Rubin v. MF Global, Ltd. et al

Filing 195

DECLARATION of Daniel E. Bacine and Carol V. Gilden in Support re: 191 MOTION for Settlement Lead Plaintiffs' Notice of Motion and Motion for Final Approval of Proposed Class Action Settlement and Plan of Allocation., 193 MOTION for Attorney Fees Lead Plaintiffs' Notice of Motion and Plaintiffs' Counsel's Petition for an Award of Attorneys' Fees and Reimbursement of Expenses and Lead Plaintiffs' Petition for Reimbursement of Expenses.. Document filed by Central States, Southeast, Southwest Areas Pension Fund, Iowa Public Employees' Retirement System, Policement's Annuity & Benefit Fund of Chicago, State-Boston Retirement System. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6)(Bunch, Stephen)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

MICHAEL RUBIN,
Plaintiff,
v.
MF GLOBAL, LTD., et al.,
Defendants.

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Case No. 08 Civ. 2233 (VM)

JOINT DECLARATION OF DANIEL E. BACINE AND CAROL V. GILDEN
IN SUPPORT OF LEAD PLAINTIFFS’ MOTION FOR FINAL APPROVAL OF
PROPOSED CLASS ACTION SETTLEMENT AND PLAN OF ALLOCATION,
AND PLAINTIFFS’ COUNSEL’S PETITION FOR AWARD OF ATTORNEYS’ FEES
AND REIMBURSEMENT OF EXPENSES
DANIEL E. BACINE and CAROL V. GILDEN declare as follows:
1.

We are members of the law firms Barrack, Rodos & Bacine (“Barrack Rodos”) and

Cohen Milstein Sellers & Toll PLLC (“Cohen Milstein”), respectively, and our firms are counsel to
the Court-appointed Lead Plaintiffs, the Iowa Public Employees’ Retirement System (“IPERS”), the
Policemen’s Annuity & Benefit Fund of Chicago (“PABF”), the Central States, Southeast and
Southwest Areas Pension Fund (“Central States”), and the State-Boston Retirement System (“StateBoston”) (collectively, “Lead Plaintiffs”), and are the Court-appointed Co-Lead Counsel (“Co-Lead
Counsel”) for the Class in the above-captioned consolidated securities class action (the
“Litigation”).1 We each have personal knowledge of the matters set forth herein based on our
participation in the prosecution and settlement of this Litigation.

1

Co-Lead Counsel and additional plaintiffs’ counsel Labaton Sucharow, LLP are collectively referred to
as “Plaintiffs’ Counsel.”

2.

We respectfully submit this Declaration in support of Lead Plaintiffs’ motion for final

approval of the proposed Settlement that will resolve the claims asserted in this Litigation on behalf
of a class of all persons or entities, including their legal representatives, heirs, successors or assigns,
who purchased or otherwise acquired MF Global common stock pursuant or traceable to the
Registration Statement and Prospectus (“Prospectus”) issued in connection with the Company’s IPO
on or about July 19, 2007, and were damaged thereby (the “Class”).2 By Order dated August 15,
2011, the Court preliminarily approved the Settlement (“Preliminary Approval Order”).
3.

We also respectfully submit this Declaration in support of Lead Plaintiffs’ motion for

approval of the proposed Plan of Allocation of the Net Settlement Fund (the “Plan of Allocation”) as
well as Plaintiffs’ Counsel’s petition for an award of attorneys’ fees and reimbursement of litigation
expenses (the “Fee and Expense Petition”) and Lead Plaintiffs’ request for reimbursement of their
costs, including lost wages.
I.

TERMS OF THE SETTLEMENT AND NOTICE
4.

Lead Plaintiffs have achieved an outstanding result for the benefit of the Settlement

Class: a recovery of $90 million paid by the Settling Defendants, plus interest at the same rate earned
by the Settlement Fund. The proposed Settlement is the result of nearly three years of hard-fought
litigation and multiple mediation sessions conducted by former federal judge Layn Phillips. The
Settlement was achieved only after Plaintiffs’ Counsel, among other things: (a) conducted extensive
legal and factual investigations into MF Global and its risk management system and controls prior
to, at the time of and following the IPO, including conducting multiple interviews with numerous
potential confidential witnesses and consultations with industry experts who were critical in enabling
Plaintiffs to understand MF Global’s internal operations; (b) filed and pursued FOIA requests; (c)
2

Unless otherwise noted, capitalized terms shall have the meanings ascribed to them in the Stipulation and
Agreement of Settlement dated August 5, 2011 and entered into by Lead Plaintiffs with Settling Defendants
(the “Stipulation”).

2

obtained and analyzed the grand jury indictment of the Company’s rogue trader, Evan “Brent”
Dooley, as well as investigative findings by the Chicago Board of Trade and the Commodities
Futures Trading Commission; (d) analyzed MF Global’s press releases, news reports, and filings in
courts abroad, including in the United Kingdom; (e) analyzed securities analysts’ and media reports;
(f) researched the law regarding claims brought against Defendants and the potential defenses to
these claims; (g) drafted three detailed consolidated complaints; (h) drafted opposition briefs to
Defendants’ motions to dismiss; (i) successfully appealed the dismissal of Lead Plaintiffs’
Consolidated Class Action Complaint (“September 2008 Complaint”) and denial of permission to
file an amended complaint (the “Proposed Amended Complaint”), which involved briefing and oral
argument on the issues on appeal;; (j) examined and analyzed over 38,000 pages of documents
produced by Defendants and deposed four fact witnesses; (k) secured expert analysis of Plaintiffs’
claims and the potential damages for the Class in preparation for settlement discussions and
mediation; (k) prepared mediation statements and engaged in extensive settlement negotiations,
including two days of mediation sessions with former judge Layn Phillips; and (l) drafted and
negotiated the terms of all relevant settlement documents. In sum, the proposed Settlement is the
product of a comprehensive investigation, aggressive and focused prosecution, and sophisticated
negotiations by experienced counsel and Lead Plaintiffs. Further, as set forth above and explained in
detail below, the Settlement represents an excellent recovery for the Settlement Class.
5.

