In Re: Cendant Corp.

Opinions of the United

2001 Decisions States Court of Appeals

for the Third Circuit

8-28-2001

In Re: Cendant Corp.

Precedential or Non-Precedential:

Docket 00-2520

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2001

Recommended Citation

"In Re: Cendant Corp." (2001). 2001 Decisions. Paper 196.

http://digitalcommons.law.villanova.edu/thirdcircuit_2001/196

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2001 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Volume 1 of 3

Filed August 28, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 00-2520, 00-2683, 00-2708, 00-2709, 00-2733,

00-2734, 00-2769, 00-3653

IN RE: CENDANT CORPORATION LITIGATION

JOANNE A. ABOFF FAMILY TRUST,

U/A DATED 2/11/92,

Appellant in No. 00-2520

BETTY DUNCAN,

Appellant in No. 00-2683

TERE THROENLE,

Appellant in No. 00-2708

JANICE G. DAVIDSON; ROBERT M. DAVIDSON, in his

capacity as trustee of Robert M. Davidson Charitable

Remainder Unitrust, and as co-trustee of Elizabeth A.

Davidson Irrevocable Trust, Emilie A. Davidson Irrevocable

Trust, John R. Davidson Irrevocable Trust, Emilie A.

Davidson Charitable Remainder Unitrust and John R.

Davidson Charitable Remainder Unitrust,

Appellants in No. 00-2709

FAYE SCHONBRUNN,

Appellant in No. 00-2733

ANN MARK,

Appellant in No. 00-2734

NEW YORK CITY PENSION FUNDS,

Appellant in No. 00-2769

NEW YORK CITY PENSION FUNDS,

Appellant in No. 00-3653

On Appeal From the United States District Court

For the District of New Jersey

(D.C. Civ. No. 98-cv-01664)

District Judge: Honorable William H. Walls

Argued: May 22, 2001

Before: BECKER, Chief Judge, SLOVITER and

AMBRO, Circuit Judges.

(Filed: August 28, 2001)

HOWARD B. SIROTA, ESQUIRE

(ARGUED)

Sirota & Sirota

110 Wall Street

New York, NY 10005

Counsel for Appellant

Joanne A. Aboff Family Trust

EDWARD W. COCHRAN, ESQUIRE

(ARGUED)

Cochran & Cochran

2872 Broxton Road

Shaker Heights, OH 44120

FRANK H. TOMLINSON, ESQUIRE

Pritchard, McCall & Jones

505 North 20th Street, Suite 800

Birmingham, AL 35203

PAUL S. ROTHSTEIN, ESQUIRE

626 Northeast First Street

Gainesville, FL 32601

Counsel for Appellant Betty Duncan

2

C. BENJAMIN NUTLEY, ESQUIRE

(ARGUED)

Kendrick & Nutley

468 North Camden Drive, Suite 200

Beverly Hills, CA 90210

RICHARD GALEX, ESQUIRE

Galex, Tortoreti & Tomes

150 Tices Lane

East Brunswick, NJ 08816

Counsel for Appellant Tere Throenle

GERALD W. PALMER, ESQUIRE

(ARGUED)

RICKY L. SHACKELFORD, ESQUIRE

EUGENIA L. CASTRUCCIO,

ESQUIRE

Jones, Day, Reavis & Pogue

555 West Fifth Street, Suite 4600

Los Angeles, CA 90013

Counsel for Appellants

Robert and Janice Davidson

LAWRENCE W. SCHONBRUN,

ESQUIRE (ARGUED)

Law Office of Lawrence W.

Schonbrun

86 Eucalyptus Road

Berkeley, CA 94705

Counsel for Appellant

Faye Schonbrunn

3

JOHN HALEBIAN, ESQUIRE

(ARGUED)

Wechsler, Harwood, Halebian &

Feffer

488 Madison Avenue, 8th Floor

New York, NY 10022

KENNETH A. ELAN, ESQUIRE

Law Offices of Kenneth A. Elan

217 Broadway

New York, NY 10007

Counsel for Appellant Ann Mark

MICHAEL D. HESS, ESQUIRE

LEONARD J. KOERNER, ESQUIRE

LORNA B. GOODMAN, ESQUIRE

ELIZABETH S. NATRELLA, ESQUIRE

(ARGUED)

LESLIE CONASON, ESQUIRE

Corporation Counsel of the

City of New York

New York City Law Department

100 Church Street

New York, NY 10007

Counsel for Appellants

New York City Pension Funds

MAX W. BERGER, ESQUIRE

DANIEL L. BERGER, ESQUIRE

(ARGUED)

JEFFREY N. LEIBELL, ESQUIRE

Bernstein, Litowitz, Berger, &

Grossman, LLP

1285 Avenue of the Americas,

33rd Floor

New York, NY 10019

4

LEONARD BARRACK, ESQUIRE

GERALD J. RODOS, ESQUIRE

JEFFREY W. GOLAN, ESQUIRE

Barrack, Rodos, & Bacine

3300 Two Commerce Square

2001 Market Street

Philadelphia, PA 19103

Counsel for Appellees

California Public Employees'

Retirement System, New York State

Common Retirement Fund and The

New York City Pension Funds

ARTHUR R. MILLER, ESQUIRE

(ARGUED)

228 Harvard Law School

Langdell West

Areeda Hall 225

1565 Massachusetts Avenue

Cambridge, MA 02138

Counsel for Appellees Barrack,

Rodos, & Bacine and Bernstein,

Litowitz, Berger & Grossmann, LLP

ALAN N. SALPETER, ESQUIRE

(ARGUED)

MICHELE ODORIZZI, ESQUIRE

CARYN L. JACOBS, ESQUIRE

Mayer, Brown & Platt

190 South LaSalle Street

Chicago, IL 60603-3441

DOUGLAS S. EAKLEY, ESQUIRE

PETER L. SKOLNIK, ESQUIRE

Lowenstein, Sandler, PC

65 Livingston Avenue

Roseland, NJ 07068

5

KATHRYN A. OBERLY, ESQUIRE

ROBERT G. COHEN, ESQUIRE

WILLIAM P. HAMMER, JR.,

ESQUIRE

Ernst & Young, LLP

787 Seventh Avenue

New York, NY 10019-6018

Counsel for Appellee

Ernst & Young, LLP

CARL GREENBERG, ESQUIRE

MICHAEL M. ROSENBAUM,

ESQUIRE

Budd, Larner, Gross, Rosenbaum,

Greenberg & Sade

150 John F. Kennedy Parkway

CN 1000

Short Hills, NJ 07078-0999

SAMUEL KADET, ESQUIRE

Skadden, Arps, Slate, Meagher &

Flom

Four Times Square

New York, NY 10036

Counsel for Appellee

Cendant Corporation

HERBERT J. STERN, ESQUIRE

Stern, Greenberg & Kilcullen

75 Livingston Avenue

Roseland, NH 07068

Counsel for Appellee

James E. Buckman

6

DAVID M. BECKER, ESQUIRE

General Counsel

MEYER EISENBERG, ESQUIRE

Deputy General Counsel

ERIC SUMMERGRAD, ESQUIRE

Deputy Solicitor

LUIS DE LA TORRE, ESQUIRE

(ARGUED)

Special Counsel

NATHAN A. FORRESTER, ESQUIRE

Senior Counsel

Securities and Exchange

Commission

450 Fifth Street, N.W.

Washington, DC 20549-0606

Counsel for Amicus Curiae

Securities and Exchange Commission

JOSEPH A. GRUNDFEST, ESQUIRE

The William A. Franke Professor of

Law and Business

Stanford Law School

Crown Quadrangle

559 Nathan Abbott Way

Stanford, CA 94305-8610

MELANIE M. PIECH, ESQUIRE

Lieff, Cabraser, Heimann &

Bernstein, LLP

275 Battery Street, 30th Floor

San Francisco, CA 94111

Counsel for Amicus Curiae

Barclays Global Investors, N.A.,

Franklin Resources, Inc., New

Hampshire Retirement System and

Public Employees' Retirement

Association of Colorado

7

OPINION OF THE COURT

BECKER, Chief Judge.

I. INTRODUCTION & SUMMARY 9

II. FACTS & PROCEDURAL H ISTORY 15

A. Background 15

B. The Appointment of Lead Plaintiff and

Lead Counsel 17

C. Class Certification, the Filing of the Amended

Complaint, and the Reaching of a Settlement 22

D. The Terms of the Settlement and the

Plan of Allocation 24

E. Preliminary Settlement Approval, the Se ttlement

Notice, and the Fairness Hearing 27

F. The Appeals and the Issues Presented by

Each Appeal 29

III. THE FAIRNESS OF THE SETTLEMENT AND THE

PLAN OF ALLOCATION 32

A. Approval of the Settlement: The Applica tion

of the Girsh Factors 32

1. The First Girsh Factor: Complex ity & Likely

Duration of Litigation 35

2. The Second Girsh Factor: The Re action

of the Class 37

3. The Third Girsh Factor: The Sta ge

of Proceedings 39

4. The Fourth Girsh Factor: The Ri sks of

Establishing Liability 41

5. The Fifth Girsh Factor: The Ris ks of

Establishing Damages 44

6. The Sixth Girsh Factor: The Ris ks of

Maintaining the Class Action Through Trial 45

7. The Seventh Girsh Factor: The A bility of the

Defendants

to Withstand a Greater Judgment 46

8. The Final Girsh Factors: The Ra nge of

Reasonableness of Settlement Fund in Light of the

Best Possible Recovery & in Light of

8

Litigation Risks 49

9. Summing Up the Girsh Factors 52

B. Intra-class Conflicts 53

1. Throenle's Arguments 53

a. The Lead Plaintiff 's Allege d Conflicts

of Interest 53

b. The Corporate Governance Change s 57

2. Mark's Arguments 61

C. The Davidsons' Objections 66

1. Class Certification Findings 67

2. Notice of the Settlement 67

3. Intra-Class Conflicts

68

4. Alleged Flaws in the Plan of Allocation 70

IV. COUNSEL SELECTION AND COUNSEL FEES 71

A. Introduction: Attorney-Client Tension i n the Class

Action Context 71

1. The Problem With Class Actions 71

2. The Evolution of Judicial Review of Cou nsel

Fees In Class Actions 73

3. The PSLRA 82

B. The Reform Act's Procedures; Selection of the

CalPERS Group As Lead Plaintiff 84

1. Legal Standards 84

a. Identifying the Presumptive Lea d Plaintiff 84

b. Determining Whether the Presump tion

Has Been Rebutted 93

2. Application of the Standards Here 96

C. The Auction 100

1. May NYCPF Validly Object to the Auction ? 100

2. Does the Reform Act Ever Permit

an Auction? 103

3. Was the Auction in this Case Permissibl e? 111

D. Counsel Fees 114

V. CONCLUSION 12

4

I. INTRODUCTION & SUMMARY

These are consolidated appeals from the District Court's

approval of a $3.2 billion settlement of a securities fraud

class action brought against Cendant Corporation and its

auditors, Ernst & Young, and the Court's award of $262

9

million in fees to counsel for the plaintiff class. Both the

settlement and the fee award are challenged in these

appeals. The enormous size of both the settlement and the

fee award presages a new generation of "mega cases" that

will test our previously developed jurisprudence.

This case is governed by the Private Securities Litigation

Reform Act of 1995 (PSLRA or Reform Act). Under the

Reform Act, one of a district court's first tasks is to select

a lead plaintiff. Once the lead plaintiff has been appointed,

the statute provides that the lead plaintiff "shall, subject to

the approval of the court, select and retain counsel to

represent the class." The District Court, after appointing a

lead plaintiff, declined to approve its choice of counsel,

instead choosing to select lead counsel by means of an

auction. The most important question presented by these

appeals is whether this decision was compatible with the

PSLRA. Closely intertwined, and also of great importance,

are issues involving the proper procedures for selecting a

lead plaintiff and for awarding counsel fees in cases

governed by the Reform Act.

Before we can reach these issues, however, we must

decide whether the District Court abused its discretion in

approving the settlement and the plan for allocation of

damages, to which objections were interposed. Some

objectors argue forcefully that the settlement was

inadequate under the nine-factor test that this Court

developed for reviewing the fairness, reasonableness, and

adequacy of class action settlements in Girsh v. Jepson,

521 F.2d 153 (3d Cir. 1975). Noting that the class's case

was exceptionally strong because Cendant (the main

defendant) virtually conceded liability and because some of

the plaintiffs' claims (i.e., those presented underS 11 of the

Securities Act of 1933) were strict liability claims, these

objectors contend that, notwithstanding the threat of

bankruptcy if the settlement was too high, a considerably

higher figure could have been extracted under these

favorable liability circumstances without running the risk

that Cendant would seek bankruptcy protection. In their

submission, the class should have received a fuller recovery

of its alleged $8.8 billion loss.

10

These objections are weighty, but other Girsh factors

counsel strongly in favor of approving the Cendant

settlement--the reaction of the class, the stage of the

proceedings, the risk of establishing damages, the range of

reasonableness in light of the possible recovery and the

litigation risks, and, though to a lesser degree, the

complexity of the litigation. Although we think that the

question of the fairness of the settlement under the Girsh

factors is closer than the District Court made it out to be,

our application of those factors supports the conclusion

that the District Court did not abuse its discretion in

approving the Cendant settlement.

The issue is even clearer with respect to the settlement

between the class and Ernst & Young (E&Y), against which

the case was far more difficult. As with Cendant's

settlement, the reaction of the class, the risk of establishing

damages, and the range of reasonableness of the recovery

weigh in favor of approving the E&Y settlement. These

factors are augmented by two other Girsh factors that weigh

strongly in favor of the E&Y settlement: the complexity of

litigation and the risk of establishing liability. Because the

ability to withstand a greater judgment is the only Girsh

factor that cuts against approving the E&Y settlement, we

conclude that the District Court did not abuse its discretion

in approving it.

One objector also argues that the District Court should

not have approved the settlement because the entities that

comprise the lead plaintiff were too conflicted to represent

the class adequately. The bases for this claim are two-fold.

First, the institutional investors that make up the lead

plaintiff continued to hold Cendant stock during the

litigation and settlement process, and thus, the objector

submits, had very different motives from other investors

who had sold their stock. Second, the lead plaintiff

negotiated as part of the settlement certain corporate

governance changes that will benefit only those class

members that continue to hold Cendant stock. We are

unpersuaded by the first argument because it is clear that

Congress, in passing the PSLRA, for better or for worse,

anticipated and implicitly approved the notion that entities

that continued to hold stock in the defendant corporation

11

would serve as lead plaintiffs notwithstanding the existence

of many class members who did not. With respect to the

second argument, there is no evidence that the lead

plaintiff gave up anything of value to the class members to

induce Cendant to agree to the corporate governance

changes. We therefore hold that the District Court did not

abuse its discretion in approving the settlement.

We then turn to the objections regarding the allocation of

the settlement fund. One objector contends that the claims

under S 11 of the Securities Act of 1933, which only a

subset of the class possesses, are legally stronger than the

other claims held by class members, i.e., claims under

S 10(b) of the Securities Exchange Act of 1934. Based on

this disparity, the objector argues that the S 11 claimants

should receive a larger share of the settlement proceeds. We

conclude, however, that the S 11 claims here are not

necessarily legally stronger than the S 10(b) claims, and

that, at any rate, the basis for measuring the different legal

strengths of the claims involved is too speculative to

support the objector's contention. We thus hold that the

District Court did not abuse its discretion in approving a

settlement allocation that treated all claims more or less

equally.

Having determined that the settlement may stand, we

must examine the District Court's award of counsel fees.

Because the Reform Act establishes a detailed and

integrated process for choosing a lead plaintiff, selecting

lead counsel, and approving counsel's fee, we discuss these

issues sequentially. In this case, the District Court selected

as lead plaintiff a group made up of three pension funds

(the CalPERS Group or Lead Plaintiff). Following the

dictates of the Reform Act, the court first identified that

Group, which is made up of three huge government pension

funds, as being the movant with the largest financial

interest in the relief sought by the class. The court then

made a preliminary determination that the CalPERS Group

satisfied Federal Rule of Civil Procedure 23's typicality and

adequacy requirements, which, under the PSLRA, made it

the presumptive lead plaintiff. The District Court ultimately

appointed the CalPERS Group as lead plaintiff because it

determined that no member of the plaintiff class had

12

succeeded in rebutting the statutory presumption. We find

no fault with the court's decisions on this score.

