Petition for Writ of Certiorari — Branch v. Tower Air, Inc.

Supreme Court brief1997

Ask Donna

What actually matters in this document.

Text

Supreme Court, U.S.

FILED

961277 FEB 1 1 1997.

OFFICE OF THE CLERK

IN THE

SUPREME COURT OF THE UNITED STATES

October Term 1996

WILLIAM BRANCH

Petitioner,

-V-

TOWER AIR, INC., STEPHEN L. GELBAND, MORRIS K.

NACHTOMI, GOLDMAN SACHS & CO., LEHMAN BROTHERS.

INC. and MORGAN STANLEY & CO. INCORPORATED,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

AVROM S. FISCHER

Attorney for Petitioner

786 East 19th Street

Brooklyn, New York 11230

(718) 434 7696

QUESTION PRESENTED

Are the due process requirements of the Fifth Amendment

of the United States Constitution and the adequacy requirement

of Rule 23 Fed. R. Civ. Proc. satisfied when, as part of a class

action settlement, claims pending in another class action matter

in a different court, but not in the forum court, are also settled

in a non adversarial process by a "settlement" class

representative plaintiff who had never prosecuted the non-

forum claims that were being settled.

PARTIES TO THE PROCEEDINGS

Petitioner William Branch ("Petitioner") was the objector-

appellant in the Court of Appeals. He had objected to the

settlement of a class action in the District Court. Respondent

Air Parness ("plaintiff") was the plaintiff-appellee in the Court

of Appeals. Respondents Stephen L. Gelband, Morris K.

Nachtomi, Tower Air, Inc., Goldman Sachs & Co., Lehman

Brothers. Inc. and Morgan Stanley & Co. Incorporated were

defendants-appellees in the Court of Appeals.

nie

1ABLE OF CONTENTS

QUESTION PRESENTED ..................... i

pp es ili

FABLE OF AUTHORITIES ................... V

PETITION FOR A WRIT OF CERTIORARI ........ ]

Co re ]

Ee fag 6s bw s Aww sd ove vn oo ce os l

eee ee eee I MULES . cok cc ce ee ee l

@awpememmes OF CASE 2... ccc cece 12

The Hajj Ciaim and the Core Allegations that were added

in the Second Amended Complaint ............ 14

Petitioner’s counsel’s investigation of the Core Allegations :

a RE SS ar ee ]

The sealing of the discovery in this action.......... 18

The discovery taken by plaintiff's counsel with regard to

the Core Allegations ..............ccccccce 19

EE a a 30

TABLE OF AUTHORITIES

Cases

In Re General Motors Corp. Pick-up Truck Fuel Tank

Products Liability Litigation, 55 F.3d 768 (3d Air. 1995)

28, 29

Mars Steel v. Continental Illinois Nat’! Bank & Trust, 834

Pimter? Cree ee WORD Siva cach ce Cee ee 29

Statutes

Section 11 of the Securities Act of 1933 - 15 U.S.C.A. §

TER 50% 42 eae ae ee ee ee ee ee ]

Section 12 of the Securities Act of 1933 - 15 U.S.C. § 771

Federal Rules of Civil Proceedure

Federal Rules of Civil Procedure, Rule 23 ........... 8

Rule 11 Fed. R. Civ. Proc................. 19, 23-25

Rule 60 (5) and (6), Fed. R. Civ. Proc. ............, 28

Regulations

GP WEEE 6 «kos 29s wae ees bee 22

St Sa a ae A ern carte UMuRE ACE an f8 Be. 22

Pee CEE 5 a CARRS ee 22

eG Se ere Seer ewe sk 21

AD 90-06-06, (55 FR 8374) ..........cccccees 16, 22

Ald) 90-25-G5, (55 PR QRIGR) ick csi awk ian 16

Executive Order 12846 of April 25, 1993, 58 FR 2577131

eee eG re eee 24

Item 303 of SEC Regulation S-K, 17 C.F.R. 229.303) . 16,

Notice of Proposed Rulemaking, Docket No. 89-NM-68-AD,

ee oo Abs Ke Ses VO eae eee 22

Textbooks

David S. Moore, The Basic Practice of Statistics, ( W. H.

Freeman and Company, New York, 1995) .......... 25

Kay & Searfoss, Handbook of Accounting and Auditing,(2d

Ed. 1989, Supplemented 1994) ................ 19, 20

PETITION FOR A WRIT OF CERTIORARI

Petitioner William Branch respectfully petitions for a writ

of certiorari to review the judgment of the United States Court

of Appeals for the Second Circuit entered on November 13 ,

1996.

OPINIONS BELOW

The order of the Court of Appeals is unreported and is

reprinted in the Appendix in the back of the Petition at pp Al-

A2. The decision of the United States District for the Eastern

District of New York approving the settlement of this

settlement class action and dismissal of the Second Amended

Complaint which is unreported, was given orally during the

settlement hearing held on February 9, 1996. The transcript of

the settlement hearing is reprinted at pages pp A3-A36 of the

Appendix.

JURISDICTION

The judgment of the Court of Appeals was entered on

November 13, 1996. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1254(1).

STATUTES AND RULES

Section 11 of the Securities Act of 1933 - 15 U.S.C.A. § 77k

(a) Persons possessing cause of action; persons liable

In case any part of the registration statement, when such

part became effective, contained an untrue statement of a

material fact or omitted to state a material fact required to be

stated therein or necessary to make the statements therein not

misleading, any person acquiring such security (unless it is

proved that at the time of such acquisition he knew of such

untruth or omission) may, either at law or in equity, in any

court of competent jurisdiction, sue--

(1) every person who signed the registration statement;

(2) every person who was a director of (or person

performing similar functions) or partner in the issuer at the

time of the filing of the part of the registration statement with

respect to which his liability is asserted;

(3) every person who, with his consent, is named in the

registration statement as being or about to become a director,

person performing similar functions, or partner;

(4) every accountant, engineer, or appraiser, or any person

whose profession gives authority to a statement made by him,

who has with his consent been named as having prepared or

certified any part of the registration statement, or as having

prepared or certified any report or valuation which is used in

connection with the registration statement, with respect to the

statement in such registration statement, report, or valuation,

which purports to have been prepared or certified by him;

(5) every underwriter with respect to such security.

If such person acquired the security after the issuer has made

generally available to its security holders an earning statement

covering a period of at least twelve months beginning after the

effective date of the registration statement, then the right of

recovery under this subsection shall be conditioned on proof

that such person acquired the security relying upon such untrue

statement in the registration statement or relying upon the

registration statement and not knowing of such omission, but

such reliance may be established without prcof of the reading

of the registration statement by such person.

(b) Persons exempt from liability upon proof of issues

Notwithstanding the provisions of subsection (a) of this

section no person, other than the issuer, shall be liable as

PO 2th a

provided therein who shall sustain the burden of proof--

(1) that before the effective date of the part of the

registration statement with respect to which his liability is

asserted (A) he had resigned from or had taken such steps as

are permitted by law to resign from, or ceased or refused to act

in, every office, capacity, or relationship in which he was

described in the registration statement as acting or agreeing to

act, and (B) he had advised the Commission and the issuer in

writing that he had taken such action and that he would not be

responsible for such part of the registration statement; or

(2) that if such part of the registration statement became

effective without his knowledge, upon becoming aware of such

fact he forthwith acted and advised the Commission, in

accordance with paragraph (1) of this subsection, and, in

addition, gave reasonable public notice that such part of the

registration statement had become effective without his

knowledge; or

(3) that (A) as regards any part of the registration statement

not purporting to be made on the authority of an expert, and

not purporting to be a copy of or extract from a report or

valuation of an expert, and not purporting to be made on the

authority of a public official document or statement, he had,

after reasonable investigation, reasonable ground to believe and

did believe, at the time such part of the registration statement

became effective, that the statements therein were true and that

there was no omission to state a material fact required to be

stated therein or necessary to make the statements therein not

misleading; and (B) as regards any part of the registration

statement purporting to be made upon his authority as an

expert or purporting to be a copy of or extract from a report

or valuation of himself as an expert, (i) he had, after

reasonable investigation, reasonable ground to believe and did

believe, at the time such part of the registration statement

became effective, that the statements therein were true and that

there was no omission to state a material fact required to be

stated therein or necessary to make the statements therein not

misleading, or (ii) such part of the registration statement did

not fairly represent his statement as an expert or was not a fair

copy of or extract from his report or valuation as an expert:

and (C) as regards any part of the registration statement

purporting to be made on the authority of an expert (other than

himself) or purporting to be a copy of or extract from a report

or valuation of an expert (other than himself), he had no

reasonable ground to believe and did not believe, at the time

such part of the registration statement became effective, that

the statements therein were untrue or that there was an

omission to state a material fact required to be stated therein

or necessary to make the statements therein not misleading, or

that such part of-the registration statement did not fairly

represent the statement of the expert or was not a fair copy of

or extract from the report or valuation of the expert; and (D)

as regards any part of the registration statement purporting to

be a statement made by an official person or purporting to be

a copy of or extract from a public official document, he had no

reasonable ground to believe and did not believe, at the time

such part of the registration statement became effective, that

the statements therein were untrue, or that there was an

omission to state a material fact required to be stated therein

or necessary to make the statements therein not misleading, or

that such part of the registration statement did not fairly

represent the statement made by the official person or was not

a fair copy of or extract from the public official document.

In determining, for the purpose of paragraph (3) of

subsection (b) of this section, what constitutes reasonable

investigation and reasonable ground for belief, the standard of

reasonableness shall be that required of a prudent man in the

management of his own property.

(d) Effective date of registration statement with regard to

underwriters

If any person becomes an underwriter with respect to the

security after the part of the registration statement with respect

to which his liability is asserted has become effective, then for

the purposes of paragraph (3) of subsection (b) of this section

such part of the registration statement shall be considered as

having become effective with respect to such person as of the

time when he became an underwriter.

(e) Measure of damages; undertaking for payment of costs

The suit authorized under subsection (a) of this section may

be to recover such damages as shall represent the difference

between the amount paid for the security (not exceeding the

price at which the security was offered to the public) and (1)

the value thereof as of the time such suit was brought, or (2)

the price at which such security shall have been disposed of in

the market before suit, or (3) the price at which such security

shall have been disposed of after suit but before judgment if

such damages shall be less than the damages representing the

difference between the amount paid for the security (not

exceeding the price at which the security was offered to the

public) and the value thereof as of the time such suit was

brought: Provided, That if the defendant proves that any

portion or all of such damages represents other than the

depreciation in value of such security resulting from such part

of the registration statement, with respect to which his liability

is asserted, not being true or omitting to state a material fact

required to be stated therein or necessary to make the

statements therein not misleading, such portion of or al! such

damages shall not be recoverable. In no event shall any

underwriter (unless such underwmier shall have knowingly

received from the issuer for acting as an underwriter some

benefit, directly or indirectly, in which all other underwriters

similarly situated did not share in proportion to their respective

interests in the underwriting) be liable in any suit or as a

consequence of suits authorized under subsection (a) of this

section for damages in excess of the total price at which the

securities underwritten by him and distributed to the public

were offered to the public. In any suit under this or any other

section of this subchapter the court may, in its discretion,

require an undertaking for the payment of the costs of such

suit, including reasonable attorney’s fees, and if judgment shall

be rendered against a party litigant, upon the motion of the

other party litigant, such costs may be assessed in favor of

such party litigant (whether or not such undertaking has been

required) if the court believes the suit or the defense to have

been without merit, in an amount sufficient to reimburse him

for the reasonable expenses incurred by him, in connection

with such suit, such costs to be taxed in the manner usually

provided for taxing of costs in the court in which the suit was

heard.

(f) Joint and several liability

(1) Except as provided in paragraph (2), all or any one or

more of the persons specified in subsection (a) of this section

shall be jointly and severally liable, and every person who

becomes liable to make any payment under this section may

recover contribution as in cases of contract from any person

who, if sued separately, would have been liable to make the

same payment, unless the person who has become liable was,

and the other was not, guilty of fraudulent misrepresentation.

(2)(A) The liability of an outside director under subsection

(e) of this section shall be determined in accordance with

section 38 of the Securities Exchange Act of 1934.

(B) For purposes of this paragraph, the term "outside

director" shall have the meaning given such term by rule or

regulation of the Commission.

(g) Offering price to public as maximum amount recoverable

In no case shall the amount recoverable under this section

a el at Saal *

exceed the price at which the security was offered to the

public.

Section 12 of the Securities Act of 1933 - 15 U.S.C. § 771

Civil liabilities arising in connection with prospectuses and

communications

(a) In general

Any person who--

(1) offers or sells a security in violation of section 77e of

this title, or

(2) offers or sells a security (whether or not exempted by

the provisions of section 77c of this title, other than paragraph

(2) of subsection (a) of said section), by the use of any means

or instruments of transportation or communication in interstate

commerce or of the mails, by means of a prospectus or oral

communication, which includes an untrue statement of a

material fact or omits to state a material fact necessary in order

to make the statements, in the light of the circumstances under

which they were made, not misleading (the purchaser not

knowing of such untruth or omission), and who shall not

sustain the burden of proof that he did not know, and in the

exercise of reasonable care could not have known, of such

untruth or omission, shall be liable, subject to subsection (b)

of this section, to the person purchasing such security from

him, who may sue either at law or in equity in any court of

competent jurisdiction, to recover the consideration paid for

such security with interest thereon, less the amount of any

income received thereon, upon the tender of such security, or

for damages if he no longer owns the security.

