In re UnitedHealth Group Inc. PSLRA Litigation

Citations: 643 F. Supp. 2d 1094; 2009 U.S. Dist. LEXIS 70988; 2009 WL 2482029Docket: No. 06-CV-1691 (JMR/FLN)

Court: District Court, D. Minnesota; August 11, 2009; Federal District Court

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Final approval has been granted for a class action settlement involving lead plaintiff California Public Employees’ Retirement System (CalPERS). The Court, after hearing arguments on March 16, 2009, sanctioned the settlement and awarded attorneys’ fees and expenses as specified. The case stems from a series of securities class actions initiated on May 5, 2006, with CalPERS filing a related action on July 7, 2006. CalPERS sought lead plaintiff status and proposed Lerach Coughlin Stoia Geller Rudman as lead counsel, a request that was supported by other plaintiffs. Under the Private Securities Litigation Reform Act (PSLRA), the Court is tasked with appointing a lead plaintiff and lead counsel, a matter referred to Magistrate Judge Franklin L. Noel. On August 11, 2006, Judge Noel consolidated the cases and mandated that potential lead counsel disclose any legal-ethical issues from the past decade. Lerach Coughlin disclosed its connections to the Milberg Weiss firm and confirmed that it had not been subject to any grand jury investigation. On September 14, 2006, CalPERS was appointed as lead plaintiff, and Lerach Coughlin as lead counsel, with the Court affirming these appointments on October 31, 2006. The Court subsequently enjoined defendant McGuire from exercising his stock options on November 29, 2006. Lerach Coughlin filed a consolidated class action complaint on December 8, 2006, alleging violations of federal securities laws by UnitedHealth and certain executives. Discovery was automatically stayed under the PSLRA, but proceeded in parallel derivative actions, with a motion to dismiss filed by defendants in February 2007, which was denied on June 4, 2007, allowing discovery to continue.

In mid-2007, CalPERS and Lerach Coughlin were unable to reach a settlement. Subsequently, they negotiated a fee agreement where CalPERS would pay Lerach Coughlin on an escalating basis: 11% of recoveries up to $250 million, 12% for amounts over $250 million, and 13% for amounts exceeding $750 million. The Court was not informed of this agreement. CalPERS filed for partial summary judgment on July 18, 2007, which was denied. Fact discovery began on August 24, 2007, resulting in 27 million document pages, 68 depositions, and 15 discovery motions. On September 15, 2007, Lerach Coughlin informed the Court of its name change to Coughlin Stoia Geller Rudman & Robbins LLP, and William Lerach retired from the firm. In October 2007, Lerach pleaded guilty to conspiracy to obstruct justice related to Milberg Weiss. Class action litigation progressed with a motion to certify a class of UnitedHealth stockholders, which was granted. CalPERS sought to protect class assets through a derivative action, leading to a proposed settlement in December 2007. CalPERS successfully extended an injunction on Dr. McGuire's stock options, while McGuire appealed this decision. The Minnesota Supreme Court provided clarification on the business judgment doctrine in August 2008. Settlement discussions resumed in early 2008, but were unsuccessful until an agreement-in-principle was reached on July 2, 2008. The proposed settlement included a $925.5 million common fund and changes in corporate governance, with McGuire canceling stock options and contributing $30 million, and Lubben contributing $500,000. The Court preliminarily approved the settlement on December 22, 2008, with notice sent to over 874,500 potential class members, published in major newspapers, and posted online, directing objections to be filed by February 17, 2009.

On February 15, 2009, Harold Myers, a UnitedHealth shareholder, filed an objection (Docket No. 841) regarding a proposed settlement, followed by objections from shareholders Ernest J. Browne and Bruce Botchik on February 17, which were supplemented on February 18 and March 4 (Docket Nos. 828, 829, 834). The objections primarily focused on the attorneys’ fees proposed by Coughlin Stoia, with no challenges to the settlement terms or reimbursement of expenses for lead plaintiffs. Only 37 class members opted out of the settlement (Docket No. 830). The Court is now assessing the final approval of the proposed settlement, the plan of allocation, and the requests for reimbursement of expenses and attorneys’ fees by the lead plaintiffs.

