motion for approval of the settlement - Reuters

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

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NANCY GEORGE, ROBERT GEORGE AND RANDALL WHITMAN, Individually and on Behalf of All Others Similarly Situated,

Plaintiffs,

- against -

CHINA AUTOMOTIVE SYSTEMS, INC., HANLIN CHEN, QIZHOU WU, XIE LIPING, WONG TSE YIU, WANG SHAOBO, YU SHENGBIN, and SCHWARTZ LEVITSKY FELDMAN LLP,

Auditor Defendant.

: : : : : : : : : : : : : : : : :

Civil Action No. 11-7533

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LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT AND

CERTIFICATION OF SETTLEMENT CLASS

Case 1:11-cv-07533-KBF Document 135 Filed 12/06/13 of 34

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ........................................................................................................ iii I. INTRODUCTION .............................................................................................................. 1

II. SUMMARY OF THE LITIGATION AND SETTLEMENT ............................................. 2

A. The Litigation ........................................................................................................... 2

B. Settlement Discussions ............................................................................................. 6

C. Summary of Key Terms of The Proposed Settlement .............................................. 7

1. Relief Available to Class Members ............................................................ 7

2. Class Notice and Settlement Administration .............................................. 8

3. Opt-Out and Exclusionary Provisions ...................................................... 10

4. Release Provisions .................................................................................... 11

5. Reimbursement Award and Attorneys’ Fees and Expenses ..................... 11

6. No Admission of Liability ........................................................................ 12

III. PRELIMINARY APPROVAL OF THE PROPOSED SETTLEMENT IS APPROPRIATE ................................................................................................................ 12

A. The Settlement Of A Class Action Is Favored And Should Be Preliminarily Approved If It Falls Within The Range Of Reasonableness .................................. 12

B. The Proposed Settlement Negotiated By The Parties Enjoys A Presumption Of Fairness ............................................................................................................. 14

C. The Settlement Benefit Falls Within The Range Of Possible Recovery ................ 16

1. The Complexity, Expense and Likely Duration of the Litigation ............ 16

2. Stage of Proceedings and Amount of Discovery Completed .................... 17

3. The Risks of Establishing Liability & Damages....................................... 17

4. Reasonableness of the Settlement Fund .................................................... 18

IV. THE PROPOSED SETTLEMENT CLASS SHOULD BE CERTIFIED FOR SETTLEMENT PURPOSES ............................................................................................ 19


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A. The Proposed Settlement Class Meets The Requirements Of Rule 23(a) And 23(b)(3) ........................................................................................................... 19

B. Class Certification Is Appropriate for Settlement Purposes ................................... 25

V. THE COURT SHOULD APPROVE THE PROPOSED FORM AND METHOD OF CLASS NOTICE .............................................................................................................. 25

A. Notice By Direct Mail is Sufficient When a Large, Nationwide Class is Present .................................................................................................................... 25

B. The Proposed Form Of Notice Adequately Informs Class Members Of Their Rights In This Litigation ............................................................................... 26

VI. CONCLUSION ................................................................................................................. 28


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TABLE OF AUTHORITIES

Federal Cases

Amchem Prods. v. Windsor, 521 U.S. 591 (1997) ................................................................................................... 19, 21, 23

Bourlas v. Davis Law Associates, 237 F.R.D. 345 (E.D.N.Y. 2006) ........................................................................................... 22

Carson v. Am. Brands, Inc., 450 U.S. 79 (1981) ................................................................................................................. 13

City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974) ............................................................................................ 14, 16

Cordes & Co. Fin. Servs., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91 (2d Cir. 2007) .................................................................................................... 24

George v. China Auto. Sys., Inc., 11 CIV. 7533 KBF, 2012 WL 3205062 (S.D.N.Y. Aug. 8, 2012) .......................................... 5

George v. China Auto. Sys., Inc., 11 CIV. 7533 KBF, 2012 WL 4493107 (S.D.N.Y. Sept. 25, 2012) ........................................ 5

George v. China Auto. Sys., Inc., 11 CIV. 7533 KBF, 2013 WL 3357170 (S.D.N.Y. July 3, 2013) ..................................... 6, 22

Haddock v. Nationwide Fin. Servs., Inc., 262 F.R.D. 97 (D. Conn. 2009) ............................................................................................. 20

Holden v. Burlington N., Inc., 665 F. Supp. 1398 (D. Minn. 1987) ....................................................................................... 18

In re Am. Int'l Grp., Inc. Sec. Litig., 689 F.3d 229 (2d Cir. 2012) ............................................................................................ 22, 24

In re Arotech Corp. Sec. Litig., 76 Fed. R. Serv. 3d 1717 (E.D.N.Y. 2010) ............................................................................ 22

In re Crazy Eddie Sec. Litig., 824 F. Supp. 320 (E.D.N.Y. 1993) ........................................................................................ 18

In re Flag Telecom Holdings, Ltd. Secs. Litig., 574 F.3d 29 (2d Cir. 2009) .................................................................................................... 21

In re Gen. Motors Corp. Pick–Up Truck Fuel Tank Products Liab. Litig., 55 F.3d 768 (3d Cir.1995) ..................................................................................................... 23

In re Genta Sec. Litig., 2008 WL 2229843 (D.N.J. May 28, 2008) ............................................................................ 17

In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436 (S.D.N.Y. 2004) ........................................................................................... 21

In re Initial Pub. Offering Sec. Litig., 260 F.R.D. 81 (S.D.N.Y. 2009) ............................................................................................. 22


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In re Initial Public Offering Securities Litigation, 226 F.R.D. 186 (S.D.N.Y. 2005) ........................................................................................... 24

In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454 (9th Cir. 2000) ................................................................................................. 18

In re Oxford Health Plans, Inc., 191 F.R.D. 369 (S.D.N.Y. 2000) ........................................................................................... 21

In re Rite Aid Corp. Sec. Litig., 146 F. Supp. 2d 706 (E.D. Pa. 2001) ..................................................................................... 18

In re Salomon Analyst Metromedia Litig., 544 F.3d 474 (2d Cir. 2008) .................................................................................................. 23

Mangone v. First USA Bank, 206 F.R.D. 222 (S.D. Ill. 2001) ............................................................................................. 25

Marisol A. v. Giuliani, 126 F.3d 372 (2d Cir. 1997) .................................................................................................. 20

Menkes v. Stolt-Nielsen S.A., 270 F.R.D. 80 (D. Conn. 2010) ................................................................................. 20, 24, 25

Merck-Medco Managed Care, LLC, 504 F.3d 229 (2d Cir. 2007) .................................................................................................. 20

Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306 (1950) ................................................................................................................. 9

Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) ............................................................................................................... 25

Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010) .................................................................................................. 18

Soberal-Perez v. Heckler, 717 F.2d 36 (2d Cir. 1983) ...................................................................................................... 9

Sullivan v. DB Invs., Inc., 667 F.3d 273 .......................................................................................................................... 22

Thompson v. Metro. Life Ins. Co., 216 F.R.D. 55 (S.D.N.Y. 2003) ............................................................................................. 16

Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., 396 F.3d 96 (2d Cir. 2005) .............................................................................................. 12, 13

Weinberger v. Kendrick, 698 F.2d 61 (2d Cir. 1982) .................................................................................................... 19

Wright v. Stern, 553 F. Supp. 2d 337 (S.D.N.Y. 2008) ................................................................................... 13


