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IN RE NATIONAL STUDENT MKTG. LITIG.

January 9, 1978

IN RE NATIONAL STUDENT MARKETING LITIGATION


The opinion of the court was delivered by: PARKER

 BARRINGTON D. PARKER UNITED STATES DISTRICT JUDGE

 Barrington D. Parker, District Judge:

 The National Student Marketing Corporation (Student Marketing or NSMC) stock fraud scheme has spawned extensive litigation. In addition to the Securities and Exchange Commission suit seeking injunctive relief against certain corporate officials, accountants and attorneys, several private proceedings were filed seeking money damages and other relief. Among those private proceedings are the three above-captioned actions which have been consolidated and designated as class actions.

 This opinion relates to the claims brought by Louis W. Biegler and the Biegler Foundation (the Bieglers), formerly members of the plaintiff class in these actions, but later named as defendants in an amended complaint. In response to the amended complaint the Bieglers filed a two-count counterclaim charging misconduct against the law firm of Pomerantz, Levy, Haudek & Block (Pomerantz Levy or PLHB), the law firm of Olwine, Connelly, Chase, O'Donnell & Weyher (Olwine Connelly or OCCOW) and the named plaintiffs in these actions. *fn1" Pomerantz Levy is general counsel for the class plaintiffs and Olwine Connelly represents Student Marketing. In substance the Bieglers claim that as members of the plaintiff class they were inadequately and fraudulently represented by the named plaintiffs and Pomerantz Levy through the failure of the class representatives to seek rescission of the 1969 merger of the Interstate National Corporation (Interstate or INC) into Student Marketing. They also allege that Olwine Connelly colluded with the plaintiffs and the Pomerantz Levy firm. The details of the counterclaim are discussed infra slip op. at pages 4-5.

 The Bieglers have moved for class certification of the first count. The two law firms and the plaintiffs have moved for summary judgment on the counterclaim. *fn2" The legal memoranda, the volume of documents and exhibits, and the oral argument of counsel have been considered. For the reasons expressed below, the Court concludes that the Bieglers' motion for class certification of the first count of the counterclaim should be denied, that the claims present no genuine issue of material fact, and that summary judgment on the counterclaim in favor of the two law firms and the named plaintiffs is appropriate.

 The Bieglers have also filed a barrage of other motions: (1) a motion to vacate the 1974 settlement between the class and Student Marketing; (2) a motion to disqualify Pomerantz Levy and other counsel from further representing the class; (3) motions to intervene as plaintiffs in the class actions; and (4) an initial and supplemental motion for security for costs in the action by the class against the Bieglers. Those motions have been duly considered, found lacking in merit, and must be denied.

 BACKGROUND

 The Corporate Merger and the Resulting Litigation

 Although the value of NSMC stock rose immediately after the merger, by February of 1970 its market price had plummeted. This triggered various lawsuits charging fraud and violations of the securities laws. The three class actions now before this Court were originally filed in the District Court for the Southern District of New York. *fn3" In early 1972 they were consolidated and Pomerantz Levy was appointed plaintiffs' general counsel for motion practice and pretrial proceedings. On December 1, 1972, these actions and other cases pending against Student Marketing were transferred by the Judicial Panel on Multidistrict Litigation to this Court for consolidated pretrial proceedings. The consolidated cases were certified as a class action in late 1973. Notice was sent to all class members, including the Bieglers. It provided that the opt-out period pursuant to Rule 23(c)(2) of the Federal Rules of Civil Procedure would expire November 30, 1973. *fn4"

 The Settlement Discussions

 The potential liability of Student Marketing in the lawsuits was extremely high and careful consideration was given to the possibility that NSMC's financial foundation would be weakened, if not destroyed, by protracted litigation. Settlement was therefore considered an important element for the survival of the company. *fn5" Representatives of Student Marketing participated with Pomerantz Levy in negotiations toward that end. *fn6"

