Appeal from the Circuit Court of Cook County. No. 97-CH-00287 Honorable Lester D. Foreman, Judge Presiding.
The opinion of the court was delivered by: Justice Theis
the opinion of the court:
Plaintiff-appellee, Eli Steinberg *fn1 (Steinberg), filed a class action complaint in the circuit court of Cook County, Illinois, on January 8, 1997, against defendants-appellees, System Software Associates, Inc. (SSA), and certain of its officers (Roger E. Covey, Terence H. Osborne, Terry E. Notari, and Joseph Skadra). Steinberg, on behalf of a class of purchasers of SSA common stock, sought damages for alleged violations of the Illinois Securities Law of 1953, as amended (815 ILCS 5/1 et seq. (West 1996)), common law fraud, the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/2 (West 1996)), and negligence. Steinberg's complaint stemmed from SSA's use of allegedly overly aggressive accounting practices and revenue recognition policies.
The day after Steinberg's class action complaint was filed, the appellants, federal class action plaintiffs and objectors below to the circuit court class action settlement (the Objectors), filed a federal securities fraud class action against the same defendants in the United States District Court for the Northern District of Illinois, seeking damages based on essentially the same set of facts. *fn2 Defendants moved to dismiss the consolidated federal complaint and, pursuant to the Private Securities Litigation Reform Act of 1995 (the PSLRA) (15 U.S.C.A. §78u-4(b)(3)(B) (West 1997)), pretrial discovery in the federal court class action was automatically stayed. The Objectors now appeal from the final judgment of dismissal of the circuit court class action entered on September 30, 1997, and the circuit court's order of October 8, 1997, denying the Objectors' petition to intervene. We affirm.
Defendant SSA develops business information systems for large, industrial sector companies. An October 5, 1995, Wall Street Journal article disclosed that SSA's revenue recognition policies may have been "overly aggressive" in recording certain sales for which it had not yet been paid or on which payment might be withdrawn in the future. The day before Steinberg's complaint was filed, SSA announced that it was restating its revenues and earnings for fiscal years 1994 and 1995, as well as for the first three quarters of 1996.
While discovery was stayed in the federal court, plaintiffs in the circuit court filed discovery requests. In response to those requests, defendants produced approximately 20,000 pages of documents to plaintiff's counsel during April 1997. Documents were subpoenaed from SSA's accountant, Price Waterhouse, which produced approximately 40,000 pages of documents on April 2, 1997. Roger Covey, chairman and chief executive officer of SSA, and Joseph Skadra, chief financial officer of SSA, also gave confirmatory depositions, disclosing their financial condition. The discovery materials obtained in the circuit court class action were later made available to lead counsel in the federal class action.
Settlement Discussions began between the parties to the state court class action suit. The parties, unable to reach an agreement, employed a mediator. The mediation resulted in an agreement in principal to a settlement. Pursuant to section 2-806 of the Illinois Code of Civil Procedure (735 ILCS 5/2-806 (West 1996)), the parties applied for an order approving settlement of the lawsuit in accordance with a settlement agreement dated June 26, 1997 (the Agreement).
Under the terms of the Agreement, SSA would pay the plaintiff class $1,700,000 in cash and interest accruing from May 29, 1997, to the date of deposit. Covey was to contribute 100,000 shares of SSA stock with a guaranteed minimum worth of $5 per share. Therefore, the guaranteed minimum settlement value was $2,200,000. Following the settlement hearing, in September 1997, plaintiffs sold the SSA stock and converted it to cash at prices ranging from 12-7/8 to 13-1/8 per share. Thus, the value of the settlement ultimately exceeded $3 million.
On June 27, 1997, the circuit court entered an order certifying the class for settlement purposes and granting preliminary approval of the settlement set forth in the Agreement. By that order, the circuit court also provided that a settlement hearing be held on September 5, 1997, to determine whether the Agreement was fair, just, reasonable, adequate, in the best interest of the class, and should be approved. In addition, the circuit court's order of June 27, 1997, approved the notice proposed, as to form and content, noted the manner by which class members were to request exclusion from the class, and specified that any member of the class may appear at the settlement hearing and show cause why settlement should not be approved.
By letter dated July 15, 1997, counsel for the defendants informed the Judge presiding over the federal class action of the developments in the circuit court regarding settlement. Lead counsel in the federal action were also notified of the circuit court settlement by their receipt of a copy of that letter. Defendants were represented by the same counsel in circuit court and federal court.
Attached to defendants' circuit court brief, filed in support of the settlement, was a letter from the mediator to the presiding Judge in the circuit court action, dated September 3, 1997. By his letter, the mediator noted that the case settled "after much give and take." The mediator further noted in the letter:
"There can be no doubt that the financial condition of the company, over which the greater part of our time and effort was spent, and which was clearly, fully, and unmistakably established to the satisfaction of both sides, including that of the mediator, was a key factor in bringing this matter to a reasonable Conclusion."
SSA'S FINANCIAL CONDITION
At the September 1997 settlement hearing, counsel for the Objectors noted his awareness of SSA's precarious financial condition at the time the settlement agreement was being negotiated. By affidavit attached to defendants' brief in support of final approval of the proposed settlement, Skadra, SSA's chief financial officer, attested to the truthfulness of the following statements regarding SSA's financial condition. In early 1997, SSA faced a serious liquidity crisis caused primarily by a lack of revenue and profitability over the immediately preceding five quarters and by the high debt-equity leverage in SSA's capital structure. Investment bankers involved in SSA's attempt to refinance expressed concern that the pending class actions could be resolved without a material impact on SSA's financial statement.
In the spring of 1997, while negotiations with plaintiffs were underway, SSA began negotiating with potential investors to accomplish the recapitalization of its balance sheet. During that time, SSA began negotiating for a refinancing with Bain Capital, Inc. (Bain), an investment banking group. Thereafter, other investment banking firms expressed interest in facilitating SSA's refinancing. Prior to the ...