The Lead Plaintiff then asked the District Court to

appoint as lead counsel two firms with which it had

previously negotiated a Retainer Agreement, Bernstein,

Litowitz, Berger, & Grossmann of New York City, and

Barrack, Rodos & Bacine of Philadelphia. The court

declined initially to approve the Lead Plaintiff 's choice,

deciding instead to select lead counsel via an auction, but

giving the CalPERS Group's chosen counsel the option to

match what the court determined to be the lowest qualified

bid. Those firms exercised this option and were appointed

as lead counsel. Following the settlement of the case, and

consonant with the results of the auction, Lead Counsel

petitioned for and was awarded a sum of $262 million in

counsel fees, even though that amount was at least $76

million higher than that provided for under the Retainer

Agreement.

We conclude that the court's decision to hold an auction

to select lead counsel was inconsistent with the Reform Act,

which is designed to infuse lead plaintiffs with the

responsibility (and motivation) to drive a hard bargain with

prospective lead counsel and to give deference to their

stewardship. Although we believe that there are situations

under which the PSLRA would permit a court to employ the

auction technique, this was not one of them. Here,

inasmuch as the Lead Plaintiff conducted its counsel

search with faithful observance to the letter and spirit of

the Reform Act, it was improper for the District Court to

supplant the CalPERS Group's statutorily-conferred right to

select and retain lead counsel by deciding to hold an

auction. In sum, we hold that the District Court erred in

using an auction to appoint lead counsel; rather it should

have done so pursuant to the terms of the Retainer

Agreement.

Because the District Court's process resulted in the firms

chosen by the Lead Plaintiff being appointed lead counsel

anyway, this error was harmless (with regard to the

selection of lead counsel). However, because the terms of

the Retainer Agreement required the prior approval of the

pension funds comprising the CalPERS Group, and that

13

prior approval was not obtained, the fee request here was

improper. The fee award must therefore be set aside and

this matter remanded to the District Court with

instructions to dismiss the fee application and to decline to

accept any further applications that are submitted without

the prior approval of the Funds.

It goes without saying that the principal focus after

remand will be the counsel fee application which will be

resubmitted. The parties have extensively briefed and

argued the fee award issue, understanding that if the

award is set aside the District Court will need guidance on

remand. Having this need in mind--along with the fact that

this case, in its various facets, has been before this Court

seven times now--we will set forth the standards that the

court should follow in evaluating a properly-submitted fee

request in Reform Act cases so as to help bring this now

protracted matter to a close. Although in general the court

should use the same seven-factor test that our cases have

developed for reviewing fee requests in other class action

contexts, review in PSLRA cases must be modified to take

into account the changes wrought by the Reform Act. The

biggest change, we believe, is that courts should afford a

presumption of reasonableness to fee requests submitted

pursuant to an agreement between a properly-selected lead

plaintiff and properly-selected lead counsel.

This is not to say, however, that this presumption cannot

be overcome. There is an arguable tension between the

general schema of the PSLRA on the one hand and its

overarching provision that requires the court to insure that

counsel fees not exceed a reasonable amount, see 15 U.S.C.

S 78u-4(a)(6), on the other. We hold that the presumption

will be rebutted when a district court finds the fee to be

(prima facie) clearly excessive.

For the past decade, counsel fees in securities litigation

have generally been fixed on a percentage basis rather than

by the so-called lodestar method. Consistent with that

approach, we have held that, when the percentage fee is

challenged, the Court's obligation to award a reasonable fee

will be best exercised by application of the factors described

in Gunter v. Ridgewood Energy Corp., 223 F.3d 190 (3d Cir.

2000). Gunter itself allows for the possibility of a lodestar

14

cross-check, see id. at 200, even though the lodestar

approach is no longer favored. We conclude that, in

determining whether the retainer agreement between the

Lead Plaintiff and Lead Counsel is clearly excessive, the

court should first use the Gunter factors to evaluate it, for

the lodestar cross-check is quite time consuming. But if the

court cannot otherwise come to a resolution, it can consider

a lodestar cross-check.

In determining whether the presumption of

reasonableness of a properly submitted fee request has

been rebutted here, the District Court will have to consider

the powerful arguments of the objectors that: (1) this was

a simple case in terms of liability; (2) the settlement was

achieved without a great deal of work by lead counsel; and

(3) both the fee award of $262 million under the auction

and (potentially up to) $187 million under the Retainer

Agreement are staggering in their size, and, on the basis of

the evidence in the record, may represent compensation at

an astonishing hourly rate (as well as an extraordinarily

high lodestar "multiplier").

We conclude by explaining that, if the court's

deliberations were to confirm that the fee agreed to by a

lead plaintiff and lead counsel was clearly excessive, the

court will need to set a reasonable fee according to the

standards our previous cases have set down for class

actions not governed by the PSLRA.

II. FACTS & PROCEDURAL HISTORY

A. Background

Cendant Corporation, the main defendant, was formed by

a December 17, 1997 merger of CUC International, Inc.

(CUC) and HFS Incorporated (HFS). Pursuant to a

Registration Statement and Joint Proxy

Statement/Prospectus, HFS shareholders tendered their

shares in exchange for CUC shares. HFS was then merged

into CUC and the combined company was renamed

Cendant. Cendant is currently one of the world's largest

consumer and business service companies; among its more

well-known businesses are Avis, Century 21, and the

Ramada and Howard Johnson hotel franchise chains.

15

On March 31, 1998, Cendant filed its Form 10-K Annual

Report with the SEC, which included the company's 1997

financial statements. Two weeks later, after the close of

trading on April 15, 1998, Cendant announced that it had

discovered "accounting irregularities" in certain units of the

former CUC. The notice stated that Cendant expected to

restate its annual and quarterly financial statements for

1997 and possibly for earlier periods as well; it also stated

that Cendant had retained the law firm Willkie Farr &

Gallagher (Willkie Farr) to conduct an investigation into its

past financial statements and the allegations of fraud made

by some Cendant employees. The next day, Cendant's stock

fell 47%, from $35-5/8 to $19-1/16 per share, triggering

several class action lawsuits on behalf of investors who

purchased CUC or Cendant stock during 1997.

On July 14, 1998, Cendant announced that it would also

restate CUC's annual and quarterly financial statements for

1995 and 1996. Following this announcement, Cendant's

stock fell by another 9%, to $15-11/16 per share. On

August 28, 1998, Cendant filed Willkie Farr's report of its

investigation, with the SEC. The report revealed that

Cendant would restate its 1995, 1996, and 1997 financial

statements by approximately $500 million. On August 31,

1998, the first trading day after Cendant's disclosure of the

Willkie Farr report, Cendant's stock fell another 11%, to

$11-5/8. The disclosure of the report triggered several more

lawsuits arising from purchases of CUC securities during

the broader period of alleged fraud. All told, Cendant

shareholders lost more than $20 billion in market

capitalization.

Between April and August 1998, at least sixty-four

putative securities fraud class action lawsuits were filed

nationwide as a result of the above disclosures. Generally

speaking, the lawsuits alleged that, from 1995 to 1998,

CUC/Cendant had issued a series of materially false and

misleading statements in the form of quarterly reports,

annual reports, registration statements, prospectuses, and

press releases, and that these statements artificially

inflated CUC/Cendant's stock price. The lawsuits named as

defendants Cendant, its officers and directors, and other

parties--including E&Y, which had acted as CUC's

16

independent public accountant from 1983 until the time of

the creation of Cendant. E&Y had also performed a post-

merger audit of the financial statements of Cendant

Membership Services, a wholly-owned subsidiary of

Cendant, for the year ending December 31, 1997. The

lawsuits alleged that E&Y had issued unqualified reviews

and audit opinions certifying CUC's quarterly and annual

reports, and that E&Y had failed to adhere to Generally

Accepted Auditing Standards and thus lacked any

reasonable basis for its opinions and reports.

Cendant eventually filed a cross-claim against E&Y,

detailing allegations that E&Y became aware of the fraud

long before it was made public but chose to conceal and

facilitate it, thereby continuing to garner millions of dollars

in fees. Alternatively, Cendant alleged that E&Y was

negligent in failing to discover the fraud earlier. E&Y

strenuously denied all the allegations made in the amended

cross-claim, pointing out that Cendant had not provided

any evidence or documentation to back up the allegations.

By order of the Judicial Panel on Multidistrict Litigation,

all cases relating to Cendant's accounting irregularities

were transferred to the United States District Court for the

District of New Jersey. On May 29, 1998, the District Court

consolidated all of them under the caption In re Cendant

Corporation Litigation.

B. The Appointment of Lead Plaintiff and Lead

Counsel

After consolidation, two of the District Court's first

responsibilities were to appoint a lead plaintiff and lead

counsel to represent the putative class. The PSLRA lays out

detailed procedures for courts to follow in making these

decisions, directing them to appoint "the most adequate

plaintiff " as the lead plaintiff, and instructing them to

"adopt a presumption" that the most adequate plaintiff is

the movant that "has the largest financial interest in the

relief sought by the class" and "otherwise satisfies the

requirements of Rule 23 of the Federal Rules of Civil

Procedure." 15 U.S.C. S 78u-4(a)(3)(B)(i) & (iii)(I).1 The

_________________________________________________________________

1. The Reform Act inserted identical amendments into the Securities Act

of 1933 and the Securities Exchange Act of 1934. All citations are to the

Exchange Act provisions.

17

presumption "may be rebutted only upon proof by a

member of the purported plaintiff class that the

presumptively most adequate plaintiff will not fairly and

adequately protect the interests of the class or is subject to

unique defenses that render such plaintiff incapable of

adequately representing the class." Id.S 78u-

4(a)(3)(B)(iii)(II). With regard to the selection of lead counsel,

the statute provides that "[t]he most adequate plaintiff

shall, subject to the approval of the court, select and retain

counsel to represent the class." Id. S 78u-4(a)(3)(B)(v).

Fifteen individuals and groups filed motions to serve as

lead plaintiff, and the District Court held a hearing on

August 4, 1998. It soon became clear that the CalPERS

Group--a consortium of the three largest publicly-managed

pension funds in the United States: the California Public

Employees' Retirement System (CalPERS), the New York

City Pension Funds (NYCPF), and the New York State

Common Retirement Fund (NYSCRF)--had, by far,"the

largest financial interest in the relief sought by the class."

According to the District Court, the members of the

CalPERS Group alleged combined losses in excess of $89

million, while the largest amount alleged by any other

movant was $10.6 million. See In re Cendant Corp. Litig.,

182 F.R.D. 144, 147 (D.N.J. 1998). This fact, in conjunction

with the District Court's express finding that it satisfied

Rule 23's "adequacy" and "typicality" requirements, see id.

at 147-48, rendered the CalPERS Group the presumptive

lead plaintiff.

Two competing movants, the Joanne A. Aboff Family

Trust (Aboff) and Douglas Wilson, offered three reasons why

the presumption had been rebutted, but the District Court

rejected their claims. Aboff and Wilson: (1) contended that

they were better suited to be lead plaintiff than the

CalPERS Group because they had negotiated a lower fee

schedule with their lawyers; (2) argued that the CalPERS

Group could not fairly and adequately protect the interests

of the class because one of the Group's chosen counsel had

made substantial campaign contributions to the sole

trustee of one of the funds that make up the CalPERS

Group, thereby creating an appearance of impropriety; and

(3) suggested that the District Court should select lead

18

plaintiff "through a process of competitive bidding." Id. at

148-49. The District Court concluded that the CalPERS

Group could not fairly and adequately represent the

interests of the holders of convertible Cendant derivative

securities known as PRIDES, see id. at 149-50, and severed

the PRIDES claims from the main action.2 The court

eventually appointed the CalPERS Group as lead plaintiff of

the main Cendant action. See id. at 149.3

The court then turned to selection of lead counsel. The

CalPERS Group had filed a motion seeking to have Barrack,

Rodos & Bacine (BRB) and Bernstein Litowitz Berger &

Grossman LLP (BLBG) appointed lead counsel pursuant to

a Retainer Agreement that it had negotiated with them,

which dictated not only the formula for determining

attorneys fees but also included a Plan for Monitoring

Litigation, a section outlining a Theory of Recovery, and a

part captioned Consultation Regarding Settlement

Negotiations.4 The District Court, however, decided to select

(Text continued on page 21)

_________________________________________________________________

2. The court based this conclusion on the fact that all members of the

CalPERS Group had sizeable holdings in Merrill Lynch, a defendant with

respect to the claims involving PRIDES. See id. at 149. The court

eventually appointed a different lead plaintiff and lead counsel in the

PRIDES action. See id. at 149-50.

3. Although the District Court and some of the parties refer to members

of the CalPERS Group as "co-Lead Plaintiffs," we agree with the

Securities and Exchange Commission that "[t]here is one lead plaintiff

under the Reform Act: an individual, an institution or a properly-

constituted group." Brief for the Securities and Exchange Commission as

Amicus Curiae, at 11 n.8 (emphasis added). The statute always speaks

of the lead plaintiff in the singular, requiring that the court appoint

"as

lead plaintiff the member or members of the purported plaintiff class that

the court determines to be most capable of adequately representing the

interests of class members" and stating that the presumptively "most

adequate plaintiff . . . is the person or group of persons" that satisfies

the statute's three threshold requirements. 15 U.S.C. S 78u-4(a)(3)(B)(i)

&

(iii) (emphasis added). The biggest consequence of this distinction is

that

only one "entity" is entitled to speak for the class: the lead plaintiff.

In

cases where a group serves as lead plaintiff, it is for the group's

members to decide how the group will make decisions, but it is the

group--not its constituent members--that speaks for the class. A fortiori,

we use the singular "Lead Plaintiff " throughout this opinion.

4. The Retainer Agreement declares that the members of the CalPERS

Group "have agreed to proceed together to seek a Co-Lead Plaintiff

19

position," and states that the funds, if selected as Lead Plaintiff, will

"seek the appointment of BRB and BLBG as Co-Lead Counsel to the

Class." The Agreement provides that Lead Counsel will "receive fees, as

awarded by the Court, from the proceeds of any judgment or settlement,"

and that Lead Counsel "will advance all costs and out-of-pocket

expenses."

The Retainer Agreement contains four sections set off by roman

numerals. The first deals with attorneys fees, providing:

I. Attorneys Fees. The fee will be a function of both the timing

and

size of the recovery but, unless agreed to by the Funds, will, in

no event exceed the following:

A. Initiation of action through to commencement of discovery:

1. Recovery of $0 to $400 million - fee of 5%;

2. Additional recoveries above $400 million - fee of 3%.

B. Commencement of discovery through to conclusion of all fact

and expert discovery:

1. Recovery of $0 to $100 million - fee of 17.5%;

2. Additional recoveries of above $100 million to $300

million - fee of 10%;

3. Additional recoveries of above $300 million to $500

million - fee of 7.5%;

4. Additional recoveries of above $500 million- fee of 5%.

C. Proceedings after conclusion of all discovery, including

motions for summary judgment, if any, through and

including trial and post-trial proceedings:

1. Recovery of $0 to $150 million - fee of 20%;

2. Additional recoveries above $150 million to $400 million

- fee of 12.5%;

3. Additional recoveries above $400 million - fee of 7.5%

In any event, we [i.e., BRB and BLBG] will not submit any fee

application to the Court without the prior approval of The Funds,

and all fee applications would, of course, be subject to final

approval

of the Court. Travel, meals and lodging expenses shall be

reasonable

and subject to the approval of Co-Lead Plaintiffs prior to

reimbursement.

Section II is captioned "Plan for Monitoring Litigation," and requires

Lead

Counsel to: (1) provide the CalPERS Group with "all significant

pleadings" at least 24 hours before filing; (2) make monthly status

reports, including statements as to time expended and expenses

incurred; (3) promptly advise the CalPERS Group of"any significant

developments in the case, including settlement discussions"; and (4)

20

lead counsel via auction. The court acknowledged that the

PSLRA provides that "[t]he most adequate plaintiff shall,

subject to the approval of the court, select and retain

counsel to represent the class." 15 U.S.C. S 78u-

4(a)(3)(B)(v); see Cendant Corp. Litig., 182 F.R.D. at 150

(quoting this language from the Reform Act). But it

reasoned that "the Court's approval is subject to its

discretionary judgment that lead plaintiff 's choice of

representative best suits the needs of the class," and

concluded that "mechanisms" other than the lead plaintiff 's

choice were available to assist the court in making that

determination. Id. at 150. The court pointed to the

"emerging trend" of using auctions "to simulate the free

market in the selection of class counsel," and stated that it

would hold an auction to select lead counsel and to

determine its fee. Id. at 150-51. Recognizing that the

Reform Act confers upon the Lead Plaintiff the

"opportunity" to "select and retain" lead counsel, the

District Court ruled that counsel chosen by the CalPERS

Group would have the chance to match what the court

determined to be the lowest qualified bid. Id. at 151. Later,

the District Court made clear that any winning bidder

would have to agree to comply with all provisions of the

Retainer Agreement that the CalPERS Group had

negotiated with its chosen counsel (except, of course, the

fee grid).

The District Court solicited input about how the auction

should be conducted and held a hearing on August 19,

1998. The court eventually required that bids be submitted

_________________________________________________________________

schedule periodic meetings to discuss "case developments" and "joint

strategies in the prosecution of the case." Section III is captioned

"Theory

of Recovery," and declares that the goal of the case was "to maximize the

recovery obtained from sources outside the corporation . . . without

unduly penalizing Cendant or its long-term shareholders." Lead Counsel

agreed "to vigorously represent your collective interests, and the

interests

of the Class, to maximize the recovery for the Class of Cendant securities

purchasers in this case, while being cognizant of the interests of the

long-term holders of Cendant securities." Section IV is captioned

"Consultation Regarding Settlement Negotiations," and it requires Lead

Counsel to "consult with" and obtain approval from the CalPERS Group

before entering into a final settlement agreement.

21

pursuant to a grid it had designed,5 and received nine bids

to serve as lead counsel in the main Cendant action.6 The

District Court rejected the bid by counsel for appellant

Aboff, which would have generated fees of 1-2% of the total

settlement depending on the size of the settlement and the

timing of the recovery, characterizing it as unrealistic and

"quasi-philanthropic," and stating that "[u]nless the

eventual monetary recovery in this case is in the billions,

such an apparently `cheap' fee does not make professional

sense."7 In contrast, the court expressly found that counsel

proposed by the Lead Plaintiff was qualified and that its

proposed fee scale was "realistic," but also concluded that

another qualified bidder had submitted a lower "realistic"

bid. Counsel chosen by the Lead Plaintiff exercised its

power to meet this lower bid, and was thus appointed lead

counsel.

C. Class Certification, the Filing of the Amended

Complaint, and the Reaching of a Settlement

After a case management conference, the newly-

appointed Lead Plaintiff filed its Amended and Consolidated

_________________________________________________________________

5. The grid for the main Cendant action required that counsel submit a

fee in terms of a percentage of the total class recovery. Movants were

directed to propose fees depending on the phase at which the litigation

was resolved (the horizontal axis) and the size of the eventual recovery

(the vertical axis). The phases of litigation listed on the grid were:

from

pleadings through adjudication of any motion to dismiss; during

discovery through adjudication of a summary judgment motion; after

adjudication through a trial verdict; and post-trial. The sizes of

recovery

listed on the grid were: first 100 million; second 100 million; third 100

million; next 50 million; next 50 million; next 50 million; next 50

million;

and over 500 million.

6. The court required that the bids be submitted under seal. This Court

recently held that the District Court abused its discretion by imposing

such a confidentiality order. See In re Cendant Corp., No. 99-5485, at 23

(3d Cir. Aug. 8, 2001).

7. The case did, of course, settle for an amount well into the billions,

reflecting the perspicacity of Mr. Sirota, Aboff 's counsel. We need not

decide whether Mr. Sirota could have negotiated such a large settlement

because we are satisfied that, from the perspective of the District Court

at the time, its decision in selecting counsel was not an abuse of

discretion.

22

Class Action Complaint (the Complaint or Amended

Complaint) along with a motion for class certification on

December 14, 1998. The Complaint defined the class

represented as

[a]ll persons and entities who purchased or otherwise

acquired publicly traded securities . . . either of

Cendant or CUC during the period beginning May 31,

1995 through and including August 28, 1998 and who

were injured thereby, including all persons or entities

who exchanged shares of HFS common stock for

shares of CUC stock pursuant to the Registration

Statement . . . . Excluded from the Class are: (i)

defendants; (ii) members of the family of each

individual defendant; (iii) any entity in which any

defendant has a controlling interest; (iv) officers and

directors of Cendant and its subsidiaries and affiliates;

and (iv) [sic] the legal representatives, heirs, successors

or assigns of any such excluded party.

The Amended Complaint alleged claims under bothS 10(b)

of the Securities Exchange Act of 1934 [hereinafter "S 10(b)

claims"] and S 11 of the Securities Act of 1933 [hereinafter

"S 11 claims"], as well as numerous other claims that are

not relevant for the purposes of our discussion and

decision. The Complaint set out S 10(b) claims for all class

members, but presented S 11 claims only for those class

members who received Cendant stock via the HFS merger.

CUC, however, acquired via merger fourteen other

companies during the class period. As with the HFS

merger, these other mergers involved the filing of

registration statements with the SEC during the class

period, and thus these mergers also gave rise toS 11 claims

(as well as claims under S 12 of the Securities Act of 1933)

for those who received CUC stock via these mergers.

On January 27, 1999, the District Court granted Lead

Plaintiff 's motion for class certification, defining the

certified class as including "all purchasers or acquirers of

Cendant Corporation or CUC International, Inc. publicly

traded securities between May 31, 1995 and August 28,

1998 who were injured thereby." Several of the defendants

then filed motions to dismiss. In an order issued July 27,

1999, the District Court denied all of them except E&Y's

23

motion to dismiss S 10(b) claims against it that were related

to stock purchases made after April 15, 1998. See In re

Cendant Corp. Litig., 60 F. Supp. 2d 354 (D.N.J. 1999). On

August 6, 1999, the court approved the form of the notice

of the class action to be sent to potential class members

and ordered its dissemination. The District Court required

Lead Plaintiff to mail notice to all record holders of Cendant

and CUC stock and to all brokers in the transfer records,

and to publish notice of the class action on three different

days in The Wall Street Journal, The New York Times

(National Edition), and the Dow Jones Business Newswire.

In all, the Class Administrator sent 261,224 notices.

Both the individually mailed and published notices

included the definition of the Class as stated in the

Complaint, and warned potential class members that if they

failed to follow the specific procedures for opting out of the

Class, they would be deemed class members and would be

bound by any settlement or judgment. The notice stated

that any class member who wanted to opt out had to file a

written request for exclusion postmarked by December 27,

1999, which served as the final opt-out date.

On December 7, 1999, almost three weeks before the

final opt-out date, Cendant announced a proposed

settlement that would require it to pay $2.85 billion to the

class members, and ten days later the parties announced

that a proposed settlement had been reached between E&Y

and the Lead Plaintiff (collectively, "the Settlement"). On

December 27, 1999, the opt-out period closed pursuant to

the class notice. Out of over 100,000 class members, only

234 opted out before the deadline. See In re Cendant Corp.

Sec. Litig., 109 F. Supp. 2d 235, 257 (D.N.J. 2000). On

March 17, 2000, Cendant and the Lead Plaintiff submitted

settlement documents to the District Court, including a

Plan of Allocation for the distribution of settlement proceeds

among class members.

D. The Terms of the Settlement and the Plan of

Allocation

The defendants' obligations under the Settlement consist

of three primary elements:

24

1) Cash Payment: Cendant agreed to pay

$2,851,500,000 and E&Y agreed to pay $335,000,000

into the settlement pool, which brings the total

settlement money to approximately $3.2 billion.

Interest will accrue on this money until it is paid out

to the Class.

2) 50% of any recovery from E&Y: Cendant and the

individual defendants from HFS Inc. are currently

suing E&Y over E&Y's role in the fraud. Fifty percent of

any net recovery from this action will go to the Class.

3) Corporate governance changes: Cendant will

institute corporate governance changes, including

putting a majority of independent directors on its

Board of Directors; placing only independent directors

on the Board's Audit, Nominating, and Compensation

Committees; de-classifying the Board and providing for

the annual election of all directors; and precluding the

repricing of any employee stock option after its grant,

except with the approval of a majority of voting

shareholders.

In exchange for these undertakings, the Class has agreed

to release Cendant, E&Y, the HFS individual defendants,

and the CUC individual defendants from all claims that "are

based upon, are related to, arise from or are connected with

any facts, circumstances, statements, omissions, events or

other matters raised or referred to in the pleadings in the

Litigation or which could have been asserted against

Cendant, the HFS Individual Defendants and the other

Released Parties by the Lead Plaintiffs and any Class

Member." Stipulation of Settlement with Cendant Corp. and

Certain Other Defs. at 12.

The Settlement also contains a Plan of Allocation, which

will be used to allocate the settlement money among the

class members. The specifics of the Plan of Allocation are

somewhat complex because it involves calculating the"true

value" of Cendant/CUC stock for any given day during the

class period. To get the "true value" of Cendant stock on

any given day, one has to remove from the actual price the

artificial inflation that Cendant's fraud caused in the price,

a process made trickier by the fact that, unlike many other

25

frauds, the fraudulent statements made by Cendant were

not in the form of a surprising announcement that caused

the stock to rise a certain amount which would provide a

fair indication of how much the fraud affected the price.

Instead, Cendant's fraud consisted of releasing financial

statements that met the market's expectations, while the

truth was that Cendant was falling far short of these

expectations.

Cendant did, however, make several announcements

revealing the fraud that caused the price of its stock to

plummet, namely, the three announcements made on April

15, July 14, and August 28, 1998. The Plan of Allocation

works backwards from these price drops to develop an

equation for determining the true, non-artificially-inflated

value of Cendant stock for any day during the class period.

This "true value" is then compared to the actual price of

Cendant/CUC stock on that day to determine how much

that day's purchasers of Cendant/CUC stock overspent.

The Plan uses this amount of overpayment to determine the

class members' damages.

The Plan of Allocation also allows class members who

had received their stock in CUC's merger with HFS to

receive as damages the greater of (1) their damages

calculated under S 10(b) as determined by the Plan, or (2)

their damages as calculated under S 11, which would give

them the difference between what they paid for the Cendant

stock (i.e., the value of the HFS securities that they traded

in to get the Cendant stock) and the value of the Cendant

stock as of the day the lawsuit was brought (April 16, 1998,

the date the first lawsuit was filed). This S 11 provision

draws upon the text of the 1933 Act, described in the margin.8

_________________________________________________________________

8. Title 15 U.S.C. S 77k (the codification of S 11 of the 1933 Act)

actually

provides for three ways of determining S 11 damages: (1) the difference

between the amount paid for the stock and the stock's price the day the

lawsuit was brought (the method used above); (2) the difference between

the amount paid for the stock and the amount received for it when it

was sold, if it was sold before the lawsuit was brought; and (3) the

difference between the amount paid for the stock and the amount

received for it when it was sold, if it was sold after the lawsuit was

brought but before judgment, only if such damages are less than the

26

Lead Plaintiff 's damages expert used the Plan of

Allocation's damage determination method to calculate the

total damages suffered by the Class from the Cendant fraud

as $8.8 billion. At oral argument on this appeal and in a

supplemental affidavit, Lead Plaintiff represented that the

Claims Administrator had received over 118,000 proofs of

claim from class members, for a total of $4.9 billion claimed

losses. The $3.185 billion cash payment in the Settlement

thus represents approximately a 36% recovery rate on the

Class's total losses and a 64% recovery rate on the actually

claimed losses. Of the $4.9 billion claimed losses,

approximately $2.1 billion are losses claimed by class

members who acquired Cendant stock in the HFS merger

deal.

E. Preliminary Settlement Approval, the Settlement

Notice, the Attorneys Fees Request, and the

Fairness Hearing

On March 29, 2000, the District Court granted

preliminary approval to the proposed settlement and

enjoined all actions or claims that were contemplated by it.

In early April, pursuant to the order containing the

settlement approval, the Class Administrator mailed

478,000 notices of the Settlement and proof of claim form

packages [hereinafter "the Settlement Notice"] to potential

class members, and also published notices in The Wall

Street Journal and The New York Times. The Settlement

Notice summarized the course of the litigation and the

terms of the Settlement, including Lead Plaintiff 's Plan of

Allocation of the settlement funds. It also informed the

_________________________________________________________________

damages as calculated under (1). See 15 U.S.C. S 77k(e). Only (1) is

relevant to this case, however. Regarding option (2), if the class members

sold their stock before April 16, 1998 (the day the lawsuit was brought)

they would have no damages--the fraud was not revealed until after

trading ended on April 15, 1998, so the stock price before April 16 was

at least as artificially inflated by the fraud at the sale of the stock as

it

was at the purchase. Regarding option (3), because the price of Cendant

stock continued to decline after the day the lawsuit was filed as more

fraud was revealed, this option would result in greater damages than

those calculated under (1) and thus cannot be used under the provisions

of 15 U.S.C. S 77k(e).

27

class members that Lead Counsel intended to submit an

application for attorneys fees totaling 8.275% of the total

settlement fund and for reimbursement of expenses in the

amount of $15,855,000. The Notice stated that the District

Court would conduct a fairness hearing on June 28, 2000,

and contained information about how class members could

go about objecting to the Settlement. It provided that any

class member could appear at the fairness hearing to object

to the Settlement. Class members were also allowed simply

to state an objection to the Settlement in writing, although,

as we discuss below in Part III.A.2, there is some dispute

over how clear the Settlement Notice was on this point.

Prior to the fairness hearing, Lead Counsel petitioned the

District Court for an award of $262,468,857 in attorneys

fees and $14,623,806 in expenses. Lead Counsel noted that

its fee request "adhere[d] precisely to the parameters in the

lowest qualified bid proposal" established by the court's

auction.9 At the hearing on the request to approve the

Settlement and for counsel fees, six parties raised

objections to the substantive provisions of the Settlement.

Three were class members (Betty Duncan, Ann Mark, and

Tere Throenle); two were not class members (Martin

Deutch, a derivative plaintiff, and the State Board of

Administration of Florida, which opted out of the Class);

and one was a party whose class status is unclear (the

Davidsons).10 Four class members filed objections to the fee

_________________________________________________________________

9. In contrast, had the District Court not held the auction and appointed

Lead Counsel pursuant to the Retainer Agreement that it had negotiated

with the CalPERS Group, see supra n.4 and accompanying text, the

maximum allowable fee--"unless agreed to by The Funds"-- would have

been approximately $187 million.

10. Janice and Robert Davidson, for themselves and as trustees of trusts

for the benefit of their children (collectively, the Davidsons), have

participated in this appeal as objectors to the Settlement. The procedural

history of their claims presents a special situation. On June 20, 2000,

in response to a motion by the Davidsons for clarification of the class

definition specifying that they were not class members or, in the

alternative, an extension of time for them to opt out of the Class, the

District Court issued an order that: (1) ruled that the Davidsons were

covered by the class definition and thus were included in the Class; (2)

refused the Davidsons' request for an extension of time to opt out of the

28

request: NYCPF (a member of the CalPERS Group); Aboff;

Faye Schonbrunn; and Throenle.

August 15, 2000, the District Court formally approved

the Settlement, entering two opinions and orders approving

the Settlement and Plan of Allocation and rejecting all of

the objectors' objections. See In re Cendant Corp. Sec. Litig.,

109 F. Supp. 2d 235 (D.N.J. 2000); In re Cendant Corp. Sec.

Litig., 109 F. Supp. 2d 273 (D.N.J. 2000). On August 16,

2000, the District Court filed an opinion and order

awarding Lead Counsel approximately $262 million in

attorneys fees pursuant to the schedule that had been pre-

set via the auction. See In re Cendant Corp. Sec. Litig., 109

F. Supp. 2d 285 (D.N.J. 2000). Several of the objectors

appealed these rulings.

F. The Appeals and the Issues Presented by Each

Appeal

This opinion addresses three appeals from the District

Court's approval of the Settlement and the Plan of

Allocation, and four appeals from its award of counsel fees.11

_________________________________________________________________

Class; and (3) enjoined the Davidsons from arbitrating their claims in

California, an action which they had initiated on December 17, 1998.

See In re Cendant Corp. Sec. Litig., 194 F.R.D. 158 (D.N.J. 2000). The

Davidsons appealed this order. On May 9, 2001, two weeks before oral

argument in the present appeal, a panel of this Court filed an opinion

affirming in part and reversing in part the District Court's June 20, 2000

Order. In particular, the panel majority generally affirmed the court's

Order but left the extent of the scope of the matters to be arbitrated to

the arbitrator. However, the full Court has since voted to rehear the

Davidsons' appeal en banc, thereby vacating the panel opinion, so at this

time it is not clear whether the Davidsons will be held to be class

members, whether they will be given an extended time to opt out of the

Class, or whether they will be permitted to pursue their claims in

arbitration. If any of these possibilities comes to pass, the Davidsons'

objections in this appeal will be mooted. However, for reasons set forth

infra at Part III.C, we will take up the Davidsons' objections in this

opinion.

11. This is the seventh appeal from this case that this Court has heard

so far. The preceding six are: In re Cendant Corp., No. 99-5485 (3d Cir.

