Just Who Won This Lawsuit, Besides the Attorneys?
by Jerome F. Winzig
The envelope marked "Securities Litigation" came from a law firm in California. It contained two multi-page legal documents from the United States District Court for the Northern District of California, entitled "Proof of Claim and Release" and "Notice of Pendency and Settlement of Class Action and Settlement Hearing." There was no cover letter.
One document explained the mailing applied to everyone who had purchased stock in ADAC Laboratories from January 10, 1996 through August 18, 1999. This applied to me since my self-employment retirement funds are in IRA and Keogh accounts. Last year I had purchased some stock in ADAC, a maker of medical imaging equipment and health care information software. It's not a huge company, with annual revenue totals just under $350 million. It's price had dropped last year, but it seemed to be a sound company. Since then, its stock price has rebounded significantly.
This was odd; someone was suing a company that was improving. The mailing revealed that the lawsuit had been filed on my behalf, even though I had neither requested nor authorized any such lawsuit. Upon reading further, it became clear that my approval was not required. I didn't even have to be told about the lawsuit until it was all over. Twelve people had filed lawsuits against ADAC Labs. These suits had been consolidated under two "Lead Plaintiffs"--law firms in New York City and San Diego. The court had then certified a Settlement Class "composed of purchasers of ADAC common stock from January 10, 1996 through August 18, 1999 (the "Settlement Class Period')."
The lawsuit alleged that ADAC Laboratories "disseminated false financial statements that reported materially inflated revenues, operating income, net income and earnings per share for fiscal years 1996-1998." The lawsuit claimed that "ADAC common stock was allegedly artificially inflated...." Sounds terrible. But in the settlement, ADAC stated that they had "denied and continue to deny each and all of the claims and contentions alleged by the Lead Plaintiffs...."
So the lawsuit did not resolve ADAC Laboratories' guilt or innocence. Nor did it resolve whether the lawsuit itself affected the price of the stock. It did not resolve whether the lawsuit's claims were "materially false or misleading" or whether the claims in the lawsuit "influenced (if at all) the trading price of ADAC common stock." It also did not resolve whether the plaintiffs omitted relevant information from the lawsuit, thereby influencing the stock's price, or even whether such omissions could be prosecuted under federal securities laws.
According to the settlement, ADAC has set up a $20 million and "the average distribution per share would be approximately $1.10 before deduction of court-approved fees and expenses." Thirty percent of the total, or six million dollars, will go to attorney fees for the two law firms. Up to $350,000 will go to "out-of-pocket expenses" for the two law firms. That amounts to 35 cents per share, making the net average distribution per share just 75 cents.
However, there are limitations in what stockholders who were allegedly harmed can receive. The "Class Period" is divided into two separate time periods. Those who purchased stock when I did are limited to a maximum claim per share of just 8 cents. In other words, the attorneys' fees for my portion of the settlement are at least four times greater than my maximum possible settlement.
This is a strange settlement. No one has admitted to any wrongdoing. No facts have been presented in the courtroom. No trial has occurred. Many stockholders are eligible to receive just a negligible settlement amount. However, the attorneys will receive $6.35 million. In addition, those of us who are current stockholders will pay for the settlement costs ourselves because we own the company.
Institutional investors, such as pension funds and mutual funds own over sixty percent of the stock in ADAC Laboratories. In other words, it is likely that much of the stock in this company consists of long-term investments held for people's retirement.
This settlement seems to be pure extortion. Incredibly, it is very difficult legally to object to such extortion. An individual stockholder can only do so by filing papers and briefs with the District Court, serving copies of such papers and briefs to six different law firms, AND appearing either "in person or through counsel" at a September 18, 2000 hearing before Judge Marilyn H. Patel in San Francisco.
No other mode of objection is possible. The settlement states that "any Member of the Settlement Class who does not make his, her, or its objection or opposition in the manner provided shall be deemed to have waived all objections and opposition to the fairness, reasonableness and adequacy of the proposed settlement, the Plan of Allocation and the request of Class Council for attorneys' fees, costs and expenses." The settlement concludes with these words: "Inquiries should not be directed to the Clerk of Court or to the Judge."
Clearly, those who object to tort reform have some explaining to do. This kind of extortion is becoming all too common. It demeans our legal process, condones the continued enrichment of certain attorneys out of retirement funds, and destroys public confidence in our courts. It needs to stop.