NOTICE OF CALSTRS OBJECTIONS TO PROPOSED SETTLEMENT

Transcription

1 DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO Denver City and County Building 1437 Bannock St. Denver, CO COURT USE ONLY Plaintiff: THOMAS R. STRAUSS, trustee under the Thomas R. Strauss Living Trust, Derivatively on behalf of Qwest Communications International, Inc., a Delaware Corporation. v. Defendants: PHILLIP F. ANSCHUTZ, ANSCHUTZ COMPANY, LINDA G. ALVARADO, CRAIG R. BARRETT, THOMAS J. DONOHUE, JORDAN L. HAINES, CANNON Y. HARVEY, PETER S. HELLMAN, VINOD KHOSLA, RICHARD NOTEBAERT, FRANK POPOFF, CRAIG D. SLATER, W. THOMAS STEPHENS, JOSEPH P. NACCHIO, ROBIN R. SZELIGA, ROBERT R. WOODRUFF, STEPHEN M. JACOBSEN, DRAKE S. TEMPEST, MARC B. WEISBERG, JAMES A. SMITH, LEWIS O. WILKS, AFSHIN MOHEBBI, Case Number: 02-CV-8188 Ctrm.: 5 and Nominal Defendant: QWEST COMMUNICATIONS INTERNATIONAL, INC. (Attorney for Objectors CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM) Michael D. Murphy SHUGHART THOMSON & KILROY P.C. Independence Plaza th Street, Suite 2300 Denver, Colorado Tel: (303) NOTICE OF CALSTRS OBJECTIONS TO PROPOSED SETTLEMENT

2 PLEASE TAKE NOTICE that at the hearing to be held on June 15, 2004 at 8:30 a.m., before the Honorable Lawrence A. Manzanares in the above captioned Court located at 1437 Bannock Street, Denver, Colorado 80202, the California State Teachers Retirement System ( CalSTRS ) will object to the Proposed Settlement and application by Plaintiffs Counsel for an award of attorneys fees. CalSTRS makes these objections on the grounds that the Proposed Settlement is not fair, reasonable or adequate, and that the application for attorneys fees is unreasonable. CalSTRS bases these objections on the Notice of CalSTRS Objections To Proposed Settlement, Memorandum In Support of CalSTRS Objections To Proposed Settlement, Declaration of Christopher Ailman In Support of CalSTRS Objections To Proposed Settlement, all the pleadings and papers on file herein, and such other oral and documentary evidence and argument as may be presented at the Settlement Hearing. Respectfully submitted, SHUGHART THOMSON & KILROY P.C. Dated: May 26, 2004 By: Michael D. Murphy Independence Plaza th Street, Suite 2300 Denver, Colorado Tel: (303) GIRARD GIBBS & De BARTOLOMEO LLP Daniel C. Girard A.J. De Bartolomeo Aaron M. Sheanin 601 California Street, Suite 1400 San Francisco, California Tel: (415) Fax: (415)

3 COCHETT, PITRE, SIMON & McCARTHY Joseph W. Cotchett Bruce L. Simon Steven N. Williams Nanci E. Nishimura San Francisco Airport Office Center 840 Malcolm Road, Suite 200 Burlingame, CA Tel: (650) Fax: (650) Counsel for Objector CalSTRS 3

4 DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO Denver City and County Building 1437 Bannock St. Denver, CO COURT USE ONLY Plaintiff: THOMAS R. STRAUSS, trustee under the Thomas R. Strauss Living Trust, Derivatively on behalf of Qwest Communications International, Inc., a Delaware Corporation. v. Defendants: PHILLIP F. ANSCHUTZ, ANSCHUTZ COMPANY, LINDA G. ALVARADO, CRAIG R. BARRETT, THOMAS J. DONOHUE, JORDAN L. HAINES, CANNON Y. HARVEY, PETER S. HELLMAN, VINOD KHOSLA, RICHARD NOTEBAERT, FRANK POPOFF, CRAIG D. SLATER, W. THOMAS STEPHENS, JOSEPH P. NACCHIO, ROBIN R. SZELIGA, ROBERT R. WOODRUFF, STEPHEN M. JACOBSEN, DRAKE S. TEMPEST, MARC B. WEISBERG, JAMES A. SMITH, LEWIS O. WILKS, AFSHIN MOHEBBI, Case Number: 02-CV-8188 Ctrm.: 5 and Nominal Defendant: QWEST COMMUNICATIONS INTERNATIONAL, INC. (Attorney for Objectors CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM) Michael D. Murphy SHUGHART THOMSON & KILROY P.C. Independence Plaza th Street, Suite 2300 Denver, Colorado Tel: (303) MEMORANDUM IN SUPPORT OF CALSTRS OBJECTIONS TO PROPOSED SETTLEMENT

