The opinion of the court was delivered by: WALKER
The first of these related securities class actions was filed on August 5, 1994, one day after defendant California Micro Devices Corporation ("CAMD") announced that it had issued materially false financial statements. A number of additional actions were filed over the course of several months as new information emerged concerning the company.
The court issued an order on October 19, 1994, establishing a bidding procedure to be used for selection of class counsel and suggesting that a status conference be held on October 28 or November 3, 1994, to facilitate that process. At the request of counsel, that conference was delayed until January 19, 1995. In the interim, counsel for CAMD and certain plaintiffs' lawyers engaged in settlement discussions without notifying the court that they were doing so. On August 4, 1995, the court issued an order denying preliminary approval of the settlement that resulted from those negotiations. The court also found the firm of Lieff, Cabraser, Heimann & Bernstein ("LCHB") unsuited to represent the class in the absence of a showing of affirmative support for the settlement proposal from "a significant portion of the prospective class." In re California Micro Devices Securities Litigation, 1995 U.S. Dist. LEXIS 11587, 1995 WL 476625 (ND Cal 1995) ("CAMD Sec Lit I ").
At a hearing on November 17, 1995, LCHB attempted to demonstrate that its proposal had the affirmative support of the class. In an order dated February 2, 1996, the court explained why the showing made by LCHB fell short of that required for the court to find the firm and its nominal plaintiff appropriate legal representatives for the class. In re California Micro Devices Securities Litigation, 168 F.R.D. 257, 263-68 (ND Cal 1996) ("CAMD Sec Lit II "). In connection with the November 1995 hearing, an alternative class representative, the Colorado Public Employees Retirement Fund ("ColPERA"), came forward. Finding that ColPERA was in a position to provide meaningful case supervision on behalf of the class, the court ordered the substitution of ColPERA as representative plaintiff and directed that ColPERA's attorneys, the law firm of Hogan & Hartson, serve as class counsel. Id at 275-76.
In its February 1996 order, the court also rejected the proposed settlement on its merits. The specific deficiencies of that proposal will be discussed below. In essence, the settlement was reached under conditions which suggested the possibility of collusion between plaintiffs' counsel and CAMD, and the substantive terms of the agreement were not sufficiently beneficial to the class to alleviate the concerns created by the procedural defect.
In July 1996, the court granted a motion by California State Teachers' Retirement System ("CalSTRS") to intervene as an additional representative plaintiff. The same month, the parties met with Judge Lynch for renewed settlement discussions. Based on agreements reached in those meetings, the new representative plaintiffs filed a motion for preliminary approval of settlement on November 1, 1996. After a hearing on that motion on December 13, 1996, the court granted the motion. On February 14, 1997, the representative plaintiffs filed a motion for final approval of settlement. As explained below, the court finds that the proposed settlement satisfies the requirements of FRCP 23 and is, therefore, approved.
Federal Rule of Civil Procedure 23(e) requires court approval for the settlement of any class action. In order to be approved, a settlement must be "fundamentally fair, adequate and reasonable." Torrisi v Tucson Elec Power Co, 8 F.3d 1370, 1375 (9th Cir 1993) (quoting Class Plaintiffs v Seattle, 955 F.2d 1268, 1276 (9th Cir 1992), cert denied, 506 U.S. 953, 121 L. Ed. 2d 333, 113 S. Ct. 408 (1992)), cert denied, 512 U.S. 1220 (1994). Assessing a settlement proposal requires the court to balance a number of factors, potentially including:
the strength of the plaintiffs' case; the risk, expense, complexity, and likely duration of further litigation; the risk of maintaining class action status throughout the trial; the amount offered in settlement; the extent of discovery completed, and the stage of the proceedings; the experience and views of counsel; the presence of a governmental participant; and the reaction of the class members to the proposed settlement.
Torrisi, 8 F.3d at 1375 (quoting Officers for Justice v Civil Serv Comm'n of San Francisco, 688 F.2d 615, 625 (9th Cir 1982), cert denied, 459 U.S. 1217, 75 L. Ed. 2d 456, 103 S. Ct. 1219 (1983)). Other factors may play a role, or even predominate, in certain circumstances. Torrisi, 8 F.3d at 1376.
Under most circumstances, the court's evaluation of a class action settlement requires a searching inquiry, conducted with due regard to the potential for tacit collusion between plaintiffs' counsel and the defendant. See CAMD Sec Lit II, 168 F.R.D. at 260-62. As the court has previously noted in reference to class actions,
Id at 261 (quoting Mars Steel Corp v Continental Illinois National Bank & Trust, 834 F.2d 677, 681-82 (7th Cir 1987) (Posner)).
The settlement proposed here is not the "ordinary" class action circumstance. The representative plaintiffs are large institutional investors who are sophisticated in legal and business issues generally, and in the securities markets specifically. Moreover, they have a fiduciary duty to exercise reasonable diligence in pursuing the interests of their investors. ColPERA and CalSTRS have both the resources and the incentive to monitor the efforts of class counsel. They have demonstrated this fact by coming forward to be heard in this case and by selecting a law firm to represent them (in striking contrast to the common circumstance of attorneys choosing their clients in class actions). The presence of interested and able class representatives reduces substantially the agency problems associated with class actions and correspondingly reassures the court about the bona fides of a proposed settlement.
The court's February 1996 order examined the substantive terms of the previous settlement proposal at some length. Five specific weaknesses in that agreement were identified:
(1) the settlement contained a relatively small cash component, while CAMD had a large cash reserve;
(2) the terms of the settlement reflected an apparently uncritical acceptance by LCHB of CAMD's claims of imminent insolvency;
(3) the settlement relieved the outside directors of liability without requiring them to ...