In a prior post (here), I discussed Judge William Alsup’s rejection of the proposed settlement of the options backdating-related derivative lawsuit involving Zoran Corporation, in which the parties had proposed to resolve the case without any cash payment to the company. A more recent case presents another example of a court’s similar unwillingness to approve an options backdating derivative lawsuit settlement in the absence of any cash payment to the company. The events ensuing after the settlement’s rejection represent a rather noteworthy and surprising outcome.
In a January 8, 2009 order (here), Judge Sam Sparks of the Western District of Texas rejected the proposed settlement of the Cirrus Logic options backdating-related derivative lawsuit. Judge Sparks first noted that "while the Settlement consists of no monetary benefit to Cirrus, it does include a provision by which Plaintiffs’ attorneys will be paid $2.85 million in fees by Cirrus’ insurer."
With respect to his obligation to determine that a proposed derivative settlement is "fair, reasonable and adequate," Judge Sparks said this "does not mean that the settlement must be fair to the attorneys (as the Stipulation of Settlement no doubt is) but that it must be fair in light of the corporation’s interests."
Judge Sparks went on to observe that the parties had "utterly failed to convince the court that it is fair."
Judge Sparks stated that the supposed "substantial benefits" were "for the most part, cosmetic." He found that the proposed governance reforms "appear far too meager." He added that "the Court simply is not convinced that the proposed reforms alone present any meaningful compensation to Cirrus for the extreme damages Plaintiffs claimed were suffered by the corporation as a result of the backdating." The proposed reforms "confer so little value" that that the settlement, Judge Sparks found, could only be approved "by showing that the suit brought by the Plaintiffs was virtually meritless."
The plaintiffs’ lawyers had argued that their proposed attorneys’ fees were "well within the range of attorneys’ fees paid in shareholder derivative backdating cases, especially given the substantial benefit to Cirrus brought through the prosecution of the Litigation." However, Judge Sparks said with respect to these proposed fees and their purported justification that
For obtaining a minimal (if not non-existent) benefit to Cirrus, Plaintiffs’ attorneys under the terms of the Stipulation of Settlement would earn $2.85 million in attorney’s fees for a suit that has been pending less than two years. Although the Court would prefer to give deference to all parties’ counsel’s views and opinions regarding whether the settlement is satisfactory given the risks of continued litigation, the Court simply cannot fathom (and was entirely unconvinced by Plaintiffs’ counsel at the hearing) how counsel feels they could have earned these fees. Viewed objectively, the attorneys are requesting top-dollar fees for their inability to be successful in this case. By approving this Stipulation of Settlement, the Court would be compensating Plaintiffs’ counsel handsomely and encouraging plaintiffs’ attorneys in the future to go on fishing expeditions against corporations. Sometimes when at [sic] attorney goes fishing he catches fish, and sometimes he does not – but when he does not he should not eat filet mignon afterwards.
Duly chastised by Judge Sparks’ vituperative rejection of their initial proposed settlement, the parties regrouped and on March 10, 2009, they submitted a revised proposed settlement stipulation (here).
The revised settlement not only includes significant alternations to the proposed governance reforms, but also provides that Cirrus’ D&O insurer will pay its "remaining Limit of Liability" of $2,850,000 directly to Cirrus, "in consideration of which Plaintiffs and Plaintiffs’ Counsel will waive and relinquish any claim for attorneys’ fees and expenses."
Although Judge Sparks’ January ruling rejecting the initial proposed Cirrus settlement makes no reference to Judge Alsup’s earlier rejection of the Zoran settlement, both decisions are very much in the same vein. (To be sure, Judge Alsup’s rhetoric, replete with words such as "collusive" is more heavily freighted than that of Judge Sparks, although the outcome in both cases was more or less the same.)
Certainly, both opinions underscore the fact that courts take their responsibilities to absent class members very seriously and in particular that courts will take a dim view of proposed settlements in which plaintiffs’ attorneys’ reap substantial fees but in which the purportedly harmed corporation receives no monetary benefit.
The surprising finale in the Cirrus Logic case, in which plaintiffs’ attorneys wound up waiving their fee in order to complete the settlement, highlights how critical it may be for plaintiffs’ attorneys to be able to demonstrate in the first instance that it is the corporation and not the attorneys that benefit the most from a proposed settlement.
I noted in my prior discussion of Judge Alsup’s rejection of the Zoran settlement that there may be an increasing sense in which the plaintiffs’ attorneys seem to be growing weary of the options backdating cases and indeed may just want them to go away. The plaintiffs’ attorneys’ willingness to resolve the Cirrus Logic case without any provision for the payment of their own fees would certainly seem to corroborate this point. Whether or not the plaintiffs’ attorneys want the options backdating cases in general to go away, the specific lawyers in the Cirrus Logic case pretty clearly were committed to bringing an end to that particular case. Given some of Judge Sparks’ comments, who could blame them?
I have in any event added the revised proposed Cirrus Logic settlement to my updated table of options backdating settlements and case resolutions, which can be accessed here.
Special thanks to a loyal reader for a copy of Judge Sparks’ January 8 opinion.
Curses, Foreclosed Again: It may be supposed that growing wave of residential mortgage foreclosures is sufficiently awful that there would be no need for further dramatization. However, that supposition fails to reckon with Hollywood’s capacity to sensationalize anything, even something as banal as a bank officer’s decision to foreclose on an overdue mortgage.
"Drag Me to Hell," a new movie by Sam Raimi, the director of the "Spiderman," involves a young bank office (Alison Lohman) who, in order to show herself worthy of a promotion, decides to foreclose on a home owned by a frail eldely woman. In response, the old woman lays a curse on the bank officer, whose career and life suddenly becomes very dark and gruesome. The ensuing mayhem may somehow be metaphorical of the financial chaos in which we all find ourselves.
I have linked below to a trailer for the movie. After viewing the trailer it may be unnecessary to actually see the movie, which in at a time when everybody is trying to save a few bucks may be good thing. However, the movie itself may be too dark to satisfy any populist need for vengence on supposely cruel and insensitive banks.
Hat tip to the NPR Planet Money blog (here) for the link to the trailer.