 During these discussions, especially as the opt-out date drew near, the negotiators feared that one of the recently acquired subsidiary companies of NSMC would withdraw from the class actions and assert an individual claim, possibly for rescission of its merger with NSMC. *fn7" If successful, a rescission action would further diminish Student Marketing's assets, which were already insufficient to meet the potential liability. All involved recognized that if one company attempted to withdraw from the class actions and bring a separate action, the other subsidiaries would be forced to follow in order to protect their chance for recovery. The unavoidable result would be the bankruptcy of Student Marketing, an event which would devastate the subsidiary companies, particularly the Interstate insurance companies which relied heavily upon public trust. *fn8"

 To forestall such a domino effect, those persons who had received substantial amounts of NSMC stock in exchange for their stock in companies acquired by Student Marketing executed a "sign-off" agreement. *fn9" The agreement provided, inter alia, that the signatories (1) would not elect exclusion from the class action; (2) would relinquish all claims against NSMC except those asserted in the class action; and (3) would try to reach a settlement of the class claims against NSMC in return for a pro-rata share in a settlement fund consisting of at least 1,500,000 shares of NSMC stock. Biegler executed this agreement for himself and the Biegler Foundation on November 20, 1973, ten days before the expiration of the opt-out period for the class.

 On April 8, 1974, a Stipulation and Agreement of Compromise and Settlement was entered into by representatives of the class and Student Marketing, specifically by Pomerantz Levy for the class and by Olwine Connelly for NSMC. The settlement proposal basically tracked the sign-off agreement and provided for, among other things: (1) pro-rata distribution of a settlement fund consisting of 2,050,000 NSMC shares; (2) relinquishment of all claims against NSMC; and (3) assignment to the class of any derivative claims on behalf of NSMC. The Court ordered publication of the proposed settlement and scheduled a hearing on its approval. All class members were notified. The settlement was approved and an appropriate judgment was entered on June 25, 1974, In re National Student Marketing Litigation, 68 F.R.D. 151 (D.D.C. 1974), from which no appeal was taken.

 The Biegler Counterclaim

 Originally, the Bieglers were members of the plaintiff class. However, as a result of extensive pretrial discovery, the named plaintiffs, through class counsel, moved for leave to amend the complaint to join the Bieglers and other Interstate principals as additional defendants on claims under the securities laws. *fn10" The motion was granted and, in May of 1976, Louis W. Biegler responded by filing a two-count counterclaim against the named plaintiffs and Pomerantz Levy.

 The counterclaim marked the first time that the Bieglers expressed any objection to the settlement. The first count purports to be a class action on behalf of former Interstate shareholders who were injured through inadequate representation by class plaintiffs and counsel. Although phrasing the counterclaim in terms of inadequate representation, the Bieglers clearly charge intentional and fraudulent misconduct on the part of the class representatives for their failure to seek rescission of the merger. *fn11" According to them, rescission would have given Interstate shareholders the benefit of restitution of the Interstate companies, rather than the much less valuable pro-rata share of the damage settlement. *fn12" By foregoing rescission as a remedy, the class representatives assured the inclusion of the substantial Interstate assets in the assets of Student Marketing, thereby making available a much larger pot for both the settlement fund and counsel fees. The Bieglers seek an accounting to determine the damages resulting from the misconduct of plaintiffs and Pomerantz Levy, as well as exemplary damages, costs and attorney fees.

 On February 7, 1977, the Bieglers, with leave of the Court, amended their counterclaim to join Student Marketing's counsel, Olwine Connelly, as an additional counterdefendant to the first count. They charge that Olwine Connelly acted in collusion with plaintiffs and class counsel in perpetrating the fraud on the Interstate shareholders and on the Court. *fn13"

 The second count of the counterclaim, brought against the named plaintiffs and Pomerantz Levy, alleges misconduct in joining the Bieglers as defendants. The gist of the charge is that plaintiffs and counsel had in fact decided to join the Bieglers as defendants prior to execution of the sign-off agreement and approval of the settlement, but consciously concealed the intention to sue so as to obtain their acquiescence in the agreement and settlement. As a result of the omission, the Bieglers gave up off-setting defenses to the ...


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