The terms of the Settlement are set forth in the Stipulation and a summary of the

Settlement was set forth in the Notice of Pendency of Class Action, Proposed Settlement and
Settlement Fairness Hearing (the “Notice”), which was mailed to over 28,000 potential Class
Members pursuant to the Court’s Preliminary Approval Order. See Declaration of Michelle La
Count, the Claims Administrator in this Litigation (“La Count Decl.”), attached hereto as Exhibit 1

3

at ¶¶ 9-12. In addition, on September 8, 2011, the Summary Notice of Pendency of Class Action and
Proposed Settlement (the “Summary Notice”) was published in the national edition of The Wall
Street Journal and over the PR Newswire. See La Count Decl. ¶ 16. Co-Lead Counsel also posted
information regarding the Settlement on the websites they maintain, www.barrack.com and
www.cohenmilstein.com, and on the website that A.B. Data established for this Litigation,
www.mfglobalsettlement.com, each of which included downloadable copies of the Notice and Proof
of Claim and Release form (“Claim Form”).
6.

The Notice advised all recipients of, inter alia: (a) their right to exclude themselves

from the Settlement Class; (b) their right to object to any aspect of the Settlement, the proposed Plan
of Allocation, and/or Plaintiffs’ Counsel’s request for attorneys’ fees and reimbursement of
expenses; (c) the method by which Class Members were required to submit exclusion requests or
objections; and (d) the manner for submitting a Claim Form in order to be eligible for a payment
from the proceeds of the Settlement.
7.

The Settlement Class reaction to the Settlement has been overwhelmingly positive.

Although over 28,000 Notices were mailed to potential Class Members, as of the filing of this
Declaration, which is ten days prior to the deadline for filing objections or requesting exclusion from
the Settlement Class, only one request for exclusion from the Settlement Class was received (see La
Count Decl. ¶ 17). To date, no Class Members have filed an objection to the Settlement, Plan of
Allocation or Plaintiffs’ Counsel’s request for attorneys’ fees and reimbursement of litigation
expenses.
8.

Upon approval of the Settlement, the claims asserted in the Litigation will be

dismissed with prejudice, subject to the terms of the Stipulation. For the reasons set forth below,
Lead Plaintiffs respectfully submit that the terms of the Settlement are fair, reasonable and adequate

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in all respects and, pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, should be
approved by this Court. Lead Plaintiffs further respectfully submit that the proposed Plan of
Allocation is fair and reasonable, and that pursuant to standards enunciated by courts in this Circuit
and elsewhere, it should also be approved.
9.

For creating this substantial benefit for the Settlement Class, Plaintiffs’ Counsel seek

a fee of 18% of the Settlement Fund, plus interest at the same rate earned by the Settlement Fund,
and reimbursement of litigation expenses in the amount of $254,531.79. Additionally, as set forth
in detail in ¶ 82, below, Lead Plaintiffs are also seeking reimbursement in the total amount of
$20,499.40 for the costs they incurred relating to their representation of the Settlement Class.
Plaintiffs’ Counsel’s request, which has been approved by the Court-appointed Lead Plaintiffs that
oversaw the prosecution and resolution of this Litigation, is at the low end of the range of fees
typically awarded in securities class actions in this and other Circuits. The requested fee is also
reasonable when viewed in light of the time expended by Plaintiffs’ Counsel in prosecuting the
Litigation, and represents only a modest multiple (2.67) of the lodestar incurred by Plaintiffs’
Counsel. See ¶ 60 below.
10.

Plaintiffs’ Counsel also request that the Court approve payments totaling $20,499.40

to reimburse the Lead Plaintiffs for the value of their time and expenses directly related to the
prosecution of this Litigation on behalf of the Settlement Class.
II.

BACKGROUND OF THE LITIGATION AND CLAIMS ASSERTED
11.

This Litigation brought claims pursuant to Sections 11, 12(a)(2) and 15 of the

Securities Act of 1933 (“Securities Act”) and alleges that Defendants made materially false
statements and omissions in the Prospectus issued in connection with MF Global’s July 19, 2007
IPO. More specifically, the Company, which is the “world’s leading broker of exchange listed

5

futures and options,”3 materially misrepresented the nature and operation of the Company’s “robust,
globally integrated risk-management” system at the time of the IPO. This risk management system
was billed as a “Disciplined Approach to Risk” and purportedly included elaborate and time-tested
systems and procedures, including “continuous” oversight and monitoring conducted on a “real
time” basis, offsetting buy and sell trades, and aversion to “directional trading” by the Company. As
alleged in Lead Plaintiffs’ First Amended Consolidated Class Action Complaint (the “Complaint”),
Defendants’ portrayal of the Company’s risk management system in the Prospectus was materially
inaccurate and misleading because it failed to disclose that at the time of the IPO, MF Global’s risk
management system had failed or controls had been removed or disabled in the areas where they
were needed most.
12.

The dramatic contrast between Defendants’ portrayal of MF Global’s risk

management system in the Prospectus and reality first became apparent to investors on February 28,
2008, when they learned that a key component of MF Global’s risk management system could be
and, in fact, had been circumvented by an employee when trading for his own account. This flaw in
the Company’s risk management system reportedly had allowed one trader from the Company’s
Memphis branch office, Dooley, in just one night’s trading from home on February 26-27, 2008, to
rack up an astounding $141.5 million loss on wheat futures trades that the Company had to absorb
(the “Memphis Incident”), notwithstanding the Company’s claimed ban on “directional trading” and
its purported conduct of “continuous,” “real-time” and “worldwide” monitoring of trading activities.4

3

“MF Global provides execution and clearing services for exchange-traded and over-the-counter derivative
products, as well as for non-derivative foreign exchange products and securities in the cash market. MF
Global is a “specialty” broker, whose focus is on providing both brokerage execution and clearing services to
its clients. It does not engage in non-brokerage businesses, such as investment banking, asset management or
principal investments.” First Amended Consolidated Class Action Complaint at ¶ 26.
4

During the course of discovery, Plaintiffs’ Counsel learned that MF Global’s independent investigators had
adopted the term “Memphis Incident” to refer to the event of Mr. Dooley’s unauthorized and illegal trading
on February 26-27, 2008. For the sake of consistency, we use the same term here.

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13.

