United States District Court, N.D. California
ANIKA R. RIECKBORN, et al., Plaintiffs,
VELTI PLC, et al., Defendants.
ORDER REGARDING MOTION FOR FINAL APPROVAL OF PARTIAL SETTLEMENT AND MOTION FOR ATTORNEY'S FEES Re: Dkt. Nos. 170, 171
WILLIAM H. ORRICK, District Judge.
These motions of plaintiffs Bobby Yadegar/Ygar Capital LLC, St. Paul Teachers' Retirement Association, Newport News Employees' Retirement Fund, and Oklahoma Firefighters Pension and Retirement System (collectively, "plaintiffs") for final approval of a partial class action settlement and for an award of attorney's fees and costs raise important issues in addition to the fairness, reasonableness, and adequacy of the monetary value of the settlement. Should individuals named as defendants but never served be released? Is it appropriate to decide now what judgment reduction methodology will apply to a future judgment against the nonsettling defendants? If so, are the nonsettling defendants entitled to a proportionate fault reduction (or, more specifically, a Section 78u-4(f)(7)(B) reduction) on all Securities Act claims, as they assert they are?
The settlement creates a fund of $9.5 million to be distributed among a class consisting of all persons who purchased or otherwise acquired Velti plc ("Velti") securities between January 27, 2011 and August 20, 2013. In light of Velti's bankruptcy and the limited financial resources of the individual defendants, I find that the settlement is fair, reasonable, and adequate, and that plaintiffs' counsel's requested award for fees and costs is appropriate. I also answer all of the questions above in the affirmative, holding that the release of the unserved defendants is appropriate under the circumstances of this case, and that fairness dictates that I decide now that the nonsettling defendants are entitled to a Section 78u-4(f)(7)(B) reduction on all Securities Act claims pending against them. Accordingly, I will GRANT plaintiffs' motions for final approval and for attorney's fees and enter the Proposed Judgment submitted by plaintiffs subject to the modifications addressed in Section II of the Discussion.
I. ALLEGATIONS IN THE CONSOLIDATED COMPLAINT
According to the Consolidated Complaint, Velti is a provider of "mobile marketing and advertising technology and solutions" for businesses around the world. Consolidated Complaint ¶ 4 (Dkt. No. 105) ("Compl."). It entered contracts pursuant to which it provided services but did not get paid until after its work was done and the customer invoiced. Id. Between the completion of work and the receipt of payment, the amount due represented an account receivable. Id. Throughout the relevant period, it regularly reported as revenue amounts due on contracts before the receivable was actually paid, thereby creating an appearance of healthy revenue and earnings growth. Compl. ¶ 5.
Because Velti operated heavily in Greece, it was particularly affected by the Greek economic crisis through increasing numbers of unpaid invoices. Compl. ¶¶ 6-7. It continued to report robust revenue growth, however. Id. It misrepresented its "day sales outstanding" ("DSO") - a measure of the number of days it takes to collect a receivable - as significantly lower than it actually was. Compl. ¶¶ 8-9. It violated Generally Accepted Accounting Principles ("GAAP") in doing so. It also represented that it was diversifying its customer base beyond Greece, but in fact it was as dependent on the Greek market as ever. Compl. ¶ 8.
On May 16, 2012, shortly before Velti's first quarter 2012 earnings call, a stock market research firm published a report stating that Velti underreported its DSO. Compl. ¶ 10. Velti's securities declined in value over the next several days. Id. On May 22, 2012, it confirmed the report and changed its method of calculating its reported DSO. Compl. ¶ 11. Its reported DSO more than doubled as a result, from an already high 116 days to an "incredible" 272 days. Id. On November 14, 2012, it announced that due to its continued inability to timely collect receivables from certain of its customers in Greece, the Balkans, and various North African and Middle Eastern countries, it was transitioning its business away from those regions and into the United States and Western Europe. Compl. ¶ 12. It subsequently represented that only 10 percent of its revenue came from Greece or the Balkans. Compl. ¶ 13.
On August 20, 2013, Velti announced its 2013 second quarter financial results and revealed that it had decided to write off approximately $111 million of its receivables. Compl. ¶ 15. It disclosed that some of its receivables had been due since before 2012 and that, despite its representation that only 10 percent of its receivables were from Greece and the Balkans, the true proportion was about 66 percent. Id. In response to the news, Velti shares declined $0.66 per share, or 66 percent, to close on August 21, 2013 at $0.34 per share. Compl. ¶ 16.