Under Rule 23(e), class action settlements require court determination of fairness, reasonableness, and adequacy. The Court serves as a fiduciary for absent class members, maintaining that the PSLRA complements rather than replaces Rule 23(e), allowing district courts to protect class interests. To evaluate the settlement, the Court considers the merits of the plaintiffs' case against the settlement terms, the defendants' financial status, the complexity and expenses of continued litigation, and the level of opposition to the settlement.

1. **Merits vs. Settlement Terms**: The Court emphasizes that the strength of the plaintiffs' case relative to the settlement amount is the most critical factor. Allegations include violations of several provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933, which survived a motion to dismiss. Defendants sought summary judgment on grounds of lack of intent and causation, with motions pending at the time of settlement. The Court notes significant risks for plaintiffs had the case proceeded, favoring the settlement.

2. **Defendants’ Financial Condition**: The proposed $925.5 million settlement is deemed substantial, with the defendants capable of paying this amount. The mere possibility that some defendants could afford a larger settlement does not undermine its adequacy.

3. **Complexity and Expense of Further Litigation**: The potential costs and duration of a trial, initially set for October 2008, are considerable. The Court estimates a lengthy trial involving extensive legal resources and the likelihood of appeals if plaintiffs succeeded, further supporting the settlement's approval.

At the time of settlement, McGuire's appeal against an injunction was still pending in the Eighth Circuit, and the Court recognized the potential length and expense of continued litigation, noting that class members would receive nothing during this time. The Court deemed an immediate payment of $925.5 million more valuable than any uncertain recovery after further proceedings, thus favoring settlement approval.

Class member objections were carefully considered, with no institutional investor objections among over 874,500 notified members. Only 37 opted out, and only three individuals objected. Harold W. Myers, who traded UnitedHealth stock during the class period, raised concerns about misleading information in the Notice and the adequacy of the plan of allocation for short sellers. The Court overruled his objections, affirming the sufficiency of the Notice and the adequacy of CalPERS as the lead plaintiff. Objectors Ernest Browne and Bruce Botchik did not challenge the settlement itself but questioned attorneys’ fees; their objections were deemed minimal compared to the overall class approval.

The allocation plan distributes the settlement fund to class members who submit valid claims, with payments adjusted if funds are insufficient. Myers' claim regarding inadequate compensation for short sellers was found meritless, as the plan was based on expert assessments of damages connected to specific purchase periods. The Court approved the allocation plan, determining it fair and reasonable, as only those short sellers who incurred losses due to the litigation's conduct would be compensated.

Reimbursement for Lead Plaintiffs' expenses can be awarded by the Court under 15 U.S.C. 78u-4(a)(4), with CalPERS requesting $25,291.10 for costs related to overseeing litigation and consulting with counsel, which the Court grants without objection. Coughlin Stoia does not seek direct reimbursement for its expenses exceeding $3 million, as these will be covered by its attorneys’ fee award. Regarding attorneys’ fees, the Court may award "reasonable attorney’s fees and nontaxable costs" as per Fed. R. Civ. P. 23(h), with such awards subject to the Court's discretion. Judicial oversight in determining fee awards is emphasized as crucial for class action integrity. The PSLRA mandates the Court to ensure fee reasonableness, and some courts have found fees pre-agreed between lead plaintiffs and counsel to be presumptively reasonable. Coughlin Stoia requests attorneys’ fees based on a formula from its fee agreement with CalPERS, amounting to $110 million (about 11.92% of the common fund), supported by an expert report from Professor Charles Silver asserting that judges cannot set better fees than market forces. The Court, however, rejects this expert opinion, asserting that the independent duty to award reasonable fees lies with the presiding judge, not the lead plaintiff or counsel. The fee agreement was deemed non-binding as it was made solely by the lead plaintiff and counsel without input from other class members. Ultimately, the Court retains discretion under Rule 23 to establish attorneys’ fees for the class action, rather than relying on the lead plaintiff's agreement.

The Court emphasizes its responsibility to protect absent class members from excessive fees, indicating that any fee agreement between the lead plaintiff and its counsel does not automatically bind the entire class. While the lead plaintiff asserts that the settlement's success is solely due to lead counsel's expertise, the Court counters that multiple factors influenced the settlement outcome, including the skills of opposing counsel, corporate governance dynamics, and the defendants' willingness to resolve the matter. The Court references Professor Silver's findings regarding CalPERS, noting its potential as an activist investor but criticizing the absence of evidence that it actively pursued reforms or negotiated lower fees prior to litigation. Furthermore, the Court acknowledges lead counsel's reputation for securing large recoveries but highlights concerns over ethical conduct involving a former partner's undisclosed role in the Milberg Weiss scandal. This raises questions about the adequacy of representation for the class. The Court expresses that it would have likely rejected the appointment of the firm had it known of the investigation at the time of fee negotiations and considers deducting any fees billed by the implicated attorney.