Aug. 8, 2001); In re Cendant Corp. Litigation , 2001 WL 487903, No. 00-

2185, (3d Cir. May 9, 2001) (this is the Davidsons' appeal that gave rise

29

These appeals were consolidated for argument. On appeal,

the objectors to the Settlement and the Plan of Allocation

are:

Tere Throenle (00-2708): Throenle challenges the

overall fairness to the Class of the Cendant part of the

Settlement, and contends that the Lead Plaintiff

suffered from a conflict of interest that prevented it

from fairly representing all class members because it

continued to hold Cendant stock during and after the

settlement negotiations.12

Betty Duncan (00-2683): Duncan challenges the

overall fairness to the Class of the E&Y part of the

Settlement.13

Ann Mark (00-2734): Mark claims that the proposed

allocation of the settlement money among the Class is

unfair because class members with S 11 claims should

have received more than class members with S 10(b)

claims.14

The Davidsons (00-2709): The Davidsons contend that

the District Court erred by not making explicit

Fed.R.Civ.P. 23 findings when certifying the Class; that

the notice given to the Class was insufficient; that

there are intra-class conflicts arising from the

disparate treatment of class members under the terms

_________________________________________________________________

to the since-vacated opinion and is now pending an en banc hearing, see

supra n.10); In re Cendant Corp. PRIDES Litigation, 243 F.3d 722 (3d Cir.

2001); In re Cendant Corp. PRIDES Litigation, 235 F.3d 176 (3d Cir.

2000); In re Cendant Corp. PRIDES Litigation, 234 F.3d 166 (3d Cir.

2000); In re Cendant Corp. PRIDES Litigation, 233 F.3d 188 (3d Cir.

2000).

12. Throenle purchased 100 shares of Cendant stock during the class

period and lost approximately $600.

13. Duncan bought an unspecified number of CUC notes and claims a

loss of $1,294.

14. Mark exchanged 100 shares of HFS for 240 shares of CUC in the

HFS merger and also purchased 400 Cendant shares in the open market

during the class period.

30

of the Settlement; and that the Plan of Allocation is

flawed.15

Objector Deutch's contentions are addressed in a

separate opinion by this panel. See In re Cendant Corp. Sec.

Litig. (Deutch), No. 00-2684 (3d Cir. Aug. 28, 2001).

Objector State Board of Administration of Florida did not

appeal.

The objectors to the court's award of counsel fees are:

NYCPF (00-2769; 00-3653): NYCPF argues that the

District Court's decision to select lead counsel by

means of an auction was inconsistent with the PSLRA,

and contends that the Retainer Agreement negotiated

between the Lead Plaintiff and Lead Counsel remains

in effect. It also contends that the fee award approved

by the District Court constitutes an excessively high

percentage of the recovery given the circumstances.

Aboff (00-2520): Aboff argues that the fee award was

"grossly excessive," and also claims that the notices

that were sent to class members did not contain

sufficient information so as to allow them to evaluate

the reasonableness of the fee request.

Throenle (00-2708): Throenle contends that the fee

request was improper and excessive.

Faye Schonbrunn (00-2733): Schonbrunn argues that

the District Court ignored this Court's jurisprudence

governing fee requests, and claims that the court's

award was excessive.16

Securities and Exchange Commission (SEC): The

SEC appears as amicus curiae, contending that

auctions are generally not consistent with the Reform

Act.

_________________________________________________________________

15. The Davidsons held a substantial amount of CUC stock stemming

from the merger of their company into CUC, although it is not clear from

the record or the briefs exactly how many shares they held or how large

their losses were.

16. For the most part, Schronbrunn's arguments are duplicative of, or

subsumed by, those made by other objectors. Accordingly, we will not

identify them separately.

31

Barclays Global Investors, N.A. et al (the Barclays

Group): The Barclays Group appears as amicus curiae,

arguing that the auction in this case was improper

because there was no reason to believe that the Lead

Plaintiff lacked the capacity or willingness to negotiate

vigorously in the counsel selection and retention

process.

The District Court had jurisdiction pursuant to 15 U.S.C.

SS 77v & 78aa and 28 U.S.C. S 1331, and we have

jurisdiction under 28 U.S.C. S 1291.

III. THE FAIRNESS OF THE SETTLEMENT

AND THE PLAN OF ALLOCATION

The objectors' arguments as to the fairness and adequacy

of the Settlement fit into two basic categories. First, they

argue that the District Court erred in applying the nine-

factor test that we developed in Girsh v. Jepson , 521 F.2d

153 (3d Cir. 1975), for determining whether a settlement is

fair, reasonable, and adequate under Federal Rule of Civil

Procedure 23(e). Second, they contend that the District

Court erred in approving the Settlement because there were

serious intra-class conflicts that caused the Lead Plaintiff

to represent the Class inadequately in negotiating the

Settlement. See, e.g., Amchem Prods., Inc. v. Windsor, 521

U.S. 591 (1997). We review the District Court's approval of

a class action settlement, including its determination that

the settlement was fair, reasonable, and adequate, for

abuse of discretion. See In re General Motors Corp. Pick-Up

Truck Fuel Tank Prods. Liability Litig., 55 F.3d 768, 782 (3d

Cir. 1995) [hereinafter "GM Trucks"].

A. Approval of the Settlement: The Application of

the Girsh factors

Rule 23(e) sets out the basic charter for a court's analysis

of the fairness of a class action settlement. It provides: "A

class action shall not be dismissed or compromised without

the approval of the court, and notice of the proposed

dismissal or compromise shall be given to all members of

the class in such manner as the court directs." We have

interpreted this rule to require courts to " `independently

and objectively analyze the evidence and circumstances

32

before it in order to determine whether the settlement is in

the best interest of those whose claims will be

extinguished.' " GM Trucks, 55 F.3d at 785 (quoting 2

Herbert Newberg & Alba Conte, Newberg on Class Actions

S 11.41). Under Rule 23(e), the District Court acts as a

fiduciary guarding the rights of absent class members and

must determine that the proffered settlement is"fair,

reasonable, and adequate." Id.

In approving the Settlement, the District Court applied

the nine-factor test this Court developed in Girsh, which

provides the analytic structure for determining whether a

class action settlement is fair, reasonable, and adequate

under Rule 23(e). See id. The nine Girsh factors are:

(1) the complexity, expense and likely duration of the

litigation;

(2) the reaction of the class to the settlement;

(3) the stage of the proceedings and the amount of

discovery completed;

(4) the risks of establishing liability;

(5) the risks of establishing damages;

(6) the risks of maintaining the class action through

the trial;

(7) the ability of the defendants to withstand a greater

judgment;

(8) the range of reasonableness of the settlement fund

in light of the best possible recovery; and

(9) the range of reasonableness of the settlement fund

in light of all the attendant risks of litigation.

See Girsh, 521 F.2d at 157. The proponents of a settlement

bear the burden of proving that these factors weigh in favor

of approval. See GM Trucks, 55 F.3d at 785.

Objectors Throenle and Duncan submit that the District

Court abused its discretion in its application of the Girsh

test to this settlement. In particular, Throenle argues that

a correct application of the Girsh factors weighed against

the settlement with Cendant, and Duncan raises a similar

33

argument as to the settlement with E&Y.17 Because there is

substantial overlap between Throenle's and Duncan's

arguments, we will consider these arguments together,

noting any differences where relevant.18 In our review of the

_________________________________________________________________

17. Throenle does raise some points against the settlement with E&Y as

well, but the bulk of her argument centers on the Cendant settlement.

18. Duncan raises another argument that we dispose of summarily. GM

Trucks held that a district court reviewing a proposed class action

settlement should make a preliminary determination, under which a

presumption of fairness for the settlement is established if the court

finds that: (1) the negotiations occurred at arms length; (2) there was

sufficient discovery; (3) the proponents of the settlement are experienced

in similar litigation; and (4) only a small fraction of the class

objected.

See GM Trucks, 55 F.3d at 785. Duncan contends that the District Court

should not have accorded the Settlement a threshold presumption of

fairness because there was insufficient discovery directed to uncovering

E&Y's involvement in the fraud, which, she submits, compels the

conclusion that the Lead Plaintiff 's negotiations with E&Y were not at

arms-length. More specifically, Duncan argues that there is a strong

possibility that three Cendant former employees who have pled guilty to

federal criminal charges arising from this fraud may eventually give

testimony implicating E&Y more fully in this fraud. (The three former

employees are Cosmo Corigliano, the former chief financial officer; Anne

Pember, a former senior vice president and controller; and Casper

Sabatino, a former vice president of accounting and financial reporting.

Duncan refers to these three as "the three felons.") Duncan asserts that

"this Court can reasonably conclude that the testimony of the three

felons will ultimately establish the fraudulent intent by E&Y." Duncan's

Opening Br. at 40.

We reject this argument for two reasons. First, Duncan uses the wrong

standard of review. She says that this Court "can reasonably conclude"

that more discovery will lead to more information against E&Y; the

question, however, is not what this Court can reasonably conclude, but

whether the District Court abused its discretion in finding otherwise. See

GM Trucks, 55 F.3d at 782, 785. Second, E&Y points out in its brief that

Sabatino told investigators that he and others at Cendant took steps to

deceive E&Y as to the existence of the fraud. This is corroborated by the

Willkie Farr Report on the Cendant fraud, which states that Cendant

officials tried to conceal the fraud from E&Y. Indeed, the SEC also filed

a complaint against Corigliano, Pember, and Sabatino on the date of

their guilty pleas which accused them of lying to E&Y and of withholding

material information from E&Y. These factors support the conclusion

that E&Y was not an active participant in the fraud but was itself

34

District Court's application of the Girsh factors, we will first

consider the strength of each side's arguments on each

factor, and then, based on the totality of the factors,

determine whether the District Court abused its discretion

in finding overall that the Girsh factors weighed in favor of

the Settlement.

1. The First Girsh Factor: Complexity, Expense &

Likely Duration of Litigation

This factor captures "the probable costs, in both time and

money, of continued litigation." GM Trucks , 55 F.3d at 812

(internal quotation marks and citation omitted). The

District Court found that this case would involve complex

and protracted discovery, extensive trial preparation, and

difficult legal and factual issues, and that this factor

therefore weighed in favor of approval of the Settlement.

The court focused on a number of specific variables that

increased the case's complexity: the number of defendants;

the complex accounting issues involved with respect to

damages; the need for expert review and testimony; the fact

that Cendant and E&Y were blaming each other for the

accounting errors; and the possibility of unknown novel

legal issues raised by the PSLRA. The court also found that

litigation would likely be drawn out, with an extended

discovery period necessary and a trial date that would likely

not occur until 2002. See In re Cendant Corp. Sec. Litig.,

109 F. Supp. 2d at 256-57.

_________________________________________________________________

deceived by Cendant officials, rendering Duncan's contentions that the

Corigliano, Pember, and Sabatino testimony will reveal E&Y's fraud an

exercise in optimism.

In sum, Duncan's arguments here are built on pure speculation that

relies almost exclusively on the naked allegations made in Cendant's

complaint against E&Y. See supra Part II.A. Moreover, Duncan's "wait

and see" approach to the E&Y settlement (i.e., waiting for further

discovery to develop) would likely mean a substantial delay to the Class

in receiving settlement money even though there is no evidence that,

given time, more information implicating E&Y would come to light.

Therefore, we reject Duncan's arguments that there was insufficient

discovery regarding E&Y's involvement, and we thus conclude that it was

not an abuse of discretion for the District Court to give an initial

presumption of fairness to the Settlement.

35

The objectors counter with a number of arguments.

Throenle's best argument is that the liability aspect of the

case against Cendant is simple--Cendant basically admits

that its employees had the requisite scienter forS 10(b)

liability, and there is strict liability for Cendant on the S 11

claims--so that the only truly contested issue is damages.

She adds that the District Court's denial of the defendants'

motions to dismiss means that the plaintiffs have

surmounted the most formidable barrier posed by the

PSLRA, namely, the heightened pleading standards put in

place by the Act. As to the complexity of the case against

E&Y, Duncan argues that we will not know enough about

this issue until the parties engage in more discovery to

determine E&Y's involvement. She asserts that if the three

Cendant employees who pled guilty to fraud implicate E&Y

in their testimony, see supra n.18, the plaintiffs' case

against E&Y will be uncomplicated.

We find Throenle's objections with respect to the Cendant

portion of the Settlement to have considerable merit. We

agree with Throenle's contention that Cendant's basic

liability does not present a difficult or complex issue.

Cendant has indicated that, insofar as liability is

concerned, it would argue at trial that it is not responsible

for any illegal actions taken by its employees because these

acts were not done to benefit Cendant. However, because

(as we explain below) we are skeptical of the viability of this

defense for Cendant, see infra Part III.A.4, the fact that

Cendant would likely raise it increases only minimally the

complexity and likely duration of the litigation. We are thus

dubious that this case, insofar as it involves Cendant's

liability, presents numerous complex legal and factual

issues that would result in substantial costs of time and

money. But this does not necessarily militate against an

attractive settlement, a point we address later.

The issue of damages against Cendant is different in

character, for it involves technical accounting issues and

hence can be quite complex. Thus, we agree that this factor

weighs in favor of settlement insofar as the damages

determination is concerned. We note in this regard that the

damages determination formula developed by the Lead

Plaintiff 's damages expert is complicated and difficult to

36

follow; if Cendant constructed its own damages

determination formula (as we presume it would), the

damages issue could appreciably lengthen and complicate

this litigation. Still, we think that, compared to a case in

which basic liability is contested, the damages issues

involved here would increase only moderately the time and

expense required to litigate.

Regarding Duncan's arguments on the complexity of

determining E&Y's liability, we note that E&Y has

consistently and strenuously denied any fault for this

fraud, and as we have explained, see supra n.18, there

does not seem to be good reason to think that the three

convicted Cendant employees will implicate E&Y. E&Y

points out that the fraud was perpetrated at Cendant

facilities by Cendant employees, and no evidence has

surfaced in the investigations following the fraud that E&Y

employees participated in or even knew about the fraud.

E&Y also emphasizes the fact that the Willkie Farr report

describes numerous instances in which Cendant employees

admitted concealing or falsifying information to prevent

E&Y from discovering the truth. We agree with E&Y that

establishing liability and damages against it would involve

fairly complex and protracted litigation.

In sum, while the complexity and duration of litigation

factor does not weigh as heavily in favor of settlement as

the District Court concluded, we do think it does weigh

somewhat in favor of the Cendant part of the Settlement,

and strongly in favor of the E&Y part of the Settlement.

2. The Second Girsh Factor: The Reaction of the Class

The District Court found that this factor cut strongly in

favor of the Settlement, as the number of objectors was

quite small in light of the number of notices sent and

claims filed. The claims administrator sent 478,000 notices

of the Settlement to potential class members, and also

published notices in The Wall Street Journal and The New

York Times. Over 30,000 settlement claims were filed as of

June 12, 2000 (more than two weeks before the fairness

hearing), and almost 120,000 claims were filed by May 15,

2001. Yet only four class members objected to the

Settlement (Throenle, Duncan, the Davidsons, and Mark,

37

who objected only to the Plan of Allocation), and only two

non-class members objected as well (Deutch and the State

Board Administration of Florida). As the District Court

noted, none of the objectors was an institutional investor

(although the Davidsons had very large holdings), and only

234 class members opted out of the Class; the court took

the latter number "as an extremely favorable indicator of

class reaction." 109 F. Supp. 2d at 257.

Throenle argues that the low number of objectors is

attributable to the confusing notice to the Class; she

contends that the notice implied that objectors had to

appear personally before the court to lodge objections.

Throenle also asserts that she had difficulty obtaining

relevant documents from the clerk's office before the

objection deadline, and that "[s]uch a fundamental

deprivation of due process very likely hindered[other]

objectors." Throenle Br. at 47. Duncan submits that the

number of objectors and opt-outs is "meaningless" because

the opt-out and objection-filing deadlines occurred before

the three arrested Cendant employees pled guilty.

The District Court correctly found that this factor

weighed strongly in favor of the Settlement. The vast

disparity between the number of potential class members

who received notice of the Settlement and the number of

objectors creates a strong presumption that this factor

weighs in favor of the Settlement, and the objectors'

arguments otherwise are not convincing. Although it is true

that the Settlement Notice could have been clearer on how

to object to the Settlement, the District Court pointed out

that the notice provided the address and phone numbers

for Lead Plaintiff 's counsel in the event that class members

had questions about any matter in the notice. See 109 F.

Supp. 2d at 255. A confused class member who wanted to

make an objection could have easily called class counsel

and clarified the process by which to make it. Throenle's

assertion about her difficulty in obtaining documents from

the clerk's office is troubling, but the fact is that she did

receive the relevant documents in time and no other class

member has complained of this problem. Furthermore,

Duncan's contention that more people would have objected

had the objection deadline date occurred after the three

38

Cendant employees pled guilty to fraud is purely

speculative; nothing in these employees' statements to

investigators implicates E&Y, and in fact the statements

reflect that they tried to conceal the fraud from E&Y. We

therefore conclude that this factor cuts strongly in favor of

the Settlement.

