Federal Judge Approves Global Settlement of Internet IPO Actions; Not Good Time to Chill Class Actions

A federal judge has given final approval to the global settlement of one of the most protracted multi-district securities litigations in history. It has been eight years since thousands of investors brought the class actions consolidated in this action alleging that 55 underwriters, more than 300 issuers, and hundreds of individuals defrauded the public with regard to Internet IPOs. In re Initial Public Offering Securities Litigation, Master File No 21 MC 92 (SAS), Oct. 5, 2009.

In a 128-page opinion, the court found that the proposed $586 million settlement was fair, reasonable and adequate despite the fact that it represented 2 percent of the aggregate expected recovery in actions. While a number of objectors noted that the settlement was miniscule compared to the expected recovery in the case, the district judge noted that the Second Circuit has said that a settlement amount of even a fraction of the potential recovery does not render a proposed settlement inadequate. The court found that the settlement was reasonable in light of the expected recovery and attendant risks. The investors could have lost against the underwriters after expending significant costs and the litigation could have taken another decade to resolve.

The court also noted that disapproving the settlement would have a significant chilling effect on future class actions at a time when serious questions have been raised about the conduct of many banks during the recent financial crisis.

Rejecting reliance objections, the court noted that it was alleged that the firms engaged in a scheme to induce the purchase of IPO shares at inflated prices and for undisclosed compensation and then sustained the price inflation by publishing misleading analyst reports. It was also alleged that they failed to disclose the nature of the scheme and the underwriter and analyst compensation. The Supreme Court specifically contemplated that the Affiliated Ute presumption of reliance would apply in this situation.

While declaring the result "underwhelming’’ despite counsel’s best efforts, and taking ``great pause’’ in the stark difference between counsel’s fee request and each class member’s shares of the settlement, the court awarded counsel fees of one-third of the net settlement fund to take into account the risks that counsel undertook to represent the class members and the hard work that was put into resolving the litigation.

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