The market reaction to this news was strong. The Company incurred a devastating

loss of market capitalization greater than $1.14 billion over two days of trading as the investing
public reacted to the fact that MF Global did not have the risk controls described in its Prospectus
and that the $141.5 million trading loss, while significant in itself, might potentially represent only
the tip of an iceberg. In particular, and as alleged in the Complaint, the ratings agencies’ and
analysts’ downgrades of MF Global immediately following the February 28, 2008 disclosure
specifically referenced the demonstrably impaired risk management environment at the Company.
For example, Fitch Ratings reduced the Company’s rating and warned that the $141.5 million loss
“questions the robustness of risk measurement systems and represents a substantial portion of net
income level.” A Credit Suisse analyst stated that the “magnitude of the loss is clearly disconcerting
to us and calls into question the degree of risk taking and risk management at the franchise” and a
Banc of America analyst stated “the questions raised around the company’s risk-management
practices are likely to keep the stock depressed for quite some time.” Indeed, The Wall Street
Journal reported on March 1, 2008, “Analysts and investors are concerned that more bad trades
could surface at MF Global,” and repeated that statement again in another article on March 17, 2008.
Thus, as alleged in the Complaint, the investing public perceived the Memphis Incident to be
indicative of an inherently flawed operational risk control environment at the Company where huge
losses could occur without forewarning and independent of any outside events. For example, as
alleged in the Complaint, following news reports of investigations by the New York Attorney
General and the CFTC, Bruce Weber, a finance professor at the London Business School, reportedly
echoed the market’s concerns, observing, “It seems like MF Global didn’t have good control
systems.”

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III.

HISTORY OF THE LITIGATION
A.

Commencement of the Litigation, Plaintiffs’ Counsel’s Investigation
and the September 2008 and Proposed Amended Complaints

14.

During February and March 2008, in the immediate aftermath of the Memphis

Incident, several securities class action complaints were filed in the United States District Court for
the Southern District of New York against MF Global and certain of MF Global’s officers and
directors. These actions were consolidated by the Court on April 9, 2008.
15.

Thereafter, by Order entered June 23, 2008, the Court appointed IPERS, PABF,

Central States and State-Boston as Lead Plaintiffs in the consolidated action, and approved Lead
Plaintiffs’ selection of Barrack Rodos and Cohen Milstein as Co-Lead Counsel for the Class.
16.

In preparation for the filing of the September 2008 Complaint, Plaintiffs’ Counsel

conducted a thorough and extensive investigation into the matter. The investigation included, among
other things:
•
•

retaining and consulting with a private investigation firm;

•

reviewing all publicly available information concerning MF Global, including
statements made by the Company and the Individual Defendants in regulatory filings,
press releases, conference calls, news articles, analysts’ reports, and court filings in
the United States and United Kingdom, including the Dooley indictment;

•

making and pursuing FOIA requests to the SEC and CFTC;

•

investigating the background of and all relevant facts concerning Dooley; and

•
17.

identifying and interviewing former MF Global employees at all levels of the
Company;

retaining and consulting an industry expert with respect to options trading in wheat
futures.
Based on the information uncovered through our investigation and as directed by the

Court, on September 12, 2008, Lead Plaintiffs filed the September 2008 Complaint, asserting claims
against MF Global, the Individual Defendants, Man Financial, and the Underwriter Defendants

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under Sections 11, 12(a)(2) and 15 of the Securities Act. The September 2008 Complaint included
allegations based on information obtained from, inter alia: (a) more than 20 former MF Global
employees; (b) documents Plaintiffs’ Counsel obtained from numerous sources; and (c) a thorough
review and analysis of MF Global’s Prospectus as well as all other relevant public filings and
statements. The evidence Plaintiffs’ Counsel uncovered allowed Lead Plaintiffs to plead detailed
facts concerning how and why statements in the Prospectus were materially false and misleading in
describing the state and operation of the Company’s risk management system and risk controls at the
time of the IPO.
18.

The September 2008 Complaint generally alleged violations of the federal securities

laws through, among other things, misstatements and omissions in the Prospectus concerning the
Company’s risk management system and controls. The September 2008 Complaint sought
certification of a class consisting of all persons who purchased or otherwise acquired MF Global
common stock pursuant or traceable to the Prospectus, and were damaged thereby.
19.

On January 12, 2009, the Defendants named in the September 2008 Complaint filed

two separate motions to dismiss that Complaint. Lead Plaintiffs responded on March 13, 2009 with
opposing memoranda. Defendants filed reply briefs on their motions on April 13, 2009.
20.

By Decision and Order entered July 16, 2009, this Court granted Defendants’ motions

to dismiss, stating that because the applicability of the “bespeaks caution” doctrine was ambiguous
under case law outside the context of fraud claims under Rule 10b-5 and “because a skillful plaintiff
may skirt application of the doctrine through artful pleading, the Court will examine whether
Plaintiffs’ allegations concerning representations or omissions of present or historical fact touch
upon forward-looking or prospective concerns.” The Court determined Lead Plaintiffs’ allegations
to be that “Defendants failed to disclose the risk of a future negative event.” In connection with its

9

Order, the Court held that Lead Plaintiffs would be granted leave to replead only “upon a request by
Plaintiffs plausibly showing that such a repleading would not be futile.”
21.

Following their filing of the September 2008 Complaint, Lead Plaintiffs had

continued to seek out and interview numerous additional confidential witnesses as well as repeatedly
attempted to obtain documents from the CFTC and SEC through FOIA requests. Lead Plaintiffs’
continuing investigation also focused on, among other things, MF Global filings in court in the
United States and abroad, as well as investigative findings by the Chicago Board of Trade, the CFTC
and other regulatory agencies. In addition, Lead Plaintiffs had secured expert assistance on
commodities options trading to clarify certain of the allegations concerning the nature and kind of
trading in which Dooley had engaged. In dismissing the September 2008 Complaint, the Court
allowed Plaintiffs a short window to attempt to amend to cure what the Court had found inadequate.
Because Plaintiffs’ Counsel had continued their investigation of the facts relevant to the case even
after the September 2008 Complaint was filed, Lead Plaintiffs were able to include in the Proposed
Amended Complaint significant additional information from several confidential witnesses. This
additional information allowed Lead Plaintiffs to address the issues the Court raised in its decision
and to provide substantial additional detail to demonstrate the merits of their claims. This
information was critical to the enhanced factual allegations of the Proposed Amended Complaint that
Plaintiffs’ Counsel prepared and sought permission to file.
22.

