Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 1 of 34 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK : : : : : :

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1 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 1 of 34 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x : 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. : : x Civil Action No LEAD PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT AND CERTIFICATION OF SETTLEMENT CLASS

2 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 2 of 34 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 Relief Available to Class Members Class Notice and Settlement Administration Opt-Out and Exclusionary Provisions Release Provisions Reimbursement Award and Attorneys Fees and Expenses No Admission of Liability 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 B. The Proposed Settlement Negotiated By The Parties Enjoys A Presumption Of Fairness C. The Settlement Benefit Falls Within The Range Of Possible Recovery The Complexity, Expense and Likely Duration of the Litigation Stage of Proceedings and Amount of Discovery Completed The Risks of Establishing Liability & Damages Reasonableness of the Settlement Fund IV. THE PROPOSED SETTLEMENT CLASS SHOULD BE CERTIFIED FOR SETTLEMENT PURPOSES i

3 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 3 of 34 A. The Proposed Settlement Class Meets The Requirements Of Rule 23(a) And 23(b)(3) B. Class Certification Is Appropriate for Settlement Purposes 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 B. The Proposed Form Of Notice Adequately Informs Class Members Of Their Rights In This Litigation VI. CONCLUSION ii

4 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 4 of 34 Federal Cases TABLE OF AUTHORITIES 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) Carson v. Am. Brands, Inc., 450 U.S. 79 (1981) 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) George v. China Auto. Sys., Inc., 11 CIV KBF, 2012 WL (S.D.N.Y. Aug. 8, 2012)... 5 George v. China Auto. Sys., Inc., 11 CIV KBF, 2012 WL (S.D.N.Y. Sept. 25, 2012)... 5 George v. China Auto. Sys., Inc., 11 CIV KBF, 2013 WL (S.D.N.Y. July 3, 2013)... 6, 22 Haddock v. Nationwide Fin. Servs., Inc., 262 F.R.D. 97 (D. Conn. 2009) Holden v. Burlington N., Inc., 665 F. Supp (D. Minn. 1987) 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) In re Crazy Eddie Sec. Litig., 824 F. Supp. 320 (E.D.N.Y. 1993) In re Flag Telecom Holdings, Ltd. Secs. Litig., 574 F.3d 29 (2d Cir. 2009) In re Gen. Motors Corp. Pick Up Truck Fuel Tank Products Liab. Litig., 55 F.3d 768 (3d Cir.1995) In re Genta Sec. Litig., 2008 WL (D.N.J. May 28, 2008) In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436 (S.D.N.Y. 2004) In re Initial Pub. Offering Sec. Litig., 260 F.R.D. 81 (S.D.N.Y. 2009) iii

5 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 5 of 34 In re Initial Public Offering Securities Litigation, 226 F.R.D. 186 (S.D.N.Y. 2005) In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454 (9th Cir. 2000) In re Oxford Health Plans, Inc., 191 F.R.D. 369 (S.D.N.Y. 2000) In re Rite Aid Corp. Sec. Litig., 146 F. Supp. 2d 706 (E.D. Pa. 2001) In re Salomon Analyst Metromedia Litig., 544 F.3d 474 (2d Cir. 2008) Mangone v. First USA Bank, 206 F.R.D. 222 (S.D. Ill. 2001) Marisol A. v. Giuliani, 126 F.3d 372 (2d Cir. 1997) 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) Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306 (1950)... 9 Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010) Soberal-Perez v. Heckler, 717 F.2d 36 (2d Cir. 1983)... 9 Sullivan v. DB Invs., Inc., 667 F.3d Thompson v. Metro. Life Ins. Co., 216 F.R.D. 55 (S.D.N.Y. 2003) 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) Wright v. Stern, 553 F. Supp. 2d 337 (S.D.N.Y. 2008) iv

6 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 6 of 34 Federal Statutes 15 U.S.C U.S.C. 78u-4(a)(7) Federal Rules Fed. R. Civ. P. 23 (a) (4) Fed. R. Civ. P. 23 (a)(1) Fed. R. Civ. P. 23(a)(2) Fed. R. Civ. P. 23(b)(1), (2), or (3) Fed. R. Civ. P. 23(b)(3)(D) Fed. R. Civ. P. 23(c)(2) Fed. R. Civ. P. 23(e) Fed. R. Civ. P. 23(g)(1)(A) Federal Rule of Civil Procedure 23(f)... 6 Rule , 24, 25 Rule 23(a) And 23(b)(3)... 19, 20, 21 Rule 23(b)(1), (b)(2), or (b)(3) Rule 23(b)(3)... 20, 23, 26 Rule 23(g) Other Authorities Newberg Newberg, Newberg, v

7 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 7 of 34 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. 1

8 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 8 of 34 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, 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, 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 2

9 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 9 of 34 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 Notes 2 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, 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 ). 3

10 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 10 of 34 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 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 $ million, $33.2 million of which is attributable to the Company s failure to implement EITF 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 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 entirety 4. This Court denied China Automotive s Motion on August 8, See George v. China Auto. Sys., Inc., 11 CIV KBF, 2012 WL 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 (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. 4

11 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 11 of 34 (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, SLF once again moved to dismiss. This Court denied SLF s motion on September 25, See George v. China Auto. Sys., Inc., 11 CIV KBF, 2012 WL (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, 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 KBF, 2013 WL (S.D.N.Y. July 3, 2013). As explained in further detail below, the Court s denial of the class certification 5

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

13 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 13 of 34 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 7

14 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 14 of 34 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). 8

15 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 15 of 34 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 9

16 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 16 of 34 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, 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 10

17 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 17 of 34 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 11

18 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 18 of 34 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 12

19 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 19 of 34 (Fourth) (2002) ( 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 , 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, 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, (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, 13

20 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 20 of 34 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, 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 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 , at *3 (S.D.N.Y. Dec. 21, 2010)); Diaz v. E. Locating Serv. Inc., No. 10 Civ. 4082, 2010 U.S. Dist. LEXIS , at *3 (S.D.N.Y. Nov. 29, 2010); Clark, 2010 U.S. Dist. LEXIS 47036, at *4. 14

21 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 21 of 34 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, 15

22 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 22 of 34 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 (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 16

23 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 23 of 34 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 , 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. 17

24 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 24 of 34 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 18

25 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 25 of 34 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, 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 19

26 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 26 of 34 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, (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 20

27 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 27 of 34 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, (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, 21

28 Case 1:11-cv KBF Document 135 Filed 12/06/13 Page 28 of 34 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 KBF, 2013 WL , *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). F.3d 273, 335: Indeed, as explained by Judge Scirica in his concurrence Sullivan v. DB Invs., Inc., 667 [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. 22