Case Study: Cendant

Our firm served as one of two lead counsel for the class in In re Cendant Corporation Litigation, Master File No. 98-1664 (WHW), before the Honorable William H. Walls of the U.S. District Court for the District of New Jersey. We were retained by the two largest state pension funds and the largest municipal pension fund in the country – the New York State Common Retirement Fund, California Public Employees’ Retirement System and New York City Pension Funds – to represent them in the lawsuits. Each of the Funds had suffered losses in the range of $30 million. The case stemmed from a restatement of financial statements that was announced just a few months after a highly-publicized merger of two high-flying companies, HFS Incorporated and CUC International, Inc., was consummated. The resulting company was named Cendant Corporation. Through our prosecution of the case, BR&B succeeded in certifying a class of purchasers of Cendant and CUC publicly traded securities during the period from May 31, 1995 through August 28, 1998, and recovering for the Class nearly four times more than had ever been recovered in the history of federal securities law class actions.

By the time the dust had settled, we had achieved recoveries of more than $3.3 billion for the class, as well as highly significant corporate governance changes that we negotiated as part of the settlement with Cendant. Notably, the $3.3 billion recovery represented nearly 40% of the damages suffered by class members, and provided very significant payments – in a number of cases, in excess of $100 million – for the largest claimants, many of which were public pension funds. The recovery from CUC’s prior auditor, Ernst & Young LLP, still stands as the largest amount ever received in a federal securities law class action from an outside auditor.

Litigation Highlights

• In September 1998, just a few months after Cendant’s stunning announcement, Judge Walls appointed the Funds as the lead plaintiffs pursuant to the PSLRA. Shortly thereafter, Judge Walls appointed our firm, as one of the Funds’ chosen counsel, to be co-lead counsel for the injured investors.
• In December 1998, we filed a comprehensive consolidated class action complaint on behalf of purchasers and acquirers of all Cendant and CUC publicly traded securities except for Cendant PRIDES (which had their own case). The Complaint asserted claims against Cendant, certain of its officers and directors, certain former officers and directors of CUC, and E&Y for alleged violations of the federal securities laws. At the same time, we also moved for certification of a Class of all persons and entities, other than defendants and their affiliates, who purchased or acquired publicly traded securities of Cendant and its predecessor, CUC, during the period from May 31, 1995 through August 28, 1998. At the same time, we filed a motion for partial summary judgment, seeking a liability finding against Cendant for the false statements made in the registration statement for the merger.
• At the end of January 1999, the court granted our motion for certification of the class, which encompassed persons and entities who acquired: (a) Cendant and CUC common stock, including stock acquired in exchange for HFS common stock in the Merger; (b) Cendant and CUC common stock options; and (c) various notes issued by Cendant and CUC.
• Many of the defendants moved to dismiss the complaint, claiming either that it failed to state legal claims against them, or that it did so without sufficient “particularity.” In July 1999, the judge denied all but one of the motions, granting E&Y's motion to dismiss the claims brought against it for purchases of Cendant securities made after April 15, 1998 (the date of the initial disclosure, which informed investors that they could no longer rely on previously-issued E&Y statements).
• Also, in July 1999, the court heard oral argument on various motions to stay proceedings in our case pending the outcome of an investigation being conducted by the U.S. Attorneys’ Office relating to Cendant. While permitting the U.S. Attorneys' Office to intervene for the purpose of moving to stay the case, the Court, with limited exceptions, denied the motions seeking a stay. This was a key ruling in terms of allowing us to continue prosecuting the case.
• From the outset of the case, we conducted an extensive investigation concerning the allegations of wrongdoing pertaining to each defendant, the damages suffered by the class, and the financial capabilities of the defendants. We inspected hundreds of thousands of documents produced by Cendant, E&Y, the individual defendants and various non-parties. Through negotiations with Cendant concerning the class motion and the partial summary judgment motion filed at the outset of the case, we obtained from Cendant copies of all documents that were part of the internal investigation conducted in preparation of the audit committee report filed with the SEC in August 1998, notwithstanding that under the PSLRA, with very limited exceptions, there is a statutorily-imposed stay of discovery once any defendant files a motion to dismiss the complaint.
• Additionally, we took two further very important steps that laid the groundwork for the remarkable recoveries achieved from Cendant and E&Y in the case: first, we retained an expert consultant in the field of assessing damages in securities law cases, which allowed the lead plaintiffs to put into a proper context our goals for the litigation, and the ultimate positions taken by defendants during settlement negotiations; second, we undertook a concerted effort to retain an eminently qualified investment banking firm to assess the financial capability of Cendant, and provide advice on various possible settlement structures that might, eventually, be negotiated. At the time, this was the first instance that such an analysis had been undertaken in the context of a securities class action. With the lead plaintiffs’ consent, after obtaining many proposals and interviewing a number of investment bankers, we retained Lazard Frères & Co., LLC, an internationally renowned investment banking firm, to assist in this type of analysis and settlement negotiations.