Plaintiffs allege four different partial corrective disclosures during the class period. These occurred on May 16, 2012, November 15-16, 2012, January 31, 2012, and August 20, 2013. Dkt. No. 136 at 2-4; Dkt. No. 136-2 at 5 n.5.
Velti's accounting firm, defendant Baker Tilly Virchow Krause LLP ("Baker Tilly"), opined on the financial statements contained in Velti's initial public offering on January 28, 2011 and its secondary public offering on June 14, 2011. Velti's underwriters were Jefferies LLC, RBC Capital Markets, LLC, Needham & Company, LLC, and Canaccord Genuity Inc. (the "Underwriters"). Baker Tilly and the Underwriters are accused of failing to exercise the reasonable care necessary to ensure that Velti's DSO and financials conformed with GAAP. Compl. ¶ 18.
II. FILING OF THIS ACTION AND PARTIAL SETTLEMENT
Between August 22, 2013 and October 4, 2013, four securities class actions were filed in this district in connection with the collapse of Velti's stock value. On December 30, 2013, the cases were consolidated. On January 24, 2014, a fifth action was filed and also consolidated.
The Consolidated Complaint identifies three groups of defendants: (1) Velti and four of its officers/directors - Wilson W. Cheung, Nicholas P. Negroponte, Jeffrey G. Ross, and Winnie W. Tso (collectively with Velti, the "Settling Defendants"); (2) five other Velti officers/directors - Jerry Goldstein, David C. Hobley, Chris Kaskavelis, David W. Mann, and Alex Moukas (the "Overseas Defendants"); and (3) Baker Tilly and the Underwriters (collectively, the "Nonsettling Defendants"). Dkt. No. 105. It asserts five causes of action: (1) violations of Section 11 of the Securities Act of 1933 ("Securities Act") against all defendants; (2) violations of Section 12(a)(2) of the Securities Act against Velti, Goldstein, Hobley, Kaskavelis, Mann, Moukas, Negroponte, and the Underwriters; (3) violations of Section 15 of the Securities Act against all of the individual defendants; (4) violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 against Velti, Cheung, Kaskavelis, Moukas, Ross, Tso, and Baker Tilley; and (5) violations of Section 20(a) of the Exchange Act against Cheung, Kaskavelis, Moukas, Ross, and Tso. Id.
Plaintiffs' counsel have undertaken extensive multinational efforts to serve the Overseas Defendants but have been unable to do so. By performing a "skip trace" and other computerized research, it was determined that Goldstein lived in Greece, Hobley in either England or Ireland, and Mann in England. Dingman Decl. ¶ 2 (Dkt. No. 136-3). A process server attempted to serve Kaskavelis and Moukas at Velti's offices in San Francisco on October 22, 2013. Id. Velti's legal department informed the server that Kaskavelis and Moukas did not work at that location and declined to provide additional information concerning their whereabouts. Id. Servers twice attempted to serve Moukas at a potential address in California; they were told that Moukas had not been seen at that location for months and that he had moved back to Greece. Id. ¶¶ 2, 4. Another potential address for Kaskavelis and Moukas was located in New York City. Id. ¶ 5. Servers twice attempted to complete service there. Id. One doorman at the location stated that he had never heard of Kaskavelis; another doorman told the server that he could not recall the last time he had seen Moukas. Id. Another attempt to serve Kaskavelis at a potential address in Massachusetts also failed. Id. ¶ 6. In early 2014, plaintiffs' counsel retained an international agency for the purpose of serving the Overseas Defendants in Europe but were still unable to complete service. Mickow Decl. ¶¶ 1-5 (Dkt. No. 136-4).
When Velti's United States-based operations filed for Chapter 11 bankruptcy on November 4, 2013, the parties began discussing settlement. Plaintiffs' counsel, Velti, and some of the individual defendants mediated before the Honorable Layn Phillips on March 14, 2014. The mediation failed, but the parties continued to communicate with Judge Phillips. At some point after the Consolidated Complaint was filed on April 22, 2014, plaintiffs and the Settling Defendants (the "Settling Parties") agreed to this partial settlement.