(b) Loss causation

In an action described in subsection (a)(2) of this section,

if the person who offered or sold such security proves that any

portion or all of the amount recoverable under subsection

(a)(2) of this section represents other than the depreciation in

value of the subject security resulting from such part of the

prospectus or oral communication, with respect to which the

liability of that person is asserted, not being true or omitting

to state a material fact required to be stated therein or

necessary to make the statement not misleading, then such

portion or amount, as the case may be, shall not be

recoverable.

Federal Rules of Civil Procedure, Rule 23

(a) Prerequisites to a Class Action. One or more members

of a class may sue or be sued as representative parties on

behalf of all only if (1) the class is so numerous that joinder

of all members is impracticable, (2) there are questions of law

or fact common to the class, (3) the claims or defenses of the

representative parties are typical of the claims or defenses of

the class, and (4) the representative parties will fairly and

adequately protect the interests of the class.

(b) Class Actions Maintainable. An action may be

maintained as a class action if the prerequisites of subdivision

(a) are satisfied, and in addition:

(1) the prosecution of separate actions by or against

individual members of the class would create a risk of

(A) inconsistent or varying adjudications with respect to

individual members of the class which would establish

incompatible standards of conduct for the party opposing the

class, or

(B) adjudications with respect to individual members of the

class which would as a practical matter be dispositive of the

interests of the other members not parties to the adjudications

or substantially impair or impede their ability to protect their

interests; or

(2) the party opposing the class has acted or refused to act

on grounds generally applicable to the class, thereby making

appropriate final injunctive relief or corresponding declaratory

relief with respect to the class as a whole; or

(3) 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, and that a class action is

superior to other available methods for the fair and efficient

adjudication of the controversy. The matters pertinent to the

findings include: (A) the interest of members of the class in

individually controlling the prosecution or defense of separate

actions; (B) the extent and nature of any litigation concerning

the controversy already commenced by or against members of

the class; (C) the desirability or undesirability of concentrating

the litigation of the claims in the particular forum; (D) the

difficulties likely to be encountered in the management of a

class action.

Maintained; Notice; Judgment; Actions Conducted Partially

as Class Actions.

(1) As soon as practicable after the commencement of an

action brought as a class action, the court shall determine by

order whether it is to be so maintained. An order under this

subdivision may be conditional, and may be altered or

amended before the decision on the merits.

(2) In any class action maintained under subdivision (b)(3),

the court shall direct to the members of the class the best

notice practicable under the circumstances, including individual

notice to all members who can be identified through reasonable

efiort. The notice shall advise each member that (A) the court

will exclude the member from the class if the member so

requests by a specified date; (B) the judgment, whether

favorable or not, will include all members who do not request

exclusion; and (C) any member who does not request

exclusion may, if the member desires, enter an appearance

through counsel.

(3) The judgment in an action maintained as a class action

under subdivision (b)(1) or (b)(2), whether or not favorable to

the class, shall include and describe those whom the court

finds to be members of the class. The judgment in an action

maintained as a class action under subdivision (b)(3), whether

or not favorable to the class, shall include and specify or

describe those to whom the notice provided in subdivision

(c)(2) was directed, and who have not requested exclusion, and

whom the court finds to be members of the class.

(4) When appropriate (A) an action may be brought or

maintained as a class action with respect to particular issues,

or (B) a class may be divided into subclasses and each subclass

treated as a class, and the provisions of this rule shall then be

construed and applied accordingly.

(d) Orders in Conduct of Actions. In the conduct of actions

to which this rule applies, the court may make appropriate

orders: (1) determining the course of proceedings or

prescribing measures to prevent undue repetition or

complication in the presentation of evidence or argument; (2)

requiring, for the protection of the members of the class or

otherwise for the fair conduct of the action, that notice be

given in such manner as the court may direct to some or all of

the members of any step in the action, or of the proposed

extent of the judgment, or of the opportunity of members to

signify whether they consider the representation fair and

adequate, to intervene and present claims or defenses, or

otherwise to come into the action; (3) imposing conditions on

the representative parties or on intervenors; (4) requiring that

the pleadings be amended to eliminate therefrom allegations as

to representation of absent persons, and that the action proceed

accordingly; (5) dealing with similar procedural matters. The

ea hat ole aA Rise Mhbl

orders may be combined with an order under Rule 16, and

may be altered or amended as may be desirable from time to

time.

(e) Dismissal or Compromise. 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.

STATEMENT OF CASE

This action arose out of the initial public offering of

defendant respondent Tower Air, Inc ("Tower"), a United

States flag commercial airline that provided both scheduled and

charter service. The action was commenced in the United

States District Court for the Eastern District of New York as

a class action on behalf of purchasers of Tower stock between

November 15, 1993 and March 24, 1994. It was initially

alleged that the Registration Statement and Prospectus of

Tower were misleading, giving rise to claims under §§ 11 and

12 of the Securities Act of 1933. ("Securities Act"), 15 U.S.C.

§§ 77k, 771. Jurisdiction was initially predicated on § 27 of

the Securities Act, 15 U.S.C. § 77(v) and 28 U.S.C. § 1331.

Pursuant to Rule 23(e) Fed. R. Civ. Proc. the District Court

authorized the use of a settlement class and approved the

settlement of the action below on February 9, 1996. As a

condition of the settlement defendants’ counsel demanded and

plaintiff's counsel agreed to also dismiss the claims ("Core

Allegations")' that were the subject of an action that had been

brought by Petitioner in the Southern District of New York.

As part of the settlement agreement it was agreed that plaintiff

would file a Second Amended Complaint containing the Core

Allegations which would then be dismissed. Plaintiffs’

counsel stated that the consideration for the release of the

These claims were described in the Notice to the class as the "Core"

allegations of the action that had been filed by petitioner in the Southern

District of New York against the defendants and Tower’s auditor, Ernst &

Young.

claims set out in Core Allegations was "nominal". [J772]

In their determination of whether to permit the use of a

settlement class both the District Judge and the Magistrate

Judge were dependent upon the information that was furnished

by plaintiff's counsel. Neither the District Judge nor the

Magistrate Judge had occasion to acquire familiarity with the

merits of the original claims or the Core Allegations in any

adversarial proceeding in this action. No motions to dismiss

the complaint or for summary judgment were made in the

District Court. The Docket entries show that there was no

conferences with the District Judge until the November 1, 1995

hearing to fix the date for the settlement hearing. [Docket

Entry 32] The only discovery disputes, which were before the

Magistrate Judge, involved defendants’ discovery of the

plaintiff's experience as a class action plaintiff in other

litigation, and not the merits of the claim. [760]

The Core Allegations had not been the subject of any

adversarial proceedings in this action prior to the settlement

process. Petitioner was not a party to this action except as an

objector to the settlement. That occurred after plaintiff's

counsel had conducted his discovery to justify the settlement.

The Second Amended Complaint which incorporated the Core

Allegations was filed October 19, 1995 [J368] as part of the

settlement process. Plaintiff's counsel stated that discovery

with respect to the Core Allegations did not begin until after

the "adversarial mode" had terminated with the agreement in

principal on the settlement in August 1995. The non-

adversarial mode discovery was then conducted to justify a

settlement. [J769,J779] The three depositions that were taken

by plaintiff of the defendants’ witnesses were taken in the fall

This and similar references preceded by the letter "J" are to the Joint

Appendix in the Court of Appeals.

of 1995 after the parties had agreed on a settlement and they

were taken to confirm the settlement. [J769] Plaintiff had not

taken any depositions while this case was in adversarial mode.

The Magistrate Judge’s only experience with the

merits of the Core Allegations occurred in connection with the

settlement conference that she held. It was agreed that to

satisfy defendants’ demand that the Core Allegations be

disposed of, the settlement would include the Core Allegations.

[Docket Entry 10] It was not in plaintiff's counsel’s interest

at the settlement conference to submit evidence that the Core

Allegations had merit. He had done nothing to prosecute

them. He had known of the Core Allegations for over a year.

To urge that the Core Allegations had merit would reflect

adversely on his diligence. Plaintiff's counsel had first learned

of the Core Allegations in July 1994, four months after this

action was filed and approximately fifteen months before the

complaint was amended to include the Core Allegations. [J758]

Tower showed plaintiff's counsel the April 1994 letter

Petitioner’s counsel had written to Tower outlining some of the

findings of an investigation he was making on behalf of the

Petitioner. [J758] Plaintiff's counsel did not begin discovery

with respect to the Core Allegations prior to agreeing to settle

them.

As part of the settlement, Plaintiffs’ counsel also expanded

the class to include all persons who purchased the stock of

Tower from the date of the public offering to the present and

not just those who purchased prior to March 24, 1994.

Neither Petitioner nor his counsel were parties to any of

the settlement conferences.

The Hajj Claim and the Core Allegations that were added

in the Second Amended Complaint

On March 23, 1994 Tower announced that it would nct

ti <n etn

receive a contract from P.T. Garuda,("Garuda") the national

airline of Indonesia, to fly Moslem pilgrims to Jeddah in Saudi

Arabia for the annual Hajj pilgrimage. The price of its stock

fell that day from about 15 to about 12 1/2. Overall the price

of Tower stock has fallen steadily from approximately 15 1/2

on the public offering to less than 4 now. Within 24 hours of

that announcement, Plaintiff-Appellee rushed vo file a

complaint against Tower alleging that the Registration

Statement and the Prospectus used on the public offering were

misleading in not disclosing that more than eight percent of

Tower’s annual revenue for fiscal year 1993 was derived from

a single one year contract with Garuda." [J756] Plaintiff's

counsel in his fee application points out in response that

"defendants would assert that on page F-18 in the Notes to

Financial Statements Section in the Prospectus did disclose that

those revenues came from a single source and that it could be

also discerned from the Prospectus that this derived from

Religious Pilgrimage Revenue." [J775]

In August 1994 plaintiff filed an amended complaint which

named the three lead underwriters of the offering as additional

defendants. A change was made in the Hajj allegations. It

was alleged on information and belief that the likelihood of

Tower gaining the contract with Garuda in 1994 was

misrepresented .

When the parties had agreed upon the settlement amount,

they also agreed to dispose of the claims reflected in the Core

Allegations in the Second Amended Complaint. The principal

Core Allegations that were included in the Second Amended

Complaint were:

(a) There was a $62 million discrepancy between

book value as shown in the Prospectus and the fair

market value of the flight equipment which was not

commented on in the Prospectus; the $62 million

discrepancy was more than double stockholders equity.

[J352,933].

(b) The FAA had calculated it would cost an cperator

$2.3 million for a Boeing 747-100 to comply with the

Airworthiness Directives issued by the FAA under the

Aging Aircraft Program, AD 90-06-06, (55 FR 8374),

AD 90-25-05, (55 FR 49268) when Tower had claimed

in the Prospectus in response to SEC instructions in its

comment letter that it would only spend $700,000 per

aircraft over the next four years (see also Item 303 of

SEC Regulation S-K, 17 C.F.R. 229.303) [J353,934])

thousand hours that was more than double the rate of

inflight engine shutdowns of the American Airline

Industry [J354-5,938]’ (In each of the four months

preceding the IPO the Tower rate of inflight engine

shutdowns even exceeded the upper control limit or

UCL. [J307])

(d) The range in the Prospectus of the Tower aircraft

was overstated by 5-6%. [J353-4,937] which was

critical on Tower’s most important and longest route.

(e) Tower of all the major and national U.S. Airlines

had the worst rate of consumer complaints as well as

the worst rate of passengers denied boarding

(overbooking) in every single quarter of 1992 and 1993

according to the records of the Department of

Transportation. [J354-5,]38] (The raw numbers had

Tower Air’s own internal documents to which plaintiff's counsel had

access when he filed the Second Amended Complaint show that in the

twelve months preceding the IPO Tower Air’s rate of inflight engine

shutdowns was actually three to four times the rate of industry inflight

engine shutdowns and even exceeded the Upper Control Limit[J306-J307].

been disclosed, but not Tower’s consistent ranking as

the worst airline.)

(f) Tower used misleading advertising. [J356-7,943k]

Petitioner’s counsel’s investigation of the Core Allegations

On February 25, 1994, Petitioner’s counsel wrote to

Tower about the frequency with which Tower aircraft stopped

on non-stop flights to Israel. He had clients who had

experienced on numerous occasions on flights to Israel their

aircraft stopping for refueling. [J396,J472-3] The Tower flights

to Israel were and are listed as non stop in the computerized

airline reservation systems and the Official Airline Guide.

("OAG") Tower’s largest source of revenue is scheduled

passenger service between New York and Tel Aviv. [J857] It

provides over 25% of its revenue. [J857] Tower responded

that the stops are for refueling, "stops of this nature are

infrequent", and the "majority of technical/ refueling stops are

planned prior to takeoff." |J396,J472-3]. Petitioner’s counsel

subsequently learned that Tower was then stopping for

refueling over 40% of the time on its scheduled nonstop

service to Israel, and not the 15% Petitioner’s counsel had

been led to believe from conversations with the FAA.

Petitioner’s counsel had also contacted officials of the FAA

who had referred him to Tower on the grounds that this was

a consumer issue.

Shortly afterwards, petitioner’s counsel was retained by

petitioner to represent him in a possible action in connection

with his investment in Tower. After petitioner’s counsel had

conducted a preliminary investigation of matters of public

record including relevant news media stories concerning

Tower and filings by Tower with the SEC, the FAA, and the

Department of Transportation, he consulted with two aviation

professionals, Yakov Morgan, and Timothy Howe. [J462] Mr.

Morgan had retired as Vice President of Operations for E] Al.

Mr. Howe was active in the aviation industry as an aircraft

lessor and as an aircraft broker.