On August 5, 2009, Lead Plaintiffs filed a motion for permission to file a 59-page

Proposed Amended Complaint asserting claims under Sections 11, 12(a)(2) and 15 of the Securities
Act.
23.

Plaintiffs’ motion for leave to file the Proposed Amended Complaint met with strong

opposition from Defendants. On August 17, 2009, Defendants filed their opposition to Plaintiffs’

10

motion to file the Proposed Amended Complaint and Lead Plaintiffs filed a reply brief on August 18,
2009. On September 11, 2009, the Court denied the motion for leave to file the Proposed Amended
Complaint, finding that it would not cure the inadequacies the Court had identified in dismissing the
September 2008 Complaint. The result was that Plaintiffs’ case was dismissed in its entirety.
B.

The Appeal

24.

In consultation with the Lead Plaintiffs, Plaintiffs’ Counsel decided to appeal the two

decisions by the Court that dismissed the September 2008 Complaint and denied Plaintiffs leave to
file the Proposed Amended Complaint. The briefing on appeal was extensive, and Plaintiffs replied
to opposition briefs from three sets of Defendants. The appeal was argued before the Second Circuit
on July 15, 2011 by Barrack Rodos partner Mark R. Rosen.
25.

In a unanimous decision written by Chief Judge Jacobs of the Second Circuit, the

Court of Appeals affirmed in part and vacated in part the District Court’s ruling dismissing the
September 2008 Complaint. The Court of Appeals held that the “bespeaks caution” doctrine has no
applicability to misrepresentations or omissions concerning present factual conditions such as the
state of the Company’s risk management system at the time of the IPO. Iowa Pub. Employees’ Ret.
Sys. v. MF Global, Ltd., 620 F.3d 137, 142-44 (2d Cir. Sept. 14, 2010). The Court of Appeals also
held that Plaintiffs had sufficiently pleaded that the disclosures in the Prospectus about the
Company’s risk management system were materially misleading. Id. The Second Circuit’s decision
provided significant clarification of the law on the often confusing difference between a statement of
current fact and a forward-looking statement. Id. at 144.
26.

On remand, Lead Plaintiffs continued their aggressive prosecution of the Litigation

by seeking leave to file an amended complaint that tracked the Second Circuit’s ruling, thereby
maximizing Lead Plaintiffs’ ability to survive anticipated motions to dismiss by Defendants that
might raise issues that were raised in their earlier motions but not reached by either the District Court

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or the Court of Appeals. That request was granted and the operative Complaint was filed on
November 5, 2010.
C.

Settlement and Discovery

27.

After filing the Complaint and before Defendants’ response to that pleading was due,

Defendants approached Lead Counsel to inquire about the possibility of settlement.

After

consultation with and approval by Lead Plaintiffs, representatives of Plaintiffs and Defendants
eventually agreed to engage in discussions.
28.

After spending considerable time exploring the merits of a possible mediation, the

parties eventually agreed to engage in non-binding mediation before former federal judge Layn
Phillips.
29.

Preparation for the mediation involved submitting to the mediator detailed opening

and reply mediation statements, including expert submissions concerning damages, which were
specially prepared for the mediation process. The parties engaged in two full days of mediation in
New York City, as well as in numerous telephone conferences. The mediation resulted in an
agreement in principle to settle the case, with certain Defendants agreeing to create a Settlement
Fund for the Settlement Class in the amount of $90 million, conditioned upon Lead Plaintiffs’
concluding, after conducting sufficient discovery to satisfy themselves and the Court, that the
proposed Settlement was fair and reasonable and in the best interests of the Settlement Class. The
parties then negotiated the terms of a Memorandum of Understanding embodying the principal terms
of the Settlement. Because there were three groups of Defendants whose interests were not
altogether aligned, as well as numerous insurers providing various amounts and levels of coverage,
the negotiations were more complicated than usual.
30.

After agreeing to settle the case in principle, Plaintiffs’ Counsel engaged in extensive

discussion and negotiation with Defendants’ counsel concerning discovery of relevant facts and

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documents to be produced, including the existence and disposition of all materials related to the IPO,
the background for and due diligence conducted in connection with the IPO, the Company’s internal
audit documents concerning its risk controls during the relevant time period, and all documents
concerning the Memphis Incident, the investigation of that incident, and the failure of the
Company’s risk management system to prevent it. Plaintiffs’ Counsel obtained approximately
38,000 pages of documents from Defendants, which included materials from the Company and the
underwriters of the IPO, as well as documents from a consulting firm retained by MF Global to
investigate the Memphis Incident and the attendant risk control failure. Plaintiffs’ Counsel’s review
also extended to all of the documents the Company had produced to the SEC and the CFTC, as well
as United States Department of Justice pleadings. Plaintiffs’ Counsel then examined and analyzed
these materials and distilled them into a master file of approximately 4,000 pages of the most
relevant documents for use in conducting depositions.
31.

Plaintiffs’ Counsel conducted four depositions of fact witnesses, including Stephen

Hood, identified by Defendants as a person knowledgeable about the risk control systems at the
Company at the time of the IPO and the Memphis Incident; Michael J. Beare, the Company’s Chief
Risk Officer at the time of the IPO; Simon C.W. Hewett, the head of the execution team for co-lead
underwriter Citigroup in the IPO; and Chris Chaloner, the current head of “Group Risk” for MF
Global’s former corporate parent, Man Financial.
32.

As a result of the investigation and discovery conducted by Plaintiffs’ Counsel, we

can recommend that the Court approve the Settlement without reservation. Plaintiffs have
determined that although they have made, and can offer evidence establishing, credible claims that
Defendants violated the securities laws and that the Class sustained damages as a result, Defendants
may be able to offer various factual and legal defenses that render the ultimate outcome of these

13

proceedings uncertain. Accordingly, obtaining $90 million constitutes a reasonable recovery for the
injuries suffered by the Class.
D.

The Risks Faced By Lead Plaintiffs

33.

