Anwar et al v. Fairfield Greenwich Limited et al

Filing 1047

RESPONSE in Opposition re: #1032 MOTION for Settlement Notice of Motion for Final Approval of the Proposed Partial Settlement and Plan of Allocation. Derivative Plaintiffs' Objection to Proposed Settlement and Notice of Intention to Appear at Settlement Hearing. Document filed by Morning Mist Holdings Limited, Miguel Lomeli. (Wallner, Robert)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ANWAR, et al.,

Master File No. 09-cv-118 (VM)
Plaintiffs,

v.
FAIRFIELD GREENWICH LIMITED, et al.,
Defendants.

DERIVATIVE PLAINTIFFS’ OBJECTION TO PROPOSED SETTLEMENT
AND NOTICE OF INTENTION TO APPEAR AT SETTLEMENT HEARING

MILBERG LLP
One Pennsylvania Plaza
New York, New York 10119
Tel.: [phone]
SEEGER WEISS LLP
77 Water Street
New York, New York 10004
Tel.: [phone]
Attorneys for Objectors

TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .......................................................................................................... ii
PRELIMINARY STATEMENT .....................................................................................................1
THE PROPOSED SETTLEMENT .................................................................................................3
ARGUMENT...................................................................................................................................5
I.

THE COURT SHOULD REJECT THE PROPOSED SETTLEMENT..............................5
A.
B.

The Class’s Lead Counsel and Plaintiffs Cannot Adequately Represent the
Interests of Sentry.. ................................................................................................10

C.
II.

The Gratuitous Release is Overreaching, Unfair and Unreasonable .......................5

The Settlement Notice is Inadequate .....................................................................11

ALTERNATIVELY, ANY APPROVAL SHOULD REQUIRE A CARVE OUT
OF THE DERIVATIVE ACTION ....................................................................................12

CONCLUSION..............................................................................................................................12

i

TABLE OF AUTHORITIES
Page(s)
CASES
Amchem Prods., Inc. v. Windsor,
521 U.S. 591 (1997).................................................................................................................11
Anwar v. Fairfield Greenwich Ltd.,
676 F. Supp. 2d 285 (S.D.N.Y. 2009)................................................................................1, 4, 7
Anwar v. Fairfield Greenwich Ltd.,
728 F. Supp. 2d 372 (S.D.N.Y. 2010)........................................................................................2
In re Auction Houses Antitrust Litig.,
2001 WL 170792 (S.D.N.Y. 2001), aff’d, 42 F App’x 511 (2d Cir. 2002) .....................5, 6, 12
Brickman v. Tyco Toys, Inc.,
731 F. Supp. 101 (S.D.N.Y. 1990) ..........................................................................................10
Browning v. Yahoo! Inc.,
2006 U.S. Dist. LEXIS 34770 (N.D. Cal. May 19, 2006) .........................................................9
Consol. Edison, Inc. v. Ne. Utils.,
332 F. Supp. 2d 639 (S.D.N.Y. 2004)......................................................................................12
In re Fairfield Sentry Ltd.,
440 B.R. 60 (Bankr. S.D.N.Y. 2010), aff’d, No. 10-7311, 2011 WL 4357421
(S.D.N.Y. Sept. 16, 2011), appeal argued, No. 11-4376-cv (2d Cir. Nov. 19, 2012)...............2
In re FirstEnergy S’holder Derivative Litig.,
219 F.R.D. 584 (N.D. Ohio 2004) .............................................................................................7
Karvaly v. eBay, Inc.,
245 F.R.D. 71 (E.D.N.Y. 2007) .................................................................................................8
McReynolds v. Richards-Cantave,
588 F.3d 790 (2d Cir. 2009).....................................................................................................12
Nat’l Super Spuds, Inc. v. N.Y. Mercantile Exch.,
660 F.2d 9 (2d Cir. 1981)................................................................................................. passim
National Australian Bank v. Morrison,
130 S. Ct. 2869 (2010)...............................................................................................................8
Priestly v. Comrie,
2007 U.S. Dist. LEXIS 87386 (S.D.N.Y. Nov. 27, 2007) .......................................................10
Romero v. Career Educ. Corp.,
2005 Del. Ch. LEXIS 112 (Del. Ch. July 19, 2005) ..................................................................7
ii

