Sunday, November 25, 2007

Brave New Securities Lawsuit World: Qwest Opt-Out Settlements Exceed Class Settlement

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In the latest in the series of significant opt-out settlements, two different state pension funds have announced settlements with Qwest in their separate securities actions against the company. In both instances, the funds announced that their separate settlements far exceeded the amounts that they would have recovered in Qwest’s $400 million class action settlement (refer here regarding the class action and its settlement) and it now appears that the aggregate amount Qwest has agreed to pay opt-out claimants exceeds the amount it agreed to pay the class.

In a November 21, 2007 press release (here), the Colorado Public Employees’ Retirement Association (PERA) announced a $15.5 million settlement of its separate action against Qwest. And in a November 21, 2007 announcement (here), the Alaska Permanent Fund Corporation (APFC) announced that the Alaska Department of Law had reached a $19 million settlement (net of fees and costs) on behalf of APFC, which will receive $13 million from the settlement, and on behalf of the Alaska State Department of Revenue and the Alaska Retirement Management Board, which together will split the remaining $6 million. Press article describing the Colorado settlement can be found here and regarding the Alaska settlement can be found here.

There are several significant features of these opt-out settlements. The first is what the settling funds themselves said about how they fared by proceeding separately rather than participating in the class settlement. Colorado PERA (which is Colorado’s largest pension fund and the 25th largest public pension fund in the country) said that its recovery in the class settlement would only have been $400,000, or less than one cent on the dollar of the fund’s investment losses, meaning the fund increased its recovery more than 38 times by pursuing a separate action.

The AFPC for its part said that the state’s combined recovery in the class settlement would only have been $422,000, on combined investment losses of approximately $89 million. While the state recovered only a quarter of its investment losses through its separate action, it recovered 45 times what it would have recovered in the class settlement. (The AFPC is the investment fund that receives and invests royalties from the Alaska pipeline. With over $38 billion in assets, the fund paid a fiscal 2007 dividend of $1,654 to each qualifying Alaskan state resident.)

The second significant thing about these opt-out settlements is what the funds said about their motivations in pursuing separate actions. Colorado PERA’s press release said that it "elected to forego the class recovery" because of its concerns about "excessive attorneys’ fees and an inadequate recovery" – it also reported that its counsel (the Entwistle & Cappucci firm) charged only a 5 percent fee, compared to the 15 percent fee awarded to class counsel. Although Alaska was less explicit in describing its motivations for opting out, the AFPC announcement does underscore the amount by which the state increased its recovery by opting out and also points out that the state has previously obtained opt-out settlement recoveries against WorldCom ($14 million) and AOL Time Warner ($45 million). Alaska's opt out settlement with AOL Time Warner is discussed in a prior post here.

The third significant thing about the funds’ opt-out settlements is what their actions may say about their willingness to pursue their own actions in the future. Colorado State Treasurer Cary Kennedy (a PERA board member) said, referring to its opt-out settlement, that "Colorado’s public employees should take comfort in the fact that PERA continues to be vigilant in protecting their retirement." PERA’s Board Chair added that "being involved in cases such as the separate proceeding against Qwest demonstrates our ongoing commitment to protecting the [members’] benefits." (It should be noted that PERA has been active generally in securities litigation, having served, for example, as lead plaintiff in the Royal Ahold class action.) Similarly, an Alaskan state attorney is quoted in the news article as saying that "we have a system in place to monitor cases that get filed and then decide whether we should get actively involved."

According to the Alaska press release, Entwistle & Capucci represented not only the Alaska and Colorado funds, but also the Florida State Board of Administration and the New York State Teachers’ Retirement System. These latter two funds do not appear to have made any recent announcements regarding their funds’ separate actions.

As discussed in an earlier post on The D & O Diary (here), there have been prior significant settlements involving Qwest class action opt outs. For example, the California State Teachers’ Retirement System previously entered a $46.5 million opt-out settlement that included a $1.5 million contribution on behalf of former Qwest CEO Joseph Nacchio. According to press reports (here), Qwest also reached separate settlements with the New York City Employees’ Retirement System and Stichting Pensioenfunds of Netherlands and the Teachers’ Retirement System of Louisiana. The amount of these other settlements has not been publicly disclosed.

In its October 30, 2007 filing on SEC Form 10-Q (here), Qwest disclosed that the aggregate amount claimed by various persons opting out from the class settlement is "in excess of $1.9 billion." Qwest went on to state that "we have entered into settlement agreements with all of those persons." Qwest added that in connection with those settlements, "we have agreed to pay up to an aggregate of approximately $411 million, including applicable interest, on or before June 30, 2008." Although Qwest’s disclosure does not explicitly state that the $411 million amount includes the Colorado and Alaska settlements, the disclosure’s wording ("agreements with all of those persons") suggests that the $411 million does include those two settlements.

It should be noted, with all due emphasis, that the $411 million in opt out settlements exceeds the $400 million that Qwest agreed to pay in the class settlement.

As I have noted at greater length here, the emergence of these opt-out settlements presents a host of potentially significant complicating problems for current and future securities class action litigants. The involvement of public pension funds with significant investment losses, who now have a track record of having substantially increased their recoveries by having proceeded separately, suggests that significant opt out actions could become a regular part of larger class action settlements. At a minimum, these developments may raise potentially serious concerns about the continuing utility of class actions, especially if the perception becomes more widespread that, as viewed by Colorado PERA, class actions entail higher fees and lower recoveries.