It is well-recognized that securities class actions are fraught with risks. In this

Litigation, the risks were particularly significant. First, Lead Plaintiffs faced the risk that they would
not be able to establish that internal controls, including those that would have prevented the
Memphis Incident, had been removed and/or disabled at the time of the IPO. If Lead Plaintiffs failed
to establish this fact, they would be hard-pressed at trial to prove that the Prospectus was materially
false and misleading in failing to accurately describe the Company’s risk management system and
controls at the time of the IPO. Indeed, indicative of these risks, the Court originally dismissed the
entire case holding that Lead Plaintiffs had merely alleged that “Defendants failed to disclose the
risk of a future negative event.” Second, Lead Plaintiffs faced the very real risk that the jury might
interpret market reaction to the adverse news concerning the Memphis Incident on February 28,
2008 to be solely in reaction to the impact of having to absorb $141.5 million in trading losses rather
than to the disclosure of an overall risk management failure at the Company, thereby precluding a
showing of loss causation or considerably reducing class-wide damages. Third, Lead Plaintiffs faced
the risk that Defendants might be successful in arguing that Dooley’s conduct was completely
unforeseeable or that the Company’s Prospectus had, in fact, adequately warned of the risk of a
“rogue trader.” Lead Plaintiffs recognized that a jury could have concluded, based on these facts,
that Defendants had acted properly and that the Company’s Prospectus was not materially false or
misleading.
34.

Lead Plaintiffs also faced other significant risks of proving their allegations at trial

and, indeed, success at trial was not assured. For example, Defendants could be expected to argue
that the disclosures that were made in connection with the IPO were sufficient to warn prospective

14

investors of the risks of investing, including the possible failure of the risk management system, such
that any misstatements or omissions of relevant facts concerning risk controls were immaterial.
Moreover, Defendants could attempt to argue that Lead Plaintiffs could not use the Memphis
Incident, which occurred seven months after the IPO, to establish that the Prospectus’
representations about risk were materially inaccurate at the time of the IPO.
35.

Finally, as became apparent in settlement discussions and mediation, the parties

vigorously disputed the amount of damages, if any, for which Defendants could be held liable.
Although Lead Plaintiffs believe they have strong arguments to refute Defendants’ damages
challenges, this issue would likely be resolved through a battle of the experts before the jury,
following the presentation of detailed statistical analyses, Daubert challenges and subsequent
appeals. Thus, Lead Plaintiffs faced a significant risk that, even if they successfully prosecuted the
merits of their claims, a jury might accept Defendants’ view on damages – or a court could take
away any substantial damages award – and thereby significantly limit any recovery.
36.

In addition, Lead Plaintiffs faced additional barriers in establishing their claims

against Man Financial and the Underwriter Defendants.

Based upon Plaintiffs’ discovery,

Defendants could be expected to proffer evidence at trial supporting their position, including:
(a)

Man Financial had a long-established and carefully-managed system of risk

controls, which in fact had accounted for possible risk control failures, such as the one that had
allowed occurrence of the Memphis Incident; and
(b)

the Underwriters had engaged in appropriate “due diligence” concerning both

Man Financial and MF Global’s businesses and operations in preparation for the IPO.
37.

Thus, the risks Lead Plaintiffs faced were substantial.

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E.

The Negotiation of the Settlement

38.

Informal and unsuccessful settlement discussions were held between the parties under

the auspices of the Second Circuit’s appellate mediation office prior to briefing on the appeal.
Settlement discussions commenced in earnest following the issuance of the Second Circuit’s
decision in September 2010.
39.

The Settlement is the result of intensive, arm’s-length, and substantive negotiations

conducted under the direction of former federal judge Layn Phillips.
40.

Plaintiffs’ Counsel, Lead Plaintiffs and counsel for Defendants as well as

representatives of their insurers engaged in two day-long mediation sessions conducted by Judge
Phillips in New York in December 2010. These sessions were followed by extensive, ongoing
discussions between Judge Phillips and the Settling Parties. Judge Phillips subsequently issued a
mediator’s recommendation, which the Settling Parties accepted, to settle all claims for $90 million
in cash.
41.

The parties spent several months engaged in discovery and negotiating the precise

terms of the Stipulation, which was submitted to the Court for preliminary approval on August 11,
2011.
42.

Lead Plaintiffs and Plaintiffs’ Counsel respectfully submit that the Settlement

represents an extraordinary result for the Settlement Class, particularly when viewed in light of the
significant litigation risks discussed above. The Settlement represents recovery of a meaningful
percentage of the Settlement Class’s likely maximum recoverable damages.
IV.

NOTICE PROGRAM AND POSITIVE RESPONSE OF THE CLASS
43.

The Preliminary Approval Order required that notice be disseminated to the

Settlement Class; set October 28, 2011 as the deadline for Class Members to submit objections to the

16

Settlement, the Plan of Allocation or the Fee and Expense Petition and to request exclusion from the
Settlement Class; and set a final approval hearing date of November 18, 2011.
44.

Pursuant to the Preliminary Approval Order, Plaintiffs’ Counsel instructed A.B. Data,

the court-appointed Claims Administrator for the Settlement, to disseminate copies of the Notice by
mail and to publish the Summary Notice. The Notice contains a thorough description of the
Settlement, the Plan of Allocation and Class Members’ rights to: (a) participate in the Settlement; (b)
object to the Settlement, the Plan of Allocation and/or the Fee and Expense Petition; or (c) exclude
themselves from the Settlement Class. The Notice also informs Class Members of Plaintiffs’
Counsel’s intent to apply for an award of attorneys’ fees in an amount of up to 21% of the Settlement
Fund, and for reimbursement of litigation expenses in an amount not to exceed $350,000. To
disseminate the Notice, A.B. Data obtained the names and addresses of potential Class Members
from listings provided by the Company and its transfer agent and from banks, brokers and other
nominees pursuant to the Preliminary Approval Order. See La Count Decl. ¶¶ 4-12, 16 & Ex. A.
45.

On August 29, 2011 A.B. Data disseminated the first copies of the Notice and Claim

Form (the “Claim Packet”) by first-class mail. Id. ¶ 9. As of October 18, 2011, A.B. Data had
disseminated over 28,000 Claim Packets. See id. ¶ 12.
46.

On September 8, 2011, in accordance with the Preliminary Approval Order, A.B.