SIPC v. Bernard L. Madoff Inv. Secs. LLC,
No. 12-9408 (VM), 2013 U.S. Dist. LEXIS 17457 (S.D.N.Y. Feb. 6, 2013)......................4, 10
W. End Capital Mgmt., LLC v. Pixelplus Co.,
580 F. Supp. 2d 343 (S.D.N.Y. 2008)........................................................................................9
Wal-Mart Stores, Inc. v. Visa U.S.A., Inc.,
396 F.3d 96 (2d Cir. 2005).................................................................................................10, 11
Weinberger v. Kendrick,
698 F.2d 61 (2d Cir. 1982).......................................................................................................11
STATUTES
11 U.S.C. § 1509(b) .........................................................................................................................2
15 U.S.C. § 78bb(f)(5)(C)................................................................................................................7
15 U.S.C. § 1517(b)(1) ....................................................................................................................2

iii

PRELIMINARY STATEMENT
Morning Mist Holdings Ltd. and Miguel Lomeli (“Derivative Plaintiffs” or “Objectors”)
respectfully submit this Objection to the Proposed Partial Settlement (“Proposed Settlement”).
Objectors also hereby provide notice of their counsel’s intention to appear at the settlement
hearing on March 22, 2013.
Objectors are shareholders of Fairfield Sentry Ltd. (“Sentry”) and plaintiffs in Morning
Mist Holdings Ltd. v. Fairfield Greenwich Group, a derivative action (“Derivative Action”)
pending on behalf of Sentry. The Derivative Action was filed in May 2009 in New York
Supreme Court. It was then removed to this Court by defendant Fairfield Greenwich Advisors
LLC, who claimed that this Court had subject matter jurisdiction under the Class Action Fairness
Act of 2005 (“CAFA”). Objectors moved to remand the action on the grounds that this Court
lacked subject matter jurisdiction under CAFA. The Court granted the motion in December
2009. See Anwar v. Fairfield Greenwich Ltd., 676 F. Supp. 2d 285, 295, 301 (S.D.N.Y. 2009)
(“Remand Decision”) (rejecting defendants’ “astoundingly expansive approach” and explaining
that their position was “directly contradicted by the plain language of CAFA”).
The Derivative Action alleges, inter alia, that various persons affiliated with Fairfield
Greenwich Group -- many of whom are also named defendants in this action (“FG Defendants”)
-- are liable to Sentry for fees paid by Sentry (which fees were calculated on the basis of Sentry’s
improperly calculated net asset values and thus inflated). See generally Stipulation of Settlement
(“Stipulation”), Doc. 996, at 4, § J (describing Derivative Action). Claims are also asserted
against Sentry’s service providers, including PricewaterhouseCoopers and Citco (who also are
defendants in this action). Unlike this class action -- which was filed on behalf of persons who
invested in Sentry and other funds, the Derivative Action was brought to “recover losses on
behalf of [Sentry].” Remand Decision, 676 F. Supp. 2d at 294.

In May 2009, the Anwar plaintiffs’ Lead Counsel caused an application to be filed in the
British Virgin Islands (“BVI”) to place Sentry into liquidation. See Joint Declaration of Lead
Counsel (“Joint Decl.”), Doc. 1035, ¶ 43. In July 2009, a BVI court issued an order of
liquidation. Id., ¶ 44. Lead Counsel have “actively participated” in the liquidation. See id.,
¶ 45.
In June 2010, the liquidators filed an application in the United States Bankruptcy Court
for the Southern District of New York under Chapter 15 of the U.S. bankruptcy code, seeking,
inter alia, “recognition” and a stay of the Derivative Litigation. (“Recognition” permits a
foreign entity’s representative to sue in the United States. See 11 U.S.C. § 1509(b)). That
application was granted by order (“Recognition Order”) of the bankruptcy court (Hon. Burton
Lifland) over the objection of the Derivative Plaintiffs. See In re Fairfield Sentry Ltd., 440 B.R.
60 (Bankr. S.D.N.Y. 2010), aff’d, No. 10-7311, 2011 WL 4357421 (S.D.N.Y. Sept. 16, 2011),
appeal argued, No. 11-4376-cv (2d Cir. Nov. 19, 2012).1
Following the issuance of Recognition Order, Sentry’s liquidators and Irving Picard, the
trustee (“Trustee”) of Bernard L. Madoff Investment Securities LLC, entered into a settlement