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Federal Statutes

15 U.S.C. § 78 ............................................................................................................................... 25

15 U.S.C. § 78u-4(a)(7) ................................................................................................................ 26

Federal Rules

Fed. R. Civ. P. 23 (a) (4) ............................................................................................................... 21

Fed. R. Civ. P. 23 (a)(1) ................................................................................................................ 20

Fed. R. Civ. P. 23(a)(2) ................................................................................................................. 21

Fed. R. Civ. P. 23(b)(1), (2), or (3) ............................................................................................... 19

Fed. R. Civ. P. 23(b)(3)(D) ........................................................................................................... 19

Fed. R. Civ. P. 23(c)(2) ................................................................................................................. 26

Fed. R. Civ. P. 23(e) ..................................................................................................................... 13

Fed. R. Civ. P. 23(g)(1)(A) ........................................................................................................... 23

Federal Rule of Civil Procedure 23(f) ............................................................................................ 6

Rule 23 .............................................................................................................................. 22, 24, 25

Rule 23(a) And 23(b)(3) ................................................................................................... 19, 20, 21

Rule 23(b)(1), (b)(2), or (b)(3) ...................................................................................................... 25

Rule 23(b)(3) ..................................................................................................................... 20, 23, 26

Rule 23(g) ..................................................................................................................................... 23

Other Authorities

Newberg § 8.04 ............................................................................................................................. 25

Newberg, § 11.22 .......................................................................................................................... 14

Newberg, § 11.25 .......................................................................................................................... 13


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Nancy George, Robert George, and Randall Whitman (“Class Plaintiffs”), individually

and on behalf of themselves and all others similarly situated respectfully submit this

memorandum in support of Plaintiffs’ Motion seeking (i) Preliminary Approval of the Proposed

Settlement (the “Settlement”); (ii) certification of the Settlement Class; (iii) approval of the

Notice to the Settlement Class and conditional Settlement Class certification; and (iv) a date for a

Settlement Hearing and deadlines for the mailing of the Notice, the filing of Settlement Class

Member objections, the filing of opt-out notices, and the filing of Lead Counsel’s application for

attorneys’ fees and expenses.1

I. INTRODUCTION

Class Plaintiffs and Schwartz Levitsky Feldman LLP (the “Auditor Defendant” or

“Settling Defendant”) (collectively, the “Settling Parties”) have reached an agreement to settle

this case (the “Action”) regarding the Settling Defendant’s alleged violations of the Securities

Exchange Act (the “Exchange Act”). The terms of the settlement are contained in the Stipulation

and Agreement of Settlement (the “Stipulation”) attached hereto. Plaintiffs and the Settling

Defendant now wish to begin the settlement approval process outlined in the Manual for

Complex Litigation (Fourth). They seek entry of an order:

Granting preliminary approval of the Stipulation;

Certifying a Class for settlement purposes only, appointing Lead Plaintiffs as the Class Plaintiffs, and certifying Pomerantz Grossman Hufford Dahlstrom & Gross LLP and Bronstein Gewirtz & Grossman LLC as Class Counsel;

Approving the parties’ proposed form and method of giving

Class Members notice of the action and proposed Settlement;

Directing that notice be given to Class Members in the proposed form and manner; and

1 All capitalized terms used herein have the meanings set forth and defined in the Settlement Stipulation.


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Setting a hearing on whether the Court should grant final approval of the Settlement, dismiss claims against the Settling Defendant, approve the release of claims against the Settling Defendant, enter judgment, award attorneys’ fees and expenses to Lead Counsel, and approve compensatory awards to Lead Plaintiffs.

The Settlement provides substantial benefits to the Settlement Class. As consideration

for the Stipulation, the Settling Defendant agrees to pay $1,700,000 in cash (the “Settlement

Consideration”) into an interest-bearing escrow account for distribution to Settlement Class

Members in settlement of all active and potential claims against the Auditor Defendant arising

from its alleged conduct underlying the Action.

The proposed Settlement addresses Lead Plaintiffs’ litigation objectives and falls well

within the range of reasonable settlement outcomes. Here, the Settlement Consideration

represents over 14% of damages that could have been proven at trial. Moreover, the Settlement

was negotiated by lawyers experienced in complex litigation through exhaustive arms-length

negotiations and mediation. For these reasons, the Settlement enjoys a presumption of fairness

and the attached proposed order (the “Preliminary Approval Order”) should be entered by this

Court (Exhibit A to the Stipulation) and notice should be provided to Class Members (Exhibit A-

1 to the Stipulation).

II. SUMMARY OF THE LITIGATION AND SETTLEMENT

A. The Litigation

This action was commenced on October 25, 2011. On February 2, 2012, this Court

appointed Robert George, Nancy George, and Randall Whitman as Lead Plaintiffs. Lead

Plaintiffs filed an Amended Complaint on February 27, 2012.

Class Plaintiffs in this action allege that Defendants made false and/or misleading

statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5


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promulgated thereunder. Specifically, Class Plaintiffs allege that CAAS' annual and quarterly

reports, blessed by SLF throughout the Class Period, were false and misleading because: (1) they

repeatedly acknowledged the importance of accounting for its Convertible Notes2 under EITF

07-05, but then failed to properly apply the accounting principle; (2) they failed to account for

certain operating expenses and other charges against income; (3) they failed to reveal “material

deficiencies in [the Company’s] internal controls;” (4) they failed to disclose that the financial

results were not prepared in accordance with Generally Accepted Accounting Principles

(“GAAP”); and (5) they failed to disclose that SLF was not licensed to conduct audits in the PRC

and therefore outsourced these critical duties to a local PRC subcontractor. Class Plaintiffs allege

that SLF falsely assured investors that it had audited CAAS pursuant to Generally Accepted

Auditing Standards (“GAAS”) and that CAAS’s financial statements were GAAP compliant.

However, CAAS’ reported net income for that period was inflated by more than $39 million. In

addition, SLF gave its seal of approval to each of the allegedly false statements in CAAS’ 10-K

enumerated in the Complaint.

On December 13, 2010, the Company issued a press release announcing SLF’s

resignation, and the hiring of PWC in its stead. According to Lead Plaintiffs, this disclosure

caused CAAS stock to steadily decline from $14.62 to $10.23 from December 13, 2010 to March

16, 2011.

On March 17, 2011, CAAS disclosed for the first time in a press release and 8-K that it

would have to delay the filing of its annual 10-K and restate its previously issued financial

statements for 2009 and the first three quarters of 2010 due to accounting errors related to the

2 On February 15, 2008, the Company issued senior convertible notes to two institutional investors, Lehman Brothers (“Lehman”) and YA Global Investments L.P. (“YA Global”), pursuant to a signed Securities Purchase Agreement (“Agreement”) entered into between the parties on February 4, 2008 (“Convertible Notes” or “Notes”).


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Company’s Convertible Notes. This disclosure revealed that on March 12, 2011, based upon

PWC’s audit procedures, the Audit Committee determined that it had improperly classified its

Convertible Notes as equities, as opposed to liabilities as EITF 07-05 required. The Company’s

shares dropped $1.42 or almost 14% in response on March 17, 2011, on unusually heavy trading

volume.

