Ohio Joins the Time Warner Opt-Out Settlement Parade

The Ohio Attorney General, Marc Dann, issued a March 7, 2007 press release (here) announcing a $144 million net settlement in the opt-out action filed against the Time Warner defendants on behalf of the Ohio Bureau of Workers’ Compensation and five state pension funds. As explained further below, the gross amount of the settlement is $175 million.

According to news reports (here), the net settlement proceeds will be distributed as follows: State Teachers Retirement System of Ohio, $66.5 million; Ohio Public Employees Retirement System (OPERS), $62.3 million; Ohio Bureau of Workers’ Compensation, $8 million; Ohio Police and Fire Retirement System, $4.1 million; School Employees Retirement System of Ohio, $2.5 million; and Ohio Highway Patrol Retirement System, $290,778. Hat tip to the Best in Class blog (here) for the settlement proceeds distribution.

Dann stated in the press release that the settlement "will yield $135 million more than the pension funds would have received had we remained a party to the class action suit." In other words, Ohio's net recovery in the opt-out settlement represents 16 times more than the $9 million Ohio believes it would have recovered from the class settlement. Ohio's net recovery of $144 million represents 36% of its estimated $400 million investment loss.

The decision to opt-out from the Time Warner class action settlement had actually been made by Dann’s predecessor, Republican Jim Petro. (Dann, a Democrat, was sworn in as AG on January 7, 2007.) At the time of the opt-out decision, Petro said (here) explaining his decision to opt-out, "the class action suit, you get peanuts at the end of it." In an unusual gesture, Dann went out of his way in the press release to praise his Republican predecessor: "Jim Petro did the right thing by opting out of the class action. His decision put me in a very strong negotiating position."

Ohio was represented in its opt-out action by the Lerach Coughlin firm and the Cleveland law firm of Benesch, Friedlander, Coplan & Aronoff. According to news reports (here), the $144 million is Ohio's net recovery from a gross settlement of $175 million. The remaining $31 million will pay expenses and attorneys. Petro had agreed to a 17.5% contingency fee to Lerach Coughlin and hourly compensation to Benesch. Dann said he negotiated the Lerach Coughlin fee down by $3 million and that firm agreed to pay Benesch from its contingency fee. Dann said this was a signal to other future outside counsel that he "will drive a harder bargain in the future." (I guess the plaintiffs' bar has been warned; let that $31 million be a lesson.)

A couple of things about Dann’s press release strike me as particularly troublesome. The first is the grandstanding tone. For example, Dann is quoted as saying "Today, we are sending a loud and clear message to corporate American and to Wall Street: we will not tolerate fraud, stock manipulation, or deceit in this state." There is much more in a similar vein that I cannot bring myself to quote here. Dann clearly felt comfortable mining this settlement for political capital. If other state or local politicians perceive that they might be able to use opt-out settlements to buff up their images as protectors of the little guy and scourges of corporate fat cats, watch out. Given Dann’s comments about attorneys’ fees and sending messages for future cases, he anticipates that there will be a next time.

The other troublesome note is the care Dann's press release takes to validate the Ohio settlement among the other recently announced opt-out settlements: "Mr. Dann said the amount of the settlement is proportionate to or greater than those reached by plaintiffs who have filed and settled similar cases against AOL/Time Warner." A March 8, 2007 issue of the Cleveland Plain Dealer quotes Bill Lerach (here) as saying that Dann would not settle for anything less than the 36 percent of investment loss that the University of California (also represented by Lerach) recovered in its separate opt-out action. Clearly, there is some benchmarking going on in the Time Warner opt out cases, which undoubtedly will weigh on remaining settlement negotiations in other Time Warner opt out cases. The greater concern is that some kind of universal standards are being set that could affect negotiations in other cases, or future cases.

In any event, the $175 million Ohio gross settlement, taken together with the gross amounts of the other previously announced Time Warner opt-out settlements (refer here), brings the total value of the publicly announced Time Warner opt-out settlements to $730 million. Based on the information on the Stanford Law School Class Action Clearinghouse website (here), a class action settlement of $730 million would rank as the ninth larges class action settlement ever. The aggregate attorneys’ fees (which by the way do not have to approved by a court) undoubtedly are similarly staggering. Settlements (and attorneys' fees) of this magnitude obviously will attract keen interest in opting-out as a securities lawsuit strategy, particularly if others share the view of Ohio’s former Attorney General that a class action settlement only gets you "peanuts."

The Cleveland Plain Dealer (here) reports that negotiations on the Ohio settlement began on February 27, with Time Warner's attorneys offering $30 million, and by the following afternoon the parties had reached the $175 million deal. Time Warner was represented by Cravath Swaine & Moore (which Dann called "a fancy New York law firm) and Jones Day. The settlement does not resolve the state's case against Ernst & Young, AOL's accountant.

Oxley Surveys His Work: Speaking of retired Ohio Republicans, Michael Oxley , as reported in the March 2, 2007 International Herald Tribune interview (here), while addressing at a conference of 200 accountants in Paris, had some choice words to say about his best known legislative legacy, the eponymous Sarbanes Oxley Act. Among other things, Oxley, in repsonse to questions about the statute's impact, acknowledged that if he knew then what he knows now, "I would have written it differently and [Sarbanes] would have written it differently."

Oxley went on to explain that the statute was not the product of "normal times." He says that "Everybody felt like Rome was burning. People felt like they were getting cheated. It was unlike anything I had ever seen in Congress in 25 years in terms of the heat from the body politic. And all the members were facing it." Oxley now says that he felt at the time that Section 404 could spell trouble, but said that with the pressure on the Bush administration, there was no question that a bill needed to be passed, however imperfect.

Oxley also said that the decision to prosecute Arthur Andserson was a "White House decision." The Bush administration made the decision to "give the death penalty to Arthur Anderson" because "they had to look really tough." Oxley says now that "virtually anyone would agree it was a terrible decision" because it "eliminated a major accounting firm" and sent a chill through the accounting industry, causing accountants to revert to "extremely conservative practice."

Hat tip to Houston’s Clear Thinkers blog (here) for the link to the Oxley article.

Mow Down The Laws Just to Get the Devil?: Oxley’s frank acknowledgement that Arthur Anderson was sacrificed for mere political effect has made me reflective. The politicians feel they must protect us from the fraudsters, or, rather, that they must be seen as protecting us from the fraudsters, but who protects us from the politicians?
This all reminds me of one of the scenes in A Man for All Seasons , the play based on the life of Thomas More, the 16th Century English chancellor and author. In the scene, More’s wife Alice, and his son-in-law William Roper, urge More to arrest an informer who had sought to curry favor with More by providing information (this excerpt taken from the complete text of the play, which may be found here ) :

ALICE: While you talk, he's gone!

MORE: And go he should, if he was the Devil himself, until he broke the law!

ROPER: So now you'd give the Devil benefit of law!

MORE: Yes. What would you do? Cut a great road through the law to get after the Devil?

ROPER: I'd cut down every law in England to do that!

MORE: Oh? And when the last law was down, and the Devil turned round on you --where would you hide, Roper, the laws all being flat? This country's planted thick with laws from coast to coast -- man's laws, not God's -- and if you cut them down --and you're just the man to do it -- d'you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake.