Thursday, March 01, 2007

More Massive Opt-Out Settlements

Photobucket - Video and Image Hosting In recent posts (most recently here and here), I have commented on the worrying trend toward institutional investor opt-out cases and the massive settlements that have followed. In a February 28, 2007 press release (here), the University of California announced the latest of institutional investor opt-out settlement, a $246 settlement on the University’s behalf with Time Warner, of which the University's counsel, the Lerach Coughlin law firm, will receive about $37 million.

The University stated in its press release that its settlement is “believed to be the largest publicly announced payment in an opt-out securities claim in history.” The University estimated that the settlement represents “between 16 and 24 times the amount that it would have received through the class settlement.” The University estimates that its investment loss on its Time Warner stock was about $555 million, so the school recovered about 44 cents on for each dollar of investment loss.

According to a March 1, 2007 New York Sun article (here), the University of California settlement was only one of five large institutional investors that recently reached opt-out settlements with Time Warner. The five settlements collectively totaled approximately $400 million. In addition the University of California, Time Warner also reached settlements with Amalgamated Bank, the California Public Employees Retirement System, and two pension funds for Los Angeles County.

The Sun article also notes that the payouts in the opt-out settlements “could rile some small investors because the institutions claim they are getting vastly better settlements than they would have if they remained in the class.” The Sun article quotes Columbia Law School Professor John Coffee as saying that the discrepancy in per-share recovery between the class and the opt-outs is an “embarrassing distinction,” but one that is not easily rectified, since any party has the right to opt-out. Coffee also said that the opt-outs could reduce the amounts companies are willing to pay out to the main pool of investors.

The five institutional investor opt-out settlements mentioned in the Sun article, together with the previously announced $105 million CalSTRS settlement with Time Warner, brings the total amount of just these six opt out settlements to $505 million, more than 20% of the $2.4 billion settlement for the entire class.

In a prior post (here), guest blogger Rick Bortnick and I discussed the problems created by the possibility of large opt out settlements following prior class settlements. But Professor Coffee’s remarks in the Sun article raise the possibility that it may become increasingly difficult to reach a class settlement at all, as settling defendants seek to reduce the amount they pay in class settlement in order to preserve assets to settle with opt outs, while class members seek to avoid any “discrepancy” in the value of class and opt out settlements, and as individual plaintiffs stream out of the class to see if they can improve their recovery by proceeding individually.

Notwithstanding these troublesome thoughts, we still don't know whether or not the opt-out settlements will become a standard part of securities fraud litigation or will prove to be an exclusive attribute of the mega-cases growing out the wave of corporate scandals earlier in this decade. To take one example, the size of the recoveries for both for the University of California and its counsel was directly related to the massive size of the University’s investment loss. Would institutional investors, or for that matter, plaintiffs’ lawyers, be as interested in going it alone if the potential recovery is significantly less substantial?

All of these questions remain to be seen. In the meantime, it is hard to disagree with Professor Coffee’s statement in the Sun article that the flood of securities opt-out settlements is “probably the most distinctive new trend in class action litigation.”

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