On April 18, 1994, petitioner’s counsel wrote to Morris

Nachtomi, Tower’s Chief Executive officer and its principal

shareholder, outlining his findings which subsequently

plaintiff's counsel pointed out formed the basis for many of

the Core Allegations. [J758]. In their response Tower did not

point to any factual errors in Petitioner’s counsel’s review of

the facts.

The sealing of the discovery in this action.

After the Notice of Settlement was sent to the class,

Petitioner was able to obtain access to the discovery material

upon which plaintiff's counsel relied. Prior to that Petitioner

could not obtain access to it. All of the discovery material that

plaintiff had access to was subject to a confidentiality order

which enabled the defendants to designate all discovery

material as confidential and to restrict use of that material

solely to this action. It cannot be used in any related accion.

The order also required that any papers referring to the

confidential material be filed under seal. The entire court

settlement file has been sealed because of the references to the

discovery material. The Briefs and Appendix in the Court of

Appeals are also sealed.

The istrict Court denied Petitioner access to the expert

reports and opinions upon which Petitioner relied in evaluating

the Core Allegations except for the expert materials actually

filed in Court. [Docket entry 31] The experts reports and

opinions which plaintiff's counsel relied upon in his initial

evaluation of the Core Allegations were used as both a shield

and a sword. Plaintiff relied upon those reports and opinions

in claiming there was no merit to the Core Allegations, but

Be sti hn, ‘

plaintiff's counsel was able to shield those opinions from

Petitioner.

The discovery taken by plaintiff’s counsel with regard to

the Core Allegations.

Plaintiff's counsel in the deposition of William Cain, the

Tower Vice President of maintenance, avoided asking the

follow up questions that would have definitively established

that Tower decided to retire its flight equipment, principally

six 21-23 year old Boeing 747-100 prior to the expiration of

their useful lives rather than perform the mandated

- Maintenance required under the Federal Aviation Authorities

Aging Aircraft Program. The change in the useful life of the

aircraft would have required a write down of the Carrying

value of the flight equipment to its current market value and

disclosure of the $62 million discrepancy between the book

value of the Tower aircraft and the fair market value of that

equipment which was more than double the Stockholders’

Equity of $28.877 million shown in Prospectus.

[J352,J891,J464-465]. Pursuant to Rule 11 Fed. R. Civ. Proc.,

plaintiff's counsel when he signed the Second Amended

Complaint "had certified to the best of the [his] knowledge,

information, and belief formed after reasonable inquiry [that

the allegations as to the fair market value of the aircraft, and

the difference between the fair market value and the book

value of the equipment] were well grounded in fact."

The Tower Air defendants in their memorandum in

support of the settlement at Page 19, fn 8, had relied upon Kay

& Searfoss, Handbook of Accounting and Auditing,(2d Ed.

1989, Supplemented 1994). In Kay & Searfoss, it was stated:

Disposal

The final transaction in the capital asset cycle is disposal.

Ultimately, property assets will be retired, either by sale,

exchange, abandonment, or scrapings.

Kay & Searfoss at 15-4

The authors further stated:

Asset Impairment Write-Down When management

decides on the disposal of some element of property,

plant, and equipment, its net realizable value should be

estimated. If this is less than the net carrying amount, a

write-down should be recorded to place the asset on a

realizable value basis. If the asset is expected to be sold

within 12 months, the asset should be carried as a current

asset.

Kay & Searfoss at 15-17

Furthermore, in view of the change in the useful life of

the aircraft in light of the decision to not perform all of the

Aging Aircraft Program Tower Air was obligated under

Accounting Principles Board Opinion No 20 to disclose the

change in the useful life of the aircraft. APB 20.31 provides:

The Board concludes that the effect of a change in

accounting estimate should be accounted for in (a) the

period of change if the change affects that period only or

(b) the period of change and future periods if the change

affects both. A change in an estimate should not be

accounted for by restating amounts reported in financial

statements of prior periods or by reporting pro forma

amounts for prior periods.

The SEC in its comment letter on the Prospectus had

instructed Tower Air to "clarify whether increased maintenance

cost due to the age of the Company’s fleet of aircraft is

currently being incurred or will be in the future".[293] Tower

Air did not identify any work that it was doing in compliance

with the Aging Aircraft programs. See also Item 303 of SEC

Regulation S-K, 17 C.F.R. 229.303

The SEC also instructed Tower Air to address "the

specific schedule of replacement for major parts for the

Company’s aircraft"[293] Tower Air did not identify a single

major part that it was going to replace. See also Item 303 of

SEC Regulation S-K, 17 C.F.R. 229.303

The SEC also instructed Tower Air to disclose "the extent

of compliance with required component replacement schedule,

noise abatement requirements and with the Airworthiness

Directives related to structural modifications."[293] Item 303

of SEC Regulation S-K, 17 C.F.R.229.303 With the exception

of compliance with Stage III noise abatement requirements

which only involves the placing of a placard on the aircraft at

nominal cost.(57 FR 46944)* Tower Air did not identify any

work that had been done.

In the Prospectus Tower Air responded to the comments

of the SEC by stating the "Company estimates that the cost of

compliance with [Airworthiness Directive under the Aging

Aircraft Program ] over the next four years will be up to

$700,000 per B747 aircraft". [J834]

As a result of the focus on older aircraft following the

April 1988 Aloha incident where a section of the roof of the

aircraft was torn off the FAA has adopted a program that

requires modifications or replacement of certain parts,

components, or sections of the aircraft at specified periods

even if inspection did not reveal a problem. The program is

referred to as the Aging Aircraft Program. On the date of the

public offering just one of the major Airworthiness Directives

("AD") issued by the FAA under the Aging Aircraft Program

required a minimum expenditure of over $2.300 million each

All wide bodied aircraft, namely the Boeing 747, Lockheed L-101 1,

and McDonnell-Douglas DC-10 use high bypass ratio engines and met

Stage 2 noise requirements. (46 FR 33454)

Boeing 747 aircraft. This Airworthiness Directive required the

installation of the structural modifications identified in "Aging

Airplane Service Bulletin Structural Modification Program --

Model 747", Boeing Document Number D6-35999, AD 90-06-

06, Amendment 39-6440, (55 FR 8374, March 7, 1990). The

FAA stated that the "cost to modify each airplane is estimated

to be $2,300,000" in the Notice of Proposed Rulemaking,

Docket No. 89-NM-68-AD, 54 FR 22300. The cost for the

equivalent programs on other models in the Boeing fleet were

less. For example, the FAA had calculated that the cost of

implementing the Aging Airplane Service Bulletin Structural

Modification Program for the Boeing 737 at $898,070 (55 FR

8372) for the Boeing 727 at $1,057,212 (55 FR 8370), and for

the Boeing 707 at $1,040,000 (56 FR 13073).

William Cain, the Tower Air vice president of

maintenance testified that rather than perform all the required

maintenance under the Aging Aircraft Program, Tower Air was

going to retire its owned Boeing passenger 747-100 aircraft.

His testimony was as follows:

Q. On page 10 of Plaintiffs’ Exhibit 1, second full

paragraph, the third sentence where it says, "The company

estimates that the cost of compliance with such directives."

Do you see that?

A. Uh-huh. Yes.

Q. The cost of compliance was approximately

$700,000?

A. Right.

Q. How was this figure arrived at?

A. It was an estimate based upon, we were looking

at the work that was going to be mandatory to accomplish

on the aircraft and on all of our aircraft that we had

owned at that time, different degrees or different parts of

the work had already been accomplished so we tried to

estimate what the average cost of accomplishing the

remaining work would be on each of the aircraft that we

owned.

Q. So the $700,000 figure refers only to what would

be mandatory?

A. That’s correct.

Q. Mandatory compliance?

A. There were parts of the aging aircraft program

which we did not contemplate accomplishing at that point

in time, and these items were items that were mandatory

that we would have to accomplish.

Some of the cycle-related items that were far out in

the future, our mindset at this point in time was that we

would not accomplish those, that we would retire the

aircraft before in fact they reached that threshold requiring

the mandatory termination of those particular items.

The 700,000 basically dealt with items that we

knew we would have to accomplish before we retired the

aircraft because of our intended continued operation of

them.

[J267-J269]

Plaintiff's counsel asked no follow up questions of either

Mr. Cain, Ms. Essex, the internal accounting officer, who also

testified, or Mr. Nachtomi, the chief executive officer of

Tower, concerning the decision not to do all the required

maintenance on the six aircraft, when the aircraft would be

retired, when was the change made in the useful life of the

aircraft, or why the change in the useful life and the resulting

change in the carrying value of the aircraft was made.[J38-

J291]

Pursuant to Rule 11 Fed. R. Civ. Proc., plaintiff's counsel

when he signed the Second Amended Complaint "had certified

to the best of the [his] knowledge, information, and belief

formed after reasonable inquiry [the allegations that the

Prospectus misrepresented the cost of Tower’s compliance with

the FAA’s aging Aircraft Program] were well grounded in fact.

There was no follow up by plaintiffs counsel with either

Mr. Cain, Mr. Nachtomi or Ms. Essex why given the

discrepancy between the FAA’s figures for the cost of the

mandated Aging Aircraft Program and the disclosure made in

the Prospectus, Tower did not explain the discrepancy in the

Prospectus.

Pursuant to Rule 11 Fed. R. Civ. Proc., plaintiffs counsel

when he signed the Second Amended Complaint "had certified

to the best of [his] knowledge, information, and belief formed

after reasonable inquiry [the allegations that the figures in the

Prospectus as to the range of the aircraft were misleading and

that Tower’s advertising was misleading] were well grounded

in fact.

In the course of examining Morris Nachtomi about

Tower’s aircraft repeatedly stopping on flights to Israel that

Tower advertised as non-stop, plaintiffs counsel elicited

testimony that the hostilities in the former Yugoslavia

sometimes increased the distance the aircraft had to fly on the

way to Israel. Plaintiff's counsel cited this testimony in

claiming there was little merit to the Core Allegations.[J764]

Plaintiff's counsel did not ask the logical follow up question,

why was Tower even overflying the former Yugoslavia.

Payments to the governments in the former Yugoslavia (which

would include the payments for overflight rights) were bared

by Executive Order 12846 of April 25, 1993, 58 FR 2577131

CFR Part 585, 58 FR 35828. Accordingly Tower Air could

not have legally planned overflights of that area and the

hostilities should not impacted on its flights.

Given the extraordinary high number of stops on the non-

stop route, if in fact the stops were unplanned plaintiff's

counsel did not ask the logical question, what was the FAA

doing in the face of these numerous unplanned stops. The

FAA requires that flights carry sufficient fuel reserves to cover

contingencies, 14 CFR 121.645

Plaintiff's counsel also elicited testimony from Morris

Nachtomi regarding construction at Ben Gurion Airport which

shortened the runway and thus making it difficult to take off

with a full load of fuel. Plaintiff's counsel cited this testimony

in seeking to justify Tower’s not disclosing in the Prospectus

that it was falsely advertising its flights to Israel as non-stop

and its misstating the range of its aircraft. [J764] Plaintiff's

counsel did not ask the logical question what bearing did the

Shortened runways at Ben Gurion Airport have on Tower

advertising its New York to Israel flights as being non-stop.

The runways at Kennedy International Airport from which the

flight to Israel originate are among the longest in the world.

Pursuant to Rule 11 Fed. R. Civ. Proc., plaintiff's counsel

when he signed the Second Amended Complaint "had certified

to the best of the [his] knowledge, information, and belief

formed after reasonable inquiry [the allegations that Tower

experienced in flight engine shutdowns of more than twice the

American airline industry average-per 1000 flight hours] were

well grounded in fact. |

Morris Nachtomi in response to the question whether as of

June 16, 1993, the engine shutdown problems were resolved,

testified that they were.[J116] Plaintiffs’ counsel accepted this

answer and did not ask Mr. Nachtomi to document that

assertion. Plaintiff's counsel even relied on it in his brief. But

the "Tower Air Fleet Reliability Report, Engine inflight

shutdown rate" directly contradicts that answer. The report

shows that in November 1993 and the three months preceding

the IPO Tower Air’s rate of inflight engine shutdowns was

four times greater than the American Industry as a whole. It

was even above the UCL or Upper Control Limit. In David

S. Moore, The Basic Practice of Statistics, ( W. H. Freeman

and Company, New York, 1995) it was pointed out at page

308 that "any [x bar] that does not fall between the control

limits is evidence that the process is out of control". The

reliability report was part of the defendants’ document

production to plaintiff's counsel. Plaintiff’s counsel did not

confronted Mr. Nachtomi with the reliability report and asked

him to explain the contradiction between his testimony and the

facts shown in the report.

Plaintiff's counsel accepted at face value Mr. Nachtomi’s

testimony that the Inflight engine shutdowns experienced in

flying Hajj for Garuda were not due to desert conditions and

so urged to the Court[J765] as an excuse to not require

disclosure of the high rate of inflight engine shutdowns that

Tower Air had experience.

There was substantial evidence in the record which

plaintiff's counsel could have used to cross examine Morris

Nachtomi that the high rate of Inflight engine shutdowns was

due to desert conditions and not to inadequacies in Tower

Air’s own maintenance which should have been disclosed to

investors.

In a letter labeled dated February 10, 1993 from T. S.