The Settling Parties executed a Stipulation and Agreement of Partial Settlement ("Settlement Agreement") on May 23, 2014. Dkt. No. 170-2. The Settlement Agreement creates a settlement fund of $9, 500, 000 to be distributed among class members who submit a valid, timely claim form. Settlement Agreement ¶ 3.1; Weiser Decl. ¶ 51 (Dkt. No. 170-1). The settlement fund is financed exclusively through Velti's insurance policies. See, e.g., Weiser Decl. ¶ 42. These policies have been rapidly diminishing following Velti's bankruptcy. See, e.g., Weiser Decl. ¶¶ 5, 38. Participating class members will recover according to the "Plan of Distribution, " which makes eligible for recovery all class members who have a net loss arising out of all transactions involving Velti securities purchased pursuant to, or traceable to, either of Velti's public offerings or on the open market during the class period. Weiser Decl. ¶ 52.
In addition to creating the settlement fund, the Settlement Agreement includes a provision requiring the Settling Defendants to aid plaintiffs in the continued prosecution of their claims against the Nonsettling Defendants. Settlement Agreement ¶ 3.2. The Settlement Agreement and Proposed Judgment also include a bar order - which purports to bar certain claims against the Settling Defendants and other "Released Persons" - and judgment reduction provisions - which describe the manner in which any future judgment against the Nonsettling Defendants will be reduced.
Plaintiffs filed their motion for preliminary approval on May 23, 2014. Dkt. No. 109. On August 19, 2014, I granted it. Dkt. No. 147. As instructed by the preliminary approval order, the settlement administrator mailed 43, 110 class notices to potential class members, and notice of the settlement was published in the national edition of Investor's Business Daily and over the Business Wire. Mot. 25; Weiser Decl. ¶¶ 50-51. The settlement administrator set up a website, www.veltisecuritieslitigation.com, which allowed visitors to view the Settlement Agreement, class notice, and Plan of Distribution, to submit questions, and to file a claim online. Bravata Decl. ¶ 7 (Dkt. No. 181). By the December 2, 2014 deadline, eight potential class members had submitted objections and five had opted out. See Reply 1; Bravata Decl. ¶ 10 (Dkt. No. 181). Three of the objections were subsequently withdrawn. Dkt. No. 196.
Plaintiffs filed their motion for final approval and motion for attorney's fees on November 6, 2014. Dkt. Nos. 170, 171. As at preliminary approval, the Nonsettling Defendants filed extensive objections, primarily regarding the Proposed Judgment's bar order and judgment reduction provisions. See Dkt. Nos. 176, 178. The final approval hearing was held on January 14, 2015.
I. CLASS ACTION SETTLEMENT APPROVAL
Rule 23(e) of the Federal Rules of Civil Procedure requires a court to determine whether a proposed settlement is fair, reasonable, and adequate. Fed.R.Civ.P. 23(e). To determine whether a settlement agreement meets these standards, a district court must consider a number of factors, including: "(1) the strength of the plaintiffs' case; (2) the risk, expense, complexity, and likely duration of further litigation; (3) the risk of maintaining class action status throughout the trial; (4) the amount offered in settlement; (5) the extent of discovery completed and the stage of the proceedings; (6) the experience and views of counsel; (7) the presence of a governmental participant; and (8) the reaction of the class members to the proposed settlement." Churchill Vill., L.L.C. v. Gen. Elec., 361 F.3d 566, 575 (9th Cir. 2004); In re Bluetooth Headset Products Liab. Litig., 654 F.3d 935, 946 (9th Cir. 2011) (quoting same). "This list is not exclusive and different factors may predominate in different factual contexts." Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370, 1376 (9th Cir. 1993). In certain cases, one factor alone may prove determinative in finding sufficient grounds for approval. See id.
Settlements that occur before formal class certification require a higher standard of fairness. In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 458 (9th Cir. 2000). In reviewing such settlements, in addition to considering the above factors, the court must also ensure that "the settlement is not the product of collusion among the negotiating parties." Bluetooth, 654 F.3d at 946-47 (internal quotation marks and citations omitted). Signs of collusion include: (1) "when counsel receive a disproportionate distribution of the settlement;" (2) when the parties negotiate an arrangement under which defendants agree not to oppose an attorneys' fee award up to a certain amount separate from the class's actual recovery, as such arrangements carry "the potential of enabling a defendant to pay class counsel excessive fees and costs in exchange for counsel accepting an unfair settlement on behalf of the class;" and (3) "when the parties arrange for fees not awarded to revert to defendants rather than be added to the class fund." Id. at 947.