All of these concerns are exacerbated if public officials are convinced they can garner valuable publicity and advance their own political interests by pursuing separate actions on behalf of state funds. The fact that the aggregate amount of the Qwest opt out settlements apparently exceeds the amount of the class settlement puts the issue in even sharper focus; indeed, the fact that Alaska is now on its third significant opt-out settlement, and has procedures in place to govern its future opt out decisions, makes it even more emphatic that opting-out may now be more routine and could become standard practice for public pension funds.

The possibility of continuing significant opt-out litigation after class settlement has been achieved threatens to increase both litigation costs and settlement expense in civil securities litigation. At a minimum, class litigants, eager to try to deter opt-outs, will feel pressure to increase class settlement amounts, in an effort to try to reduce attrition from the class. And, at some point, opt-outs may trigger the standard "blow up" provisions in many class settlement provisions, by which the class settlement in set aside of a specified percentage of class members opt out.

From the beginning, one of the questions about these opt-out settlements has been whether they are merely an attribute of the massive corporate scandals from earlier in the decade. The thought was that perhaps as the corporate scandal cases work their way through the system, the opt-out phenomenon might die down. However, the massive cases now arriving in connection with the subprime lending meltdown may create their own dynamic. The scale of the investment losses in at least some of the subprime cases may create the same incentives to opt-out as existed in the cases arising from the corporate scandals.

Indeed, at a panel on which I participated at the recent PLUS International Conference, one of the leading plaintiffs’ attorneys, who was also on the panel, said that many institutional investors (particularly European investors) were not interested in pursuing class cases at all in connection with the subprime mess, but were solely interested in individual or group actions. And as Adam Savett has noted on his Securities Litigation Watch blog (here), narrow class certification rulings are forcing other institutional investors to initiate their own separate lawsuits. With these kinds of concerns looming, we may get to the place where class litigation, long reviled by would-be corporate reformers, starts to look pretty good compared to a piecemeal process with separate investors pursuing claims separately. But at a minimum, these events and trends raise troubling questions about the future of securities class action litigation.

In a couple of months, the various consulting groups will be issuing their annual reports discussing developments in securities class action settlements. But their standard analysis, focusing exclusively on class settlements, may no longer be a sufficient basis upon which to understand what is happening in terms of total securities lawsuit severity. We have indeed entered a brave new world.

Options Backdating Case Going Back, Back to California: In an April 11, 2007 opinion (here), the federal court in California dismissed the CNET options backdating derivative case with leave to amend, later specifically instructing the parties to cooperate to allow the plaintiffs to conduct a books and records inspection under applicable Delaware law before the plaintiff refilled an amended complaint.

The parties have been involved in extensive books and records proceedings is Delaware and in a November 21, 2007 opinion (here) in the Delaware Chancery Court, Chancellor William B Chandler III granted the plaintiff’s books and records request, providing lively commentary along the way. Among other things, the Chancellor said that "it is about time the defendant…provides the requested documents, " -- and, he added, quoting The Notorious B.I.G., it is time that the case gets "going, going/back back/to Cali Cali."

The Delaware Corporate and Commercial Litigation Blog has a detailed and interesting discussion of the opinion here. Special thanks to blog author Francis Pileggi for forwarding a link to his post.

So What’s on Your iPod?: For those of you who may be wondering what Chancellor Chandler is listening to on his iPod, the song he quotes in the opinion, "Going Back to Cali," is from the Notorious B.I.G.’s posthumous double-album entitled "Life After Death," which Rolling Stone listed as #483 on its list of the greatest 500 albums of all time. According to Wikipedia, the song "Going Back to Cali," reflects the East Coast/West Coast feud that may have led to Mr. B.I.G’s as-yet-unsolved March 1997 murder.

The "Cali" in the song apparently is a shorthand reference to "California," which would explain, sort of, the Chancellor’s reference to the song in his opinion, as that is the state to which the CNET case will now be returning. Many of the song’s lyrics are unsuitable for this family-oriented blog. Suffice it to say that Mr. B.I.G apparently believed that West Coast females possess certain physical characteristics that he regarded positively. He also apparently believed that the West Coast offered attractive leisure time alternatives. However, he also felt antagonism (apparently reciprocated) against certain West Coast rivals, and this rivalry included mutual threats of physical violence.

It must be said that Chancellor Chandler’s musical allusion reflects a remarkably ecumenical taste in music. Not to mention a phenomenally broad diversity of resources on which to draw for guidance in his judicial decision-making.

And Finally: The D & O Diary's stock of literary allusions is considerably narrower than Chancellor Chandler's. The "brave new world" referenced in this post's title is an allusion to the line from the Shakespeare's The Tempest, in which Miranda exclaims "What brave new world/That has such people in it!" (To which Prospero replies " 'Tis new to you.")

There is a sense in which this reference is particularly apt; the island on which Miranda and her father have been exiled is traditionally thought to be Bermuda, which is also where many of the financial consequences from heightened securities lawsuit severity could be felt.

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