1

The Derivative Plaintiffs contend that recognition was improper because, inter alia, Sentry has
not maintained its “center of main interests” in the BVI. See 15 U.S.C. § 1517(b)(1) (permitting
“recognition” if the foreign proceeding “is pending in the country where the debtor has the
center of its main interests”). Although the Anwar plaintiffs filed the liquidation application in
the BVI, see Joint Decl. ¶ 43, they concede that “[t]he funds were not permitted to sell shares in
the BVI. The Funds had no employees in the BVI. The Funds’ directors never held any
meetings in the BVI, and there were never any shareholder meetings. Simply put, nothing was
done in the BVI.” Plfs’ Consolidated Opposition to the Fairfield Greenwich Defs’ Motions to
Dismiss (filed Mar. 22, 2010), Doc. 411, at 47 (citations omitted and emphasis supplied);
Declaration of Robert C. Finkel in Opposition to Defs’ Motions to Dismiss the Complaint, dated
Mar. 22, 2010, Doc. 405, ¶ 24 (“The Funds had no operations or employees in the BVI ….”).
See also Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 400 n.8 (S.D.N.Y. 2010)
(“[A]side from the fact of incorporation,” Sentry has “no connection to … the British Virgin
Islands …. *** The forum with the greatest contact and interest in this action is New York, the
jurisdiction where the fraud and other breaches of duty were masterminded.”).

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agreement providing for, inter alia, Sentry’s future assignment of claims against its management
to the Trustee. Derivative Plaintiffs have challenged the assignment, and have filed an
application to withdraw the bankruptcy reference with respect to the assignment. See In re
Fairfield Sentry Ltd., No. 11-5905 (BSJ) (S.D.N.Y.). The application is sub judice.
Additionally, following issuance of the Recognition Order, the liquidators removed the
Derivative Action to the bankruptcy court. The Derivative Plaintiffs then moved to remand the
action to state court. That motion has been suspended by stipulation and order. See Order dated
Oct. 7, 2010, in Morning Mist Holdings Ltd. v. Fairfield Greenwich Group, Adv. Pro. No. 103765 (BRL) (Bankr. S.D.N.Y.).
Derivative Plaintiffs have appealed the Recognition Order to the United State Court of
Appeals for the Second Circuit. See In re Fairfield Sentry Ltd., 11-4376-cv (2d Cir.). The
appeal is sub judice.
THE PROPOSED SETTLEMENT
The Proposed Settlement provides a recovery for a class of persons who, inter alia,
owned shares of Sentry and suffered a “net loss” of principal. See Stipulation, at 18, § A(ss).
Although Sentry itself is not a member of the settlement class, the settlement might be
interpreted to preclude the Derivative Plaintiffs from pursuing the Derivative Action as against
the FG Defendants. Class action settlements frequently release class members’ claims with
respect to the conduct challenged in the class action complaint. But here, the settlement contains
a highly unusual provision that, broadly read, could purport to prevent class members from
prosecuting derivative claims on behalf of non-class members (e.g., Sentry). In the context of
this case, that provision renders the settlement fundamentally flawed, for several reasons:
First, the Proposed Settlement settles and provides consideration only for “direct” claims
against the FG Defendants by class members who owned Sentry and other funds, and suffered a
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net loss of principal. “Direct” claims are those that arise solely in the investors’ capacity as
purchasers and holders of Sentry shares. See SIPC v. Bernard L. Madoff Inv. Secs. LLC, No. 129408 (VM), 2013 U.S. Dist. LEXIS 17457, at *10 (S.D.N.Y. Feb. 6, 2013) (“SIPC v. BLMIS”)
(“[T]he Anwar Plaintiffs’ surviving claims are direct rather than derivative ....”) (citing Anwar,
728 F. Supp. 2d at 400-02)); see also Remand Decision, 676 F. Supp. 2d at 297-98 (analyzing
differences between direct claims and derivative claims); Letter of Robert C. Finkel, Esq. to the
Court, dated Apr. 24, 2009 (“Finkel Ltr.”), at 1-2 (“we are not asserting derivative claims at this
time”).
Nonetheless, the proposed release and injunction contemplated by the Settlement
(“Release”), broadly read, might be deemed to prevent the Derivative Plaintiffs from prosecuting
derivative claims on behalf of Sentry as against the FG Defendants. See Stipulation, at 15, §
A.11 (“Released Claims” include claims related “directly or indirectly, to … (vii) any direct or
indirect investment in BLMIS”); id. at 29, ¶ 24 (enjoining prosecution of any “Released Claim,
either directly, representatively, derivatively, or in any other capacity, against any of the
Released Parties”) (emphasis supplied).2 So read, the Release is grossly overreaching and
violates the rule against “gratuitous releases” because the settlement provides no relief to Sentry.
Second, the Proposed Settlement was negotiated by class counsel and class
representatives who cannot adequately represent the interests of Sentry.
Third, the settlement notice failed to disclose the Derivative Action, or that the Proposed
Settlement, if approved, might prevent the continued prosecution of that action as against the FG
Defendants. That omission is particularly glaring because the claims asserted on behalf of Sentry