Data caused the Summary Notice to be published in the national edition of The Wall Street Journal
and over the PR Newswire. See id. ¶ 16. The Summary Notice advised Class Members of the
deadlines set forth in the Notice for the submission of objections, requests for exclusion and Claim
Forms. See id. at Exs. A & C.
47.

Plaintiffs’ Counsel also caused A.B. Data to establish a dedicated website,

www.mfglobalsettlement.com, to provide Class Members with information concerning the

17

Settlement as well as downloadable copies of the Notice, the Claim Form and the Summary Notice.
Similar information was placed on Co-Lead Counsel’s websites, www.barrack.com and
www.cohenmilstein.com.
48.

The deadline for Class Members to file objections to the Settlement, the Plan of

Allocation or the Fee and Expense Petition and requests for exclusion from the Settlement Class is
October 28, 2011. As of October 18, 2011, despite the dissemination of over 28,000 Notices, only
one request for exclusion was received, and no Class Member has objected to the Settlement, the
Plan of Allocation, or Plaintiffs’ Counsel’s Fee and Expense Petition.
V.

PLAN OF ALLOCATION
49.

A plan of allocation is a means to fairly and reasonably allocate the net proceeds of a

settlement. Its goal is to establish the relative positions of class members in terms of the damages
they suffered as a result of the alleged wrongdoing.
50.

Plaintiffs’ Counsel developed the Plan of Allocation in consultation with Lead

Plaintiffs’ damages expert and believe that the Plan of Allocation provides a fair and reasonable
method to equitably distribute the Net Settlement Fund among Class Members.
51.

If approved, the Plan of Allocation, which is set forth at pages 9-10 of the Notice, will

govern how the proceeds of the Net Settlement Fund will be distributed among Class Members who
submit timely and valid Claim Forms. The Plan of Allocation is designed to achieve an equitable
and rational distribution of the Net Settlement Fund.
52.

In developing the Plan of Allocation, Lead Plaintiffs’ damages expert considered the

extensive analyses he had performed for Lead Plaintiffs during the course of the Litigation and in
connection with settlement negotiations, which entailed analyses of market losses, loss causation and
estimated damages. The expert analysis performed to develop the Plan of Allocation entailed
studying the market reaction to the alleged misrepresentations and to public disclosures that revealed

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or described the alleged misrepresentations or their effects, and calculating the reasonable dollar
amount of artificial inflation present in MF Global common stock throughout the Relevant Period
that was attributable to the alleged wrongdoing. The price decline associated with each particular
disclosure, adjusted to eliminate the effects, if any, attributable to general market or industry
conditions, was also measured, using standard statistical techniques to ensure that the price reaction
was outside the range of normal market movements.
53.

A.B. Data, as the Claims Administrator, will determine each Authorized Claimant’s

pro rata share of the Net Settlement Fund based upon each Authorized Claimant’s “Recognized
Loss,” calculated in accordance with the Plan of Allocation.5 Calculation of the Recognized Loss
will depend upon several factors, including whether securities were held until the conclusion of the
Relevant Period or sold during the Relevant Period.
54.

In sum, the Plan of Allocation, developed in consultation with Lead Plaintiffs’

damages expert, was designed to fairly and rationally allocate the proceeds of the Net Settlement
Fund among Class Members based on their approximate damages. Accordingly, Co-Lead Counsel
respectfully submit that the Plan of Allocation is fair and reasonable and should be approved.
55.

As noted above, more than 28,000 copies of the Notice, which contains the Plan of

Allocation and advises Class Members of their right to object to the proposed Plan of Allocation,
have been sent to potential Class Members. See La Count Decl. at ¶¶ 9-11. With ten days to go
before the deadline for the submission of objections, no objections to the proposed Plan of
Allocation have been received. Moreover, the fact that no Class Member has objected to the
proposed Plan of Allocation speaks volumes to the Class’s overwhelming approval of the propriety
of the proposed Plan.
5

An “Authorized Claimant” refers to a Class Member who submits a timely and valid Claim Form to A.B.
Data that is approved for payment by the Court.

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VI.

THE FEE AND EXPENSE PETITION
56.

Plaintiffs’ Counsel are collectively making an application for a fee award of 18% of

the Settlement Fund, plus interest at the same rate as earned by the Settlement Fund, on behalf of all
Plaintiffs’ Counsel. As discussed below, this fee represents a modest multiple of 2.67 on Plaintiffs’
Counsel’s lodestar. Plaintiffs’ Counsel also request reimbursement of litigation expenses incurred
in connection with the prosecution of this Litigation in the amount of $254,531.79.
A.

Lead Plaintiffs Support the Fee and Expense Petition

57.

Lead Plaintiffs, sophisticated institutional investors with extensive experience in

negotiating fees with counsel and in evaluating securities class action settlements, were substantially
involved in all aspects of the prosecution of the Litigation and negotiation of the Settlement,
including reviewing voluminous pleadings, assisting in preparation for mediation sessions, and
reviewing settlement demands and settlement documentation. Lead Plaintiffs have evaluated the
Fee and Expense Petition and believe it to be fair and reasonable. In coming to this conclusion, Lead
Plaintiffs considered the outstanding recovery obtained and the risks of litigation. See Declarations
of Gregg A. Schochenmaier, John J. Gallagher, Jr., James Condon, and Daniel Greene, attached
hereto as Exhibits 2, 3, 4 and 5, respectively. Accordingly, Lead Plaintiffs endorse Plaintiffs’
Counsel’s application for an award of attorneys’ fees constituting 18% of the Settlement Fund and
their request for reimbursement of litigation expenses. See id.
58.

Consistent with Lead Plaintiffs’ endorsement, the Notice informed Class Members of

Plaintiffs’ Counsel’s intent to apply for an award of attorneys’ fees in an amount up to 21% of the
Settlement Fund, and for reimbursement of litigation expenses in an amount not to exceed $350,000.
The actual application requests a smaller percentage (18%) and reimbursement of a smaller total of
litigation expenses ($254,531.79).

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B.

The Work and Experience of Counsel

59.