Bailey, Manager JT9D Technical Support, Customer Support

Department of United Technologies, Pratt & Whitney to

Norman Perenson, Manager, Power Plant Engineering, Tower

Air,[J298-J300] he stated that the inflight shutdown rate at

Tower Air had been a "focus at Pratt & Whitney and the

subject of FAA concerns recently."[J298] In this letter he

repeatedly admonished Tower Air that the problems basically

involved not following basic routine preventive maintenance

and ignoring service bulletins. It was even pointed out "Please

note that most of these service bulletins are NOT very

expensive".[J299] The comment at the end of the next to last

paragraph with regard to two particular engines is equally

applicable to all the problems found by Pratt & Whitney. The

comment of Pratt & Whitney was:

This suggests that troubleshooting was

inadequate, and the follow-up to verify that the

corrective action taken was not effective.

[J300]

Among the specific problems that Pratt & Whitney

specifically warned Tower Air about were surge problems from

improper maintenance of control devices such as the engine

vane control,("EVC") Fuel Pump ("FP"), Fuel Air Converter

Valve, ("FACV") and the Fuel Control Unit, ("FCU"), Flow

Divider ("FD") and Pressure Ratio Bleed Control,

(PRBC).[J298] Pratt & Whitney stated that it was "particularly

-oncerned about the level of oil consumption monitoring being

done, as it seems that several of the high oil consumption

events could have been avoided with a good trend monitoring

program."[J299]

These letters had been produced during document

production and could have been used by plaintiff's counsel in

cross examining Mr. Nachtomi on the high rate of in flight

shutdowns..

Of the 12 inflight engine shutdown incidents that

occurred in May 1993, seven incidents, namely incident 1 of

May 2, 1993, incident 2 of May 7, 1993, incident 5 of May 7,

1993, incident 6 of May 11, 1993, incident 7 of May 11, 1993,

incident 8 of May 11, 1993, and incident 9 of May 12, 1993,

were due to the failure of control units,[J302-J304] and four

were due to oil problems, namely the incident 3 of May 7,

1993, incident 4 on May 8, 1993, incident 11 of May 19,

1993, and incident 12 of May 25, 1993 .[J302-J304] Of the 12

incidents of inflight engine shutdowns, 11 were predictable and

Tower Air had been specifically warned by the manufacturer

that such incidents could be avoided by simple routine

maintenance. |

With one exception, all of the inflight engine shutdowns

occurred at altitude.[J301-J304] The report on the only

inflight engine shutdown, namely incident 11, that occurred at

ground level on takeoff, does not indicate that it was due to

desert conditions.[J304] This material had all been presented

in the document production and could have been used to

challenge Mr. Nachtomi’s testimony on cross examination.

The status of Petitioner’s own action against the

defendants.

On the basis of the Court of Appeals’ affirmance of the

District Court Judgment approving the settlement and

dismissing the complaint in this action, Defendants asked the

District Court where Petitioner’s own action was pending to

dismiss the action with prejudice. That application was

granted. In the event that Petitioner should be successful in

obtaining a vacation of the judgment on this appeal, Petitioner

would than move pursuant to Rule 60 (5) and (6) Fed. R. Civ.

Proc. to vacate the judgment in the other Court. In view of

the remedies under Rule 60 (5) and (6) Fed. R. Civ. Proc.

there is no need to burden the Court of Appeals with a

protective appeal.

REASONS FOR GRANTING THE WRIT

This case illustrates the very danger discussed in Jn Re

General Motors Corp. Pick-up Truck Fuel Tank Products

Liability Litigation, 55 F.3d 768, 786 (3d Air. 1995). The

Court had observed:

In particular, settlement classes create especially

lucrative opportunities for putative class attorneys to

generate fees for themselves without any effective

monitoring by class members [**47] who have not yet

been apprised of the pendency of the action. Moreover,

because the court does not appoint a class counsel until

the case is certified, attorneys jockeying for position might

attempt to cut a deal with the defendants by underselling

the plaintiffs’ claims relative to other attorneys.

Unauthorized settlement negotiations occurring before the

certification determination thus “create the possibility of

negotiation from a position of weakness by the attorney

who purports to represent the class." GM Interchange

Litig., 594 F.2d 1106, 1125 (7th Cir. 1979).

(55 F.3d at 789)

The Court further noted:

Indeed, if any difference in standards is warranied,

pre-certification settlement may raise the adequacy of

representation standard. Since this inquiry must ascertain

"whether there has been any collusion or undue pressure

by the defendants on would be class representatives," see

First Comm. Corp. of Boston Consumer Accts. Litig., 119

F.R.D. 301, 308 (D. Mass 1987); Alvarado Partners LP v.

Mehta, 723 F. Supp. 540, 546 (D. Colo. 1989), it must

Carry greater weight in the settlement class context where

there is an enhanced potential for those evils. Thus, while

the other 23(a) findings remain important when the action

settles, the need to assure an absence of collusion and an

alignment of interests assumes an especially crucial role.

Reliance, for the class requisites analysis, on the

settlement’s terms and process also increases the

importance of an independent conclusion of adequate

representation (i.e., one not derived solely by reference to

the nature of the negotiations)

(55 F.3d at 799)

The Court quoted with approval the warning by Judge

Posner about collusive settlement in Mars Steel v. Continental

Illinois Nat'l Bank & Trust, 834 F.2d 677 (7th Cir. 1987)

Judge Posner has explained the animating concern behind

this strict application. "The danger of a premature, even a

collusive, settlement is increased when as in this case the

status of the action as a class action is not determined

until a settlement has been negotiated, with all the

momentum that a settlement agreement generates... ."

(55 F.3d at 800)

Clearly, there is a conflict between the way the Third

Circuit would review a settlement class action where the

settlement did not involve an adversarial negotiation and the

way the Second Circuit reviewed this case.

This matter presents an important issue for this Court since

the judicial involvement in the class action settlement reflects

not only on the integrity of the settlement process but more

importantly on the public’s perception of the judicial process.

CONCLUSION

For the foregoing reasons, the petion should be granted.

AVROM S. FISCHER

Attorney for Petitioner

786 East 19th Street

Brooklyn, New York

11230

(718) 434 7696

February 11, 1997

Appendix Page Al

DECISION OF COURT OF APPEALS

IN RE: TOWER AIR, INC., SECURITIES LITIGATION;

ARI PARNES, Plaintiff-Appellee,

WILLIAM BRANCH, Objector-Appellant,

-V.-

STEPHEN L. GELBAND, MORRIS K. NACHTOMI, TOWER

AIR, INC., GOLDMAN SACHS & CO., LEHMAN BROTHERS

INC. and MORGAN STANLEY & CO. INCORPORATED,

Defendants-Appellees.

No. 96-7284

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

1996 U.S. App. LEXIS 33706

November 13, 1996, Decided

NOTICE: RULES OF THE SECOND CIRCUIT COURT OF

APPEALS MAY LIMIT CITATION TO UNPUBLISHED

OPINIONS. PLEASE REFER TO THE RULES OF THE UNITED

STATES COURT OF APPEALS FOR THIS CIRCUIT.

PRIOR HISTORY: Appeal from the United States District Court for

the Eastern District of New York. This cause came on to be heard

on the transcript of record from the United States District Court for

the Eastern District of New York, and was argued by counsel.

DISPOSITION: Affirmed.

COUNSEL: Appearing for Appellant: Avrom S. Fischer, Brooklyn,

Appendix Page A2

N.Y.

Appearing for Plaintiff-Appellee: Stanley D. Bernstein, Bernstein

Liebhard & Lifshitz, N.Y., N.Y.

Appearing for Defendants-Appellees: Samuel Kadet, Skadden, Arps,

Slate, Meagher & Flom, N.Y., N.Y.

JUDGES: Present: HONORABLE AMALYA L. KEARSE,

HONORABLE JOHN M. WALKER, JR., HONORABLE DENNIS

G. JACOBS, Circuit Judges.

OPINION: SUMMARY ORDER

ON CONSIDERATION WHEREOF, it is now hereby ordered,

adjudged, and decreed that the judgment of said District Court be

and it hereby is affirmed substantially for the reasons stated by

Judge Raggi on the record on February 9, 1996. The district court

is required to determine whether a class action settlement is fair,

adequate, and reasonable, and not a product [*2] of collusion. See,

e.g., Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d 1072,

1079 (2d Cir. 1995); Weinberger v. Kendrick, 698 F.2d 61, 73 (2d

Cir. 1982). Since the district judge "is in the best position to

evaluate whether the settlement constitutes a reasonable

compromise," Handschu v. Special Services Division, 787 F.2d 828,

833 (2d Cir. 1986), her evaluation is to be accorded considerable

deference and is reviewed only for abuse of discretion, see, e.g.,

Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d at 1079;

Weinberger v. Kendrick, 698 F.2d at 73. Here, the court

meticulously considered the appropriate factors, see generally County

of Suffolk v. Long Island Lighting Co., 907 F.2d 1295, 1323-24 (2d

Cir. 1990), and we see no abuse of discretion in its approval of the

settlement.

We have considered all of appellant’s contentions on this appeal

and have found them to be without merit. The judgment of the

district court is affirmed.

Appendix Page A3

RELEVANT PORTION OF TRANSCRIPT OF SETTLEMENT

HEARING AT WHICH DISTRICT COURT ANNOUNCED

DECISION

Page 3

THE COURT: In Re: Tower Air litigation. Have you all given

your appearances to the court reporter?

ALL COUNSEL: Yes, your Honor.

THE COURT: Please be seated, gentlemen.

MR. FISCHER: Your Honor, may I move the admission of my

co-counsel pro hac vice?

THE COURT: These gentlemen are?

MR. ANGSTREICH: Steven Angstreich, your Honor.

MR. COREN: Michael Coren, your Honor.

THE COURT: Are you gentlemen members of the New York

Bar?

MR. ANGSTREICH: No, your Honor, we’re members of the

Pennsylvania and New Jersey Bar.

MR. COREN: Yes, ma’am.

THE COURT: All right. Have formal motion papers been filed

yet or is this just an oral application?

MR. FISCHER: It’s an oral application, your Honor.

THE COURT: All right. Well, gentlemen, I’ll admit you pro

hac vice for today, but we do have a standard written procedure, and

if I could ask that you comply with it within the next two weeks.

MR. ANGSTREICH: We will do that, your Honor.

MR. COREN: Yes, your Honor.

MR. ANGSTREICH: Thank you.

Page 4

THE COURT: Thank you very much. All right, this matter is

before the Court for consideration of a proposed class settlement.

Now, notices were sent out to, I gather, 5,000 approximately

shareholders who could be members of this class. Three responses

have been received indicating that persons wished to opt out of the

class. Have any more been received since the papers were filed with

me?

MR. BERNSTEIN: No more opt outs, your Honor.

Appendix Page A4

THE COURT: And I have one shareholder objecting to the

proposed settlement, that’s Mr. Branch. Is counsel here?

MR. ANGSTREICH: Yes, your Honor.

MR. FISCHER: Yes, your Honor.

MR. BERNSTEIN: Though, your Honor, we did receive one

anonymous fax over the weekend from someone. I don’t know what

the name is --

THE COURT: I don’t know if I have that. Was one sent to

chambers?

MR. BERNSTEIN: From this document, it ) st -- it doesn’t

identify who it is. It looks like an M. Schwartz. No return address,

no fax header. It just showed up on my fax machine complaining

about mismanagement and attorney’s fees and the notice was

defective.

THE COURT: May I see it?

MR. BERNSTEIN: For the record, this was in my

Page 5

fax machine this Monday morning, February 5. According to the

fax machine’s records, it was faxed to me sometime over the

weekend, either Saturday or Sunday without any fax cover sheet,

without any date, without any indication from where it came, and

certainly with no proof that this person is a stockholder, even

identifying how many shares he or she claims to own.

THE COURT: Well, I have now read this on the assumption

that the person communicating with you is a bona fide member of

the class. There actually appear to be two signatures at the bottom

of this; an M. Schwartz, and then a J period, and then I can’t make

out the class name here. So, I'll just assume for purposes of this

proceeding that this is two shareholders who are voicing objections.

And if I can make a copy of this, we'll docket it. Oh, you have --

then Ill just keep this one, thank you.

Let me just ask in the courtroom, is Mr. Schwartz or anyone

acting on his behalf, it might be a Miss Schwartz for all I know,

here today? No. All right, because of course the notice advised

everyone that this court would be in session today to address

precisely this question.

Appendix Page AS5

All right, I have read through all of the papers that were

submitted and I will be happy to hear anyone any further on this.

I do have one question, though, that I can start with. I don’t want

to listen to the Branch objections

Page 6

any further, but, if I do not hold up the settlement, would Branch be

entitled to opt out? I mean, technically it was an objection to the

settlement rather than an opt out. What would the plaintiff's and

defendant’s positions be on that?

MR. KADET: Your Honor, if Mr. Branch at this point would

wish to opt out and pursue an individual claim, we would have no

objection to that.

THE COURT: That’s on behalf of the defendants?

MR. KADET: Yes, your Honor, on behalf of the defendant

Morris K. Nachtomi and Tower Air.

MR. BERNSTEIN: The plaintiffs have no objection.

THE COURT: All right. Well, that, of course, is not Mr.

Branch’s first request. The first request is that | reject the

settlement, but I did want to know whether that was anything that

the other parties would object to. Let me hear you, counsel. As

I’ve said, I’ve read the papers, so you needn’t restate those points.

MR. ANGSTREICH: I understand. Your Honor, if I might, in

response to your question about what the defendant’s and plaintiff's

position would be should we be allowed to opt out later, there are

three defendants in the Branch action who would be receiving

releases as a result of this settlement.

Those are the underwriters who are not before your Honor.

MR. HARDIMAN: Weare here, your Honor. I

Page 7

represent them.

MR. ANGSTREICH: I understand that they may be in the

courtroom. They are not before your Honor because they’re not

defendants in this action.

MR. HARDIMAN: We are defendant’s in this action, your

Honor.