On March 18, 2011, after the market closed, the Company issued a press release

announcing that it received a letter from the NASDAQ regarding its failure to comply with

continued listing requirements, which require that companies timely file quarterly reports with

the SEC. The NASDAQ letter further stated that CAAS had 60 calendar days, or until May 16,

2011, to submit a plan to NASDAQ to regain compliance. This caused CAAS securities to fall an

additional 5.7% on March 21, 2010, on unusually heavy trading volume.

The Company’s restatement of net income for the Class Period totaled $37.489 million,

$33.2 million of which is attributable to the Company’s failure to implement EITF 07-05.3 Thus,

cumulative net income for the restated periods was overstated by $39.7 million (over 170%). In

addition, pre-tax income was overstated by over $33 million due to Defendants’ failure to record

changes in fair value of its Convertible Notes, as required by EITF 07-05. In other words, for the

Class Period, instead of earning the $58.69 million that CAAS touted to investors, it only earned

$21.2 million.

In response to the Amended Complaint, Defendant China Automotive and SLF moved to

dismiss Lead Plaintiffs’ claims in their entirety4. This Court denied China Automotive’s Motion

on August 8, 2012. See George v. China Auto. Sys., Inc., 11 CIV. 7533 KBF, 2012 WL 3205062

3 This amount does not include restatements of pre-2008 net income of $225,471 which was reflected as an adjustment to the beginning balance of retained earnings in 2008. (2009 Form 10-K/A, pages 84 – 85) 44 The Individual Defendants did not move to dismiss the Amended Complaint, because they had not yet been served.


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(S.D.N.Y. Aug. 8, 2012). In its order, the Court granted SLF’s motion to dismiss and directed

Lead Plaintiffs to file an Amended Complaint only as to SLF adding certain allegations from its

briefing that did not appear in the then-operative Complaint. Heeding this Court’s directive,

Lead Plaintiff filed a Second Amended Complaint on August 20, 2012. SLF once again moved

to dismiss. This Court denied SLF’s motion on September 25, 2012. See George v. China Auto.

Sys., Inc., 11 CIV. 7533 KBF, 2012 WL 4493107 (S.D.N.Y. Sept. 25, 2012).

Class Plaintiffs filed a Motion for Class Certification on January 15, 2013 and sought

certification of a class of all persons or entities that purchased or otherwise acquired CAAS

common stock, or purchased and/or sold options on CAAS’s common stock, from May 12, 2009

and March 17, 2011, both dates inclusive. On March 11, 2013, after taking the depositions of

Lead Plaintiffs and obtaining the production of relevant documents in the possession of Lead

Plaintiffs, Defendants filed oppositions to Lead Plaintiffs’ Motion for Class Certification. On

April 10, 2013, after submitting mediation briefs, the parties participated in a full day mediation

session conducted by the Honorable Layn R. Phillips. Following the mediation session, Hon.

Phillips issued a Mediator’s recommendation to resolve Lead Plaintiffs’ claims on behalf of the

Class against the Auditor Defendant, which Lead Plaintiffs and the Auditor Defendant agreed to

in principle on April 19, 2013. On April 26, 2013, Lead Plaintiffs advised the Court that the

parties had achieved an agreement in principle to settle the claims against the Auditor Defendant.

On May 31, 2013, the Court ordered entered an order denying Lead Plaintiffs’ Motion for Class

Certification, advising the parties that a detailed opinion would follow. Thereafter on July 3,

2013, the Court issued an Order and Opinion denying Lead Plaintiffs’ Motion for Class

Certification. George v. China Auto. Sys., Inc., 11 CIV. 7533 KBF, 2013 WL 3357170 (S.D.N.Y.

July 3, 2013). As explained in further detail below, the Court’s denial of the class certification


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motion does not preclude certification of a settlement class because each of the grounds on

which the Court based its decision concerned issues of management problems at trial, which

simply do not apply in the settlement context. In addition, on July 17, 2013, Lead Plaintiffs filed

a Petition for Permission to Appeal the Order Denying Class Certification Pursuant to Federal

Rule of Civil Procedure 23(f) (“Petition”). On August 28, 2013, the Court ordered a stay of

proceedings pending the ruling of the Court of Appeals for the Second Circuit on Lead Plaintiffs

Petition for Permission to Appeal, and if granted, any resulting appeal. On October 24, 2013,

the Second Circuit denied Lead Plaintiffs Petition.

Throughout this Action, the Parties have engaged in extensive discovery. In response to

written requests by Class Plaintiffs, the Auditor Defendant produced approximately 119,872

pages of documents, including the production of SLF’s CAAS workpapers.

Lead Counsel also has consulted with damages experts to ascertain the amount of losses

suffered by the Class and to analyze the efficiency of the market for CAAS common stock and

stock options. Lead Counsel also researched the applicable law with respect to the claims

asserted in the Action and the potential defenses thereto.

B. Settlement Discussions

Counsel for Plaintiffs and the Auditor Defendant have engaged in extensive negotiations

concerning the possible resolution of this Action. Such negotiations included correspondence, an

exchange of information relevant to the Settlement, telephonic negotiations and an in-person

negotiation session. The parties agreed to attend a formal mediation session overseen by the

Honorable Layn R. Phillips (Ret.), a retired United States District Judge with extensive

experience in mediating complex litigation and securities class actions. This mediation occurred

in April, 2013.


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Throughout the mediation, the Auditor Defendant repeatedly denied any allegation of

wrongdoing associated with the claims asserted in the Action. In particular, the Auditor

Defendant maintains that it conducted a reasonable audit of CAAS consistent with GAAS”, had

a reasonable basis for determining that CAAS’ accounting for the convertible notes was

appropriate, and that any alleged misstatements were made in “good faith.” To prevail on their

claim under Section 10(b) of the Exchange Act, Class Plaintiffs would have to establish at trial,

among other things, that the Auditor Defendant acted with the state of mind required for a

Section 10(b) violation, i.e., at a minimum, with deliberate recklessness. The Auditor Defendant

contends that Class Plaintiffs could make no such showing because they cannot prove that the

audit the auditor’s conduct was so deficient that it amounted to “no audit at all.”

Moreover, the Auditor Defendant asserts that its decision to resign was related to the

additional costs and resources that would be required to conduct the upcoming audit of CAAS’

year-end financial statements for 2010, as opposed to any licensing issues. Further, the Auditor

Defendant asserts that its licensing status did not prevent it from conducting a proper audit of

CAAS’ financial statements.

Following the April 2013 mediation session, Class Plaintiffs and the Auditor Defendant

reached an oral agreement in principle to settle this Action. Subsequently, the Settling Parties

have exchanged drafts of the Stipulation and agreed upon the final version of same.

C. Summary of Key Terms of The Proposed Settlement

1. Relief Available to Class Members

In full and final settlement of all claims against the Auditor Defendant asserted or

referred to in this Action, and all claims that have been or could have been asserted against the

Auditor Defendant in the Action, the Settling Defendant agrees to pay $1,700,000 in cash (the

“Settlement Consideration”). This is an excellent result for Class Members, which represents


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over 14% of the recoverable damages should Plaintiffs prevail, thereby easily satisfying the

requirements for preliminary approval.