3. The Third Girsh Factor: The Stage of Proceedings

This factor "captures the degree of case development that

class counsel have accomplished prior to settlement.

Through this lens, courts can determine whether counsel

had an adequate appreciation of the merits of the case

before negotiating." GM Trucks, 55 F.3d at 813. In

considering this factor, the District Court took note of the

formal and informal discovery in which Lead Counsel had

engaged, and then concluded that "[t]he record reveals, and

the Court finds, that the parties understood the merits of

the class action and could fairly, safely and appropriately

decide to settle the action with Cendant and E&Y. Counsel

conducted extensive discovery, retained and used experts,

and litigated pre-trial motions." 109 F. Supp. 2d at 259

(internal quotation marks and citation omitted). The court

then described in detail the "extensive discovery"

undertaken by the Lead Counsel, which included analysis

of Cendant's public filings, review of the Willkie Farr

Report, review of various documents produced by Cendant

during informal and formal discovery, and interviews with

various Cendant and E&Y employees. See id. at 258-59.

The court also noted that, in preparation for settlement

negotiations, Lead Plaintiff had retained the investment

firm Lazard Freres and damages expert Forensic

Economics, Inc., to assist it in determining damages. See

id. at 258.

Both Throenle and Duncan argue that there was

insufficient discovery. In particular, they point to the fact

that no depositions were taken and that Lead Counsel

mainly engaged in only informal discovery. Duncan in

particular argues that the early stage of discovery means

that the Settlement was not negotiated "under a real and

credible threat of litigation." Duncan's Opening Br. at 52.

The objectors are correct that the Settlement was reached

early in the litigation, with discovery itself at an early stage.

39

However, the merits of the liability case against Cendant

were fairly clear. With respect to the S 11 claims, Cendant

has admitted that its financial statements contained

materially false information, and Cendant has strict liability

for its registration statements that incorporated these

financial statements. As for the S 10(b) claims, Cendant

employees have basically admitted committing fraud, so

Cendant was going to be on the hook for a substantial

amount, if not all, of the Class's S 10(b) damages at all

events. In its argument on the fourth Girsh factor (the risk

of establishing liability), Lead Plaintiff relies on the fact that

Cendant has advanced the defense that it should not be

held liable for the Class's damages that were caused by the

illegal acts of its various officers, because these acts were

not done for the benefit of the corporation. As we explain

below, see infra Part III.A.4, on the record before us we do

not think that Cendant would have much chance of

success with this defense. While it is not clear whether

Lead Plaintiff had an "adequate appreciation" of the merit of

this defense, its viability turns more on legal considerations

than on factual development, see id., so it does not

substantially affect Throenle and Duncan's claim that more

discovery was needed.

Given the foregoing, it is unclear what depositions and

interrogatories (with the requisite motions to compel) would

have added to the liability considerations. It is true that the

extent of the Class's damages was not clear-cut, but Lead

Plaintiff retained its own damages expert to calculate the

Class's damages and also reviewed a damages report

prepared by the National Economic Research Association,

Inc., which Cendant hired as its damages expert. The issue

of damages appears to have been headed for resolution as

a battle of the experts at trial. While Federal Rule of Civil

Procedure 26 expert witness discovery might have been

helpful on the damages issue, it is not clear what it would

have added to the settlement calculus.

Therefore, although this litigation was settled at an early

stage, because of the nature of the case Lead Plaintiff had

an excellent idea of the merits of its case against Cendant

insofar as liability was concerned at the time of the

Settlement. Lead Plaintiff also underwent a sufficient

40

process for determining the Class's damages before the

Settlement. Because of this, Lead Plaintiff was able to form

an "adequate appreciation of the merits of the case [against

Cendant] before negotiating." GM Trucks , 55 F.3d at 813.

We thus conclude that this factor cuts strongly in favor of

the settlement with Cendant.

Because the case against E&Y was strongly contested

and much more complex, it is correspondingly more

difficult to ascertain the merits of the case against E&Y

because of the early settlement. However, Duncan's

conjecture about what evidence of E&Y's involvement in the

fraud may turn up from further discovery is undermined by

the results of the investigation of the three former Cendant

employees charged with criminal fraud, which indicates

that they concealed the fraud from E&Y. See supra n.18.

Therefore, although we note the possibility that further

discovery might have illuminated the merits of the case

against E&Y, we temper this with the observation that it

seems unlikely that evidence of E&Y's further involvement

in the fraud would come to light. For these reasons, we

conclude that the stage of proceedings factor is neutral as

to the settlement with E&Y.

4. The Fourth Girsh Factor: The Risks of Establishing

Liability

A court considers this factor in order to "examine what

the potential rewards (or downside) of litigation might have

been had class counsel decided to litigate the claims rather

than settle them." GM Trucks, 55 F.3d at 814. The District

Court concluded that the risks of establishing liability

varied with the particular defendant. As to Cendant, the

court concluded that liability was easily established, but

that things got more complex for the S 10(b) claims when

the proportionality of liability was considered:"the jury

might have found that Cendant bore only a small

proportion of the responsibility for the damages suffered by

the Class." 109 F. Supp. 2d at 260 (internal quotation

marks omitted) (citing the PSLRA's provisions on

proportionate liability, which provide that a defendant is

jointly and severally liable on a S 10(b) claim only if the

defendant knowingly committed the fraud; otherwise the

defendant is only liable for the percentage of his

41

responsibility for the fraud, see S15 U.S.C. 78u- 4(f)19).

Proportionality of liability is only an issue as to the S 10(b)

claims; if Cendant were to lose on the S 11 claims at trial,

it would be jointly and severally liable on these claims. See

15 U.S.C. S 77k(f).

As to E&Y, the court reasoned that the level of scienter

required by S 10(b), E&Y's potential due diligence defenses

under Section 11, and the fact that there was no evidence

that E&Y knew about the fraud while it was being

committed meant that Lead Plaintiff faced significant

obstacles in establishing E&Y's liability. The court

concluded that this factor weighed strongly in favor of

settlement in E&Y's case, less so for Cendant, and"overall

[this factor] weighs in favor of settlement." 109 F. Supp. 2d

at 261.

Throenle concentrates her argument on the District

Court's conclusion that the risk of establishing liability with

Cendant increases when the PSLRA's proportionate liability

_________________________________________________________________

19. 15 U.S.C. S 78u-4(f) provides, in pertinent part:

(f) Proportionate liability

(2) Liability for damages

(A) Joint and several liability

Any covered person against whom a final judgment is entered

in a private action shall be liable for damages jointly and

severally only if the trier of fact specifically determines that

such covered person knowingly committed a violation of the

securities laws.

(B) Proportionate liability

(i) In general

Except as provided in subparagraph (A), a covered person

against whom a final judgment is entered in a private action

shall be liable solely for the portion of the judgment that

corresponds to the percentage of responsibility of that covered

person, as determined under paragraph (3).

Paragraph 3 of S 78u-4(f) provides in pertinent part that the factfinder

should make findings as to "the percentage of responsibility of [the

defendant], measured as a percentage of the total fault of all persons

who caused or contributed to the loss incurred by the plaintiff."

42

provisions are factored into the equation. She counters

that, although the PSLRA limited defendants' joint and

several liability in S 10(b) actions, defendants who are found

to have knowingly committed S 10(b) violations are still

jointly and severally liable for the fraud damages under the

PSLRA. See 15 U.S.C. S 78u-4(f)(2). She thus argues that,

because Cendant would be charged with knowing whatever

its employees knew and its employees knowingly committed

the fraud, Cendant would be jointly and severally liable, not

proportionately liable, on the S 10(b) claims. On this basis,

Throenle submits that the proportionate liability provisions

of the PSLRA really do not pose a risk to establishing

Cendant's liability.20

Lead Plaintiff counters Throenle's argument by pointing

to Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir.

1975), in which we set out a two-part test for determining

when the fraud of an officer of a corporation is imputed to

the corporation: the fraud is imputed "when the officer's

fraudulent conduct was (1) in the course of his

employment, and (2) for the benefit of the corporation." Id.

at 884. Lead Plaintiff notes that Cendant argued in the

District Court that it was not liable for the illegal acts of its

officers because these acts were not for Cendant's benefit,

and that Cendant used just this defense to defeat a

summary judgment motion on S 10(b) claims by an opt-out

plaintiff in this very case. See In re Cendant Corp. Sec.

Litig., 109 F. Supp. 2d 225, 232-34 (D.N.J. 2000)

[hereinafter "Yeager v. Cendant" or"Yeager"]. The court

denied the plaintiff 's summary judgment motion in Yeager

because of the possibility that "a reasonable trier of fact

could conclude that the true motive of the wrongdoers was

the preservation of their employment, salaries, emoluments,

and reputations, as well as their liberty, at the expense of

the corporation's well-being." Id. at 233 (internal quotation

marks and brackets omitted). Lead Plaintiff contends that

the possibility that Cendant could establish this defense to

_________________________________________________________________

20. Duncan's argument on this factor is that further discovery would

turn up evidence establishing E&Y's liability. As we have noted above,

this claim is not only speculative, but also undermined by the evidence

in the record. Thus, we agree with the District Court's conclusion that

the risk of establishing E&Y's liability is substantial.

43

limit its liability posed a risk of establishing liability, so that

the District Court correctly concluded that this factor

weighed in favor of the Settlement.

We do not agree with the District Court that there was a

significant risk of establishing joint and several liability

against Cendant in this case. Rochez Brothers makes clear

that a corporate officer's fraud is imputed to the

corporation "even if the officer's conduct was unauthorized,

effected for his own benefit but clothed with apparent

authority of the corporation, or contrary to instructions."

527 F.2d at 884. The reason for this is that "a corporation

can speak and act only through its agents and so must be

accountable for any acts committed by one of its agents

within his actual or apparent scope of authority and while

transacting corporate business." Id. Based on the record

before us, it would not seem difficult for the plaintiffs to

establish that the high-ranking CUC officers who published

the false financial statements in CUC's name were acting

within the apparent scope of their authority and were

transacting corporate business, whether or not they were

feathering their own nest.

In sum, we agree that there would be little risk in

establishing Cendant's joint and several liability on the

S 10(b) claims. As to the risk of establishing E&Y's liability,

we agree with the District Court's analysis that a number

of factors make this factor weigh strongly in favor of

approval of the E&Y portion of the Settlement: the lack of

any evidence that E&Y knew about the fraud; E&Y's due

diligence defenses on the S 11 claims; the complexity of the

case against E&Y; and the prospect of fierce litigation.

Overall, then, the risks of establishing liability factor cuts

substantially in favor of approval of the E&Y portion of the

Settlement, but cuts against approval of the Cendant

portion of the Settlement.

5. The Fifth Girsh Factor: The Risks of Establishing

Damages

Like the fourth factor, "this inquiry attempts to measure

the expected value of litigating the action rather than

settling it at the current time." GM Trucks , 55 F.3d at 816.

Lead Plaintiff presented evidence to the District Court that

44

the total amount of damages to class members ranges

between $8.5 and $8.8 billion. Lead Plaintiff cautioned,

however, that establishing damages at trial would lead to a

"battle of experts," with each side presenting its figures to

the jury and with no guarantee whom the jury would

believe. The District Court accepted this argument, as well

as E&Y's statement that it was prepared to prove at trial

that the decline in Cendant's stock following the

announcements of the fraud was largely due to factors and

conduct in which E&Y was not involved. The court thus

found that this factor weighed in favor of settlement.

Throenle and Duncan do not offer persuasive arguments

regarding this factor, and we find the District Court's

reasoning on this factor sound. As we set forth in the

margin, the damages determination proffered by Lead

Plaintiff 's expert is complex and hard to follow, freighted

with involved calculations and conceptually difficult issues.21

Were a jury confronted with competing expert opinions of

corresponding complexity, there is no compelling reason to

think that it would accept Lead Plaintiff 's determination

rather than Cendant's, which would posit a much lower

figure for the Class's damages. This risk in establishing

damages means that this factor weighs in favor of approval

of the Settlement.

6. The Sixth Girsh Factor: The Risks of Maintaining

the Class Action Through Trial

The District Court found that this factor slightly weighed

in favor of settlement because, "[u]nder Federal Rule of Civil

Procedure 23(a), a district court `may decertify or modify a

class at any time during the litigation if it proves to be

unmanageable,' " and proceeding to trial would always

entail the risk, even if slight, of decertification. In re

Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 262 (quoting

In re Prudential Ins. Co. of Am. Sales Practices Litig., 148

_________________________________________________________________

21. For example, as we stated in the Facts & Procedural History section,

the damages determination involves calculating the"true value" of

Cendant/CUC stock for any given day during the class period, i.e., the

value that the stock would have had if the fraud had not been

committed, which requires a complex and conceptually difficult damages

determination.

45

F.3d 283, 321 (3d Cir. 1998)). The objectors argue that this

factor is really neutral. In our view the risk of

decertification appears to be extremely slight; hence we

agree with the objectors.

7. The Seventh Girsh Factor: The Ability of the

Defendants to Withstand a Greater Judgment

There is a dispute among the parties as to what this

factor means, i.e., whether it concerns the ability of the

defendants to withstand a judgment for the $8.8 billion

maximum damages sought by the Class, as Lead Plaintiff

and E&Y argue, or whether it focuses on the ability of the

defendants to withstand a settlement or a judgment for any

amount higher than the $3.2 billion for which they are

settling, as the objectors contend. The District Court took

note of this dispute, but appears not to have taken a

position on it, as it found that there was insufficient

financial data to determine what the defendants could

afford to pay.

Lead Plaintiff and E&Y reason that the use of the term

"judgment" rather than "settlement" in the formulation of

this Girsh factor supports their contention that it concerns

only the possible judgment at trial for the full amount of

damages sought rather than other possible larger

settlements. This reasoning is not terribly persuasive,

because Girsh uses the phrase "the ability of the

defendants to withstand a greater judgment," 521 F.2d at

157 (emphasis supplied), and the comparative term

"greater" implies a comparison with the current settlement.

If this factor was intended to reference the ability of the

defendants to withstand a judgment for what the plaintiffs

claim as their damages, then it would presumably be stated

in those terms (e.g., "the ability of the defendants to

withstand a judgment for what the plaintiffs claim") rather

than as "the ability of the defendants to withstand a greater

judgment." Furthermore, because both a settlement and a

judgment take money out of Cendant's pocket,

distinguishing the two in the context of this factor makes

little sense from a practical point of view.

We think a better interpretation of this factor is that it is

concerned with whether the defendants could withstand a

46

judgment for an amount significantly greater than the

Settlement. Our case law supports this view. See In re

Prudential, 148 F.3d at 321-22 (finding no error in the

district court's analysis of this factor that considered

whether the defendant could withstand a judgment for an

amount greater than the proposed settlement); GM Trucks,

55 F.3d at 818 (same). Thus, our consideration here is

whether Cendant could withstand a judgment for an

amount significantly greater than $2.85 billion, and

whether E&Y could withstand a judgment for an amount

significantly greater than $335 million. The District Court

concluded that, although the defendants failed to produce

financial information that showed that they could not pay

a judgment greater than what the Settlement provided, this

was not enough to reject the Settlement because the other

factors cut clearly in favor of settlement. However, the

District Court went on to find that

at least as far as Cendant is concerned, objective

benchmarks support Lead Counsel and Cendant's

stance that sustaining a larger judgment, and possibly

even a larger settlement, might prove fatal. Particularly,

the significant percentage of Cendant's market

capitalization that will be paid to the class--

approximately 25-30%. Even more striking is that Lead

Plaintiffs' total damages calculation [i.e. the $8.8

billion] represents approximately 80-95% of [Cendant's]

market capitalization (depending on market close)--a

figure difficult for this Court to imagine Cendant

paying without seeking shelter in our bankruptcy laws.

109 F. Supp. 2d at 263.

Thus, while the District Court did not find that Cendant

could not pay more than the $2.85 billion it contributed to

the Settlement, it did find that if this case went to trial and

Cendant was held liable for an amount close to $8.8 billion,

it would probably declare bankruptcy. Regarding E&Y's

ability to withstand a greater judgment, the court did not

have any of E&Y's financial information before it, so it

could not ascertain whether E&Y could pay more than its

$335 million share of the Settlement. The court then

determined that, because of the lack of financial

47

information, this factor weighed neither for nor against the

Settlement.

