The opinion of the court was delivered by: Judge George M. Marovich
MEMORANDUM OPINION AND ORDER
Lead plaintiffs, the Paul H. Shield, M.D. Inc. Money Purchase Plan and the Paul H. Shield, M.D. Inc. Profit Sharing Plan, and defendants Northfield Laboratories, Inc. ("Northfield"), Steven A. Gould, M.D. ("Gould") and Richard E. DeWoskin ("DeWoskin"), collectively the "parties," have reached an agreement to settle plaintiffs' claims that defendants violated § 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5. The parties have filed a joint motion requesting four things:
(a) certification of a settlement class; (b) preliminary approval of the settlement agreement; (c) a hearing date for a fairness hearing; and (d) approval of the procedure for notifying class members.
Defendant Northfield was founded in 1985 by defendants DeWoskin and Gould. Northfield's primary purpose was to research and develop a hemoglobin-based blood substitute called PolyHeme to treat life-threatening blood loss. PolyHeme was a hemoglobin-based, oxygen-carrying blood substitute that was compatible with all blood types. Northfield manufactured PolyHeme by extracting hemoglobin molecules from outdated human blood, chemically modifying the hemoglobin into a polymerized form of hemoglobin and incorporating the polymerized hemoglobin into a solution, which could then be administered to humans. Northfield was never able to bring PolyHeme to market, and the company filed a petition for bankruptcy protection on June 1, 2009. Defendant DeWoskin served as Chairman and CEO from 1985 to July 2002. Defendant Gould took over as Northfield's Chairman and CEO in July 2002.
The Court previously concluded that plaintiffs had stated a claim against defendants for securities fraud. First, plaintiffs alleged that after Northfield had closed a clinical trial due to allegedly negative results, defendants stated, on August 3, 2001, that they intended to close the trial. Second, plaintiffs alleged that defendants, in Northfield's August 9, 2002 10-K filing (and in its 2003 and 2004 10-K filings), misstated the reason why the clinical study was stopped. Third, plaintiffs alleged that on October 11, 2001, Gould made a misstatement when he stated "no evidence of blood vessel constriction, or renal, pancreatic, gastrointestinal or cardiac dysfunction" were observed in a clinical trial even though cardiac dysfunction was observed. Fourth, plaintiffs alleged that a September 4, 2001 press release contained misstatements about clinical trial results. Fifth, plaintiffs alleged that defendants included misstatements in an August 3, 2001 proxy statement when they said "none of the adverse effects historically associated with other hemoglobin solutions have been identified by our clinical studies" when, in fact, plaintiffs alleged, cardiac events were not only present but historically associated with hemoglobin solutions.
The first time plaintiffs moved for class certification, the Court denied the motion. Lead plaintiffs had proposed a class of all persons who had purchased Northfield's shares between (and including) March 19, 2001 and March 20, 2006. The problem with that class definition was that plaintiffs were unable to put forth evidence that Northfield shares traded in an efficient market for the early years of the class period. The upshot was that the plaintiffs could not avail themselves of the fraud-on-the-market theory and would, instead, have to prove reliance individually. That meant that individual issues would predominate and that the case was not suitable for class treatment.
The lead plaintiffs then moved to certify a smaller class, one made up of persons who purchased Northfield shares between (and including) August 16, 2004 and March 20, 2006. After plaintiffs filed their second motion for class certification, the parties began discussing settlement and asked the Court to stay briefing on that motion (which plaintiffs ultimately withdrew). Over the course of several months, the parties continued to discuss settlement. With the help of a retired federal judge, the parties reached a settlement agreement.
As part of the proposed settlement, the parties have asked the Court to certify a class of persons who purchased shares of Northfield between (and including) August 16, 2004 and March 20, 2006. Defendants have agreed to put $1,500,000.00 into a settlement fund for the plaintiff class. More precisely, the money will come from the insurance policy that is and has been funding the defense of this lawsuit. Additional money from Northfield is not available. The parties agree that it is very unlikely that enough assets remain to allow these plaintiffs to obtain any money from the bankruptcy estate. This is not a surprise considering that Northfield never sold a single product and that all of its cash flow came from investors. Of the $1,500,000.00, the parties intend to use $100,000.00 for the expenses related to notifying the class members and administering the claims process. The plaintiff's attorneys plan to ask for up to $185,000.00 in fees and up to $520,000.00 in expenses. The parties have agreed that the two lead plaintiffs will receive a combined total $10,000.00.
The Court now considers whether to certify the smaller class for settlement and whether to approve, preliminarily, the settlement between the parties.
When considering whether to certify a class for the purposes of a settlement, a court must consider whether the case meets all of the requirements of Rule 23, except that the court need not consider whether proceeding as a class action would create management difficulties. Amchem Products, Inc. v. Windsor, 521 U.S. 591, 620 (1997). To certify a class, the Court must find that the putative class meets all of the requirements of Rule 23(a) and one of the requirements of Rule 23(b) of the Federal Rules of Civil Procedure. Oshana v. Coca-Cola Co., 472 F.3d 506, 513 (7th Cir. 2006). Rule 23(a) allows individual plaintiffs to represent a class "only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a). The parties wish to certify a class under Rule 23(b)(3), which allows a class action to proceed if "the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3).
The parties move to certify a class of: all persons who purchased or otherwise acquired any common stock of Northfield during the period from August 16, 2004 through and including March 20, 2006, and were allegedly damaged thereby.
The parties wish to exclude from the class "[d]efendants, and all former officers and directors of Northfield, and such excluded person's immediate families, legal representatives, heirs predecessors, successors, and assigns, and any entity in which any excluded person has or had a controlling interest, and any persons who have separately filed actions against one or more of Defendants, based in whole or in part on any claim arising out of or relating to any of the alleged acts, omissions, misrepresentations, facts, events, matters, transactions, or occurrences referred to in the Litigation or otherwise alleged, asserted, or contended in the Litigation." Also excluded are any persons who filed valid and timely requests for exclusion.
1. The Rule 23(a) requirements
The parties state that they do not know the number of class members, but they estimate that the number is about 15,000. The Court agrees that the number of class members is so high as to make joinder impracticable.
The parties agree that there are common questions of law and fact. In order to prevail on a claim under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the plaintiffs must establish: (1) a material misrepresentation; (2) scienter; (3) a connection with the sale or purchase of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-342 (2005). Factual and legal issues that would be common to the class include whether Northfield made material ...