In addition, the Plan of Allocation, which is set forth in the proposed Notice, fully

comports with the criteria set forth in case law governing the approval of such allocations. It has

a “reasonable” and “rational basis,” makes intra-Class allocations based upon the “relative

strengths and weaknesses of class members’ individual claims and the timing of purchases and

sales of the securities at issue,” and was formulated by Lead Plaintiffs and Class Counsel in

consultation with damages experts. See In re Charter Communs., Inc., MDL No. 1506, 2005

U.S. Dist. LEXIS 14772, at *33-*34 (E.D. Mo. June 30, 2005). Significantly, nothing about the

Settlement or Plan of Allocation gives preferential treatment to Lead Plaintiffs.

2. Class Notice and Settlement Administration

a. Notice

Within sixty days prior to the Settlement Hearing, a third party Settlement Administrator,

the Strategic Claims Services (“SCS” or the “Settlement Administrator”), shall provide

individual notice via mail, substantially in the form attached to the Stipulation as Exhibit A-1

(the “Notice”), to each Class Member identified by records maintained by the Company or its

transfer agent. Such Notice will also be published on a national Internet business newswire.

Lead Plaintiffs request that the Court approve the proposed Notice. In order to satisfy due

process, notice to class members must be “reasonably calculated, under all the circumstances, to

apprise interested parties of the pendency of the action and afford them an opportunity to present

their objections.” Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). “‘The

notice must be of such nature as reasonably to convey the required information . . . and it must

afford a reasonable time for those interested to make their appearance.’” Soberal-Perez v.

Heckler, 717 F.2d 36, 43 (2d Cir. 1983) (quoting Mullane, supra, 339 U.S. at 314).


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As mentioned above, the proposed Notice, which will be sent by first class mail, is

attached as Exhibit A-1 to the Stipulation. The Notice describes in plain English the terms of the

Settlement, the considerations that led Lead Counsel to conclude that the Settlement is fair and

adequate, the maximum attorneys’ fees that may be sought, the procedure for objecting to the

Settlement, and the date and place of the Settlement Hearing

At the same time that direct mail notice is first sent, the Settlement Administrator shall

publish notice of the Settlement on a national Internet business newswire, and the Notice will be

available on Class Counsel’s website.

This proposed form of notice will fairly apprise Class Members of the Settlement and

their options with respect thereto and fully satisfies due process requirements.

b. Administration

SCS will administer the settlement pursuant to the Stipulation. Within thirty (30) days

after the Court enters the attached Preliminary Approval Order (Exhibit A to the Stipulation), the

Settling Defendant shall cause its Insurance Carrier to pay by wire transfer the Settlement

Consideration to an interest-bearing escrow account in a federally chartered bank designated by

Lead Counsel (the “Escrow Account”) to be controlled by said bank as the Escrow Agent for the

benefit of the Settlement Class, with all interest to accrue for the benefit of the Settlement Class.

The Escrow Agent, i.e., the bank, shall provide complete wire transfer instructions to the

Auditor Defendant’s Insurance Carrier at least three business days prior to the date of such

payment. Until such time as the Settlement and Judgment becomes Final, the Settlement

Consideration may only be invested in United States Treasury Bills (or “T-bills”) with a maturity

of 90 days or less in an account held at a nationally recognized financial institution. The Escrow

Account will be a “qualified settlement fund.” The Escrow Agent will bear all responsibility and

liability for managing the Escrow Account and cannot assign or delegate its responsibilities


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without approval of the Parties and the Auditor Defendant’s Insurance Carrier. Statements of

account will be provided to the Parties and the Auditor Defendant’s Insurance Carrier on a

monthly basis until the Settlement becomes Final via entry of the attached Final Approval Order.

In the event the Settlement and Judgment do not become Final, within seven (7) business

days of entry of any order rendering the Settlement and Judgment non-Final, all monies held in

the Escrow Account, including interest earned, shall be returned to the Auditor Defendant’s

Insurance Carrier upon demand from the Company or its Insurance Carrier. Class Plaintiffs, the

Class and Lead Counsel shall have no responsibility for such costs. Once the Settlement

becomes Final following entry of the Final Approval Order, no monies shall revert to the Settling

Defendant or its Insurance Carrier.

The Parties also agree to the schedule for the other relevant dates, as provided for in the

proposed Preliminary Approval Order, which was negotiated among the Parties.

c. Costs of Notice and Administration

Upon deposit in the Escrow Account of the Settlement Consideration, the Escrow Agent

may transfer $200,000.00 from the Escrow Account to an interest bearing account to be

maintained by the Settlement Administrator (the “Settlement Administration Account”) in order

to pay reasonable and necessary notice and administration costs. No other disbursements from

the Escrow Account will occur until the Judgment becomes Final absent agreement of all Parties

and approval from the Court. Under no circumstances shall Class Plaintiffs or their counsel have

any responsibility for such costs.

3. Opt-Out and Exclusionary Provisions

Any Class Member who wishes to object to the fairness of the Stipulation must, by the

Opt-Out/Objection Deadline, file any such objection with the Court, and provide copies of the

objection to Class Counsel, the Auditor Defendant’s Counsel, and the Court. Any Class Member


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who does not file a timely written objection to the Stipulation shall be foreclosed from seeking

any adjudication or review of the Stipulation by appeal or otherwise.

Any Class Member who wishes to be excluded as a Class Member may submit a written

exclusion request to the Settlement Administrator, postmarked no later than the Opt-

Out/Objection Deadline, with copies of the request for exclusion to Class Counsel, the Auditor

Defendant’s Counsel, and the Settlement Administrator.

The Settling Parties have agreed to an appropriate “Opt-Out Termination Right” to be

part of the Stipulation of Settlement, which gives the Settling Defendant the sole option to

terminate the Settlement if the number of shares held by Class Members who opt·out of the

Settlement exceeds a minimum threshold agreed to by the Settling Parties. Such minimum

threshold is identified in a separate agreement countersigned by the Settling Parties. That

agreement, however, will not be filed with the Court unless a dispute over the terms therein

arises between the Settling Parties.

4. Release Provisions

Upon the Effective Date noted in the Stipulation, Class Plaintiffs and each Class Member

who does not timely exclude himself/herself from the Settlement Class, including any other

person acting on his/her behalf or for his/her benefit, shall be deemed to have released, waived,

and discharged the Released Parties from the released claims as defined in the Stipulation, and

expressly waived and relinquished the released claims, including any Unknown Claims.

5. Reimbursement Award and Attorneys’ Fees and Expenses

a. Reimbursement Award

Lead Plaintiffs shall seek a reimbursement award not to exceed $5,000 per Lead Plaintiff.

The Settling Defendant does not object to such request. This payment shall be compensation and


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consideration for the time devoted by Lead Plaintiffs in prosecuting this Action and procuring a

benefit for the Settlement Class.

b. Attorneys’ Fees and Expenses

For their services rendered on behalf of the Settlement Class, Class Counsel intends to

seek an attorneys’ fee award not to exceed 30% of the Settlement Consideration, as well as the

reimbursement of reasonable expenses not to exceed $275,000. The Settling Defendant does not

object to a request for this amount of attorneys’ fees and expenses.

6. No Admission of Liability

By entering into the Stipulation, the Settling Defendant is not admitting liability. To the

contrary, the Settling Defendant denies that it violated the Exchange Act and denies that the Lead

Plaintiffs or the putative Class are entitled to any relief. The case is being settled solely to avoid

the costs, burdens and distractions of protracted litigation and, were the litigation to proceed, the

Auditor Defendant would present numerous defenses to liability and damages.