2

Objectors do not concede that approval of the Proposed Settlement would preclude their
prosecution of the Derivative Action, but anticipate the FG Defendants would argue otherwise.

4

in the Derivative Action are far more valuable than the direct claims asserted on behalf of class
members in this action.
ARGUMENT
I.

THE COURT SHOULD REJECT THE PROPOSED SETTLEMENT
A.

The Gratuitous Release is Overreaching, Unfair and Unreasonable

Because Sentry is not a class member and obtains no recovery under the Proposed
Settlement, and the Release may prevent the Derivative Plaintiffs from prosecuting substantial
claims on behalf of Sentry, the Proposed Settlement is unfair and unreasonable, warranting its
rejection. See Nat’l Super Spuds, Inc. v. N.Y. Mercantile Exch., 660 F.2d 9, 17 (2d Cir. 1981)
(disapproving class action settlement that provided recoveries with respect to class members’
claims involving liquidated futures contracts, because it also purported to release their claims
involving unliquidated contracts); In re Auction Houses Antitrust Litig., 2001 WL 170792, at *11
(S.D.N.Y. 2001), aff’d, 42 F. App’x 511 (2d Cir. 2002). The Release here, broadly read, is
particularly troubling as it could prevent class members from pursuing claims on behalf of Sentry
(a non-class member) -- even though those claims would not be extinguished if this case were
litigated to trial. See Nat’l Super Spuds, 660 F.2d at 18 (“If a judgment after trial cannot
extinguish claims not asserted in the class action complaint, a judgment approving a settlement
in such an action ordinarily should not be able to do so either.”).3
Disapproval of the Proposed Settlement is required even if its impact on the Derivative
Action were slight. This Court’s decision in Auction Houses is instructive. In that case, the
Court disapproved the settlement of an antitrust action on behalf of class members who

3

This case is far more egregious than National Super Spuds. In that case, the proposed
settlement provided recoveries to class members at least with respect to their claims involving
liquidated contracts. Here, Sentry gets no recovery whatsoever.