Throenle and Duncan argue that the District Court erred

when it found that this factor was neutral, because both

Cendant and E&Y are able to pay greater amounts than

they would under the Settlement. Throenle contends that

Cendant's announcement after the Settlement was reached

that it was resuming its share repurchasing activity shows

that Cendant has the ability to pay significantly more than

$2.85 billion. Duncan points to E&Y's post-settlement sale

of its consulting business to Cap Gemini for $11 billion as

evidence of the need to get more information as to E&Y's

ability to pay more.

We agree with the objectors' contentions that the

defendants could afford to pay more than they did under

the Settlement. This does not end our analysis of this

factor, however. The District Court was surely right that

somewhere between Cendant's settlement payout ($2.85

billion) and the potential judgment ($8.8 billion), Cendant

would likely be tipped into declaring bankruptcy. It is not

clear on the record where this point would occur--it is

probably not clear even to Cendant's directors at this point

--but it is very likely that bankruptcy would have been a

risk if Cendant were faced with a substantially higher

judgment. There is inevitably a measure of speculation

involved in this determination, especially given the lack of

record development on this issue, so even though we think

that it is likely that both Cendant and E&Y could have paid

substantially more than they did under the Settlement, we

must remain cognizant that the possibility of bankruptcy is

quite real when the settlement or judgment numbers

sufficiently increase. At the same time, the proponents of a

settlement bear the burden of proving that the Girsh factors

weigh in favor of approval. See GM Trucks, 55 F.3d at 785.

Given these observations, we disagree with the District

Court that the ability to withstand a greater judgment

factor is neutral with regard to the Settlement. Rather, we

think that this factor cuts against approval of the

Settlement, albeit only moderately, because of the built-in

limitations of this kind of analysis and the lurking

48

possibility of bankruptcy for Cendant (and perhaps E&Y as

well) if faced with a judgment near $8.8 billion.

8. The Final Girsh Factors: The Range of

Reasonableness of the Settlement Fund in Light of

the Best Possible Recovery & in Light of Litigation

Risks

The District Court began its analysis of these factors by

noting that the maximum amount of total damages against

all defendants is approximately $8.5 billion (later amended

to $8.8 billion), so that the total settlement amount of

nearly $3.2 billion from all defendants represents a 36-37%

recovery rate by the plaintiff Class. "This far exceeds

recovery rates of any case cited by the parties." In re

Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 263 (citing

cases and a volume describing a range of recoveries from

1.6% to 14% for securities class action settlements 22).

Because Cendant paid the bulk of the $3.2 billion

settlement, the court considered the proportionate fairness

of the E&Y settlement separately. E&Y was only potentially

liable for $6.2 billion in damages (i.e., the damages

sustained by pre-April 15, 1998 purchasers), and, if E&Y

and Cendant bear equal responsibility for these damages,23

then E&Y's settlement payment of $335 million represented

9.25% of the damages for which it was responsible. The

court found that this was in line with the range of

recoveries referenced above, and that it was well above the

norm for recoveries against accounting firms in securities

litigation.

_________________________________________________________________

22. The District Court cited the following: Denise Martin et al., National

Economic Research Association, Inc., Recent Trends IV: What Explains

Filings and Settlements in Shareholder Class Actions 10-11 (1996)

(securities settlements range from 9%-14% of claimed damages); In re

Prudential Sec., Inc. L.P. Litig., MDL No. 1005, 1995 WL 798907 (S.D.N.Y.

Nov. 20, 1995) (approving settlement of between 1.6% and 5% of claimed

damages); In re Crazy Eddie Sec. Litig., 824 F. Supp. 320 (E.D.N.Y. 1993)

(settlement of between 6% and 10% of damages); In re Michael Milken &

Assocs. Sec. Litig., 150 F.R.D. 57 (S.D.N.Y. 1993) (7.5%).

23. This is of course a highly questionable proposition insofar as the

S 10(b) claims were concerned, as it appears from the record that

Cendant would likely bear a much higher proportionate responsibility

than E&Y for the fraud.

49

The objectors' arguments about these factors challenge

the District Court's calculations, contending that the

Class's damages were $13 to 20 billion rather than $8.8

billion, so that the recovery rate for the Settlement would

be much lower than the District Court concluded. These

arguments are flawed, however, because they calculate the

Class's damages by using the drop in Cendant's market

capitalization after the fraud was revealed. A stock's drop in

market capitalization is not a proper measure of damages

in securities cases under the statutory scheme laid out in

S 10(b) or S 11. See 15 U.S.C.S 77k(e) (S 11 damages) &

S 78u-4(e) (S 10(b) damages). Thus, the objectors' arguments

are unavailing.24

Furthermore, we find the District Court's conclusion that

these factors weigh in favor of the Settlement to be

persuasive. The fact that the recovery rate for the Class

here apparently exceeds the recovery rates in other

securities class action settlements tends to support the

reasonableness of the Settlement even though the Class

faced low litigation risks in its claims against Cendant

(because of the relative ease of establishing Cendant's

liability). The lower recovery rate of E&Y's portion of the

Settlement is justified by the greater litigation risks the

Class faced in establishing E&Y's liability. For these

reasons, we conclude that these factors weigh in favor of

approval of the Settlement.

_________________________________________________________________

24. The reason why a drop in market capitalization is an inaccurate

determiner of damages can be clarified by the following example.

Suppose that Samantha Shareholder bought one share of Cendant stock

at $20. The stock then rose to $25, but when the fraud was announced

it dropped to $15, whereupon Shareholder sold. Shareholder's damages

are $5 because that is the difference between what she paid for the stock

and what she sold it for after the fraud was revealed ($20 - $15); these

are her "out-of-pocket" damages. See Sowell v. Butcher & Singer, Inc.,

926 F.2d 289, 297 (3d Cir. 1991) ("The proper measure of damages to

reflect the loss proximately caused by the defendants' deceit is the out-

of-pocket rule. That rule is the traditional measure of damages in a Rule

10b-5 action.") (internal quotation marks and citation omitted). If we

used the drop in market capitalization to determine Shareholder's

damages, however, we would conclude that she had damages of $10 ($25

- $15), which is greater than her out-of-pocket loss and is thus not a

proper measure of her damages.

50

Volume 2 of 3

51

9. Summing Up the Girsh Factors

Insofar as the Cendant portion of the Settlement is

concerned, we conclude that the second (reaction of the

class), third (stage of the proceedings), fifth (risk of

establishing damages), eighth and ninth (range of

reasonableness in light of the best possible recovery and of

litigation risks) Girsh factors all weigh strongly in favor of

approval of the settlement with Cendant. The first factor

(complexity of litigation) weighs moderately in favor of

approval, while the seventh factor (ability to withstand a

greater judgment) weighs moderately against approval and

the fourth factor (risk of establishing liability) weighs more

heavily against approval of the settlement with Cendant.

Finally, the sixth factor (risk of maintaining the class

action) is effectively neutral.

As to the E&Y portion of the Settlement, we conclude

that the first (complexity of litigation), second (reaction of

the class), fourth (risk of establishing liability), fifth (risk of

establishing damages), eighth and ninth (range of

reasonableness in light of the best possible recovery and of

litigation risks) Girsh factors all weigh strongly in favor of

approval of the Settlement. The third factor (stage of the

proceedings) and the sixth factor (risk of maintaining the

class action) are neutral, while the seventh factor (ability to

withstand a greater judgment) weighs moderately against

the E&Y portion of the Settlement.

Given this analysis, we conclude that the District Court

did not abuse its discretion in finding that the Girsh factors

52

overall weighed in favor of approving the Settlement and

that therefore the Settlement was fair, reasonable, and

adequate. As should be clear from our analysis, we think

that this question with respect to the Cendant portion of

the Settlement is closer than the District Court made it out

to be. In particular, the lack of any serious risk of

establishing Cendant's liability and its probable ability to

pay substantially more in settlement raise concerns in our

minds concerning the fairness and adequacy of this

Settlement. However, a quick reference to the preceding

discussion of the Girsh factors makes clear that the balance

clearly weighed in favor of approval of the Cendant

settlement. As to E&Y, there can be no question as to the

propriety of the approval. Furthermore, under our standard

of review applicable here we accord deference to the District

Court's exercise of discretion, and can set aside its decision

only if there was an abuse of that discretion, which is

absent here. For these reasons, we hold that the District

Court did not abuse its discretion in concluding that the

Settlement was fair, reasonable, and adequate based on its

application of the Girsh factors.

B. Intra-class Conflicts

Throenle and Mark have presented objections to the

Settlement that fall under the general rubric of intra-class

conflicts. Throenle presents two related arguments for

setting aside the District Court's order approving the

Settlement, while Mark attacks the Plan of Allocation.

1. Throenle's Arguments

a. The Lead Plaintiff 's Alleged Conflicts of Interest

Throenle first argues that the members of the CalPERS

Group (who comprise Lead Plaintiff) were too conflicted to

serve adequately in that capacity because they continued to

hold huge amounts of Cendant stock during the Settlement

negotiations, rendering them more concerned with

protecting their interests in Cendant's future prospects

than with achieving maximum recovery for the Class from

Cendant. Throenle's argument is based on the general

assertion that a lead plaintiff who retains a substantial

investment in a defendant corporation cannot adequately

represent a class in a lawsuit against that corporation

53

because this lead plaintiff will naturally be conflicted

between trying to get maximum recovery for the class and

trying to protect its ongoing investment in the corporation,

e.g., by settling cheap or by securing corporate governance

changes in lieu of cash, both of which are alleged here.

Because of this, she argues that we should set aside the

Settlement.

Throenle's thesis is attractive. The problem with it is that

Congress seems to have rejected it when it enacted the lead

plaintiff provisions of the PSLRA. The Reform Act

establishes a presumption that the class member"most

capable of adequately representing the interests of class

members" is the shareholder with the largest financial

stake in the recovery sought by the class. 15 U.S.C.S 78u-

4(a)(3)(B)(i) & (iii)(I). The plaintiff with the largest stake in a

given securities class action will almost invariably be a

large institutional investor, and the PSLRA's legislative

history expressly states that Congress anticipated and

intended that such investors would serve as lead plaintiffs.

See S. Rep. No. 104-98, at 11 (1995), reprinted in 1995

U.S.C.C.A.N. 679, 690 ("The Committee intends to increase

the likelihood that institutional investors will serve as lead

plaintiffs by requiring the court to presume that the

member of the purported class with the largest financial

stake in the relief is the `most adequate plaintiff.' "). We

presume that Congress was aware that an institutional

investor with enormous stakes in a company is highly

unlikely to divest all of its holdings in that company, even

after a securities class action is filed in which it is a class

member.

By establishing a preference in favor of having such

investors serve as lead plaintiffs, Congress must have

thought that the situation present here does not inherently

create an unacceptable conflict of interest. See id. ("The

Committee believes that an institutional investor acting as

lead plaintiff can, consistent with its fiduciary obligations,

balance the interests of the class with the long-term

interests of the company and its public investors."). For this

reason, the simple fact that the institutional investors who

comprise Lead Plaintiff retained Cendant stock while the

Settlement was negotiated is not nearly enough, standing

54

alone, to support Throenle's claim that Lead Plaintiff was so

conflicted that the Settlement should be overturned. 25

_________________________________________________________________

25. Although we have held that the fact that the members of the

CalPERS Group continued to hold Cendant stock does not warrant

overturning the Settlement, we call attention to an issue of potential

intra-class conflicts with which district courts will need to grapple in

future cases at the class certification stage. See In re Party City

Securities

Litigation, 189 F.R.D. 91, 108-10 (D.N.J. 1999) (noting the possibility of

a significant conflict in many securities class actions between the

interests of individuals and institutions that purchased and then sold

stock in the defendant firm--"Sell Plaintiffs"--and those who bought and

continue to hold such stock--"Hold Plaintiffs").

In economic terms, the potential conflict may be demonstrated as

follows. The motivation of a rational Sell Plaintiff is simple: he wants

to

secure the largest possible recovery. The rational Hold Plaintiff,

however,

is in a more complicated situation; her goal is to reach a settlement that

will maximize the combined value of her share of the settlement and the

stock that she continues to hold in the defendant firm. Consequently,

though a rational Sell Plaintiff would be perfectly willing to push the

defendant firm one dollar short of declaring bankruptcy, a rational Hold

Plaintiff rarely would be so willing because the increased value of her

share of the settlement fund would almost certainly be offset by a

corresponding decrease in the value of her stock. Thus, there will often

be a significant conflict between the interests of Sell Plaintiffs and

Hold

Plaintiffs, particularly in cases where the class's expected damages are

very large. We acknowledge that settlements among market participants

are not always a function of rational behavior, as economists assume.

Indeed, most settlements are probably based on intuition--although

market factors doubtless inform the exercise of the parties' judgment.

What is important to realize, however, is that this issue is one of class

configuration. It is not merely a problem with the identity of the lead

plaintiff, because it is equally problematic to have a Sell Plaintiff

represent a class that includes Hold Plaintiffs as it is to have a Hold

Plaintiff represent a class that includes Sell Plaintiffs. Properly

understood, the issue is whether the conflict between the interests of

Sell Plaintiffs and Hold Plaintiffs in a particular case is sufficiently

severe

so as to prevent a putative class from satisfying Rule 23's requirements

for class certification, regardless whether the problem is seen as one of

commonality, see Fed. R. Civ. P. 23(a)(2) (providing that a class action

may be maintained only if "there are questions of law or fact common to

the class"), typicality, see Fed. R. Civ. P. 23(a)(3) (permitting class

certification only if "the claims or defenses of the representative

parties

are typical of the claims or defenses of the class"), adequacy of

55

Throenle appears implicitly to acknowledge this point,

because she also argues that there is specific evidence that

Lead Plaintiff did not adequately represent the Class's

interests in this case, and that this evidence rebuts the

PSLRA's presumption that the CalPERS Group was the

most adequate plaintiff. See 15 U.S.C. S 78u-4(a)(3)(B)(iii)(II)

(providing that the presumption that the largest

shareholder is the most adequate plaintiff "may be rebutted

only upon proof by a member of the purported plaintiff

class that the presumptively most adequate plaintiff. . .

will not fairly and adequately protect the interests of the

class"). Throenle points to two factors as evidence that Lead

Plaintiff did not adequately protect the Class's interests.

The first is that while some people originally placed the

Class's total damages at $13-20 billion, Cendant only paid

$2.85 billion, which is too low a percentage of the Class's

total damages. Her second piece of evidence is that Liberty

Media Co. agreed to invest $400 million in Cendant soon

after the announcement of the Settlement; because Lead

Plaintiff must have known about this impending deal"[t]his

obviously gave the Lead Plaintiffs--to the extent they

retained substantial Cendant holdings--a tremendous

incentive to settle cheap." Throenle's Opening Br. at 31.

Throenle does not clearly explain how she concluded that

the Class's damages were $13-20 billion; apparently it is

derived from Cendant's loss of market capitalization caused

by the announcement of the fraud. As we noted above in

_________________________________________________________________

representation, see Fed. R. Civ. P. 23(a)(4) (stating that a class may be

certified only if "the representative parties will fairly and adequately

protect the interests of the class"), or predominance, see Fed. R. Civ. P.

23(b)(3) (allowing for class certification if "the court finds that the

questions of law or fact common to the members of the class

predominate over any questions affecting only individual members").

Because here no party on appeal objects to class certification based on

conflicts between Sell Plaintiffs and Hold Plaintiffs, we need not decide

whether this matter should have been certified as two separate classes

or as a single class with sub-classes. We do, however, call these issues

to the attention of district courts for future cases, and note that the

use

of separate classes or sub-classes is not inconsistent with the Reform

Act because that statute deals with the identification of a lead

plaintiff,

and not with the proper means for defining a class in the first place.

56

our Girsh factor analysis, however, loss in market

capitalization is not a proper measure of damages inS 10(b)

or S 11 cases. See 15 U.S.C. S 78u-4(e) (S 10(b) damages) &

S 77k(e) (S 11 damages); supra Part III.A.8. Thus, Throenle's

argument based on this $13-20 billion figure has no

legitimate basis and we reject it for that reason.