While considering all these interests, "the court's intrusion upon what is otherwise a private consensual agreement negotiated between the parties to a lawsuit must be limited to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned." Officers for Justice v. Civil Serv. Comm'n of City & Cnty. of San Francisco, 688 F.2d 615, 625 (9th Cir. 1982). "Finally, it must not be overlooked that voluntary conciliation and settlement are the preferred means of dispute resolution. This is especially true in complex class action litigation." Id.
II. ATTORNEY'S FEE AWARD
Federal Rule of Civil Procedure 23(h) provides that "[i]n a certified class action, the court may award reasonable attorney's fees and nontaxable costs that are authorized by law or by the parties' agreement." Fed.R.Civ.P. 23(h). Attorney's fees provisions included in proposed class action agreements must be "fundamentally fair, adequate and reasonable." Staton v. Boeing Co., 327 F.3d 938, 964 (9th Cir. 2003). In "common fund cases, " a court has discretion to award attorneys' fees either as a percentage of such common fund or by using the lodestar method. Id. at 967-68. "The percentage method means that the court simply awards the attorneys a percentage of the fund sufficient to provide class counsel with a reasonable fee." Hanlon, 150 F.3d at 1029. Even when applying the percentage method, the court should use the lodestar method as a cross-check to determine the fairness of the fee award. Vizcaino v. Microsoft Corp., 290 F.3d 1043, 1050 (9th Cir. 2002).
I. FINAL APPROVAL OF PARTIAL CLASS ACTION SETTLEMENT
A. Strength of Plaintiffs' Case and Risk, Expense, Complexity, and Likely Duration of Further Litigation
In determining whether the settlement is fair, reasonable, and adequate, I must balance the risks of continued litigation, including the strengths and weaknesses of plaintiffs' case, against the benefits afforded to class members, including the immediacy and certainty of recovery. See Larsen v. Trader Joe's Co., No. 11-cv-05188-WHO, 2014 WL 3404531, at *4 (N.D. Cal. July 11, 2014); LaGarde v. Support.com, Inc., No. 12-cv-00609-JSC, 2013 WL 1283325, at *4 (N.D. Cal. Mar. 26, 2013). "In most situations, unless the settlement is clearly inadequate, its acceptance and approval are preferable to lengthy and expensive litigation with uncertain results." Nat'l Rural Telecommunications Coop. v. DIRECTV, Inc., 221 F.R.D. 523, 526 (C.D. Cal. 2004) (internal quotation marks omitted).
Plaintiffs contend that their claims have significant merit but acknowledge a number of risks and uncertainties should they proceed towards summary judgment and trial. Mot. 10-15. The Settling Defendants have adamantly denied liability and have asserted from the outset that they possess absolute defenses to all of plaintiffs' claims. The Settling Defendants' basic position is that Velti's collapse was due to a confluence of events beyond their control, and that Velti relied on its advisors - namely Baker Tilly - in assessing whether their receivables were properly managed and reported. Plaintiffs state that while they believe they could prevail over this defense, success is by no means guaranteed given the inherent unpredictability of complex securities litigation. Mot. 10-11.
Further, even if plaintiffs were able to establish liability against the Settling Defendants, they would also have to show loss causation and damages. Plaintiffs assert that the Supreme Court's decision in Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005), has made proving loss causation more difficult and point to a number of cases rejecting securities claims for failure to satisfy this element. Mot. 12. Proving damages would also entail substantial uncertainty, as it would depend in large part on which, if any, of the four alleged partial corrective disclosures plaintiffs are ultimately able to rely. See Mulholland Decl. ¶ 9 (Dkt. No. 136-2). According to plaintiffs, damages could range from anywhere between $34 million and $287 million depending on this issue. See id. The Settling Defendants, meanwhile, maintain that damages are as low as $28 million. See Dkt. No. 136 at 4 n.9.
Plaintiffs assert that the international aspects of this case create additional risks. Discovery would likely be a significant obstacle if the litigation were to continue, as a large portion of the documents and witnesses necessary to prosecute plaintiffs' claims are located in Greece, and foreign privacy laws would hinder their ability to obtain and review the evidence necessary to prove their claims. Service on the Settling Defendants (for the purpose of obtaining discovery or enforcing judgment) would be problematic as well, as some of them live abroad. Finally, plaintiffs note that any judgment would likely be appealed, and that barring settlement, "there is no question that this case would be litigated for years, ... costing millions of additional dollars, with the possibility that the end result would not be better for the class, and might even be worse." Mot. 15.