THE COURT: I thought so.

MR. HARDIMAN: That’s why I showed up.

Appendix Page A6

MR. ANGSTREICH: I apologize, your Honor. If I might, your

Honor, because we filed our objections before we had all of the

information that has been presented in support, let me just highlight

some of the facts that we’ve come to learn and also address the

expert’s report, an expert who has come from the affidavit to justify

the $2.5 million settlement.

The evidence or the facts of record are clear that at the time a

settlement was constructed, there was no facts known by plaintiff's

counsel relating to the claims in the Branch action, their strengths or

weaknesses. They weren’t pled at that point. At the same time,

there was no expert report or analysis done to quantify the measure

of damages for the class.

What happened quite clearly was that a settlement was

constructed and an amended complaint was thereafter filed to

incorporate all of the Branch allegations with which the

Page 8

defendants initially say, in the Southern District, have no merit, but

they were incorporated by Mr. Bernstein into a new complaint who

now says in his papers before your Honor that they have no merit

either. ~

Again, I assume that they were incorporated in order to dispose

of them leaving Mr. Branch and the class that he seeks to represent

with respect to them without a remedy for those misrepresentations

and omissions which we believe are material.

Then they submit to the Court the Jarrell affidavit attempts to

justify the settlement saying, well, Mr.

Jarrell has calculated the damages to be $12 million.

Unfortunately, what Mr. Jarrell has done is used the wrong

methodology. Mr. Jarrell has used an average price per share

instead of the price in the IPO. And that comes to B-2 or $3.00 per

share. Instead of 15.50, I believe his opening number is between 12

and 13 dollars per share.

And then what he’s done is he’s taken the price per share at the

date the complaint was filed, and the case law and Rule 11 --

Section 11, do not deal with price. They deal with value, its value

on the date the complaint was filed. And what you would have to

do is you have to look to see what the true value of the stock was

Appendix Page A7

on the date the complaint was filed.

What is subsumed in Section 11 is that on the date

Page 9 :

the complaint is filed, the misrepresentations and omissions, which

are the subject of the complaint, are made public. And therefore the

market then reacts to the disclosures in the complaint to adjust the

price, thereby making price equal to true value.

What happened is that it’s not until May of 1994 that the

complaint is disclosed in the 10Q and at that time we have the first

public disclosure of the Hodge issue. And at that point the stock

plummets, but Mr. Jarrell doesn’t use that price per share and it’s

that problem that creates this proposed or supposed $12 million

damage pot that he views.

If you use the correct starting point which is 15.50, and you use

the correct true value as Mr. Miller did in the documentation that we

submitted to the Court, the number is 22 to 23 million dollars as to

Section 11 damages. So, on it’s face, what you’re looking at is a

settlement that is approximately ten percent of the potential damages

from the misrepresentations that even Mr. Jarrell says is material.

We then look at Mr. Jarrell’s report and what he tries to do is to

say that none of the other misrepresentations are material omissions

or misrepresentations, and he tries to do that two ways. One he

says, you’ve got to look at the marketplace and see if the stock

reacted, the stock price reacted upon disclosure. Well, that’s not a

very effective tool if the omissions have not

Page 10

been disclosed. And part of what we’ve alleged in the Branch

action is that there are omissions that have never been disclosed as

of yet. So, trying to peg a price decline to an omission to back --

to use that and then argue it’s material or it’s not material is not an

appropriate methodology.

The other thing I tried to do is to go to the stock numbers, and

he views the numbers and he sets up a T-value. And he says, here

is the T-value. Here are the material changes in the price of stock.

Let’s see how it relates to news stories about Tower Air.

There are 21 significant or material changes in the stock price

through his chart. Ten of them have new stories associated with

Appendix Page A8

them. Eleven have no new stories.

So, the question then becomes how material is that methodology.

We then have -- and the only one fact I want to highlight, and

that’s the value of the planes, because we’ve been accused of

misrepresenting what the requirements are. It is correct that

generally accepted accounting principals say that you can use

historic value in the balance sheet for these planes.

The problem that we have is that based upon the evidence that

Mr. Bernstein assembled through the deposition of Mr. King, Tower

Air decided at the time of this IPO that they were not going to do

the scheduled maintenance five years

Page 11

after. They were going to carry the planes for four years and then

liquidate them. And they were going to do that because to do the

maintenance required by the FAA could cost as much as $2 million

per plane. They weren’t going to do that. That is a known fact that

creates the possibility or probability of a value effect of these assets.

And that value effect is $62 million.

The argument that’s been made is that you don’t have to mark to

--that’s called marking to market. You don’t have to mark to

market if in fact you’re not going to sell the planes or you don’t

know of anything to cause you to mark to market. But Financial

Accounting Standard 5 says that if there is a possibility or

probability of a contingent event occurring that you’re aware of that

will materially effect an asset that you’re carrying on your balance

sheet, you’ve got to mark to market or footnote. Had they footnoted

in the balance sheet that the planes that they were carrying, I

believe, at $102 million as an asset value was only worth $40

million, thereby reducing that --the assets of this company by $62

million, that according to our expert is a material fact that an

investor had a right to know.

THE COURT: Let me interrupt you for a moment and ask you

this. If I were to view these disputed issues in the light most

favorable to your client, because I recognize that plaintiff's and

defendant’s counsel take exception to many of

Page 12

these characterizations, but if I were to view these in the light that

Appendix Page A9

you’ve cast on them, at best it would Suggest that they are triable

issues about materiality of this.

MR. FISCHER: No, your Honor.

THE COURT: You can shake your head no, no, but let me say

this, I do not see how on this record I can simply say that the

defendants in this case should just start, you know, disgorging tens

of millions of dollars. Your case is so strong. I mean, that I could

not do.

What this means is that there is a complex, expensive and very

lengthy litigation ahead of everyone on all of these issues, not only

the ones originally brought in this court, but the ones that ~were

raised in the Branch litigations. Now, that’s one of the factors that

is appropriately considered in evaluating the reasonableness of the

settlement, similarly, the fact that there may be expert differences

about how damages should be calculated.

The possibility that the damages may be established to be

significantly higher than what the parties before me have estimated

is something that I should consider.

But the bottom line remains that the settlement class, having been

given notice of the fact that plaintiff's counsel proposes to settle this

case with all of these different disputes now before the Court at $2.5

million, has resulted in one shareholder, possibly two or three, if I’m

liberal in

Page 13

reading that fax, in short less than a handful of shareholders

objecting to this settlement with presumably a vast silent majority

eager to get some money back on their loss. Why isn’t it

appropriate for me, given the fact that I think I can balance the nine

factors in favor of this settlement, to approve the settlement and let

your client litigate his losses, his damages, if he thinks they are more

in some other forum?

MR. ANGSTREICH: Your Honor, there is -THE COURT:

Why should I hold up an entire class settlement?

MR. ANGSTREICH: Your Honor, there are two aspects. The

first is that the notice that went to the class members does not say

that the Branch plaintiffs believe or Branch plaintiff believes that the

damages are 22 to 23 million and that the settlement on that basis is

Appendix Page A10

inadequate.

It does not deal with all of the other issues raised in the Branch case.

It does not address the fact that counsel for the Branch plaintiff

believes that the non-Hodge issues are as material or are as

important and as substantial as just the one Hodge issue. And

therefore when somebody is reading a piece of paper and basically

sees that there’s a possibility of getting some money today and they

don’t have anything to truly balance it against because we had no

input in the drafting of that notice and there was not a balance as to

what

Page 14

Branch was really about, what the damages really were in this case,

then I would expect that the only person that’s going to walk into

this courtroom to object are the counsel that have looked at the

documents, read the depositions, had their expert do an analysis,

which is the Branch plaintiff's counsel.

So, it doesn’t come as a surprise to me and in the 26 years I’m

practicing, in all the class actions that I’ve been involved with, the

likelihood of substantial objection is so small, and the only time that

objection generally happens is if there’s another attorney who has

another client who believes that the settlement is inadequate and that

attorney comes forward and presents the objection.

There is an alternative, your Honor. Your Honor can certify a

settlement class relating to the Hodge claim only.

THE COURT: I don’t think that the money is available on

those terms. I have to deal with the practical realities that the

defendants have agreed to settle provided that they get releases on

this class from all of the claims.

Isn’t that the terms -- MR. KADET: You are 110 percent correct,

your Honor.

MR. ANGSTREICH: Your Honor, at the time that this

settlement was discussed, there was one claim only that

Page 15

Mr. Bernstein was advancing.

THE COURT: But that was because -- let me say this. I

indicated that I was willing to view this in the light most favorable

to your client for us to have discussions, but I’m satisfied that

Appendix Page All

plaintiffs counsel before me did not ignore the totality of the

Situation arising out of Tower. It is their considered view that the

strongest if indeed only claim that they thought they could pursue

was the Hodge claim. Now, I will say that having reviewed all of

the papers, I can clearly understand why they thought that.

MR. ANGSTREICH: Your Honor, with due respect, the papers

that we filed were filed before we had all of the information and

before we had any of their submissions in this proceeding. The brief

-- THE COURT: I don’t understand what that means.

MR. ANGSTREICH: -- the affidavit. Well, your Honor, we --

THE COURT: You’re telling me on the one hand that you are

experienced counsel so familiar with the Branch claims that I should

give serious weight to your desire to pursue them. On the other

hand you’re now telling me you didn’t have all the facts.

MR. ANGSTREICH: Your Honor, I didn’t Say that.

MR. COREN: No, your Honor. You have their position before

your Honor --Page 16

THE COURT: So-- MR.FISCHER: Your Honor, can I be

heard on this?

THE COURT: Of course.

MR. FISCHER: Thank you. Your Honor, let’s start with the

first claim, the $62 million.

THE COURT: No. Let me explain to you, I do not intend to

try the case this morning.

MR. FISCHER: I’m not asking you to. I’m just saying what

we know. There is no dispute that on the day of this IPO, Tower

Air had already elected to not -- to abandon the planes four years

down the road. Under APB, Accounts Principal Board 20, when

you elect to change the useful life of your aircraft, this is not your -

- this is your asset. You have immediate obligation to change your

book value. You’ve got to now market to value. That immediately

-- THE COURT: Counsel, I will assume that for a moment, but

you’re going to have a further burden which is showing that that fact

would have effected the price of the stock which is--M R

FISCHER: Certainly.

THE COURT: -- a serious question. I more than understand

Appendix Page A12

how counsel could advance the argument that nondisclosure of the

Hodge circumstances could effect the price of the stock. You may

persuade a fact finder in the end

Page 17

that these accounting issues could have effected the price of the

stock, but I suspect that the risks of establishing liability on those

claims when one considers all the elements you would have to

establish are real and substantial.

MR. FISCHER: Your Honor, this is the exact situation that

occurred in Saler versus Lindsay (Ph), exactly to a tee. An attorney

who is prosecuting a claim where he had one narrow issue he

wanted to settle and he said II] go in and I’ll create a paper record.

We’re saying to you explicitly, and we’ll go through it, that Mr.

Bernstein created a paper record after he agreed on the settlement to

justify the settlement.

Let’s start with the first issue, this plane. $62 million in write

down is a difference between a positive stockholder’s equity, which

is what the book showed, of 30 million, and a negative stockholder’s

equity of $30 million.

Now, this -- the market value on just the disclosure that a potential

$5 million contract was not going to be renewed, the price of the

stock he said was significant. That price he said demonstrated the

materiality. What is the -- THE COURT: But] can’t just ignore

the fact that it wasn’t that this asset was going to be, you know,

frittered away. The airline intended to continue operating. It was

all a function of how it would deal with it.

MR. FISCHER: Not with these planes, I’m sorry.

Page 18

THE COURT: That doesn’t matter necessarily to the stock

price.

MR. FISCHER: It does if that’s what they -- if they can’t -

THE COURT: I’m sorry. I wasn’t quite finished and perhaps

that wasn’t clear.

MR. FISCHER: Your Honor, I apologize.

THE COURT: It doesn’t necessarily matter to the stock price

whether it was this plane as long it was clear that they were going

to have other planes. As I said, I am neither opposing counsel nor

Appendix Page Al13

am I trying to preside over this trial, but as I review all of these

facts and papers, it appears to me that if you do pursue this claim,

you have a very tough road to hoe. I meanwhile have the ability to

secure at least some compensation for shareholders who think

they’ve been damaged. Your client is the only one complaining

about this.

MR. FISCHER: Your Honor, we are the only people who

apparently were aware of the true value, the market value of a 747-

100. The only airline in the United States, in fact I believe it’s the

only airline in the world, and we’ve documented that because it’s a

matter of public record if your Honor were to look --THE COURT:

The only 747 in the world that what?

MR. FISCHER: 100, your Honor. There’s a very

Page 19

big difference between a 747-100 configure for passenger service

and a 747-400 which allows buying for $140 million.

And that’s the whole point here. No -- as you yourself are very

surprised to learn, there is a difference in the value of these planes.

A 747-100 - THE COURT: Did I say I was surprised to learn

that?

MR. FISCHER: No.

THE COURT: Oh.

MR. FISCHER: Okay. Your Honor’s remark is that there were

-- we’re still coming back to this point, your Honor, that their sole

asset, the asset that was carried on their books, was six 747-100s all

of whom were over 20 years old. Mr. Nachtomi acknowledged a

year later that you could get one for $4 million and he’s the only

one in the United States buying them.