Similarly, Throenle's accusations about the Cendant-

Liberty Media deal are based upon speculation; she offers

no evidence that Lead Plaintiff knew about this impending

deal or that it affected the settlement calculations, except

for the fact that the deal was announced soon after the

Settlement was announced (nine days later). Furthermore,

even if this speculation were correct, Throenle's argument

on its own is not persuasive. It is unclear how this

impending deal, if Lead Plaintiff knew of it, "obviously gave

Lead Plaintiff . . . a tremendous incentive to settle cheap,"

as Throenle contends. Why would an upcoming infusion of

cash investment in Cendant impel Lead Plaintiff to settle

this litigation cheaply? Lead Plaintiff would have such an

incentive only if: (1) Liberty Media made the deal contingent

upon Cendant achieving a favorable settlement of this case;

(2) Lead Plaintiff became aware that Liberty Media had

taken this position; and (3) Lead Plaintiff determined that

the Liberty Media deal was worth more to it (as a current

shareholder of Cendant) than a larger settlement was worth

to it (as a class member). As with her other charges,

Throenle offers no evidence that any of these suppositions

are true. For these reasons, we reject Throenle's assertion

that Lead Plaintiff was in conflict with the interests of the

class members so that the Settlement should be

overturned.

b. The Corporate Governance Changes

Throenle also argues that the corporate governance

changes that Lead Plaintiff obtained from Cendant as part

of the Settlement benefitted only institutional investors who

continued to hold large blocks of Cendant stock, and not

the Class as a whole, so that the District Court abused its

discretion in approving a settlement that provided an

individual benefit to certain class members at the expense

of more recovery for the Class overall.

57

The corporate governance changes that Lead Plaintiff

negotiated include Cendant's agreement to: (1) ensure that

a majority of its Board of Directors would be independent

directors; (2) place only independent directors on the

Board's Audit, Nominating, and Compensation Committees;

(3) de-classify the Board and provide for the annual election

of all directors; and (4) preclude the repricing of any

employee stock option after its grant, except with the

approval of a majority of voting shareholders. Although

these corporate governance changes were not negotiated

until after the monetary portion of the Settlement was

agreed upon, Lead Plaintiff did make it known to Cendant

at the beginning of the negotiation process that it was going

to ask for corporate governance changes. Obviously, these

changes benefit only current and future Cendant

shareholders, as they are meant to reduce the chance of

future fraud by limiting the control of Cendant's internal

officers and directors. The Lead Plaintiff, however, was

appointed to represent the interests of the Class, which is

defined as all persons who purchased Cendant stock

between May 31, 1995 and August 28, 1998, many of

whom have long since sold their shares.

On the basis of these facts, which are essentially

undisputed, Throenle argues that the inclusion of the

corporate governance changes in the Settlement warrants

overturning the Settlement. She acknowledges that she has

no evidence that Lead Plaintiff gave up something in the

negotiations (presumably up-front dollars) in order to get

the corporate governance changes. Throenle's argument is

thus based upon the common sense premise that "you

don't get something for nothing." Throenle contends that

the only thing of value that Lead Plaintiff had to offer

Cendant for the governance changes was its acceptance of

less money for the Class. Therefore, Throenle maintains,

Lead Plaintiff sold out the interests of the class members

(by accepting less money than it could have gotten) in order

to get something of value for itself and for other current

and future Cendant shareholders. Under this view, Lead

Plaintiff breached its duty to the Class in negotiating these

corporate governance changes, and the District Court

abused its discretion in approving the Settlement given this

conflict.

58

Throenle's argument here has an intuitive pull, but

ultimately it is unpersuasive for two reasons. First, the

received wisdom of the street does not necessarily have

force in this Court as a matter of law. The truth of the

maxim "you don't get something for nothing" is not

something that we can judicially notice. We need evidence,

and there is no affirmative evidence backing up Throenle's

claims, although there is some evidence against them. Lead

Plaintiff strenuously denies that it took any less monetary

recovery to get the corporate governance changes.

Apparently, the corporate governance changes were not

negotiated until after the monetary recovery was

determined, and Lead Counsel who negotiated the

Settlement made declarations to the District Court stating

that Cendant was explicitly told that the money it paid into

the Settlement would not be decreased in any way as an

exchange for implementing the corporate governance

changes.

Cendant's general counsel confirmed this declaration,

and stated that Cendant did not request or receive any

concessions, economic or otherwise, in exchange for

adopting the corporate governance changes. Thus, Lead

Plaintiff submits that we should leave intact the District

Court's factual finding that "Throenle's objection regarding

the corporate governance changes has no substance. There

has not been the slightest indication that the cash portion

of the settlement was related to, dependent upon, or

intertwined with the governance proposals." 109 F. Supp.

2d at 252.

Second, Cendant had another possible motivation for

agreeing to the corporate governance changes: corporations

that have admitted to fraudulent activity can have a hard

time attracting and keeping investors unless they make

some affirmative efforts to ensure that such fraud will not

occur again. It is entirely plausible that Cendant agreed to

the corporate governance changes as a way to show

investors that it was addressing the situation that allowed

the fraud to occur in the first place, thus trying to make

itself more attractive. This possibility counters Throenle's

"you don't get something for nothing" argument, because,

under this scenario, Cendant gave up the corporate

59

changes in order to encourage continued investment,

particularly from institutional investors.

In sum, the lawyers involved in negotiating the

Settlement have provided affidavits and declarations to the

effect that there was no settlement-money-for-

corporate-governance-changes exchange, and Throenle

offers no evidence otherwise. We are satisfied that the

District Court's factual finding that there was no evidence

of such an exchange is not clearly erroneous, and we reject

Throenle's arguments based on the supposed existence of

such an exchange. For all the foregoing reasons, we

conclude that Throenle's conflict of interest arguments are

not a sufficient basis for concluding that the District Court

abused its discretion in approving the Settlement. 26

_________________________________________________________________

26. Throenle makes two other arguments which can be dealt with

summarily. First, she argues that the Settlement Notice was inadequate

because it omitted information that the PSLRA requires in such notices,

in 15 U.S.C. S 78u-4(a)(7)(B)(ii). That statute provides, in relevant

part:

"Disagreement on amount of damages: If the parties do not agree on the

average amount of damages per share that would be recoverable if the

plaintiff prevailed on each claim alleged under this chapter, a statement

from each settling party concerning the issue or issues on which the

parties disagree" must be included in the notice of a settlement. Throenle

appears to interpret this as a requirement that, if the parties do not

agree on damages, the notice of a settlement must include a statement

from each settling party concerning every issue on which the parties

disagree. The District Court rejected this argument, holding that

(7)(B)(ii)

clearly only requires a statement on the damages issues on which the

parties disagree. The District Court was correct. Quite obviously, the

phrase "the issue or issues on which the parties disagree" in (7)(B)(ii)

refers only to damages issues, not to every disputed issue involved in the

class action. The court found that the Settlement Notice contained a

statement of the damages issues on which the parties disagree and that

this statement was sufficient; this finding was supported. Throenle also

argues that several of the statements contained in the Settlement Notice

were misleading or incomplete; these arguments are patently without

merit and we reject them without further discussion.

Second, Throenle argues that the District Court erred in approving the

part of the Settlement in which "Lead Plaintiffs have traded their solid

case against E&Y" for a 50% interest in any recovery that Cendant gets

in its cross-claim against E&Y, because: (1) "Lead Plaintiffs cannot cede

their responsibility for prosecuting a class action against one defendant

60

2. Mark's Arguments

Mark attacks the Settlement's Plan of Allocation, arguing

that class members who had S 11 claims under the

Amended Complaint (i.e., class members who received

Cendant stock via the HFS merger) should be allocated

higher settlement payments than class members with only

S 10(b) claims, because S 11 claims and damages are far

easier to prove than S 10(b) claims and damages. She then

asserts that Lead Plaintiff did not press for a greater

recovery for S 11 claimants because it used the greater

strength of the S 11 claims to recover more for the Class's

S 10(b) claims.27 Mark therefore argues that the District

_________________________________________________________________

in a case to another defendant in the case," as this violates the "spirit"

of Rule 23; and (2) "Cendant's case against E&Y is much weaker than

the case brought against E&Y by the class." Throenle's Opening Br. at

57-58. Throenle's argument here involves a mischaracterization of the

terms of the Settlement. Under the Settlement, E&Y paid the Class $335

million in return for the Class releasing its claims against E&Y; this is

the extent of what the Class is getting from E&Y. Independent of any of

the Class's claims, Cendant has asserted certain cross-claims against

E&Y. In addition to its $2.85 billion payment, Cendant agreed to give

50% of any recovery of these claims against E&Y to the Class. Cendant

is prosecuting not the Class's claims against E&Y but its own cross-

claims, so Cendant is not in any way taking over the role of Lead

Plaintiff. Consequently, the relative strength of Cendant's claims against

E&Y as compared to the Class's claims against E&Y is immaterial to the

fairness of this settlement provision; the Class did not give up any part

of its claims against E&Y for this 50% of Cendant's recovery, but only

gave up some portion of its claims against Cendant in return for this

50% from Cendant (and given that Cendant paid the Class $2.85 billion,

it is not clear that the Class gave up very much for this 50% recovery).

Therefore, we reject Throenle's argument that the District Court abused

its discretion in approving this portion of the Settlement.

27. As we noted above, the Plan of Allocation allowed class members with

S 11 claims to calculate their damages either under a statutory S 11

calculation or under the plan's S 10(b) calculation, whichever was higher.

This is because any S 11 claim can also be treated as a S 10(b) claim, so

anyone with a S 11 claim also has a S 10(b) claim (of course, the converse

is not true). However, certain class members had both a S 11 claim and

an independent S 10(b) claim; that is, they received shares in the HFS

merger (the S 11 claim), and they also bought shares on the open market

(the S 10(b) claim). The Lead Plaintiff had both S 11 claims and

independent S 10(b) claims, as did Mark.

61

Court abused its discretion in approving the Plan of

Allocation, and she asks us to vacate that part of the

Settlement. She also asks us to appoint her lead plaintiff,

and her counsel as lead counsel, for a subclass composed

of the class members with S 11 claims.

Mark cites three basic legal differences betweenS 10(b)

and S 11 claims that affect their relative legal difficulty.

First, S 11 claims are strict liability claims (all one needs to

establish on the part of the defendant is an untrue

statement of material fact in a registration statement) while

S 10(b) claims require proof of scienter on the part of the

defendant. Second, this difference in the required mental

state means that S 11 claims are less fact intensive than

S 10(b) claims, with the result that a S 11 claim is much

more likely to survive a defendant's motion for summary

judgment. Third, there is no proportionate liability under

S 11 claims, while there is under S 10(b) if the defendant

acted only with recklessness, not knowledge. According to

Mark, these three differences make the plaintiff 's task of

proving her case easier with a S 11 claim than with a

S 10(b) claim, thus making the former a more valuable type

of claim.

Mark contends that the conflict between the class

members with S 11 claims and those without such claims

was exacerbated here because Lead Plaintiff used the

stronger S 11 claims as leverage to get more recovery for the

S 10(b) claims. More specifically, Mark points to the fact

that, early in the litigation, Lead Plaintiff agreed to defer a

motion for partial summary judgment on its S 11 claims in

return for Cendant's agreement to permit informal

discovery on the S 10(b) claims. Thus, Mark argues that, in

return for benefit for the S 10(b) claims (discovery), Lead

Plaintiff sacrificed leverage for the S 11 claims--the

summary judgment motion--which she submits could have

resulted in an early determination of liability against

Cendant.

Finally, Mark points to two other Cendant cases as

evidence that S 11 claims against Cendant are easier to

prevail on and thus should result in a higher recovery

percentage than the 36% this Settlement provides: the

PRIDES settlement, In re Cendant Corp. PRIDES Litig., 51 F.

62

Supp. 2d 537 (D.N.J. 1999), and the Yeager litigation,

Yeager v. Cendant, 109 F. Supp. 2d 225 (D.N.J. 2000).

Mark contends that these cases show that "an unconflicted

Plaintiff with a particularly strong S 11 Claim" against

Cendant can recover close to 100% of her damages, much

higher than the 36% return this Settlement garnered.

Under the terms of the PRIDES settlement, members of the

class received almost 100% of their damages claims. In

Yeager, the district court granted partial summary

judgment in favor of the plaintiff on the issue of liability on

his S 11 claims, while denying summary judgment on

S 10(b) liability because there was a genuine issue of

material fact as to Cendant's scienter.

Mark's arguments are not without force. However, there

are several considerations that convince us that the District

Court did not abuse its discretion in approving the Plan of

Allocation. First, the difference in the liability standards

between S 11 and S 10(b) claims ultimately does not make

a substantial difference in this case, as it is basically

undisputed that Cendant's employees committed fraud, so

the necessary scienter for the S 10(b) claims has been

admitted. It is true that there is a possible issue of

proportionate liability that arises with the S 10(b) claims,

because Cendant has stated that it would raise the defense

that the scienter of its employees cannot be attributed to

Cendant itself. However, as we noted previously, see supra

Part III.A.4, based on the record before us we think that

Cendant would have a very difficult time making out this

defense.

Second, the real difficulty in the trial of this case would

have been establishing damages, a process which both

S 10(b) and S 11 claimants would have to undergo equally

and which almost certainly would devolve into a"battle of

the experts." Although S 11 claimants could at the outset

calculate their damages rather simply (by subtracting the

price of the stock at the time the lawsuit was brought from

the amount that they paid for the stock, see 15 U.S.C.

S 77k(e)), the defendant can counter this calculation by

showing that any or all of this difference in stock price was

caused by something other than the fraud, see id . Thus, on

a S 11 claim there would still be a "battle of the damage

63

experts;" the only difference between a S 11 and a S 10(b)

damage determination in this case is that, on aS 11 claim,

the defendant would bear the burden of disproving the

plaintiff 's straightforward subtraction calculation. In fact,

in Yeager, the district court denied Yeager summary

judgment on his S 11 claim in part because the court found

that there was a genuine issue of material fact as to the

amount of Yeager's S 11 damages. See Yeager, 109 F. Supp.

2d at 229. Furthermore, the informal discovery that Lead

Plaintiff obtained in return for deferring the summary

judgment motion produced information relevant to

determining the Class's damages, which was beneficial to

both the S 11 and S 10(b) claims.

Finally, it is also important to note that the S 10(b)

damages available to the class members in this case are

generally greater than the S 11 damages available, so that

in this respect the S 10(b) claims are potentially stronger

than the S 11 claims.28 At all events and for all these

reasons, we are chary of holding that the respective legal

strengths of the S 10(b) and S 11 claims involved here

should have been factored into the fairness of the

settlement determination. This would be a speculative

enterprise at best, and the differences in strength of these

_________________________________________________________________

28. The reason for this is that S 11 damages and S 10(b) damages are

calculated under the Plan of Allocation using different days as the

"selling date," i.e., the date on which the class member is deemed to

have sold her Cendant stock for damage determination purposes. As we

described, supra n.8, S 11 damages are determined by using as a selling

date the date lawsuits were first filed (April 16, 1998). Section 10(b)

damages, however, are determined using the earlier of (1) the date the

class member actually sold her stock or (2) the last day of the class

period, i.e., August 28, 1998. Thus, because a class member would have

no damages if she sold before April 16, 1998 (the fraud was not revealed

until after trading on April 15, 1998, so sales before then got the full

benefit of the fraudulently inflated price of Cendant's stock), damages on

the S 10(b) claims are determined using a date between April 16, 1998

and August 28, 1998. Because Cendant stock declined steadily between

April 16 and August 28, 1998, the calculations ofS 10(b) damages under

the Plan of Allocation (which may use a post-April 16 date as the selling

date) are generally more than S 11 damage calculations under the plan

(using April 16 as the selling date).

64

claims are not so great as to make the outcome of this

process clear.

Furthermore, the PRIDES settlement and the Yeager

litigation are distinguishable. The PRIDES settlement

involved a paper payout rather than a cash payout (i.e., the

plaintiffs got new Cendant stock for their old stock), see

Cendant PRIDES, 51 F. Supp. 2d at 540, while the case at

bar involves a cash payout.29 Second, PRIDES was a "claims

made" settlement, with unclaimed settlement funds

reverting back to Cendant, see id. at 541; here all the

settlement cash (and interest) will go to the Class. This

point is important because it means that unmade claims in

this Settlement will increase the percentage return for each

class member, while unmade claims in the PRIDES

settlement did not increase each class member's return but

instead decreased the amount that Cendant had to pay out.

Put another way, giving 36% recovery to 100% of the class

in a standard settlement like the case at bar is equivalent

(in terms of money paid out by the defendant) to giving

100% recovery in a claims made settlement if only 36% of

the class actually makes claims (assuming that each claim

is for the same amount).

Thus, the "claims made" nature of the PRIDES settlement

meant that Cendant could agree to a settlement in that

case that gave a much higher percentage recovery to all

potential class members, because it knew that it only had

_________________________________________________________________

29. Mark argues that, although the PRIDES settlement involved a "paper

for paper" exchange, a PRIDES plaintiff who sold her new Cendant stock

within the first ten days that she was able to received almost 100% of

her damages claimed, so that the PRIDES settlement effectively involved

a nearly 100% cash payout. However, at the time when the PRIDES

settlement was reached, there was no guarantee that the class members

would garner such a steadily high return over the first few days during

which they would be able to sell their stock. There was about a nine-

month delay between the settlement approval and the date when the

class members could sell their new shares in the market, and much

could have happened to Cendant and its stock during that interim that

could have affected the amount of return that the PRIDES plaintiffs

received. Thus, the PRIDES "paper for paper" exchange involved a

sizeable risk, at the time the settlement was entered into, of a payout

substantially less than 100% of the class's damages.