III. PRELIMINARY APPROVAL OF THE PROPOSED SETTLEMENT IS APPROPRIATE

A. The Settlement Of A Class Action Is Favored And Should Be Preliminarily Approved If It Falls Within The Range Of Reasonableness

The law favors settlement, particularly in class actions and other complex cases where

substantial resources can be conserved by avoiding the time, cost, and rigor of prolonged

litigation. “Courts examine procedural and substantive fairness in light of the ‘strong judicial

policy favoring settlements’ of class action suits.” Palacio v. E*Trade Fin. Corp., No. 10 Civ.

4030, 2012 U.S. Dist. LEXIS 88019, at *7 (S.D.N.Y. June 22, 2012) (quoting Wal-Mart Stores,

Inc. v. Visa U.S.A. Inc., 396 F.3d 96, 116 (2d Cir. 2005)); see also Spann v. AOL Time Warner,

Inc., No. 02 Civ. 8238, 2005 U.S. Dist. LEXIS 10848, at *6 (S.D.N.Y. June 7, 2005) (“[P]ublic

policy favors settlement, especially in the case of class actions.”); Newberg on Class Actions


13

(Fourth) (2002) § 11.41 (“The compromise of complex litigation is encouraged by the courts and

favored by public policy.”). Due to the presumption in favor of settlement, and “[a]bsent fraud

or collusion,” courts “should be hesitant to substitute [their] judgment for that of the parties who

negotiated the settlement.” In re EVCI Career Colls. Holding Corp. Sec. Litig., No. 05 Civ.

10240, 2007 U.S. Dist. LEXIS 57918, at *4 (S.D.N.Y. July 27, 2007). More explicitly, the

Supreme Court has cautioned that in reviewing a proposed class settlement, courts should “not

decide the merits of the case or resolve unsettled legal questions.” Carson v. Am. Brands, Inc.,

450 U.S. 79, 88 n. 14 (1981).

Where, as here, the parties propose to resolve class action litigation through a class-wide

settlement, they must obtain the Court’s approval. See Fed. R. Civ. P. 23(e); Wright v. Stern,

553 F. Supp. 2d 337, 343 (S.D.N.Y. 2008). The typical process for approval of class action

settlements is described in the Manual, §§ 21.632-.634. The steps are:

1. Preliminary approval of the proposed settlement at an informal hearing; 2. Dissemination of mailed and/or published notice of the settlement and fairness

hearing to all affected Class members; and 3. A “formal fairness hearing,” or final approval hearing, at which Class members

may be heard regarding the settlement, and at which evidence and argument concerning the fairness, adequacy, and reasonableness of the settlement is presented.

This procedure, commonly employed by federal courts, serves the dual function of

safeguarding class members’ procedural due process rights and enabling the court to fulfill its

role as the guardian of the class members’ interests. See Newberg, § 11.25 (quoting Manual for

Complex Litigation (Second) (1985)). To determine procedural fairness, courts examine the

negotiating process leading to the settlement. Wal-Mart, supra, 396 F.3d 96 at 116. To

determine substantive fairness, courts determine whether the settlement's terms are fair,


14

adequate, and reasonable according to the factors set forth in City of Detroit v. Grinnell Corp.,

495 F.2d 448 (2d Cir. 1974).

By this motion, Plaintiffs ask that the Court take the first step in the settlement approval

process and grant preliminary approval of the settlement. Plaintiffs further request that the Court

provisionally certify the proposed Settlement Class, for settlement purposes only. Provisional

class certification is appropriate at the preliminary approval stage where, as here, the proposed

Class has not previously been certified, and the Plaintiffs have created a substantial record

supporting the propriety of class certification. See Newberg, § 11.22. The practical purpose of

provisional class certification is to facilitate dissemination of Notice to the Class of the terms of

the proposed settlement and the date and time of the final approval hearing. See id. § 11.27.

B. The Proposed Settlement Negotiated By The Parties Enjoys A Presumption Of Fairness

“In evaluating the settlement, the Court should keep in mind the unique ability of class

and defense counsel to assess the potential risks and rewards of litigation; a presumption of

fairness, adequacy and reasonableness may attach to a class settlement reached in arms-length

negotiations between experienced, capable counsel after meaningful discovery.” Clark v. Ecolab

Inc., Nos. 07 Civ. 8623, 04 Civ. 4488, 06 Civ. 5672, 2010 U.S. Dist. LEXIS 47036, at *4

(S.D.N.Y. May 11, 2010). Moreover, courts routinely give weight to the parties’ judgment that

the settlement is fair and reasonable. See Palacio, supra, 2012 U.S. Dist. LEXIS 88019, at *7

(citing Torres v. Gristede’s Operating Corp., Nos. 04 Civ. 3316, 08 Civ. 8531, 08 Civ. 9627,

2010 U.S. Dist. LEXIS 139144, at *3 (S.D.N.Y. Dec. 21, 2010)); Diaz v. E. Locating Serv. Inc.,

No. 10 Civ. 4082, 2010 U.S. Dist. LEXIS 139136, at *3 (S.D.N.Y. Nov. 29, 2010); Clark, 2010

U.S. Dist. LEXIS 47036, at *4.


15

Here, the Stipulation is presumed fair and falls within the range of possible approval.

The settlement was reached through arm’s length negotiation, through written proposals,

telephone conferences, as well as a mediation session. At the in-person mediation session, which

followed an exchange of substantial written submissions, Lead Counsel, attorneys for the

Auditor Defendant, and a representative of the Auditor Defendant’s Insurance Carrier, were

present. The parties extensively discussed the merits of the claims and defenses and the relief

available to the Class. Although the parties did not reach agreement at the mediation, settlement

talks continued and shortly thereafter resulted in an agreement. After reaching a complete

settlement agreement in principle, the parties turned their attention to documenting the

Settlement and exchanged drafts of the Stipulation, the Notice and Proof of Claim, as well as

drafts of the Preliminary and Final Approval Orders.

There was no collusion between the parties in reaching the Settlement. As explained

above, the Settlement is the result of an arm’s length, adversarial negotiation, and a mediation

process. As the record demonstrates, all counsel vigorously advocated the interests of their

respective clients and devoted a considerable amount of time, effort, and resources to securing

the terms of the Settlement. By settling the Action at this point, Lead Plaintiffs are not admitting

that the Action lacked merit or that the Class’s ultimate recovery would not have been greater

than the Settlement Consideration, nor is the Auditor Defendant admitting that the Action has

merit or that Lead Plaintiffs or the Settlement Class would have recovered anything at all.

In negotiating the Stipulation, Lead Plaintiffs had the benefit of attorneys who are highly

experienced in complex litigation and familiar with the legal and factual issues of the case

(Appendix 2 (“App. 2”)). In Class Counsel’s view, the Settlement provides substantial benefits

to the Settlement Class, especially when considering, among other things, the attendant expense,


16

risks, difficulties, delays, and uncertainties of litigation, trial, and post-trial proceedings. As

such, the Settlement here is presumptively fair and worthy of preliminary approval.

