In a settlement that has a number of interesting features, Satyam Computer Services, an Indian technology outsourcing company, has agreed to pay $125 million to settle the consolidated securities class action litigation pending against the company in Southern District of New York.
The only settling defendant is the company itself, which is now known as Mahindra Satyam. The settlement does not resolve claims against the individual defendants, including certain of the company’s former directors and officers, or against PricewaterhouseCoopers-related entities.
The settlement is subject to court approval, as well as other regulatory and governmental approval. A copy of February 16, 2011 settlement stipulation can be found here.
Satyam was quickly dubbed the "Indian Enron" when it was revealed in January 2009 – in a stunning letter of confession from the company’s founder and Chairman — that more than $1 billion of revenue that the company had reported over several years was fictitious. Investors immediately filed multiple securities class action lawsuits in the Southern District of New York.
The plaintiffs’ consolidated amended complaint alleges that in addition to fabricating revenues senior company officials siphoned off vast sums from the company to entities owned or controlled by the Chairman and members of his family. The defendants include ten former directors and officers of the company; certain entities affiliated with the company’s chairman and individuals associated with those companies; and certain PwC-related entities.The defendants filed motions to dismiss.
The Satyam Settlement
In the settlement stipulation, Satyam has agreed to pay $125 million into a settlement fund. The company, which is apparently funding the settlement entirely out of its own resources, is the only settling defendant. The claims against all of the other defendants remain pending.
In addition to the $125 million, Satyam also agreed to pay the settlement class 25% of any recovery the company may obtain against the PwC entities, in the event the company in its sole discretion decides to pursue a claim against the PwC entities.
There amount of plaintiffs’ attorneys’ fees specified or agreed to in the stipulation, however the settlement papers reflect that plaintiffs’ counsel intends to seek a fee award of 17% of the settlement fund, as well as out of pocket expenses not to exceed $2.5 million.
Lead counsel also intends to seek court approval to establish out of the settlement fund a $1 million litigation fund "to help pay for future litigation costs incurred during the continued litigation of the Action against the Non-Settling Defendants."
There are a number of interesting things about this settlement, the first being its size. Even though it is only a partial settlement, the $125 million settlement amount would be tied for 69th on the list of the all-time largest securities class action settlements.
Another very interesting feature of the settlement is that it resolves only the claims against the company – leaving all of the company’s former directors and offices in the lawsuit. These individuals include not only the company’s former Chairman and founder and his family members who were at the center of the scandal, but also the various outside individuals who were serving on the company’s board while the alleged fraud was going on. The suggestion seems to be that the current company management is prepared to leave all of the former board members hanging out there on their own.
The fact that the company apparently is also funding this settlement out of its own resources is also interesting. Shortly after the scandal broke, there were press reports that the company carried $75 million of D&O insurance. Of course, these press reports may have been mistaken. Or perhaps the insurance was unavailable to the company, either because the insurance did not include entity coverage or because the carriers are asserting coverage defenses. The possible availability of insurance raises the question whether the coverage is available for the individuals’ defense or any future settlements (assuming it has not already been depleted or exhausted by prior defense fees).
Another interesting component of the settlement is the composition of the settlement class to which the parties stipulated as part of the settlement. The class includes not only investors who bought the company’s American Depositary Shares on the NYSE, but also U.S. residents who bought ordinary company shares on Indian stock exchanges.
The interesting question is whether, in light of the U.S. Supreme Court’s holding in Morrison v. National Australia Bank, the U.S.-based investors who purchased their shares on the Indian exchange actually have claims they can assert under U.S. securities laws. (Indeed, the settlement stipulation expressly notes that the defendants had supplemented their pending motions to dismiss, seeking in reliance on Morrison to dismiss the claim of the U.S. residents who purchased their shares on the Indian exchanges.)
Several U.S. district courts (refer for example here and here) have already ruled that Morrison precludes Section 10(b) claims of so-called "f-squared claimants" – that is, U.S. residents who bought share of non-U.S. companies outside of the U.S. Nevertheless, the proposed settlement class includes these f-squared claimants. In other words, the proposed settlement class includes claimants who may or may not have the ability to assert claims under Section 10(b) in light of Morrison. Indeed, as the remaining defendants might even succeed in having those claimants’ claims dismissed as the case goes forward.
However, in recognition of the hurdles that these investors face, the settlement agreement provides that the U.S. investors who bought their shares on the Indian exchange will not receive the same proportion of compensation as the ADS investors.
As Alison Frankel notes in her February 17, 2011 Am Law Litigation Daily article about the settlement (here), common share holders will take a 90 percent discount on their potential recovery, by comparison to the ADS investors. The agreement states that this discount is "in recognition of additional legal hurdles facing U.S. residents who purchased Satyam ordinary shares on markets outside the United States in seeking to recover under federal securities laws." The estimated average recovery would be $1.36 per ADS and 6 cents per ordinary share.
But though the proposed class definition arguably includes a class of claimants broader than Morrison might prescribe, the proposed class does not include non-U.S. residents who purchased their Satyam shares on the Indian exchanges. These investors’ claims apparently are not resolved or even addressed by this settlement.
Another interesting feature of this settlement is the extent to which it seemingly encourages further litigation against the Non-Settling parties. The settlement not only includes the company’s agreement to pay the settlement class 25% of any recovery the company may obtain from the PwC entities, but it also includes a $1 million war chest for the claimants to use in order to continue their claims against the other defendants. This settlement might be good news for Satyam and for the settlement class, but it seems like bad news for the remaining defendants and for the PwC entities.
In other words, the company may be settling, but this case is far from over.
Bankruptcy and D&O Insurance: On March 2, 2011 at from 1:00 pm EST to 2:30 EST, the Torts and Insurance Practice Section of the American Bar Association will be sponsoring a teleconference on the topic of "D&O Insurance in the Context of Bankruptcy." The teleconference will feature a number of distinguished speakers, including my good friend Perry Granof. Information about the teleconference can be found here.