks not only third in size among securities class actions, but 12th among all class actions. The professor listed the 22 largest fee awards for class actions, which showed that 17 were above the 17 percent being sought in the Lucent case, with only five falling below that figure. However, most of those cases that garnered more than 17 percent were significantly smaller than the Lucent payout. Five of the class actions produced fees amounting to 30 percent, but those settlements ranged from $104 million to $185 million. The closest settlement in size to Lucent’s, the $687 million in the Washington Public Power Supply Systems case in 1990, resulted in a fee award of just 7.3 percent. Moreover, the $457 million settlement in this year’s Waste Management Inc. class action generated a fee amounting to only 7.9 percent. Another so-called megafund class action, brought against Bankamerica Corp., led to a $490 million settlement along with a fee of 18 percent for lead counsel. Coffee noted that according to a study by a consulting firm, Logan, Moshman and Moore, the average fee award for the largest 64 class actions, those topping $100 million, is 15.1 percent. The average fee jumps to 20.9 percent when the 26 cases that settled for $75 million to $100 million are considered, and rises to 23.6 percent for those cases valued at $50 million to $75 million. The lead plaintiffs’ attorneys also note the complexity of the multitude of cases. The first case was filed in January 2000. By March of that year there were 18 class actions against the Murray Hill company, a 1996 AT&T spin-off that includes Bell Laboratories. The cases were filed after the company disclosed that sales reports had been inflated and prospects hyped. Lucent’s problems began in 1999, when its optical networking products ran into trouble. The suits allege that the company shipped those products before ironing out design and technical flaws, causing sales to dive. All told, 54 cases were filed, later consolidated into the five major cases before Pisano under the federal multi-jurisdictional-litigation rules. Two other cases, one in New Jersey state court and another in federal court in Manhattan, remain outstanding.

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