C. The Settlement Benefit Falls Within The Range Of Possible Recovery

When determining whether a settlement is fair, reasonable, and adequate, the Court

should consider the following so-called “Grinnell factors”: (1) the complexity, expense and

likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the

proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the

risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7)

the ability of the Auditor Defendant to withstand a greater judgment; (8) the range of

reasonableness of the settlement fund in light of the best possible recovery; and (9) the range of

reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of

litigation. Grinnell supra, 495 F.2d at 463. All nine factors need not be satisfied; rather, the

Court should consider the totality of these factors in light of the particular circumstances.

Thompson v. Metro. Life Ins. Co., 216 F.R.D. 55, 61 (S.D.N.Y. 2003).

If the Court finds the settlement “within the range of possible approval,” it should then

order that the Class be notified of the Settlement and of a formal fairness hearing to be held on

the question of settlement approval. See Manual at § 40.42 (model preliminary approval order).

Here, the Settlement substantially satisfies the test announced by Grinnell. Therefore, the

Stipulation warrants preliminary approval.

1. The Complexity, Expense and Likely Duration of the Litigation

Here, the Settlement provides the Class with substantial relief, without the delay and

expenses of trial and post-trial proceedings. Due to the inherent complexity of securities

litigation, and particularly the stringent requirements imposed by the Private Securities Litigation

Reform Act of 1995’s (“PSLRA”) amendments to the Exchange Act, as well as supervening case


17

law developments, a securities class action is an inherently complex and lengthy litigation to

prosecute. If the parties did not agree to settle this case, further litigation – particularly a trial –

would be risky, lengthy and expensive. The Auditor Defendant continues to vigorously deny

liability. Put simply, were the current proposed Settlement taken off the table, it would all but

guarantee a substantial delay in resolving these claims.

2. Stage of Proceedings and Amount of Discovery Completed

Throughout this Action, the Parties have engaged in extensive discovery. In response to

written requests by Class Plaintiffs, the Auditor Defendant produced approximately 140,000

pages of documents, including the production of SLF’s CAAS workpapers. Lead Counsel is

completing its review of such documents and preparing to conduct numerous witness interviews

of SLF employees.

In other words, at this point in the proceedings Plaintiffs have a thorough understanding

of the strengths and weaknesses of the Class’s claims. In addition to briefing the Motion for

Class Certification and engaging in discovery, the parties previously briefed two separate

motions to dismiss which were adjudicated by the Court. See, e.g., In re Genta Sec. Litig., 2008

WL 2229843, at *2 (D.N.J. May 28, 2008) (“The motion to dismiss resolved many of the issues

raised in the Amended Complaint, leaving Lead Plaintiffs and Defendants … with a solid

understanding of the strengths and weaknesses of their respective positions.”). Moreover, in

advance of the mediation session, the Auditor Defendant provided Lead Plaintiffs with an

extensive mediation brief. As such, the settlement was reached only after Class Counsel had a

thorough understanding of the strengths and vulnerabilities of the Class’s claims.

3. The Risks of Establishing Liability & Damages

Lead Plaintiffs acknowledge that there were substantial risks in prosecuting this Action

and that further prosecution of this Action to trial may have yielded limited or no recovery.


18

“Under the law of this Circuit, to state a claim under Rule 10b-5, a plaintiff must allege that, in

connection with the purchase or sale of securities, the defendant made material misstatements or

omissions of material fact, with scienter, and that the plaintiff's reliance on the defendant's

actions caused injury to the plaintiff.” Slayton v. Am. Express Co., 604 F.3d 758, 765 (2d Cir.

2010). The Auditor Defendant argued – and continues to argue – that Plaintiffs failed to

establish the type of conscious misbehavior and recklessness implicating scienter for an auditor.

Moreover, the Auditor Defendant had particularly cogent defenses regarding its “good faith” in

making the alleged misstatements at its disposal. While the Court found Plaintiff’s allegations

sufficient to defeat the Auditor Defendant’s motion to dismiss at the pleading stage, it is far from

certain that Lead Plaintiffs would have been similarly successful at the summary judgment stage,

let alone trial.

4. Reasonableness of the Settlement Fund

The Settlement Stipulation provides for Settlement Consideration of $1.7 million to be

paid into the Settlement Fund by the Auditor Defendant’s Insurance Carrier. This is extremely

reasonable in light of Class Members’ best possible recovery. The settlement amounts to

approximately 14% of the estimate of damages should Plaintiffs prevail, well above the average

settlement for similar securities class actions. See, e.g., In re Rite Aid Corp. Sec. Litig., 146 F.

Supp. 2d 706, 715 (E.D. Pa. 2001) (citing studies indicating that the average securities fraud

class action settlement since 1995 has resulted in a recovery of 5.5% – 6.2% of estimated losses);

In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 459 (9th Cir. 2000) (court approved a settlement

that was 42% of estimated damages and stated that even using the objectors’ damages estimates,

a settlement of 14% would be fair); In re Crazy Eddie Sec. Litig., 824 F. Supp. 320 (E.D.N.Y.

1993) (approving settlement that was 10% of estimated maximum recovery); Holden v.

Burlington N., Inc., 665 F. Supp. 1398, 1414 (D. Minn. 1987) 495 F.2d 448 (2d Cir. 1974) (“In


19

fact there is no reason, at least in theory, why a satisfactory settlement could not amount to a

hundredth or even a thousandth part of a single percent of the potential recovery.”)

Furthermore, as discussed above, the Settlement is also reasonable in light of the

substantial resources that can be conserved by avoiding the time, cost, rigor, and risk of

prolonged litigation. Securities litigation is a complex and evolving area of law requiring the

devotion of significant resources. There is a high likelihood that the costs involved in

shepherding a securities action like this one through pre-trial motions and trial will far outweigh

– and indeed subsume – any recovery that might be realized by Plaintiffs and the Class.

Moreover, because the Auditor Defendant continues to deny any liability while asserting

numerous defenses, the potential for any recovery remains highly uncertain.

IV. THE PROPOSED SETTLEMENT CLASS SHOULD BE CERTIFIED FOR SETTLEMENT PURPOSES

A. The Proposed Settlement Class Meets The Requirements Of Rule 23(a) And 23(b)(3)

The Second Circuit has long acknowledged the propriety of certifying a class solely for

settlement purposes. See Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982). Before

granting preliminary approval of a class action settlement, however, the Court should determine

that the proposed Class is a proper class for settlement purposes. See Amchem Prods. v. Windsor

521 U.S. 591, 620 (1997); Manual, § 21.632. To certify a class, the Court must determine

whether four threshold requirements of Federal Rule 23(a) are met: (1) numerosity; (2)

commonality; (3) typicality; and (4) adequacy of representation. Amchem, 521 U.S. at 613.

Additionally, the action must be maintainable under Fed. R. Civ. P. 23(b)(1), (2), or (3). Id. at

614. In certifying a Settlement Class, however, the Court is not required to determine whether

the action, if tried, would present intractable management problems, “for the proposal is that

there be no trial.” Id. at 620; see also Fed. R. Civ. P. 23(b)(3)(D). Therefore, the very issues that


20

caused this Court to deny Plaintiffs’ Motion for Class Certification do not bar certification of a

class for settlement purposes because: 1) the stated concerns of the Court regarding Lead

Plaintiffs typicality—that “the parties will spend significant time and resources on the issue” of

Lead Plaintiffs “in and out” trades (ECF No. 127, at 7), is simply not applicable in the settlement

context; and 2) the Second Circuit has made clear that plaintiffs need not establish the fraud on

the market presumption of reliance in order to satisfy 23(b)(3) predominance in the settlement

context. The proposed Class therefore meets all of the requirements of Rule 23(a) and satisfies

the requirements of Rule 23(b)(3).