The Settlements

Actual settlement negotiations were conducted by the lawyers under the auspices of lead plaintiffs and with constant consultation between us and the Funds’ representatives. The discussions with Cendant’s counsel, which began in earnest in May 1999, were intense, complicated and arduous. Equally intense were the negotiations with E&Y’s counsel, which began in earnest in September 1999. While settlement discussions were occurring, we continued to vigorously prosecute the case on behalf of the Class, fighting the motions to dismiss and to stay, and pursuing the extensive factual investigation and analysis of documents.

The Settlement with Cendant

By December 1999, we were privileged to announce on behalf of the lead plaintiffs the landmark $2.85 billion settlement with Cendant that far surpassed the recoveries in any other securities law class action case in history. Until the settlements reached in the WorldCom case in 2005, this stood as the largest recovery in a securities class action case, by far, and clearly set the standard in the field. In addition to the cash payment by Cendant, which was backed by a letter of credit that the company secured to protect the class, the Cendant settlement included two other very important features:

First, the settlement provided that in the event Cendant or the former HFS officers and directors were successful in obtaining a net recovery in their continuing litigation against E&Y, the Class would receive one-half of any such net recovery. As it turned out, that litigation lasted another seven years – until the end of 2007 – when Cendant and E&Y settled their claims against each other in exchange for a payment by E&Y to Cendant of nearly $300 million. Based on the provision in the Cendant settlement agreement and certain further litigation and a court order, in December 2008, the class received another $132 million. This brought the total recovered from the Cendant settlement to $2.982 billion.

Second, Cendant was required to institute significant corporate governance changes that were far-reaching and unprecedented in securities class action litigation. Indeed, these changes included many of the corporate governance structural changes that would later be included within the Sarbanes-Oxley Act of 2002. They included the following:

• The board’s audit, nominating and compensation committees would be comprised entirely of independent directors (according to stringent definitions, endorsed by the institutional investment community, of what constituted an independent director);
• The majority of the board would be independent within two years following final approval of the settlement;
• Cendant would take the steps necessary to provide that, subject to amendment of the certificate of incorporation de-classifying the board of directors by vote of the required super-majority of shareholders, all directors would be elected annually; and
• No employee stock option could be "re-priced" following its grant without an affirmative vote of shareholders, except when such re-pricings were necessary to take into account corporate transactions such as stock dividends, stock splits, recapitalization, a merger or distributions.

The Settlement With Ernst & Young

Ten days after reaching agreement on the Cendant settlement, we finalized negotiations of an equally impressive settlement with Ernst & Young, the accounting firm that audited CUC's financial statements. On December 17, 1999, we announced that E&Y had also agreed to settle the claims of the Class for $335 million. This recovery was and remains today as the largest amount ever paid by an accounting firm in a securities class action case. The recovery from E&Y was significant because it held an outside auditing firm responsible in cases of corporate accounting fraud. The claims against E&Y were based on E&Y’s “clean” audit and review opinions for three sets of annual financial statements, and seven quarterly financial statements, between 1995 and 1997, but that it had failed to review quarterly reporting packages by CUC subsidiaries; it did not require adequate documentation for the company’s merger reserves and “top-side” adjustments; and failed to review the Company's general ledgers.
The district court approved the settlements and plan of allocation in August 2000, paving the way for Cendant and E&Y to fund the settlements. Approximately one year later, in August 2001, the settlements and plan of allocation were affirmed on appeal by the United States Third Circuit Court of Appeals. And, in March 2002, the U.S. Supreme Court determined that it would not hear any further appeals in the case.