At the time of the IPO, they had bought a 747-100 for spare parts

that was worth -- for $4 million. That was the top value for a 747-

100. So that you’re saying it wouldn’t have been hard to prove.

We will be able to submit, and if your Honor could give us a couple

of days, we will submit an affidavit from Mr. Howe who is familiar

with this area. Unfortunately he broke some ribs, but I have a

signed affidavit from him which we’ll be able to submit and we’ll

ask leave to submit additional papers. But he can testify

Page 20

Appendix Page Al4

explicitly because he’s experienced in this area that the 747-100 is

only worth $4 million a plane.

Tower is the only one buying the 100. That if you take those six

planes, value them at $4 million and they simply, since they had to -

- they said they were going to change the use -- abandon the planes

in four years, they had an obligation immediately at the time of the

IPO to write them down to a fair market value. That’s a swing of

something like $60 million and it changes a positive stockholder’s

equity to a negative stockholder’s equity.

Now, let’s go on so we can go to some of the other points where

they explicitly look.

THE COURT: I don’t want to simply hear repetition of your

papers.

MR. FISCHER: Now, your Honor, this is not -- THE COURT:

I have a fuli calendar.

MR. FISCHER: Okay. Your Honor, they said that they were

planning to spend $700,000.00 over the next four years. We say to

you, that is simply not true. We will submit affidavits to show that.

And this is very important, your Honor. There are three different

programs that the FAA has had at the time when this IPO went into

effect regarding maintenance of the 747-100. One was a program

called the aging aircraft. Its primary function was to deal with metal

fatigue. And what they mandated was that at the end of a

Page 21

series of cycles, which amounted to approximately six years, you

had to replace the front skin of the plane, which is a $1.9 million

figure according to the FAA figures in 1990.

THE COURT: Is this in your papers?

MR. FISCHER: They said it was in the press.

This is one item.

THE COURT: Why is this not -- why wasn’t this briefed for

the Court if this is a basis for objecting to settlement?

MR. FISCHER: Your Honor, when did we -- we didn’t know

what their arguments were going to be. I didn’t -- we asked your

Honor -- your Honor may remember, the objections had to be filed

before we knew what the submissions were. I can give you some

more -- I’ll give you some illustrations where we say Mr. Bernstein

Appendix Page A15

didn’t do his job.

Mr. Bernstein asked Mr. Nachtomi what was- the reason for the

non-stopping on the flights from New York to Israel. Mr. Nachtomi

told him it was the nights -- they shortened the airport runway in

Bangorian Airport. Bangorian Airport is where the plane is landing.

That has nothing to do with the range of a plane taking off from

New York.

He asked him another question. He said, what was the cause of

the engine shutdowns. He told him -- THECOURT: I will hear

you.

MR. FISCHER: He told him it was the desert - it

Page 22

was the elements, the areas where the plaiies were operating.

Well. your Honor, very interesting, if you really want to go about

checking out what Mr. Nachtomi told Mr. Bernstein and Mr.

Bernstein says I’m relying upon, it’s very simple. The FAA

publishes the monthly shutdown rate of all American Airlines.

Tower had a competitor flying for Garuda; the exact same route,

the exact same distance, the exact same time period. They were

flying -- it was World Airways. World Airways had seven planes

flying at that point, flying the Hodge. World Airways had seven out

of its eleven planes flying Hodge. Tower had five out of its thirteen

planes flying Hodge in the exact same time period.

World Airways suffered two in-flight shutdowns at an average

rate, if you look at the fleet statistics released by the FAA, and these

were available to Mr. Bernstein if he wanted to check, where it was

point one seven per thousand hours of operation. You look at the

Tower operation, and this is a -- they have lessened their fleet out

there, and they’re suffering over a point four shutdowns per

thousand hours.

In January, just three months before that, when the FAA had

Pratt and Whitney come in to do a special inspection, this is before

this Hodge, Pratt and Whitney wrote Tower and said we found a

whole bunch of series of things involving primarily not doing

routine maintenance. You’re

Page 23

understaffed. They criticized the fact that they didn’t have log

Appendix Page Al6

books. They didn’t have manuals. They even at one point put in

the comment, you know, these manuals are not expensive and they

underline not.

THE COURT: Counsel, and what do you think should have

been done to effect the stock price to insure that the stock price was

fair and accurate?

MR. FISCHER: Your Honor, let’s go back then--T H E

COURT: No. See, this is -- MR. FISCHER: Your Honor,

you’re sitting on a settlement -- THE COURT: This is not

helpful to me.

MR. FISCHER: - where an attorney did not do his job.

THE COURT: I’m not sure that I agree with that and so to that

extent I’m not interested in just ad hominem attacks here.

MR. FISCHER: I’m not -- your Honor, we have not. I’ll go

down the list and give you questions that were not raised.

THE COURT: I have a feeling that if I let you do this you’ll

be here until 7:00 o’clock tonight. The point that is before me is do

I have claims that could have affected the stock price?

MR. FISCHER: Yes.

Page 24

THE COURT: And I’m asking you, what you just went on and

on and on and on about, about their maintenance of this airplane,

how is this -- what are you saying they should have disclosed and

how would it have affected the stock price?

MR. FISCHER: Very simple, your Honor. On November 15,

1993, they should have disclosed, one, we own six aircrafts which

are carried on our books at 62 -- at $102 million. On -- we intend

to abandon those planes not in seven to twenty years as we say in

our financials, but in four years. The market value of those planes

should therefore actually be truly disclosed at 24 --THE COURT:

That part of the argument I understand.

MR. FISCHER: Okay, let’s go to the next one. We say to the |

public that we plan to do $700,000.00 worth of maintenance over |

the next four years. Your Honor, the FAA and its maintenance

program mandates two different types of actions; one called

terminating action, which means you remove the part from the plane

and you replace it and then you don’t have to inspect it.

Appendix Page A17

THE COURT: None of that has to be disclosed.

MR. FISCHER: Oh, wait a minute, your Honor.

THE COURT: When you say the bottom line dollar figures

should have been --Page 25

MR. FISCHER: Yes, let’s go through that. If you do -THE

COURT: I’m trying to.

MR. FISCHER: Okay. If you just do the routine maintenance,

that you go in and inspect and just do the immediate repair that the

FAA requires, not terminating action, just the routine, that’s 500 to

$600,000.00 a plane per year.

They submitted - Mr. Bernstein had before him the figures for

the routine compliance with the aging directives, not the terminating

action which amounts to over $2 million, just the annual routine

comparison. That was in his book. He didn’t ask a question about

it. It was seven million on one --it was 700,000 on one plane. It

was about 800,000 on the other. If you look at the figures on that

exhibit for the two planes which Mr. Caine (Ph) testified are typical,

one was 700,000 for the aging aircraft requirements and the other

one was about 800,000.

Then you want to talk about engine shutdown.

Engine shutdown rate for this airline is catastrophic. They -- if you

looked at the chart that they give you before the IPO, that shutdown

rate which Mr. Bernstein could have found out before he filed his

complaint and he would have known what was wrong with the

Garuda Hodge, he would have seen that it was three to four times

the American industry rate. This is a

Page 26

disaster.

Pratt and Whitney came in and said, this is awful, your Honor.

They said -- excuse me. Pratt and Whitney said to them, this is bad.

You’ve got to change it. And even afterwards, if you look at the --

they had an audit report. I don’t know who exactly audited it, but

they had an audit report come in after the FAA went through there.

This is on July 16th. The FAA was in there in June.

Now, Mr. Bernstein did not submit this to your Honor, but he

had these papers because they’re in the Goldman, Sachs file. They

weren't produced by Tower. They were produced by Goldman,

Appendix Page A18

Sachs, which is interesting. If you start to read off it, it says,

"Tower Air personnel are inadequately trained on the airline’s

policies." Then it says, "Technical manuals: Currently all manuals

and publications are dispersed throughout the entire office." Then it

says, "General maintenance manual: Currently this manual does not

meet the requirements of the FAA." Then we go to "Organizational

structure: The position of director of maintenance is not presently

filled and the senior duty manager who is assigned to cover his

position is not available.”

THE COURT: You can read anything you want. You can

argue anything you want. You’ve got five more minutes. I just

want that clear because this kind of minutiae, so

Page 27

unrelated to the nine factors that I have to discuss, is not proving

helpful, but I’m going to give you five minutes to say anything you

want.

MR. FISCHER: Excuse me, your Honor. We would request,

your Honor, then we’d ask for additional time since the defendants

needed approximately 60 days after the notice went out to submit

papers. We would like, now that we’ve seen their papers, additional

time. We will submit a brief briefing these issues now that we have

an opportunity to know what they’re arguing and we’d like to

submit affidavits, your Honor.

THE COURT: Thank you. Mr. Bernstein?

MR. BERNSTEIN: Good morning, your Honor.

THE COURT: You can assume I’ve read your papers as well.

MR. BERNSTEIN: I’m going to ignore everything that I’ve

prepared for today because I gather from your Honor that you are

quite familiar with the file which makes things go a lot smoother.

I'd like to respond just to very few points, not necessarily point by

point, on the minutia and the triviality that Mr. Fisher presented.

That’s quite interesting. He sounds like a walking billboard for

World Airways, and I question his true motivations here.

THE COURT: But it doesn’t help to get into a comment either

way, Okay.

Page 28

MR. BERNSTEIN: This is not a silen * rity, your Honor.

orton “

Appendix Page A19

That’s one fact that I was not able to get out before. I would like

to for the record both to introduce the publication notice and the

THE COURT: And also you have 125 proofs of claim that have

been submitted.

MR. BERNSTEIN: Right.

THE COURT: I didn’t notice that. When I said that it was a

silent majority, I meant that I didn’t have anyone writing to me

saying please, please approve the settlement, but --M R

BERNSTEIN: I'd like to update.

THE COURT: -- I do understand that.

MR. BERNSTEIN: _I would like to update that, your Honor.

It’s now up to 175 claims in the last week. | gather from the

Claims’ administrator, over 235,000 shares have submitted -- are

represented by those claims and that in fact is only the count in the

125 claims. They haven’t yet counted the last 50 claims. But I

know that -- THE COURT: All right, but to view the objector’s

arguments in the light most favorable to them, they’re saying that

my problem is that even those people don’t fully understand the

possible merits of the Branch, what I’! call the Branch claims, and

that it’s an uninformed approval that I’m getting. That’s how I

understand their argument to be

Page 29

postured.

MR. BERNSTEIN: _I understand that argument, and let me

briefly respond, and not point by point from the nose to the tail.

Mr. Angstreich is obviously new to this case because he made

several misrepresentations, the most important one is that he did not

see the notice before it went out to the class members. This is a

falsehood. They saw a draft of the notice. They made comments

on the notice. We incorporated those comments, and the comments

basically said you’ve misdescribed our case, the allegations. Why

don’t you copy what Judge Keenan put in in describing our case

when he dismissed the case, which is something I’m sure your

Honor hasn’t forgotten.

But for the record, we’re talking about a case that’s been

dismissed and they’ve recently filed an amended complaint. So, we

Appendix Page A20

incorporated those comments. And nowhere did they ask us or say,

ooh, we think that this particular claim is good or this one is bad.

I don’t think that that would be appropriate in the notice, but they

didn’t ask for it.

As far as the merits and the minutia, I think the easiest way to

handle that is to go backwards, because there’s a tremendous

admission here by Mr. Angstreich which just confirms that - why

this whole case is -- was correctly litigated, being correctly settled

and this is just a terrific

Page 30

settlement.

How do you measure the damages? I say you measure them by

the way when the news came out about Garuda the stock dropped.

That’s what Section 11 says. The value of Tower’s stock on that

date was the trading price. It was an actively traded price. And

they say, no, no, no, the truth about my case didn’t come out until

May when the Form 10Q had a brief mention of contingencies of

this lawsuit and the stock dropped that date.

The stock drop had nothing to do with that, your Honor. The

stock dropped when the news came out back in March. But if --

and that’s my honest view, but if the Branch people believe that a

notice and a 10Q or a K of a lawsuit is what causes a stock to drop,

their lawsuit was disclosed.

Their lawsuit was disclosed several times in several questions. As

we put in my affidavit and in my brief, the stock didn’t drop then.

Their lawsuit was described in great detail in the notice that went

to class members. The stock didn’t drop then. This news is out

there. This news, as Dr. Jarrell, the former chief economist at the

Securities and Exchange Commission said, is not material to

investors. It does not cause the price of stock to move. And they

have not put in any testimony to the contrary.

They put in an expert affidavit of Mr. Miller. He

Page 31

says damages are $25 million, but he doesn’t have any positive

correlation between news and damages. Dr. Jarrell’s report is about

as comprehensive as one can get. It details a stock price, every

movement. This wasn’t news. It’s not -- it may be news. It may

Appendix Page A2]

be interesting. It may be trivial. It may be coming from disgruntled

former employees. It may be coming from competitors. I don’t

know where it’s coming from, but it didn’t cause the stock drop.

So, we have even the plaintiff's experts disputing whether

damages are 12 million or 25 million. I know the defendant’s

experts will come in and say damages are zero. | probably owe

them money. I know we’ve got tremendous disputed questions of

fact about these abandoned planes. I mean, I just notice in the

prospectus it says we may decide to liquidate the planes at the end

of their useful life. It’s right in the prospectus.

Point by point, I don’t know if that would be productive because

we tried to in our papers, and I know Mr.

Kadet, point by point, very detailed examined these claims. I offer

for your Honor, you know, the exhibit, the affidavit of publication

for the record and the affidavit of mailing and I’m happy to respond

to anything. I think Professor Jarrell’s analysis was exactly correct.

I think they mischaracterized that and I’d be happy to explain that

for your Honor, what numbers he did use and didn’t use and how he

tried to

Page 32

summarize it. I think they completely misinterpreted it, but I’m not

quite sure that would be productive at this point.