A class must be “so numerous that joinder of all members is impracticable.” Fed. R. Civ.

P. 23 (a)(1). “Joinder is generally presumed to be impracticable when a putative class exceeds

40 members.” Menkes v. Stolt-Nielsen S.A., 270 F.R.D. 80, 90 (D. Conn. 2010) (citing Marisol

A. v. Giuliani, 126 F.3d 372 (2d Cir. 1997)). Impracticable does not mean impossible, but only

that the difficulty or inconvenience of joining all members of the class makes use of the class

action appropriate. Central States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco

Managed Care, LLC, 504 F.3d 229, 244-45 (2d Cir. 2007). A review of publicly-available

information reveals that during the Class Period, on average, 2,285,312 shares were traded

weekly on the NASDAQ. In addition, the amount of CAAS stock outstanding during the Class

Period ranged from 26,983,000 to 27,116,000 shares making individual joinder impracticable

and clearly satisfying the numerosity requirement.

The proposed Class also meets the commonality requirement of Rule 23(a).

Commonality is generally easily satisfied, as it “is established so long as the plaintiffs can

identify some unifying thread among the [class] members’ claims.” Haddock v. Nationwide Fin.

Servs., Inc., 262 F.R.D. 97, 116 (D. Conn. 2009). The requirement is met “if there are questions


21

of fact and law which are common to the class.” Fed. R. Civ. P. 23(a)(2). “Securities-fraud

cases generally meet Rule 23(a)(2)’s commonality requirement.” In re Global Crossing Sec. &

ERISA Litig., 225 F.R.D. 436, 451-452 (S.D.N.Y. 2004). Securities fraud class actions are

“essentially course of conduct cases because the nub of plaintiffs' claims is that material

information was withheld from the entire putative class in each action, either by written or oral

communication.” In re Oxford Health Plans, Inc., 191 F.R.D. 369, 374 (S.D.N.Y. 2000)

(quotation marks omitted).

Plaintiffs also meet Rule 23(a)’s typicality requirement. A plaintiff’s claim is typical if it

arises from “the same course of events and each class member makes similar legal arguments to

prove the defendant’s liability.” In re Flag Telecom Holdings, Ltd. Secs. Litig., 574 F.3d 29, 35

(2d Cir. 2009). Like all other Class members, Plaintiffs were subject to the Auditor Defendant’s

alleged false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange

Act. Rule 23 (a)’s last requirement is that the class representative must “fairly and adequately

protect the interests of the class.” Fed. R. Civ. P. 23 (a) (4). This inquiry focuses “on

uncovering ‘conflicts of interest between named parties and the class they seek to represent.’”

In re Flag Telecom Holdings, 574 F.3d at 35 (quoting Amchem Prods., Inc., 521 U.S. at 625).

Lead Plaintiffs adequately represent the Class since they have no individual interests or claims

that are antagonistic to the Class and have zealously represented the interests of the Class to date.

This Court’s denial of Plaintiffs’ class certification motion on typicality and adequacy

grounds does not preclude the certification of a settlement class. Specifically, it is irrelevant for

purposes of certifying a settlement class whether Lead Plaintiffs traded “in and out” of CAAS

stock during the Class Period, whether they purchased CAAS stock post- corrective disclosure,

or whether any of their transactions resulted in gains (particularly because, as the Notice reflects,


22

any profits earned are dwarfed by the losses each Lead Plaintiff suffered and the formula used to

calculate recognized losses will subtract any such profits from the Recognized Loss formula, See

Exhibit A-1 to the Stipulation). The Court’s concern in that context was that “the parties will

spend significant time and resources” litigating these unique defenses thus “overwhelming

common issues,” George v. China Auto. Sys., Inc., 11 CIV. 7533 KBF, 2013 WL 3357170, *3,

*6-*7 (S.D.N.Y. July 3, 2013). That concern does not apply in the settlement context-- “because

the case will never go to trial, the court need not consider the manageability of the proceedings

should the case or cases proceed to trial.” In re Initial Pub. Offering Sec. Litig., 260 F.R.D. 81,

88 (S.D.N.Y. 2009). See also, In re Am. Int'l Grp., Inc. Sec. Litig., 689 F.3d 229, 239 (2d Cir.

2012) (a district court confronted with a request for settlement-only class certification need not

inquire whether the case, if tried, would present intractable management problems, for the

proposal is that there be no trial); In re Arotech Corp. Sec. Litig., 76 Fed. R. Serv. 3d 1717

(E.D.N.Y. 2010) (certification for “settlement-only” … can eliminate some of Rule 23's more

difficult practical questions); Bourlas v. Davis Law Associates, 237 F.R.D. 345, 353 (E.D.N.Y.

2006).

Indeed, as explained by Judge Scirica in his concurrence Sullivan v. DB Invs., Inc., 667

F.3d 273, 335:

[S]ome inquiries essential to litigation class certification are no longer problematic in the settlement context. A key question in a litigation class action is manageability—how the case will or can be tried, and whether there are questions of fact or law that are capable of common proof. But the settlement class presents no management problems because the case will not be tried. Conversely, other inquiries assume heightened importance and heightened scrutiny because of the danger of conflicts of interest, collusion, and unfair allocation.


23

(citing Amchem, 521 U.S. at 620, 117 S.Ct. 2231); see also In re Gen. Motors Corp. Pick–Up

Truck Fuel Tank Products Liab. Litig., 55 F.3d 768, 795 (3d Cir.1995) (identifying “collusion,

inadequate prosecution, and attorney inexperience [as] the paramount concerns in pre-

certification settlements”). Here, as there is no concern regarding collusion or unfair allocation

to the Class Members, Lead Plaintiffs readily meet the typicality requirements for purposes of

certifying a Settlement Class.

Additionally Rule 23(g) states that the adequacy of Plaintiff’s counsel is determined by

four factors: (1) the work counsel has done in identifying or investigating potential claims; (2)

counsel’s experience in handling class actions; (3) counsel’s knowledge of the applicable law;

and (4) the resources counsel will commit to representing the class. Fed. R. Civ. P. 23(g)(1)(A).

Lead Counsel Pomerantz Grossman Hufford Dahlstrom & Gross LLP and Bronstein Gewirtz &

Grossman LLC have extensive experience and stellar reputations in the field of class action and

securities litigation. See attached Firm Resumes (App. 2). They have been appointed as lead or

co-lead counsel in many complex securities class actions, and have recovered substantial monies

for their clients and class members. They have prosecuted hundreds, if not thousands, of such

cases to successful resolution. Lead Counsel will continue to commit adequate resources to

ensure that the Class is properly represented in this Action.

Finally, the proposed Class meets the requirements of Rule 23(b)(3). To satisfy

predominance, “a plaintiff must show that those issues in the proposed action that are subject to

generalized proof outweigh those issues that are subject to individualized proof.” In re Salomon

Analyst Metromedia Litig., 544 F.3d 474, 480 (2d Cir. 2008). This inquiry “tests whether a

proposed class is sufficiently cohesive to warrant adjudication by representation.” Id. There are

questions of law and fact common to the Class that predominate over any individual questions,


24

specifically whether the Auditor Defendant’s alleged actions, which were centralized and

uniform, violated federal securities laws and whether those violations were knowing or reckless.

