Wednesday, December 28, 2016

Court did not "like" Facebook's argument about common damages

By Rodney F. Tonkovic, J.D.

A Second Circuit panel has given a thumbs up to the district court's handling of the late 2015 settlement between investors and Nasdaq for the problematic 2012 Facebook IPO. In a summary order, the panel found that a settlement provision deferring the question of common damages to be decided in a related action against Facebook and its underwriters was not required to be resolved by the district court under the PSLRA, and leaving the question open did not violate principles of finality (In re Facebook, Inc., IPO Securities and Derivative Litigation, December 27, 2016, per curiam).

Widely anticipated to be one of the largest IPOs in history, Facebook's public launch was beset with technical glitches that set off a string of lawsuits and a $10 million fine from the SEC. Two groups of actions relating to the IPO were eventually consolidated into two class actions: the "Nasdaq action," which alleged losses arising from the technical malfunctions, and the "Facebook action," which alleged losses arising from misrepresentations in the IPO prospectus. In November 2015, a $26.5 million settlement between investors and Nasdaq for the buggy IPO was approved by the federal district court in Manhattan.

Damages deferred. The settlement of the Nasdaq action gave rise to this appeal, brought by the defendants in the Facebook action to vindicated their interests in that ongoing litigation. There was no objection to the substance of the settlement. The dispute on appeal instead concerned the settlement's judgment credit provision, which, in pertinent part, provides that any judgment against the Facebook defendants arising from the same matters alleged in the Nasdaq complaint will be reduced by the greater of the amount paid by the Nasdaq defendants to the common plaintiffs for common damages.

The appellants challenged the inclusion of the phrase "for common damages." That is, they objected to the implication that the damages alleged in the two actions might not be common, and that the issue is left to be litigated and decided in the Facebook action. The appellants maintained that they should receive judgment credit in the Facebook action for the full amount of the Nasdaq settlement paid to common plaintiffs because all of the damages were common. They argued further that the district court was obligated to settle the issue.

In short, the appellants did not object to the settlement itself, but they instead challenged the district court's decision to defer the question of common damages to the Facebook action. They argued that the district court had to decide the issue because the PSLRA required it and because the failure to resolve them violated principles of finality.

Affirmed. The panel affirmed the district court's judgment. Looking to Second Circuit precedent, the panel noted that class settlements have frequently been approved when, as in this case, they apply a specific judgment reduction formula giving nonsettling defendants credit for the greater of the settlement amount or a proportionate share of the settling defendants' fault.

The panel was similarly unpersuaded by the argument that the settlement approval violated principles of finality, stating that the Nasdaq action was final and that all of the parties to it were satisfied. The open question of common damages will have no effect whatsoever on the Nasdaq action, and can be litigated just as well in the Facebook action, the panel concluded.

The case is No. 15-3983.

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