65

to pay out to those class members who actually made

claims, which was certain to be a subset of the entire class.

Not only does this mean that PRIDES is not"really" a

settlement for 100% recovery (because less than 100% of

the potential claimants will make a claim, thus lowering the

amount Cendant must pay out), it also means that the

settlement in this case is not "really" a settlement for 36%

recovery (because less than 100% of the potential claimants

will make a claim, thus raising the amount each claimant

will receive). More specifically, at the time of oral argument

in this case, $4.962 billion in claims had been submitted to

the Claims Administrator, which translates into a 67%

recovery for each class member--almost double the original

36% recovery figure.30

As for Yeager, that case was not a class action (the

plaintiff had opted out of this Class) and was for far less in

damages, so any comparisons between Yeager and this

case are flawed at best. Furthermore, as we note above, the

district court partially denied Yeager summary judgment on

his S 11 claims because there was a genuine issue of

material fact as to the amount of damages.

For the foregoing reasons, we reject Mark's arguments

and conclude that the District Court did not abuse its

discretion by approving a settlement that treatedS 10(b)

and S 11 claims more or less equally.

C. The Davidsons' Objections

For the reasons set forth supra at note 10, it is not clear

at this juncture whether the Davidsons are members of the

Class. If this Court, in its en banc sitting in November,

2001, decides that the Davidsons are included in the Class,

we would be required to pass on the issues they raise in

this appeal. Given the proliferation of appeals in this case

(this being the seventh appeal in the Cendant proceedings

see supra n.11), and the importance of bringing this matter

to a close as soon as the issues presently unsettled are

resolved, we think it prudent to address those issues now.

Because these objections do not warrant extensive

treatment, we will dispose of them in relatively short order.

_________________________________________________________________

30. The deadline to submit claims to the Claims Administrator was

October 31, 2000.

66

1. Class Certification Findings

The Davidsons first argue that the District Court erred by

failing to make explicit findings that all of Federal Rule of

Civil Procedure 23's requirements were met when certifying

the Class. They argue further that the court erred by not

making those findings again at the settlement stage. In the

Davidsons' submission, if the court had made the Rule 23

findings, it never would have certified the Class as it now

stands; rather it would have at least certified a subclass for

merger claimants like them. In particular, the Davidsons

argue that, if it had done its job properly, the court would

have (or should have) found that Rule 23(a)'s requirements

of typicality and adequate representation were not met by

the Class as it was defined and by the Lead Plaintiffs'

representation. In their Reply Brief, the Davidsons add the

argument that Rule 23(a)'s commonality requirement was

not met as well.

However, the Davidsons neglected to raise these

arguments in a timely fashion, failing to raise them until

the settlement approval stage. We thus conclude that they

waived these arguments by not raising them earlier. See

Joel A. v. Giuliani, 218 F.3d 132, 140 (2d Cir. 2000)

(holding that objectors to a class action settlement who

argued, at the settlement approval stage, that the Rule 23

requirements were not met for them in their subclass were

untimely with their objection, and thus the objection was

waived).

2. Notice of the Settlement

The Davidsons contend that the Settlement Notice given

to the class members was insufficient, in that it did not give

them sufficient information to make an informed decision

whether to opt out before the opt-out deadline. They argue

that the relevant terms of the Settlement Agreement--the

Plan of Allocation and the scope of the claims against

Cendant that were released--were not disclosed before the

opt-out period ended. This defect, they assert, made the

notice that was sent to the Class insufficient. The

Davidsons submit that the court either should have sent

out another notice with this particular information about

the terms of the Settlement before the opt-out deadline, or

67

should have extended the opt-out deadline (or provided for

a new opt-out period) beyond the time that the terms of the

Settlement were released. The Davidsons argue that the

reaching of a settlement in effect made this class action a

settlement class action, so that the notice requirements for

a settlement class action set forth in GM Trucks , 55 F.3d

768, 792 (3d Cir. 1995), apply here. We disagree.

This was not a settlement class action but a previously

certified class action that settled. The Davidsons have

provided no authority for their contention that if settlement

is reached before the opt-out period has run the specific

terms of the settlement must be sent to the class before the

end of the opt-out period, or that reaching a settlement

requires a new opt-out period. We do not think the

requirements of Rule 23 mandate these measures, and

thus reject the Davidsons' arguments.

3. Intra-Class Conflicts

The Davidsons press an interesting argument based on

the conflicts that allegedly arose within the Class when the

Settlement precluded the S 11 claims and 1933 Act S 12

claims31 [hereinafter "S 12 claims"] of class members who

acquired CUC shares via non-HFS mergers with CUC, even

though the Settlement did not provide any recovery for

these S 11 and S 12 claims. The Davidsons contend that the

District Court abused its discretion and that the Lead

Plaintiff breached its duty to the Class when they accepted

and approved a settlement with such terms. Relatedly, the

Davidsons contend that an intra-class conflict arose

because the Settlement gave HFS merger claimants a

choice between calculating their recoveries as S 10(b) or

S 11 damages, while non-HFS merger claimants were given

no such choice.

As we understand it, the premises of the Davidsons'

argument are that:

_________________________________________________________________

31. Section 12 of the Securities Act of 1933 provides for civil liability

for

anyone who offers or sells a security "by means of a prospectus or oral

communication, which includes an untrue statement of material fact or

omits to state a material fact necessary in order to make the statements,

in light of the circumstances under which they were made, not

misleading . . . ." 15 U.S.C. S 77l.

68

(1) The Amended Complaint did not include any S 11

and S 12 claims against Cendant for class members

who received Cendant stock from any merger other

than the HFS merger;

(2) The Davidsons and other merger partners of

Cendant/CUC during the class period have potential

S 11 and S 12 claims against Cendant;

(3) These potential S 11 and S 12 claims against

Cendant could produce greater damages than a

corresponding S 10(b) claim against Cendant;

(4) The Settlement does not allow the Davidsons or

other non-HFS merger class members to recover on

their S 11 or S 12 claims; under the Plan of Allocation,

they are limited to recovering under S 10(b) for their

losses; and

(5) The Settlement precludes non-HFS merger class

members like the Davidsons from bringing their S 11

and S 12 claims against Cendant in the future.

On the basis of the foregoing, the Davidsons reason that

the Settlement was unfair because: (i) it prevented non-HFS

merger class members from recovering on their S 11 and

S 12 claims while precluding these class members from

bringing those claims in the future, and (ii) it treated the

HFS merger claimants specially, by allowing them to

recover the higher of their damages calculated underS 10(b)

and under S 11, while denying the non-HFS merger class

members the same opportunity.

Again, we disagree. If the Davidsons are arguing that

their S 11 and S 12 claims should have been included in the

Amended Complaint in the first place, they waived this

claim by not bringing it earlier. See Joel A. v. Giuliani, 218

F.3d 132, 140 (2d Cir. 2000). Furthermore, regarding the

claim that an intra-class conflict arose from the special

treatment given the HFS claimants, we reject a

fundamental premise of the Davidsons' above argument,

namely (3): that the Davidsons' S 11 claims could produce

greater damages than their corresponding S 10(b) claims.

The Davidsons' S 11 claims would have to be determined

under the relevant section of the 1933 Securities Act by

69

using the date of the filing of this lawsuit. See supra n.8.

However, using that date, the Davidsons' potentialS 11

damages as we calculate them are less than the S 10(b)

damages that they are allotted under the Plan of Allocation.

Thus, the Davidsons are not prejudiced by being limited to

only S 10(b) damages under the terms of the Settlement--

those damages are greater than any S 11 damages they

would have received under the Plan of Allocation--so there

is no unfairness or intra-class conflict here.

4. Alleged Flaws in the Plan of Allocation

The Davidsons submit that the District Court abused its

discretion in approving the Settlement's Plan of Allocation

because the Plan "was based upon clearly erroneous

premises." They contend that the Plan does not correctly

determine out-of-pocket damages for the S 10(b) claims

because it does not correctly define the "true value" of

Cendant stock when it was purchased by the class

members, as it uses figures that "pool" Cendant's finances

with companies that Cendant merged with. Concomitantly,

the Davidsons argue that the Lead Plaintiff did not

establish a proper evidentiary basis for the Plan's method of

determining damages.

It is clear from the record that the District Court was

faced with competing expert opinions on the proper way to

determine and allocate damages. The record shows that the

court carefully considered the expert advice, and then

chose to accept the plan submitted by the Lead Plaintiff 's

damages expert over the plan submitted by the Davidsons'

expert. This kind of decision is intensely fact-based, falling

within the purview of the District Court's discretion. The

District Court properly based its decision on evidence

offered by the Lead Plaintiff, which provided more than a

sufficient evidentiary basis for its decision. See, e.g.,

Bradford Cornell & R. Gregory Morgan, Using Finance

Theory to Measure Damages in Fraud on the Market Cases,

37 U.C.L.A. L. Rev. 883 (1990) (presenting the damages

study on which the Plan of Allocation was based); In re

California Micro Devices Securities Litig., 965 F. Supp. 1327

(N.D. Cal. 1997) (using the same method of allocating

maximum artificial inflation over the class period,

developed by David L. Ross of Lexicon, Inc., as was used

70

here). We therefore find no abuse of the court's discretion

in its decision to accept the Plan of Allocation.

Accordingly, the Davidsons' objections are rejected.

IV. COUNSEL SELECTION AND COUNSEL FEES

We turn to the issues involving the selection of lead

counsel and the determination of its fee. The Reform Act

establishes detailed and interrelated procedures for

choosing a lead plaintiff and selecting lead counsel. We first

address the District Court's appointment of the CalPERS

Group as lead plaintiff, and then its choice to use an

auction to select lead counsel. With respect to legal

questions--including whether the District Court applied the

correct standards in selecting the lead plaintiff and when,

if ever, a court may hold an auction to select lead counsel

in cases governed by the PSLRA--we review de novo. See

Brytus v. Spang & Co., 203 F.3d 238, 244 (3d Cir. 2000).

If the court committed no legal errors, we review its award

of attorneys fees for abuse of discretion. See id.

A. Introduction: Attorney-Client Tension in the Class

Action Context

Lawyers operate under ethical rules that require them to

serve only their clients' interests. When a representation

involves a single client, the ability to select, retain, and

monitor counsel gives clients reason to be confident that

their lawyers will live up to this obligation. The power to

select counsel lets clients choose lawyers with whom they

are comfortable and in whose ability and integrity they have

confidence. The power to negotiate the terms under which

counsel is retained confers upon clients the ability to craft

fee agreements that promise to hold down lawyers' fees and

that work to align their lawyers' economic interests with

their own. And the power to monitor lawyers' performance

and to communicate concerns allows clients to police their

lawyers' conduct and thus prevent shirking. This regime

has served the American legal system well for a very long

time.

1. The Problem With Class Actions

Most of the safeguards we have described vanish in the

class action context, where "the client" is a sizeable, often

71

far-flung, group. Logistical and coordination problems

invariably preclude class members from meeting and

agreeing on anything, and, at all events, most class

members generally lack the economic incentive or

sophistication to take an active role. There is simply no way

for "the class" to select, retain, or monitor counsel.

Although class counsel has an ethical duty of undivided

loyalty to the interests of the class, reason for concern

remains. This is in large measure because a rational, self-

interested client seeks to maximize net recovery; he or she

wants the representation to terminate when his or her

gross recovery minus his or her counsel's fee is largest. In

contrast, at least in theory and often in practice, a rational,

self-interested lawyer looks to maximize his or her net fee,

and thus wants the representation to end at the moment

where the difference between his or her fees and costs--

which include not only the money that the lawyer spends in

advancing his or her client's cause but also the

opportunities for other work that the lawyer gives up by

pursuing it--is greatest. These two points rarely converge.

As a result, there is often a conflict between the economic

interests of clients and their lawyers, and this fact creates

reason to fear that class counsel will be highly imperfect

agents for the class.

Because of this conflict (and because "the class" cannot

counteract its effects via counsel selection, retention, and

monitoring), an agent must be located to oversee the

relationship between the class and its lawyers.

Traditionally, that agent has been the court. Although some

courts have played an active role with regard to selecting

lead counsel in securities cases, most have traditionally

appointed the person who filed the first suit as lead

plaintiff, and generally selected that person's lawyer to

serve as lead counsel (assuming, of course, that the lawyer

possessed sufficient competence and experience). See, e.g.,

H.R. Conf. Rep. 104-369, at 33 (1995), reprinted in 1995

U.S.C.C.A.N. 730, 732. In addition, time and institutional

constraints have generally prevented courts from actively

monitoring the performance of lead counsel during the

pendency of litigation.

72

Under such a regime, it was essential for courts to

scrutinize fee requests to protect the interests of absent

class members. Lead plaintiffs were often unsophisticated

investors who held small claims, and, according to some

reports, they were sometimes paid "bounties" by lead

counsel in exchange for their "services." See id. In such

situations, it was unlikely that the lead plaintiff had

undertaken a meaningful counsel selection process; indeed

it was suspected that lead counsel generally selected the

lead plaintiff rather than vice versa. See id. at 32-33,

reprinted in 1995 U.S.C.C.A.N. 730, 731-32; S. Rep. No.

104-98, at 6 (1995), reprinted in 1995 U.S.C.C.A.N. 679,

685. Moreover, there was generally little reason to believe

that the lead plaintiff had the incentive or inclination to

engage in aggressive or effective bargaining over lead

counsel's fee, or that a typical lead plaintiff could be

counted on to engage in meaningful monitoring of lead

counsel's performance.

2. The Evolution of Judicial Review of Counsel Fees In

Class Actions

Courts have developed several means of reviewing the

reasonableness of fee requests. At the dawn of the class

action era, the most frequently used device was the lodestar

method, which was developed by this Court in Lindy

Brothers Builders, Inc. of Philadelphia v. American Radiator

& Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973).

Under that approach, the court assesses the number of

hours that lead counsel reasonably worked, decides the

reasonable hourly rate for the lawyers' services, and

determines counsel's fee by multiplying the number of

hours reasonably worked by the reasonable hourly rate.

The Supreme Court has developed an elaborate

jurisprudence covering the proper application of the

lodestar method, which remains the governing approach for

cases governed by fee-shifting statutes. See, e.g., Hensley v.

Eckerhart, 461 U.S. 424 (1983); Blum v. Stenson, 465 U.S.

886 (1984); Webb v. Board of Educ. of Dyer County, 471

U.S. 234 (1985); City of Riverside v. Rivera, 477 U.S. 561

(1986); Pennsylvania v. Delaware Valley Citizens' Counsel

for Clean Air, 483 U.S. 711 (1987); Blanchard v. Bergeron,

489 U.S. 87 (1989); Farrar v. Hobby, 506 U.S. 103 (1992).

73

Over time, criticism mounted against using the lodestar

method, especially in "common fund" cases such as this

one. The "common-fund doctrine . . . allows a person who

maintains a lawsuit that results in the creation,

preservation, or increase of a fund in which others have a

common interest[ ] to be reimbursed from that fund for

litigation expenses incurred." Report of the Third Circuit

Task Force, Court Awarded Attorney Fees, 108 F.R.D. 237,

241 (1985) [hereinafter "1985 Task Force Report"]. In

common fund cases the fees paid to class counsel come

directly out of the recovery of the class, as opposed to

statutory fee-shifting cases where the plaintiffs' recovery

and counsel's fees are distinct. In those situations, every

additional dollar given to class counsel means one less

dollar for the class, regardless how a total settlement

package is formally structured. Cf. GM Trucks , 55 F.3d at

821 ("[P]rivate agreements to structure artificially separated

fee and settlement arrangements cannot transform what is

in economic reality a common fund situation into a

statutory fee shifting case.")

As the 1985 Task Force Report recognized, using the

lodestar method in the common fund context creates

numerous problems. First, because the lodestar

compensates lawyers based on hours worked rather than

results achieved, there is a risk that it will cause lawyers to

work excessive hours, inflate their hourly rate, or decline

beneficial settlement offers that are made early in litigation.

See 1985 Task Force Report, 108 F.R.D. at 247-48. Second,

requiring courts to decide how many hours a lawyer

"reasonably" worked in pursuing a given matter requires an

enormous investment of judicial time. See id. at 246. Third,

though creating the illusion of mathematical precision, the

lodestar method can be quite subjective and can produce

wildly varying awards in otherwise similar cases. See id. at

246

This text is long and has been trimmed here. Open the source document for the complete record.