These common issues predominate over any individual issues.

Significantly, Plaintiffs need not establish the fraud on the market presumption of

reliance in order to satisfy predominance for a Section 10(b) settlement class. See In re Am. Int'l

Grp., Inc. Sec. Litig., 689 F.3d 229, 241-43 (2d Cir. 2012) (“the court erred in holding that a

Section 10(b) settlement class must satisfy the fraud-on-the-market presumption in order to

demonstrate predominance… with a settlement class, the manageability concerns posed by

numerous individual questions of reliance disappear.”) Therefore, for purposes of certifying a

settlement class it does not matter that this Court denied Plaintiffs’ class certification motion on

predominance grounds. See In re Initial Public Offering Securities Litigation, 226 F.R.D. 186,

195 (S.D.N.Y. 2005) (“IPO II”) (where Judge Scheindlin certified a settlement class which

included members the court previously found did not meet the predominance requirement for a

litigation class due to the recognition that in a class action securities settlement, the

predominance and manageability inquiries merge, with the practical effect being that persons

who may not be part of a litigation class due to an inability to satisfy the Rule 23 predominance

requirement may nonetheless be included in a settlement class).

“Together with predominance, the superiority requirement ‘ensures that the class will be

certified only when it would achieve economies of time, effort, and expense, and promote

uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or

bringing about other undesirable results.’” Menkes, 270 F.R.D. at 100 (quoting Cordes & Co.

Fin. Servs., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 104 (2d Cir. 2007)). Class treatment

is often deemed superior in “negative value” cases, in which each individual class member’s


25

interest in the litigation is less than the anticipated cost of litigating individually. Menkes, 270

F.R.D. at 100.

A class action is also superior to other methods available for the fair and efficient

adjudication of this controversy. Members of the Class are not likely to and many do not have

an interest or means to prosecute an individual case against the Settling Defendant. Additionally,

concerns of efficiency and economy tip the scales in favor of litigating the issues in one suit

before this Court.

B. Class Certification Is Appropriate for Settlement Purposes

It is appropriate to settle the claims of all Class members in one action. Class members’

claims are all subject to the terms of a single federal statute, 15 U.S.C. § 78, et seq.

V. THE COURT SHOULD APPROVE THE PROPOSED FORM AND METHOD OF CLASS NOTICE

A. Notice By Direct Mail is Sufficient When a Large, Nationwide Class is Present

“Rule 23(e)(1)(B) requires the court to ‘direct notice in a reasonable manner to all class

members who would be bound by a proposed settlement, voluntary dismissal, or compromise,’

regardless of whether the class was certified under Rule 23(b)(1), (b)(2), or (b)(3).” See Manual

for Complex Litigation at §§ 21.632, 21.633. In order to protect the rights of absent Class

Members, the Court must provide the best notice practicable to Class Members. See Phillips

Petroleum Co. v. Shutts, 472 U.S. 797, 811-812 (1985).

Notice by mail is practical when the names and addresses of most of the Class members

are known. See Manual for Complex Litigation at §30.2111. Neither Rule 23 nor due process

require receipt of actual notice by all Class Members, rather, notice should be mailed to the last

known addresses of those who can be identified and publication used to notify others. Newberg

§ 8.04; see also Mangone v. First USA Bank, 206 F.R.D. 222, 231-232 (S.D. Ill. 2001)


26

(approving mailed notice to last known addresses of a Settlement Class with nearly 18.5 million

members).

The identities of the individual Class Members are known by records maintained by

CAAS or its transfer agent. Therefore, the parties propose Direct Mail Notice, as well as notice

via a press release through the issuance of the Publication Notice through a national news wire.

A Proposed Notice and Claim Form, as well as a proposed Publication Notice to be issued via a

press release, are attached to the Stipulation as Exhibits A-1, A-2, and A-3, and should be

approved by the Court.

B. The Proposed Form Of Notice Adequately Informs Class Members Of Their Rights In This Litigation

In an action proceeding under Rule 23(b)(3), the notice must inform each Class Member

that “the court will exclude anyone from the class if he so requests [by a specified date]; the

judgment will include all members who do not request exclusion and any member not requesting

exclusion may, if he desires, enter an appearance through counsel.” Fed. R. Civ. P. 23(c)(2).

Here, the proposed Notice clearly and accurately discloses the information material to a

Class Member’s decision whether to accept, object to, or opt out of the settlement. (Exhibit A-1

to the Stipulation). The proposed Notice provides information on, inter alia, the proposed

Settlement Class; the terms and provisions of the Stipulation; the relief the settlement will

provide; the date, time and place of the final approval hearing; and the procedures and deadlines

for opting out of the settlement or submitting comments or objections.

The Notice also meets the requirements of the PSLRA, 15 U.S.C. § 78u-4(a)(7). The

Notice provides:

a cover page summarizing the information contained in the Notice;


27

a statement of the Settlement Class Members’ recovery, estimating a recovery of

approximately $0.23 per damaged share before deduction of Court-approved fees and

expenses and costs of notice and claims administration; the Notice further explains that

under the Plan of Allocation, the actual amount recovered will vary greatly across the

Class;

the general terms of the Stipulation;

a statement of the potential outcome of the case including a statement concerning the

issues on which the Parties disagree;

a statement of attorney’s fees or costs sought, including a summary of this information on

the cover page;

information on how to contact the Claims Administrator and/or Lead Counsel (including

names, addresses, telephone numbers, and websites); and

a discussion of the reasons for the Proposed Settlement, including the factors Lead

Plaintiffs and the Settling Defendant considered in reaching the Proposed Settlement.

Thus, the proposed Mailed Notice to be sent to the Class provides all of the information required

by the PSLRA. The Court should approve the proposed form of Notice and direct that notice be

given to the Class as proposed by the parties.


28

VI. CONCLUSION

In light of the foregoing, Lead Plaintiffs respectfully request that the Court enter an

Order: (1) preliminarily approving the Settlement; (2) certifying the Settlement Class;

(3) certifying Lead Plaintiffs as Class Representatives and Lead Counsel as Class Counsel and

(4) setting a date for a Settlement Hearing and deadlines for the mailing of the Notice, the filing

of Class Member objections, the filing of Class Member opt-out notices, and the filing of Lead

Counsel’s application for attorneys’ fees and expenses.

Dated: December 6, 2013 Respectfully submitted,

POMERANTZ GROSSMAN HUFFORD

DAHLSTROM & GROSS LLP /s/ Jeremy A. Lieberman

Marc I. Gross Jeremy A. Lieberman Tamar A. Weinrib 600 Third Avenue New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 POMERANTZ GROSSMAN HUFFORD

DAHLSTROM & GROSS LLP Patrick V. Dahlstrom Ten South LaSalle Street, Suite 3505 Chicago, Illinois 60603 Telephone: (312) 377-1181 Facsimile: (312) 377-1184 BRONSTEIN, GEWIRTZ &

GROSSMAN, LLC Peretz Bronstein (pb8628) Shimon Yiftach (yf4433) 60 E. 42nd Street, Suite 4600 New York, New York 10165 Telephone: (212) 697-6484 Lead Counsel for Plaintiffs


motion for approval of the settlement - Reuters

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Transcript of motion for approval of the settlement - Reuters