THE COURT: Aill right. Thank you very much.

Perhaps I should allow defendant’s counsel a word or two.

MR. KADET: Your Honor, I don’t propose to take up any of

your time. I think there’s an ample basis before the Court to

approve this settlement and I don’t want our silence to be construed

as agreement with anything that Mr.

Fischer or his colleague have put before your Honor. We

categorically disagree with virtually every word of it, but I do not

intend to elaborate on any of that. Our papers are thorough. We’ve

discussed the claims and the objections. I think there’s adequate

measures before the Court to approve this settlement.

THE COURT: All right. I’m going to ask you to help me out.

I of course have to balance these nine factors, and I’ll speak in a

minute about the ones that are most hotly in dispute between the

parties. But after having read all of the papers in trying to deal with

Appendix Page A22

some of those hotly disputed issues, I realized that I really hadn’t

focused on number seven, and I wondered if you did discuss it in

your papers and I just read it too quickly. And that’s the analysis

I have to do of the ability of defendants to withstand the greater

judgment.

Was there anything in the papers about that? I

Page 33

mean, I could have started to read from start to finish again, but I

thought it was easier to just ask you.

MR. KADET: Frankly, your Honor, that’s not a point that we

did indeed address.

THE COURT: Okay, then I didn’t overlook it.

MR. KADET: You did not overlook it.

THE COURT: Well, let me ask you whether you are able to

make any kind of proffer to me along those lines so that I can

discuss all of the factors. The airline is flying; correct?

MR. KADET: The airline is flying and we do engage in

business. We have property and equipment despite Mr. Fischer’s

contexts to the contrary. I’m not familiar with the company’s cash

position, but obviously the spectra of the judgment along the lights

that Mr. Fischer would purport to recover would of course have a

materially adverse impact on my client, and it’s not like they have

the IPO sitting in the backings obviously used, as their public

documents show, to run this business.

THE COURT: Now, may I also ask, when the airline lost the

flight routes that are really the subject of this lawsuit that’s initiated

before me, that was for 1994?

MR. KADET: Yes. You use the word lost, your Honor, and

that’s what I was going to respond to.

THE COURT: Yes.

Page 34

MR. KADET: We did not get any contracts from Garuda for

the 1994 Hodge. We did, as we pointed out in the papers, and it’s

a public document to show, receive a contract from Nigeria Airlines

for 1994, admittedly in a very limited amount of dollars compared

to what we had the prior year. ~

We’re not disputing that.

Ph li i a a a St a it A wwe

Appendix Page A23

THE COURT: And then in 95, pick up for me there.

MR. KADET: ’95, your Honor, which no one seems to want to

pay much attention to, we received a total of seven contracts for the

Hodge, four of which were from Garuda and three of which were

from an Indian airline. Those four that we got from Garuda, and to

include at least two where the Indonesians gave us a waiver based

on the age requirements.

I’m happy to report to your Honor, all the Tower stockholders

here should be pleased to know that for purposes of the 1996 Hodge,

my client has received not eight leases as indicated in the press

release we put before your Honor, but a total of nine contracts for

the 1996 Hodge, the one that’s coming up this year. Of those nine,

four are from Garuda and five are from a Saudi airline of some sort.

As I understand -- THE COURT: Well, I had noticed --MR.

KADET: So, my point simply is -- THE COURT: -- that, so

I didn’t ignore it.

Page 35

MR. KADET: -- this, the simple statement and prospectus that

my client anticipated participating in this market area in the future

has been confirmed and has been absolutely true. I think the record

is abundantly clear that they had more than an ample base for

making that statement at the time of the IPO. And to the extent,

subsequent, to air that out, I think this record is overwhelming given

their continued participation in this line of business.

Now, Mr. Fischer has carried on at some length about problems

they had with in-flight engine shutdowns and the like. And |

thought before we lose all sense of prospective in this matter, the

position was that we would not get Garuda business because my

client did a very bad job in 1993 in light of all the shutdowns.

Well, obviously the Garuda people don’t view it that way. They

gave us four contracts this year. They’ve given us another four

contracts this year. It’s a relationship my client values, and, frankly,

I believe it expects and hopes to continue beyond 1996.

So, as far as I’m concerned, the proof is in the pudding. We’re

doing business with these people to this day.

We're doing it this year. We dia it last year and we hope to

continue to do.

Appendix Page A24

THE COURT: All right. Now, I asked those questions not

because I necessarily adopt that view of the

Page 36

facts, I don’t adopt anybody’s view of the facts here, but I did notice

some of these in the papers that were submitted and I thought it was

relevant to my consideration of the factor of the complexity expense

and likely duration of the litigation.

MR. KADET: Correct.

THE COURT: Because it seemed to me that even on the claim

the plaintiff initially brought before this Court, that if this case were

not to settle, as I said, the defendant would hardly just role over on

the case, that there were real and viable issues here that could be

advanced in a defense.

What a fact finder would decide is not something I can predict

today, but I cannot overlook these real issues in deciding about the

propriety of the settlement. Was there something else?

MR. KADET: No, I totally agree with what your Honor said.

THE COURT: All right. I will give the Branch objector

another ten minutes. I’m sorry. I’m sorry.

Counsel, did you wish to add something?

MR. HARDIMAN: Your Honor, just for the record since there

was a little confusion before, I just want to state for the record since

we didn’t submit papers that the underwriter defendants fully support

the settlement.

THE COURT: Thank you.

MR. HARDIMAN: Thank you.

Page 37

THE COURT: I assumed that from your silence. I will give the

Branch objectors another ten minutes if there’s anything they’d like

to note for the Court.

MR. ANGSTREICH: Your Honor, I don’t think that ten

minutes will advance the issue. Mr. Fischer asked the Court for an

opportunity if the Court will allow it so that we could file a written

response now that we have in hand the written papers of Mr.

Bernstein.

THE COURT: I’m confused as to why that’s really necessary.

You know, when I set the schedule in this case and when I had

Nanci Cd A Bm Ko aS

Appendix Page A25

counsel before me once earlier, I agreed that the Branch objector

could have access to a large amount of material. And I obtained the

assurance of Mr. Bernstein that he would be available as plaintiff's

counsel speaking to a class member to answer any and all questions.

So, I really don’t see what is in these papers that is surprising.

I do recognize that, and I have to take some care in this case that

the approach that Branch has taken in this Court has been to try to

promote delay. I mean, even the argument made to me about the

adequacy of the notice, I didn’t interrupt at the time, but I knew that

Branch had seen the notice before it had gone out. This was not a

case in which, you know, he too was surprised by the notice when

he got it, or that he only realized this week that something was not

disclosed. I mean, I’m very troubled by an attempt simply to

Page 38

delay.

MR. ANGSTREICH: Your Honor, we did not have an expert

report from Mr. Bemstein to support the or justify the

reasonableness of $2.5 million.

THE COURT: But this is not litigation. This is an attempt to

decide -- I mean, this is not like let’s -- you go out and hire your

expert to see whether he agrees or disagrees.

MR. ANGSTREICH: Your Honor, when one settles a class

action, one usually has a framework for analyzing the damages.

THE COURT: Absolutely. You’re the litigant bringing this

claim. I assume this has already been analyzed.

MR. ANGSTREICH: I don’t quite understand. There was no

opportunity -- THE COURT: Well, these are Branch’s claims that

you're saying have not been fully reviewed by plaintiff's counsel in

this case. So, rather than attack his expert’s analysis, all you needed

to give me was your view of them which I have.

MR. FISCHER: Your Honor, can I -- I can tell you that we did

not -- I still have not been served technically.

I had to send a messenger over on Monday to pick up Mr.

Bernstein’s papers.

Page 39

THE COURT: But you got them. I mean, at that point are you

saying he should have a process server?

Appendix Page A26

MR. FISCHER: Your Honor, it’s the first time that we know

his analysis. I’m talking about his analysis, a lawyer, as to what

were the merits or the merits of the claims.

THE COURT: All right, so that’s -- you have had them

Sunday, Monday. You are the lawyer pursuing these claims.

MR. FISCHER: Fine. And we would like an opportunity on a

motion for summary judgment, which this is more than a motion for

summary judgment, the party -- the opposing summary judgment is

entitled to a reasonable opportunity to respond.

THE COURT: Right, but that’s not what this is.

MR. FISCHER: It should be, your Honor. That’s the exact

same effect. There was a claim filed -- THE COURT: No, your

client can pursue its claim. Your client, Mr. Branch, can pursue his

claim. The question is whether I should allow you as an attempted

class party to tie up everybody else who is before this Court. You

are not the class attorney in this Court.

MR. FISCHER: Your Honor, may we have ten days to submit

a written -- THE COURT: No, I’m going to hear this today.

Page 40

mean, I’ve read through these papers with some care this week in an

attempt to be ready to rule today because every delay in essence

requires notice to the entire class again.

MR. KADET: _ It’s also horrifically expensive for us, your

Honor.

THE COURT: Well, let me say that while I don’t dismiss that,

that is not a factor that I weigh in this. What concerns me, as I said,

in a class settlement I would think that fairness would require that

every time I delay a decision from a day on which | notified the

class that I would make it, I must advise that class of what’s going

on and why, and I am disinclined to do that again here.

Mr. Bernstein, you want to be heard?

MR. BERNSTEIN: I also point out the scheduling is one that’s

frequently filed -- followed in securities class actions and class

actions generally, and, in fact, in the Weinberger versus Kendrich

case, the leading case on settlements, the objections are due the

week before the hearing and the papers in support were actually filed

Appendix Page A27

there and it was upheld the day before the hearing. And the Second

Circuit said that’s fine. They knew what we were going to say. I

guess what they’re claiming now is that they didn’t know that

Professor Jarrell would calculate $12 million damages. They

thought maybe he would come up with a higher number or a lower

number. But it doesn’t really matter

Page 41

because on the merits of the case, as opposed to the damages and the

liability, they had the entire record. They had everything that I had

and ihey had access to me. They asked me questions and |

responded to everyone within one business day.

THE COURT: All right. This was the day that the class

members were noticed that this Court would address and rule on the

proposed settlement in this case. Let me discuss the factors that are

relevant to this Court’s analysis. Let me first say a few words,

though, about the fact that there was a setilement class certified in

this action.

I am satisfied from the applicable case law that this is an

appropriate way to proceed, indeed the case law suggests that it may

be an ideal way to proceed in the sense that a host of people, all

with similarly situated claims, are given notice that a settlement has

been proposed. They are then given the option to either join in that

settlement or opt out of it. And indeed in this case, three parties

have opted out and will be able to pursue these or any other claims

they think they can advance and sustain against the defendants in

this case. Indeed, I intend to let Mr. Branch opt out if at the

conclusion of this proceeding he wishes to do so.

But having carefully reviewed the case law about settlement

classes, I am satisfied that it was appropriate to certify a settlement

class in this case. And so I must turn

Page 42

to the actual settlement proposed.

As I’ve said, I carefully read all of the papers.

The first factor that’s relevant to the Court’s decision is plainly

evidenced here. This is a complex expensive and lengthy litigation

that is before the Court. It was so in its original formulation when

plaintiff sought to sue defendants for securities violations linked

Appendix Page A28

primarily to the failure to disclose what we call the Hodge facts. It

has become even more so with the addition of those complaints that

were brought initially in the Southern District in what we’ve called

the Branch litigation.

Now, I am not going to try to articulate each and every claim

that would be before the Court or a fact finder if this case were to

proceed, but in its present posture before this Court, what would

have to be reviewed and analyzed by first the lawyers and then the

Court and jury would be a host of issues relating to the operation of

this airline and then an analysis of what if any omissions, accounting

factors, business decisions, should properly have been disclosed to

shareholders, what if any effect nondisclosure had on the market

price of this stock. As I said, I would have to view this case as

extremely complex, very lengthy and very expensive for all parties

involved.

The second factor I have to consider is the reaction of the class

to the settlement. Now, viewed very

Page 43

broadly, I would have to say that the class appears to support the

settlement. 175 proofs of claim have already been submitted. Of

5,000 notices sent out, at most three-have objected, but I can’t look

at it simply on the surface like that.

There is an argument made to me by Mr. Branch that the notice

was somehow inadequate, and certainly if there were inadequate

notices, the Court would have to view that very, very seriously. The

argument I’ve just heard about why the notice was inadequate is

that it failed adequately to apprise the shareholders of the scope of

the claims that Branch thinks should be pursued and of their

likelihood of success.

I’ll note preliminarily that as Mr. Bernstein has pointed out, he

did entertain comments from Branch on the notice and even

amended the notice to accommodate some of those suggestions.

And so I look perhaps with something of a jaundiced eye on

Branch’s complaints about the notice-at this point. But my task is

not simply to express dismay that Branch didn’t raise these points

earlier. My obligation has to be to the entire class, which requires

me to make an informed decision about whether the notice is

;

i el a eee

Appendix Page A29

sufficient.

Having carefully reviewed all of Branch’s papers, I am satisfied

that the notice was adequate to allow the class to make intelligent

decisions as to whether to opt out of this settlement or whether

simply by silence or by the filing of

Page 44

notice -- proof of claim, rather, to join in it.

Now, I recognize that what counsel for Branch has done today

has been to try to get me to focus on some of the fine points about

each and every claim, to try to persuade me that these are strong

claims likely to succeed. While I always respect the vigor with

which any advocate would advance his client’s position, I’m simply

not persuaded that the claims are as strong as counsel notes.

Without even getting into the business judgments and accounting

issues that have been raised, the real almost bottom line problem I

have with many of these claims is the ability to show that they

caused securities law damages and it is because of my concern in

that area that I cannot say that this class was not adequately notified

about tremendously meritorious claims that were basically being

compromised in this settlement.