5

participated in domestic auctions, where the release (in violation of the Super Spuds doctrine),
although not enjoining class members from suing on claims related to foreign auctions,
precluded them doing so in U.S. courts and under U.S. law. See Auction Houses, 2001 WL
170792, at *11 (explaining that, under the disapproved settlement, class members “may claim the
benefit of this settlement and sue abroad under applicable foreign law to recover injuries
allegedly sustained abroad. All that is sought in exchange for the settlement consideration is a
release of the right to pursue claims based on foreign auctions in courts in this country and under
U.S. law in foreign courts.”). Here, the Proposed Settlement is far more pernicious that the
Auction Houses settlement insofar as it would enjoin class members from prosecuting the
Derivative Action (i.e., an action over which this Court has no subject matter jurisdiction), on
behalf of a non-class member (Sentry), in any court (foreign or domestic), and under any law.
The Proposed Settlement is all the more problematical, given the fact that the enormous
risks confronting the Anwar class claims underscore the strength of the claims asserted on behalf
of Sentry in the Derivative Action. Those risks no doubt depressed the amount that the FG
Defendants were willing to pay under the Proposed Settlement. See Joint Decl. ¶ 117-18
(estimating 4-6 percent class recovery before award of attorneys fees and expenses, although
noting that class members’ total losses are “currently unknown”).
For example, in describing their “reasons for the settlement,” Lead Counsel notes that the
FG Defendants have raised, as among the “significant legal issues,” “the conflict between direct
and derivative claims ….” Joint Decl. ¶ 128 (emphasis supplied); see also id., ¶ 11(g) (disputed
issues include “whether Plaintiffs have standing to pursue their state law claims or whether those
claims belong to the Funds”); see generally FG Defs’ Memorandum of Law in Support of
Motion to Dismiss the Second Consolidated Amended Complaint, Doc. 364, at 2 (stating that
Anwar plaintiffs “lack standing” “because their injury -- loss in value of their shares -- is
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derivative of injury sustained by the Funds.”); id. at 12 n.16 (stating that dismissal of Anwar
claims “will not deprive Plaintiffs of a vehicle to seek recovery. Action [sic] have been brought
against FG Defendants … derivatively on behalf of … Sentry ….”) (citing Derivative Action).
The FG Defendants, maintaining that the state law claims of Sentry shareholders really belong to
Sentry, have improperly structured a class action settlement -- with the acquiescence of Lead
Counsel -- to block those claims.
The potential preemption of the class claims under the Securities Litigation Uniform
Standards Act (“SLUSA”) -- also regarded by Lead Counsel as a “significant legal issue[],” see
Joint Decl. ¶ 128 -- further highlights the strength of the Derivative Action relative to this action.
Indeed, developing case law under SLUSA could substantially jeopardize (and even require the
complete dismissal of) the Anwar plaintiffs’ state law claims. See Plaintiffs’ Mem. in Support of
Final Approval of the Proposed Settlement and Plan of Allocation, Doc. 1033 (“Approval
Mem.”), at 8 (SLUSA presents “novel and complex” issue); id. at 9 (“[The effect of SLUSA in a
case involving a Ponzi scheme is presently before the Supreme Court…. An adverse decision
could limit Plaintiffs’ state law claims against the FG Defendants”) (citation omitted). By its
express terms, however, SLUSA is inapplicable to derivative suits. See 15 U.S.C. §
78bb(f)(5)(C); Remand Decision, 676 F. Supp. 2d at 299 n.12 (citing Sung v. Wasserstein, 415 F.
Supp. 2d 393 (S.D.N.Y. 2006) (Marrero, J.)).
The fact that this case is subject to the stringent requirements of the Private Securities
Litigation Reform Act (“PSLRA”) further compounds the risks faced by the class plaintiffs. See
Joint Decl. ¶ 128. The Derivative Action, however, asserts no securities claims and thus is not
governed by the PSLRA. See In re FirstEnergy S’holder Derivative Litig., 219 F.R.D. 584, 586
(N.D. Ohio 2004) (“The PSLRA, by its terms, is limited to actions filed under the federal
securities laws and does not apply outside this context.”); Romero v. Career Educ. Corp., 2005
7

Del. Ch. LEXIS 112, at *11 (Del. Ch. July 19, 2005) (PSLRA “does not apply to … derivative
suits”).
Other critical distinctions between the two cases further demonstrate the strengths of the
Derivative Action relative to this class action. For example, the risk that federal securities claims
of Sentry shareholders may be “barred” under National Australian Bank v. Morrison, 130 S. Ct.
2869 (2010), Joint Decl. ¶ 11(i); see also Approval Mem. at 9, has no bearing on the Derivative
Action, which asserts no federal securities claims.4 Likewise, the risk that the Anwar plaintiffs
would fail to obtain class certification -- although proffered as a factor favoring the settlement,
see Joint Decl. ¶ 127; id. ¶ 12 (noting “complex” class certification issues) -- is irrelevant to the
Derivative Action.
Given the significant differences between this case and the Derivative Action, and the
fact that Lead Counsel’s analysis of this case’s potential weaknesses highlights the strengths of
the Derivative Action, the Proposed Settlement should be rejected as Sentry “gain[s] nothing,”
Karvaly v. eBay, Inc., 245 F.R.D. 71, 89 (E.D.N.Y. 2007) -- much less adequate consideration -for the derivative claims, and the settlement might ultimately prevent Sentry from recovering
anything on its valuable claims against the FG Defendants. See Nat’l Super Spuds, 660 F.2d at
18.
We anticipate that the settling parties will argue that Sentry’s shareholders would be
among the ultimate beneficiaries of the Derivative Action, and that the Proposed Settlement
adequately compensates them for any release affecting the derivative claims.5 That argument,
4