Plaintiffs have shown through their briefing and attached declarations that further litigation is likely to be costly and time-intensive, with no guarantee of a more beneficial outcome for class members as a result. Accordingly, it is reasonable for plaintiffs to decide that the guarantee of an immediate recovery outweighs the uncertainties of pursuing a possibly more favorable outcome by continuing to litigate. These first two factors weigh in favor of approval.
B. Risk of Maintaining Class Action Status Throughout the Trial
Plaintiffs have defined the class period to run from January 27, 2011, to August 20, 2013, a period which spans four alleged corrective disclosures. Plaintiffs acknowledge that this class period could be shortened if I were to find that certain disclosures were not in fact corrective. See Dkt. No. 136 at 7-8. For example, defendants have argued that the disclosure on May 16, 2012 sufficiently revealed Velti's accounting practices such that the class period should end on this date. Id. at 8. If this argument prevailed, the amount of damages possibly recoverable by the class would shrink dramatically. I agree with plaintiffs that the class period is likely to be a heavily litigated matter in this action, and that the class period's end date will control to a large extent the class's potentially recoverable damages. This factor favors approval.
C. Amount Offered in Settlement
Assessing the fairness, adequacy, and reasonableness of the amount offered in settlement is not a matter of applying a "particular formula." Rodriguez v. W. Publ'g Corp., 563 F.3d 948, 965 (9th Cir. 2009). "[U]ltimately, [it] is nothing more than an amalgam of delicate balancing, gross approximations, and rough justice." Id.
Under the circumstances, I find that the $9.5 million offered in settlement is reasonable. Velti's United States-based operations filed for bankruptcy on November 4, 2013; its European operations did the same less than a year after. As plaintiffs observe, these bankruptcy filings "immediately placed Velti's assets within the confines of bankruptcy proceedings... and effectively started the clock on when plaintiffs could ensure any recovery for the settlement class." Reply 4. Plaintiffs state that the personal assets of the individual defendants who are settling have also been diligently reviewed and are likewise extremely limited. Mot. 15; Weiser Decl. ¶ 42. The fact that some of these individuals live abroad adds risk and complexity to enforcing any judgment against them. Mot. 15. The upshot is that even if plaintiffs were able to secure a judgment against the Settling Defendants, it is not at all clear that plaintiffs would be able to collect it.
In Torrisi v. Tucson Elec. Power Co ., the Ninth Circuit found that the defendant's precarious financial condition "predominate[d] to make clear that the district court acted within its discretion" in approving a securities class action settlement. 8 F.3d at 1375-76. At the time of the settlement, the defendant was negotiating with its creditors to restructure its debt, and an involuntary bankruptcy petition had been filed against it. Id. at 1376. The defendant had reached an agreement with certain of its creditors, and there was evidence that other creditors would likely have refused to assent if the settlement had failed. Id. The Ninth Circuit observed that this could have resulted in "a bankruptcy organization which would have left little if anything for class members." Id.
While I do not find that the Settling Defendants' financial condition is dispositive to the Rule 23(e) inquiry, I do find that it highlights the reasonableness of the settlement amount. Plaintiffs here "have agreed to accept a smaller certain award rather than seek the full recovery but risk getting nothing." Omnivision, 559 F.Supp.2d at 1042. Given that Velti is bankrupt, available insurance funds are dwindling, and there is no evidence to indicate that the individual defendants would be able to provide a more than de minimis recovery for the class, this decision was reasonable. This factor favors approval.
D. Extent of Discovery Completed and Stage of the Proceedings
This factor evaluates whether "the parties have sufficient information to make an informed decision about settlement." Linney v. Cellular Alaska P'ship, 151 F.3d 1234, 1239 (9th Cir. 1998). The parties agreed to this settlement before formal discovery or any significant motion practice in this case. "However, in the context of class action settlements, formal discovery is not a necessary ticket to the bargaining table." Mego, 213 F.3d at 459 (internal quotation marks omitted). Even where the parties decide to settle relatively early in the course of the litigation, the key inquiry remains whether they had sufficient information to make an informed decision about doing so. Id.
Plaintiffs state that the settlement was reached only after plaintiffs' counsel (i) conducted an extensive investigation into the underlying facts; (b) thoroughly researched relevant law; (c) prepared and filed the 130-page Consolidated Complaint; (d) prepared an in depth mediation statement; and (e) consulted with economic experts regarding loss causation and damages. Weiser Decl. ¶ 6. Plaintiffs also submit a declaration from Judge Phillips stating that in preparation for the mediation, the Settling Parties provided to him and exchanged amongst themselves mediation briefs ...