My overall review of the record Suggests that the strongest claim

that can be advanced under the securities law is the one that was

inertly brought before this Court. Even there, as I hope my

questioning of defense counsel showed, I recognized that there are

triable issues, but that seems to me to be the issue on which the

class was most likely to achieve any recovery. And let me say

further with respect to that, that even assuming that some of the

Branch claims had merits as well as the Hodge claim, the ultimate

jury question would be: How much damage was caused by that?

Page 45

Where an omission as to one material fact would likely have

caused a tremendous difference in stock price, the fact that other

omissions may also have been material may not necessarily have

resulted in any further compromise in the stock price. I’m not

saying that you might not have persuaded a jury that they did. I’m

simply saying that this was a very tough -- this would be a very

tough claim to make. And so, I cannot say that the class was

Appendix Page A30

inadequately notified what their chances of success would be on the

further Branch claims.

Now, I’ve dwelt on this so much because the real issue before

this Court, if we were to strip everything of rhetoric, is whether I

should allow the Branch claims to be settled and compromised. |

really have no objector on settling the initial Hodge claims. It’s the

defendants who won’t settle on those terms. So, I’m almost

deciding whether the Branch claims should be settled here, and

that’s why I’ve devoted so much time to this.

Just to continue in taking the factors in the order in which they’re

usually discussed in the case law, the stage of the proceedings and

the amount of discovery completed is the next issue I have to

address. On the Hodge claim, I’m satisfied that the amount of

discovery completed is significant and requires nothing further for

intelligent decisions to be made about settlement. There is the

argument made before me that plaintiff's counsel has done so little

Page 46

investigation intu the Branch claims that he’s compromising them

prematurely.

Having reviewed all of the papers, again, and particularly

focusing on the exhibits attached to all of the papers, I am satisfied

that plaintiff's counsel, experienced in this area and with an apparent

sensitivity to the claims of his client, is not prematurely

compromising these claims.

I recognize that the Branch claims were dismissed before Judge

Keenan, but I don’t see that as something that I should give too

much weight to. Judge Keenan said they could be repleaded. He

was concerned that there was insufficient factual pleading in the

complaint. He wasn’t making a statement that no complaint could

be pleaded to state the claims. So, I don’t rely on that. Rather, I

rely on the actual submissions of the parties.

Plaintiff has asked for more time to respond -- I’m sorry, not

plaintiff, Mr. Branch’s counsel. Plaintiff in the Branch case has

asked for more time to respond to what Mr. <a

Bernstein has submitted. Why I don’t give that is that Branch did

not need to see Mr. Bernstein’s submissions to be able to put

together a showing of what more should be known by everyone

Appendix Page A31

about the Branch litigation. Indeed, it’s been his claim that he

knows so much about it, that to not allow him to pursue the class

claims is what’s unjust here. And so I think that the desire for more

time is really simply a delay tactic

Page 47

that, as I said, complicates dealing with this class tremendously and

with no good purpose. I am satisfied that adequate inquiry has been

made by plaintiff's counsel before me to allow the case to be settled.

Let me deal with the next two factors together, the risks of

establishing liability and the risks of establishing damages. As I’ve

already said, I think there is a real risk to plaintiff in establishing

liability on all of the claims brought hear, including the Hodge

claims. They may succeed in the end on these as well as some of

the Branch claims, but there are real defenses here and they would

be vigorously pursued. I cannot say that this is not an appropriate

discounting factor in a settlement. The risks of establishing damages

here seems even higher to me and particularly with respect to the

Branch claims. I mean, the Branch claims are myriad. And while

I recognize the significance of not fairly accounting for assets or not

listing expenses that one can reasonably expect will be incurred,

especially when they go into the hundreds of thousands, if in the

millions of dollars, I have more serious questions about what

securities law damages would be attributed to not disclosing that a

son was hired or some of the other claims that seem to relate more

to business judgments. I don’t either support or condemn those

business judgments. I’m just saying that the risks of establishing

Page 48

damages are very high here.

The risks of maintaining the class action through the trial do not

appear to me to be a problem here. From everything I’ve seen,

heard from counsel, from my assessment of counsel in the case, I’m

sure that the class action would be maintained vigorously throughout

a trial. That’s not a factor that causes me to approve the settlement.

The ability of the defendants to withstand 2 greater judgment was,

as I said, the one factor that I hadn’t really focused on and it’s now

apparent to me why it’s not discussed in the papers. In light of

Appendix Page A32

that, I will assume for purposes of this discussion that the defendants

could withstand a greater judgment.

Otherwise I would think people would come before me with this,

with the papers.

But, you know, there have been various claims as to what the

potential damages in this case would be. Whether a company could

withstand $25 million in damages as easily as it could maintain or

sustain $12 million or 9.6 million, which are among the various

numbers that have been thrown out to me, are very, very different

questions. There’s also, of course, the blunt reality that over a

certain number, a company would always litigate rather than pay a

settlement. And so, I do have to conclude that while defendants

may be prepared to settle for 2.5 million, it is very probable that

they would not settle for anything in the neighborhood of 20 million

Page 49

25 million or whatever the amount plaintiff believes the actual

damages in this case are, that there we would be into the lengthy

and expensive litigation that would likely be involved here.

The next factor I have to consider is the range of reasonableness

of the settlement fund in light of the best possible recovery. And

the last factor is actually linked to it, the range of reasonableness of

the settlement fund relative to a possible recovery in light of all the

attendant risks of litigation. This is one of the factors that I also see

is in sharp dispute and which I’ve given some careful attention to.

The plaintiff advises me that the damages in this case are perhaps

in the neighborhood of $12 million, and so a $2.5 million recovery

is not on its face an extraordinarily high one. Plaintiff asks me to

consider the fact that the entire market had a 20 percent decline in

its stock prices.

And when that’s considered perhaps the settlement looks a little

better.

I also have to consider what the Branch plaintiff tells me, which

is that their analysis suggests that the loss could be as high as $25

million or $20 million, but something in that neighborhood, and that

compared to that, the settlement is even smaller.

I will assume for purposes of today’s discussion

Appendix Page A33

Page 50

that the loss could indeed be higher than $12 million, that a jury

would possibly find that the stock price had declined or that the loss

suffered was far in excess of $12 million, possibly as high as $20

million and decide whether or not I think it’s reasonable to settle this

case for $2.5 million under those circumstances. I initially looked

at that with some skepticism because I would be concerned about

shareholders compromising the claim at that dollar amount if the loss

was that high. But having carefully reviewed all of the papers, I am

satisfied that the risks of succeeding on the Hodge claim are such

that the plaintiff has to be prepared to discount its claim

considerably, that the risks of succeeding on the Branch claim, being

even higher, it seems to me that the discounting should be even

higher.

When I add to that the fact that this litigation would likely be

long, possibly not reaching trial for another two years, if then, the

fact that there is the possibility for a prompt recovery for the

shareholders seems reasonable to me. I weigh in this decision the

fact that I have experienced plaintiff's counsel before me. It is not

my task simply to blindly accept the recommendation, even of

experienced plaintiff's counsel, and so I want to emphasize that |

have not done that. And given the possible recovery, given the

settlement amount, I have perhaps spent more time with all the

papers than I would if the dollar amount here were higher. _

Page 51

But even recognizing the Branch plaintiff's optimistic view of what

it could recover, when I balance all of the factors before me, I’m

satisfied that this is a fair, just and appropriate settlement.

I of course will allow Mr. Branch who feels so strongly about his

claims to opt out and to pursue them in another forum if he wishes

to do so, but I will not hold up the payment of the settlement monies

to the other class members while this -- while Mr. Branch or the

other opt out parties pursue their claims. And so I intend to approve

the settlement.

Now, there are two other issues; one is the award of attorney’s

fees, the other is the application for sanctions. I’d like to deal with

the sanctions question first and perhaps short-circuit it. Did you see

Appendix Page A34

these?

MR. KADET: Yes, your Honor. I saw the document from Mr.

Fischer. We have not received our papers and on that basis I’m

prepared to withdraw that application.

THE COURT: All right, so I’m not imposing any sanctions in

the case.

MR. ANGSTREICH: Your Honor, we have taken no position

and made no objection with respect to the attorney’s fees issue. So,

in light of the fact that your Honor is going to approve the

settlement, we see no reason why Mr. Bernstein couldn’t just

proceed and we will step to the back.

Page 52

THE COURT: All right.

MR. ANGSTREICH: Thank you, your Honor

THE COURT: I gather no one has filed anything to oppose the

attorney’s fees except perhaps for the facts that you gave me, Mr.

Bernstein? I’m going to approve your fees, but let me make a few

statements on the record even here about this.

You’ve asked for a third of the settlement funds for attorney’s

fees. That would result in something over 700 -- almost

$800,000.00 being paid here, plus expenses. And I’ve looked at the

expenses and given the type of case that it is, I don’t see them as

having been exorbitant.

Since the class was told that no more than a third of the recovery

would be sought as attorney fees, I have to say that when the

amount of recovery versus the possible damages is the percentage it

is in this case, anc when counsel is taking a third of that as attorney

fees, I think it’s appropriate for a Court to look hard at whether

that’s fair and just or whether perhaps more should be available for

the recovery fund. I’ve done that in this case.

I’m satisfied that the quality of the legal work throughout has

been high and conscientious and mindful of the fact that this is

typical of the recovery awarded in so many of these cases. I am

prepared to award it.

I rely on this percentage fee, rather than your

Page 53

attempt to argue to me that even on a loan star calculation, this

Appendix Page A35

would be awarded. While I recognize that there are lawyers who do

receive that dollar amount and that sometimes there are even

additional amounts paid for the complexity of the case, I have to say

that since the recovery is in the third of the amount, I have no real

knowledge of how many people are successful in recovering those

kinds of attorney’s fees in full from their clients. So, that’s the

reason | award it, because of the typicality of this kind of an award

and my satisfaction that the attorney’s work throughout has been of

high quality and conscientious.

Is there anything else that anybody would like to be heard on

today?

MR. BERNSTEIN: No, your Honor.

THE COURT: Do you have a proposed order?

MR. BERNSTEIN: We have a proposed order, and if I might

just take a second to mark it up.

THE COURT: Counsel, thank you very much.

MR. BERNSTEIN: Your Honor, the arithmetic is slightly

higher, it’s 833.

THE COURT: All right, let me take a look at it.

Have you had a chance to see it, counsel?

MR. KADET: Yes. We have no objection to it, your Honor.

Thank you.

THE COURT: All right.

Page 54

MR. BERNSTEIN: It’s the exact judgment in the proposed

order but we’ve added the names of the exclusions as an Exhibit A.

THE COURT: And did you add Mr. Branch’s name?

MR. BERNSTEIN: He has not indicated he’s opting out.

THE COURT: Would you just see if counsel is there. I’ve said

two or three times that I would give him that option and I assumed

from his silence that he was taking that option.

MR. BERNSTEIN: Oh, no, I assume we’re visiting Foley

Square.

MR. KADET: He’ll do what he’s going to do. We have no

objection to his name being added after your Honor enters a

judgment.

THE COURT: Fine.

Appendix Page A36

MR. BERNSTEIN: I mean, he ordered a disk before we got in.

THE COURT: Fine. All right. That’s fine. I just want to

make sure that that’s the case.

MR. KADET: Yeah. We would have no objection to them

adding his name.

THE COURT: Let me read this.

MR. ANGSTREICH: My apologies, Judge.

THE COURT: Counsel, I just wanted to be clear

Page 55

because I’m about to sign this order, does your client want to be

listed as an opt out party or not?

MR. ANGSTREICH: No, your Honor, not as far as I know. I

_think Mr. Fischer intends to pursue whatever avenues he has.

THE COURT: Fine. I just wanted to make sure that it was

clear in the document that I’m about to sign.

Thank you very much.

MR. ANGSTREICH: Thank you.

THE COURT: All right. Now, as I look at the list of

defendants who are being released in this case, counsel for Branch

mentioned to me there was somebody who is a defendant in the

Southern District action who is not a defendant here. Do you recall

who that is?

MR. BERNSTEIN:~ What it is is there are some released parties

that are not defendants here; Urmston Young (Ph) being one in

particular that he mentioned, and some of the original selling

shareholders, some individuals who sold.

So that’s who is listed here. The defendants here are, well, I don’t

know if it’s broken up to your -- THE COURT: Well, I gather he

was objecting to the release of those parties since they were not

defendants before the Court.

MR. BERNSTEIN: He - I think he was trying to argue that

‘you are preventing him from suing those people and

Page 56

that the order does do that and they are being released.

That’s what the notice -- and the notice clearly set that forth.

THE COURT: All right. It’s the same in another context in

another case in which I settled or tried to help the parties settle

Appendix Page A37

earlier this week. One of the issues was whether parties not before

the Court could voluntarily participate in a global settlement

discussion in order to reach a resolution of a matter in which there

was a limited fund. Now, the context was very different, but I

satisfied myself there that certainly parties can join in settlements

and particularly here where the class was given notice that this was

going to be the case. I’m prepared to sign this.

I would have to say that the likelihood of pursuing the claims

against these parties seems even more remote to me. I mean, the

principal parties who could be held accountable for all of the claims

here have always been named defendants before me.

All right, thank you all very much. I really appreciate the papers.

It makes the Court’s task easier when they are so well set out.

MR. BERNSTEIN: Thank you very much, your Honor.

ALL COUNSEL: Thank you.

THE COURT: From the defendant’s perspective, too, definitely,

thank you.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.