Morrison’s impact could be significant, given Lead Counsel’s analysis of the geographic
locations of Sentry shareholders. See Corrected Declaration of Sashi Bach Boruchow in Support
of Motion for Class Certification, Doc. 772, at ¶ 2, and Exh. 2.
5

According to Lead Counsel, Sentry’s shareholders include persons who are not members of the
settlement class. See Joint Decl. ¶ 43.
8

however, misses the mark as it improperly conflates the derivative claims and the “direct”
shareholder claims. Indeed, to the extent that Sentry shareholders would be beneficiaries of the
Derivative Action, the Proposed Settlement represents negative value, since the derivative claims
are enormously more valuable than the “direct” claims for which Sentry shareholders could
recover under the Proposed Settlement. Although Lead Counsel state that they are acting to
“maximize” investor returns (as well as the returns to “the Sentry estate”), see Joint Decl. ¶ 45 &
n.10, they have accepted a settlement that that could do just the opposite.
The settling parties also might argue that the Release should be ignored for now, and
litigated later in the Derivative Action. However, given the significant claims asserted in the
Derivative Action, this Court should fully understand the Release before ruling on the Proposed
Settlement, and any final judgment should be crystal clear as to its impact, if any, on the
Derivative Action. Any ambiguity or uncertainty concerning the Release or its impact warrants
rejection of the settlement. Nat’l Super Spuds, 660 F.2d at 16; see Browning v. Yahoo! Inc.,
2006 U.S. Dist. LEXIS 34770, at *8 (N.D. Cal. May 19, 2006) (“While the court feels it is
important to know exactly who is in the class, it is even more important to know who and -crucially -- what is being released. The language of the proposed release appears to be both
vague and extremely sweeping[.]”) (emphasis in original).6

6

See also W. End Capital Mgmt., LLC v. Pixelplus Co., 580 F. Supp. 2d 343, 344-45 (S.D.N.Y.
2008) (addressing objection to proposed bar order in class action settlement prior to
dissemination of class notice and final settlement hearing: “Although the proposed bar order
does not expressly speak of indemnification for [underwriters’] fees and expenses, it is agreed
that the bar order is broad enough to cover such indemnification,” and further noting that “[i]t
was appropriate to deal with those objections before proceeding further.”) (emphasis supplied).

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B.

The Class’s Lead Counsel and Plaintiffs Cannot Adequately Represent the
Interests of Sentry

“The most fundamental principles underlying class actions limit the powers of the
representative parties to the claims they possess in common with other members of the class.”
See Nat’l Super Spuds, 660 F.2d at 16. Thus, even assuming that the Anwar “direct” claims and
the derivative claims in the Derivative Action “arose from the same factual predicate,” Wal-Mart
Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 109 (2d Cir. 2005), a release of derivative claims is
impermissible because the Anwar plaintiffs never asserted and were “never authorized” to pursue
those claims. See National Super Spuds, 660 F.2d at 18; see also SIPC v. BLMIS, 2013 U.S.
Dist. LEXIS, at *10; Finkel Ltr. at 1-2. Accordingly, any class settlement that purports to restrict
anyone’s ability to pursue derivative claims on behalf of Sentry must be rejected.
Moreover, any attempt by the Anwar plaintiffs and their counsel to represent Sentry’s
interests here would conflict with their representation of the Anwar class. See Priestly v. Comrie,
2007 U.S. Dist. LEXIS 87386, at *18-19 (S.D.N.Y. Nov. 27, 2007) (courts in the Second Circuit
“have long found that plaintiffs attempting to advance derivative and direct claims in the same
action face an impermissible conflict of interest”; plaintiff’s “attempt to advance derivative and
direct claims in the same action is an impermissible conflict of interest that disqualifies her from
maintaining this action.”) (citations omitted).
The conflict is particularly problematical here because, according to Lead Counsel, the
Proposed Settlement was driven largely by the FG Defendants’ limited assets. See Joint Decl.
¶¶ 13, 131 (referencing FG Defendants’ “depleted finances” and lack of insurance, and the
“substantial potential difficulties in collecting a judgment”); Approval Mem. at 16. If the
settlement is approved, those assets would be unavailable to satisfy the far stronger claims
asserted in the Derivative Action. See Brickman v. Tyco Toys, Inc., 731 F. Supp. 101, 108-09
(S.D.N.Y. 1990) (denying class certification due to plaintiff’s assertion of both class and
10