Attached hereto as Exhibit 6 are declarations from Plaintiffs’ Counsel in support of

the request for an award of attorneys’ fees and reimbursement of litigation expenses. Included with
each declaration is a schedule that summarizes the lodestar of the firms, as well as the expenses
incurred by category (the “Fee and Expense Schedules”).6 The Fee and Expense Schedules indicate
the amount of time spent by each attorney and paraprofessional employed by Plaintiffs’ Counsel, and
the lodestar calculations based on their current billing rates. As set forth in each declaration, the
declarations were prepared from contemporaneous daily time records regularly prepared and
maintained by the respective firms, which records are available at the request of the Court. The
hourly rates for attorneys and paraprofessionals included in these schedules are the same as the
current rates charged for their services in non-contingent matters and/or which have been accepted in
other securities or shareholder litigation. For attorneys or paraprofessionals who are no longer
employed by Plaintiffs’ Counsel, the lodestar calculations are based upon the billing rates for such
person in his or her final year of employment.
60.

Plaintiffs’ Counsel have expended a total of 11,055.05 hours in the investigation and

prosecution of this Litigation. The resulting lodestar is $6,076,530.25. This does not include time
Plaintiffs’ Counsel will spend addressing any objections, appearing at the final approval hearing and
administering the Settlement. Under the lodestar approach, the requested fee yields a multiple of
approximately 2.67, a modest multiple of the value of the time expended by Plaintiffs’ Counsel.
61.

Plaintiffs’ Counsel are experienced in prosecuting securities class actions, and worked

diligently and efficiently in prosecuting this Litigation. Co-Lead Counsel and additional plaintiffs’
counsel Labaton Sucharow are among the most experienced and skilled practitioners in the securities
litigation field, and have long and successful track records in such cases. See Ex. 6 (attaching
6

The first page of Exhibit 6 is a summary chart of the lodestars and expenses of all of the firms.

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Plaintiffs’ Counsel’s firm resumes). Co-Lead Counsel worked closely together with and supervised
the coordinated work of all members of Plaintiffs’ Counsel’s team to avoid duplication of effort and
to ensure efficient prosecution.
C.

Standing and Caliber of Defense Counsel

62.

The quality of the work performed by Plaintiffs’ Counsel in attaining the Settlement

should also be evaluated in light of the quality of the opposition. Defendants were represented by
some of the country’s most prestigious law firms, namely, Wachtell, Lipton, Rosen & Katz (on
behalf of MF Global and the Individual Defendants); Boies, Schiller & Flexner LLP (on behalf of
Man Financial), Shearman & Sterling (on behalf of the Underwriter Defendants), and Kramer,
Levin, Naftalis & Frankel, LLP (on behalf of defendant Butte). These firms spared no effort in the
defense of their clients. In the face of this knowledgeable, formidable, and well-financed opposition,
Plaintiffs’ Counsel were nonetheless able to develop a case that was sufficiently strong to persuade
Defendants to settle the case on terms that are extremely favorable to the Settlement Class.
D.

The Risks of Litigation and the Need to Ensure the Availability of Competent
Counsel in High-Risk Contingent Securities Cases

63.

This prosecution was undertaken by Plaintiffs’ Counsel entirely on a contingent-fee

basis. The risks assumed by Plaintiffs’ Counsel in bringing this Litigation to a successful conclusion
are described above. Those risks are also relevant to an award of attorneys’ fees. Here, the risks
assumed by Plaintiffs’ Counsel, and the time and expenses incurred without any payment, were
extensive, and are described in detail above.
64.

From the outset, Plaintiffs’ Counsel understood that they were embarking on

complex, expensive and lengthy litigation with no guarantee of ever being compensated for the
substantial investment of time and money the case would require. In undertaking that responsibility,
Plaintiffs’ Counsel were obligated to ensure that sufficient resources were dedicated to the

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prosecution of this Litigation, and that funds were available to compensate staff and to cover the
considerable out-of-pocket costs that a case such as this requires. With an average lag time of
several years for these types of cases to conclude, the financial burden on contingent-fee counsel is
far greater than on a firm that is paid on an ongoing basis. Indeed, Plaintiffs’ Counsel have received
no compensation during the more than three-year course of this Litigation. Plaintiffs’ Counsel have
devoted 11,055.05 hours to the prosecution of the Litigation and have incurred $254,531.79 in outof-pocket-expenses in prosecuting this Litigation for the benefit of the Class.
65.

Plaintiffs’ Counsel also bore the risk that no recovery would be achieved. As

discussed herein, from the outset, this case presented a number of risks and uncertainties that could
have prevented any recovery whatsoever. Despite the most vigorous and competent of efforts,
success in contingent-fee litigation, such as this, is never assured.
66.

Plaintiffs’ Counsel know from experience that the commencement of a class action

does not guarantee a settlement. To the contrary, it takes hard work and diligence by skilled counsel
to develop the facts and theories that are needed to sustain a complaint or win at trial, or to induce
sophisticated defendants to engage in serious settlement negotiations at meaningful levels. Indeed,
in this case, as set forth in ¶¶ 63-65 above, Plaintiffs’ Counsel faced very real risks that they would
not be able to establish liability. Finally, from the beginning, Plaintiffs knew there would be serious
challenges as to the amount of recoverable damages.
67.

Moreover, courts have repeatedly recognized that it is in the public interest to have

experienced and able counsel enforce the securities laws and regulations pertaining to the duties of
officers and directors of public companies. As recognized by Congress through the passage of the
PSLRA, vigorous private enforcement of the federal securities laws can occur only if private
investors, particularly institutional investors, take an active role in protecting the interests of

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shareholders. If this important public policy is to be carried out, the courts should award fees that
adequately compensate plaintiffs’ counsel, taking into account the risks undertaken in prosecuting a
securities class action.
68.

Plaintiffs’ Counsel’s extensive and persistent efforts in the face of substantial risks

and uncertainties have resulted in a significant recovery for the benefit of the Settlement Class. In
light of these circumstances, and in consideration of Plaintiffs’ Counsel’s hard work and the
extraordinary result achieved, the requested 18% fee is reasonable and should be approved.
E.

The Reaction of the Class to the Fee and Expense Petition

69.