The Court declines to defer to CalPERS’ fee agreement with Coughlin Stoia, emphasizing that this is a class action rather than a contract dispute. In class actions, any fee arrangement is contingent upon the Court's approval of the lead plaintiff, lead counsel, settlement recovery, and the fee itself. The Court asserts its authority to set fees, distinguishing its role from merely adjusting them post-settlement. It adopts the percentage-of-the-fund method for calculating attorney fees in this common-fund settlement, as supported by the Eighth Circuit.

Without established Eighth Circuit factors, the Court considers several criteria: the benefit to the class, the risks faced by plaintiffs' counsel, the complexity of legal issues, the skill of the attorneys, the time and labor invested, the class's response, and comparisons to fees awarded in similar cases. The "degree of success obtained" is identified as the most critical factor in determining the fee award.

Lead counsel has secured a substantial benefit for the class, totaling $925.5 million in cash and significant corporate reforms, including the cancellation of over three million tainted options. Counsel took on considerable risk, advancing over $3 million in expenses on a contingent basis over more than three years of litigation. Despite facing challenges related to causation and potential time-bar issues, risks were mitigated by external investigations and disclosures that enhanced the factual record.

UnitedHealth was solvent, which minimized the risk of an unsatisfied judgment for plaintiffs. At the time of settlement, plaintiffs’ counsel faced uncertainties regarding their return on investment, but their willingness to take on this risk supported a substantial fee award. The case was complex, involving novel legal and factual issues, although the legal theory of liability was straightforward. The Court noted that this area of law is evolving, referencing relevant Supreme Court cases on loss causation, scienter, and reliance.

Lead counsel and opposing counsel were both highly skilled, and the litigation proceeded efficiently and cooperatively, reducing potential delays. The case experienced minimal class objections, primarily concerning the fees of lead counsel. The Court rejected objections regarding the use of paralegals and contract lawyers, affirming their role in enhancing efficiency.

While comparing the proposed fee to awards in similar cases, the Court acknowledged the fact-specific nature of such comparisons. Counsel's requested fee of 11.92%, or $110 million, was deemed reasonable, being neither excessively high nor low enough to deter future cases. The Court referenced other cases with varying fee percentages, noting that a decline in the fee percentage with larger recoveries is justified due to the defendant's size and solvency. Consequently, the Court determined a fee of 7% of the fund, totaling $64,785,000, as appropriate.

To verify the fee's reasonableness, the Court conducted a lodestar cross-check, considering factors such as hours worked, reasonable hourly rates, the contingent nature of success, and the quality of legal work, while excluding inadequately documented hours.

The court calculates attorney fees using the lodestar method, which involves multiplying "the hours reasonably expended" by "a reasonable hourly rate." Counsel's billing of over 45,000 hours resulted in a lodestar exceeding $18 million; however, the court critiques the billing judgment, noting excessive and unnecessary hours billed at rates above the Twin Cities market. The court determines reasonable hourly rates of $500 for partners, $200 for other attorneys, and $100 for paralegals, categorizing all other staff time as overhead. The recalculated total hours amount to 37,465.57, yielding a lodestar of $9,978,670. The counsel seeks a fee of $110 million, implying a multiplier greater than 11, whereas similar cases exhibited lower multipliers (Enron at 5.39 and Royal Ahold at 2.57). The court finds a fee of $64,785,000 reasonable, equating to a multiplier of nearly 6.5 based on the calculated lodestar. Counsel has not requested additional expenses, opting to deduct them from the fee. The court approves the settlement and sets attorney fees at $64,785,000, with Lead Plaintiff reimbursed $25,291.10 for expenses. The court notes the fee agreement's negotiation occurred after a significant reduction in litigation risks but was not disclosed prior to the current motion. Additionally, the court references a letter from CalPERS' general counsel regarding fee terms, dated shortly before a press release announcing a guilty plea by attorney Lerach.