derivative claims: “Substantial recovery on the class claim may reduce the potential recovery on
behalf of the corporation on the derivative claim.”); see also Amchem Prods., Inc. v. Windsor,
521 U.S. 591, 626-27 (1997). Although the settlement provides some relief to class members, it
gives absolutely nothing to Sentry.
C.

The Settlement Notice is Inadequate

The notice to settlement class members is inadequate because it fails to describe the
Derivative Action, or disclose that the Release, broadly read, might bar the prosecution of the
Derivative Action as against the FG Defendants. In Wal-Mart, the Second Circuit admonished
settling parties to advise class members of other pending cases that might be impacted by a
proposed class action settlement:
We note, however, that class notices do sometimes include specific
reference to pending actions. See, e.g., [In re] Auction Houses
[Antitrust Litig.], 2001 WL 170792, at *3-4 [(S.D.N.Y. Feb. 22,
2001), aff’d, 42 F. App’x 511 (2d Cir. 2002)]; Fradette v. Am.
Serv. Corp., 1979 WL 1756, *1 (S.D. Fla. Aug. 29, 1979) (finding
information concerning “related litigation” in class notice to be
material to a reasonable person). Obviously, this information is
helpful to class members. We strongly encourage the inclusion of
such information in the future.
396 F.3d at 116 n.22 (emphasis supplied).
Here, the settlement notice does not suffice, as it nowhere discloses the Derivative
Action, or that the Release may bar prosecution of the derivative claims. Compare with
Weinberger v. Kendrick, 698 F.2d 61, 70 (2d Cir. 1982) (settlement notice was adequate where it
provided detailed description of related case and advised class members that participation in the
settlement would preclude their participation in the related case).
The defective notice warrant rejection of the Proposed Settlement. See Wal-Mart, 396
F.3d at 116; Nat’l Super Spuds, 660 F.2d at 17 (reversing approval of class action settlement
where class notice “referred only to claims based on liquidated contracts; it gave no indication
11

that the action would concern any other claims.”); Consol. Edison, Inc. v. Ne. Utils., 332 F. Supp.
2d 639, 653 (S.D.N.Y. 2004) (“Because of its unreasonableness and lack of adequate notice, the
Settlement Agreement could not be valid, and the release could not be enforced in this action, if
the release has the meaning that Con Ed now asserts that [it] does.”).
II.

ALTERNATIVELY, ANY APPROVAL SHOULD REQUIRE A CARVE OUT OF
THE DERIVATIVE ACTION
Given the fundamental problems described above, any approval of the Proposed

Settlement should be conditioned on a modified release that explicitly carves out the Derivative
Action. See McReynolds v. Richards-Cantave, 588 F.3d 790, 803 (2d Cir. 2009) (remanding
class action settlement to district court “to require the parties to clarify the language of the
release provision in order to reflect their stated understanding ….”); Auction Houses, 2001 WL
170792, at *18 (approval of class settlement conditioned on revised release).
CONCLUSION
The Court should not approve the Proposed Settlement. Alternatively, the Court should
condition any approval on a modified release that carves out the Derivative Action.
Dated: February 15, 2013

Respectfully submitted,
MILBERG LLP
By: /s/ Robert A. Wallner___
Robert A. Wallner
Kent A. Bronson
Kristi Stahnke McGregor
One Pennsylvania Plaza
New York, New York 10119
Tel.: [phone]
Fax: [phone]
[e-mail]
[e-mail]
[e-mail]

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Stephen A. Weiss
Parvin Aminolroaya
SEEGER WEISS LLP
77 Water Street
New York, New York 10004
Tel.: [phone]
Fax: [phone]
[e-mail]
[e-mail]
Attorneys for Objectors

DOCS\652732v1

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