As noted, over 28,000 Claim Packets were mailed to potential Class Members

advising them that Plaintiffs’ Counsel would apply for an award of attorneys’ fees up to 21% of the
Settlement Fund, and for reimbursement of litigation expenses in an amount not to exceed $350,000.
See La Count Decl. at ¶¶ 9-12 and Ex. A. Additionally, on September 8, 2011, the Summary Notice
was published in the national edition of The Wall Street Journal and over the PR Newswire. See id.
at ¶ 16. The Notice and Claim Form have also been available on the website maintained by the
Claims Administrator and on Co-Lead Counsel’s respective websites. See id. at ¶ 9.
70.

The deadline for objecting to the anticipated fee request is October 28, 2011. To date,

no objections to the fee request have been received.
F.

Reimbursement of the Requested Litigation Expenses
is Fair and Reasonable

71.

Plaintiffs’ Counsel seek reimbursement of $254,531.79 in litigation expenses

reasonably and actually incurred by Plaintiffs’ Counsel in connection with commencing and
prosecuting the claims against the Defendants as well as the costs incurred by Lead Plaintiffs directly
relating to their representation of the Class. The Notice apprised potential Class Members that
Plaintiffs’ Counsel would be seeking reimbursement of expenses in an amount not to exceed

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$350,000. The amount of the requested litigation expenses actually requested is far less than what
was stated in the Notice and, to date, no objection has been raised to Plaintiffs’ Counsel’s request for
reimbursement of litigation expenses.
72.

From the beginning of the case, Plaintiffs’ Counsel were aware that they might not

recover any of their expenses, and, at the very least, would not recover anything until the Litigation
was successfully resolved. Plaintiffs’ Counsel also understood that, even assuming that the case was
ultimately successful, reimbursement for expenses would not compensate them for the lost use of the
funds advanced by them to prosecute this Litigation. Thus, Plaintiffs’ Counsel were motivated to,
and did, take significant steps to minimize expenses whenever practicable without jeopardizing the
vigorous and efficient prosecution of the case.
73.

As set forth in the Fee and Expense Schedules (provided in Exhibit 6 hereto) and in

the Summary Expense Report (attached as the first page of Exhibit 6), Plaintiffs’ Counsel have
incurred a total of $254,531.79 in unreimbursed litigation expenses in connection with the
prosecution of this Litigation. As set forth in the respective declarations, the expenses are reflected
on the books and records maintained by Plaintiffs’ Counsel. These books and records are prepared
from expense vouchers, check records and other source materials, and are an accurate record of the
expenses incurred. Plaintiffs’ Counsel’s expenses are set forth in detail in each firm’s declaration,
each of which identifies the specific category of expense, e.g., experts’ fees, transcripts, travel costs,
photocopying, telephone, fax and postage expenses, and other costs actually incurred for which
Plaintiffs’ Counsel seek reimbursement. These expense items are billed separately by Plaintiffs’
Counsel, and such charges are not duplicated in the respective firms’ lodestars.

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74.

The litigation expenses for which Plaintiffs’ Counsel seek reimbursement were

largely incurred for professional fees, including the costs of investigators, and the costs associated
with the depositions conducted by Plaintiffs’ Counsel.
75.

Plaintiffs’ Counsel retained a professional investigator to assist in the investigation of

facts and location and interviews of prospective fact witnesses and former employees for the
preparation of the complaints. The investigator provided substantial assistance to Plaintiffs’ Counsel
in the prosecution of this Litigation and pursued numerous leads including several former employees
cited as confidential witnesses in the Complaint.
76.

Plaintiffs’ expert on economic damages similarly provided substantial assistance to

Plaintiffs’ Counsel in the prosecution and resolution of this Litigation. This included drafting
reports and otherwise assisting Plaintiffs’ Counsel in preparing for the mediation. Those reports
provided crucial analysis in establishing potential damages and addressing issues such as loss
causation.
77.

Another component of the litigation expenses necessarily incurred in this Litigation

was discovery. In addition to document review costs, four depositions in New York City were taken
of knowledgeable individuals from the Company, Man Financial and the Underwriters during June
and July 2011, which required court reporting services and travel by out-of town-counsel.
78.

Plaintiffs’ Counsel also seek reimbursement for other travel expenses, which are also

the type of expense that is necessarily incurred in litigation and routinely charged to clients billed by
the hour. This Litigation involved travel for, among other things, several court appearances
including the motion for appointment of Lead Plaintiffs, oral argument on the appeal, and interviews
of several confidential witnesses.

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79.

The other expenses for which Plaintiffs’ Counsel seek reimbursement are also the

types of expenses that are necessarily incurred in litigation and routinely charged to clients billed by
the hour. These expenses include, among others, long distance telephone and facsimile charges,
postage and delivery expenses, computerized research, overtime expenses, filing fees and
photocopying.
80.

All of the litigation expenses incurred, which total $254,531.79, were necessary to the

successful prosecution and resolution of the claims against the Defendants. These expenses have
been reviewed and approved by Lead Plaintiffs. See Schochenmaier Decl. at ¶ 13; Gallagher Decl.
at ¶ 13; Condon Decl. at ¶ 7; and Greene Decl. at ¶ 4. In addition, the Notice apprised potential
Class Members that Plaintiffs’ Counsel would be seeking reimbursement of expenses in an amount
not to exceed $350,000 and, to date, no objection has been raised to this request for reimbursement
of litigation expenses.
81.

Additionally, Lead Plaintiffs seek reimbursement of their reasonable costs directly

relating to their representation of the Settlement Class, as explicitly allowed by the PSLRA. As set
forth in ¶ 57 above and in the Schochenmaier, Gallagher, Condon and Greene Declarations, Lead
Plaintiffs were actively involved in the prosecution and settlement of the Litigation, devoting
considerable time and effort for the benefit of the Settlement Class, including reviewing and
approving pleadings and engaging in extensive discussion and analysis of the merits of the case and
the preparation for the mediation. Lead Plaintiff IPERS seeks reimbursement in the amount of
$4,786.86 (see Schochenmaier Decl. ¶ 14); Lead Plaintiff PABF seeks reimbursement in the amount
of $5,300.00 (see Gallagher Decl. ¶ 14); Lead Plaintiff Central States seeks reimbursement in the
amount of $5,412.54 (see Condon Decl. ¶ 11); and Lead Plaintiff State-Boston seeks reimbursement
in the amount of $5,000.00 (see Greene Decl. ¶ 8). In the aggregate, these Lead Plaintiffs seek

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