5 The California State Teachers Retirement System ( CalSTRS ), the nation s third-largest public pension fund with assets under management of $116 billion, objects to the Proposed Settlement in the above-entitled litigation which is neither a fair, reasonable nor adequate resolution of the shareholder derivative litigation against the current and former directors and officers of Qwest Communications International, Inc. ( Qwest ) and the Anschutz Company on behalf of Qwest. CalSTRS contends that the Court should reject the Proposed Settlement because it: (1) disproportionately favors defendants at the expense of Qwest; (2) provides no meaningful corporate governance reform; and (3) grants a windfall to plaintiffs attorneys. Background As detailed in the Second Amended Complaint, defendants engaged in a multiyear scheme and pattern of misconduct whereby they enriched themselves while causing substantial detriment to Qwest. Among other things, defendants are accused of breaching their fiduciary duties to Qwest by participating in self-dealing conduct and insider trading transactions, failing to implement policies and procedures to ensure compliance with Generally Accepted Accounting Procedures, engaging in fraudulent transactions, artificially inflating corporate financial results, damaging the company s reputation, exposing Qwest to litigation for violations of state and federal securities laws, misappropriating corporate opportunities, wasting corporate assets, and diverting corporate business to particular investment banking firms for the purpose of obtaining IPO allocations and other investment opportunities. At the same time, defendants engaged in $1.8 billion in insider trading transactions and reaped more than $35 million 2

6 of incentive-based compensation. In 2002 and 2003, Qwest restated more than $1.8 billion in revenues improperly recognized on transactions orchestrated by defendants. Plaintiffs filed this action on November 22, 2002 and filed a First Amended Complaint on January 9, Absent mediation, no significant litigation activity has occurred in this action. In November 2003, Qwest reached a settlement with its insurance carriers (the Insurance Settlement Agreement ) which set aside $200 million to pay judgments or settlements against Qwest and its current and former directors and officers. On February 17, 2004, the Court entered an Order granting preliminary approval to the Proposed Settlement which would result in the termination of five derivative cases on behalf of Qwest two consolidated actions pending before this Court, two consolidated cases pending in the Court of Chancery in Delaware, and one action pending in the United States District Court for the District of Colorado. The Court set a hearing for final approval of the Proposed Settlement for June 15, The material terms of the Proposed Settlement include Qwest s adoption of certain corporate governance reforms and the establishment of a $25 million fund for Qwest from the Insurance Settlement Agreement. The Stipulation of Settlement describes the fund as follows: [T]he Individual Defendants agree to provide Qwest with sole and exclusive right to a fund consisting of $25 million (the Fund ) of the proceeds of the Insurance Settlement Agreement to pay Loss as defined in the Insurance Settlement Agreement and to pay from this amount attorneys fees and expenses awarded by the Court to Plaintiffs Counsel. The Individual Defendants agree that as consideration they have given up their greater or co-extensive rights to the proceeds under the Insurance Settlement Agreement to the extent of the $25 million to be provided to Qwest. (Stipulation of Settlement, 2.) 3

7 In exchange, Qwest agrees to fully release all claims of the corporation against defendants. The release, however, does not preclude defendants from asserting any claims for indemnification arising from Qwest s articles of incorporation and by-laws. (Id., 7-10.) Further, subject to Court approval, defendants agree to pay from the Fund up to $7,500,000 in attorneys fees and up to $125,000 in expenses to plaintiffs counsel. (Id., 17.) CalSTRS Objections As an initial matter, CalSTRS has standing to object to the Proposed Settlement. CalSTRS has continuously held Qwest common stock since May 15, 1998, with present holdings of approximately 5,760,000 shares. (Declaration of Christopher Ailman In Support of CalSTRS Objections To Proposed Settlement; Letter of Sylvia Quayle dated March 26, 2004, attached hereto as Exhibit A.) CalSTRS objects to the Proposed Settlement on three principle grounds: first, that the Proposed Settlement disproportionately benefits defendants at the expense of Qwest; second, that the Proposed Settlement lacks meaningful corporate governance reform; and third, that the award of attorneys fees is excessive. (a) The Proposed Settlement Disproportionately Favors Defendants The Proposed Settlement exacts no financial consideration from defendants, despite the fact that defendants engaged in more than $1.8 billion in insider trading transactions and received more than $35 million of incentive-based compensation. Instead, defendants purport to provide monetary consideration to the Proposed Settlement by ceding to Qwest their rights to $25 million from the Insurance Settlement Agreement, with a substantial portion of these funds earmarked for payment of attorneys fees to 4

8 plaintiffs counsel. Whether defendants have any rights to the $25 million is questionable. Under the Insurance Settlement Agreement, which is referenced in the terms of the Proposed Settlement, but is neither incorporated nor attached as an exhibit by the parties, Qwest s insurance carriers agreed to pay $200 million to Qwest to cover rulings or settlements against Qwest and its directors and officers. While the directors and officers, as insured parties, may posses an interest in the $200 million, such that their agreement to release their claim to $25 million of that $200 million may in some theoretical sense constitute consideration, these same officers and directors retain their rights to indemnification by the company. They are faced with claims for billions in damages in several securities fraud actions. Thus, by ceding the right to $25 million out of a $200 million fund of insurance and retaining their rights to indemnification, the settling defendants are providing no meaningful compensation. Qwest must still defend and indemnify them against all claims asserted in the various cases pending against them. They retain their rights to the balance of the $200 million insurance fund. They are assured that they will be included in an eventual settlement of the litigation, and that in the event of a judgment, Qwest s assets, including whatever remains of the $25 million, will be committed to indemnify them. The Proposed Settlement merely allows Qwest to move $25 million from one pocket to another, while paying a fee to plaintiffs attorneys and releasing defendants from further liability. Assuming defendants have are ceding some legal right to the $25 million to Qwest, whatever intangible cost that concession may represent to defendants pales in comparison to the value of the release of Qwest s claims against defendants. The Second Amended Complaint alleges a litany of misconduct that gives rise to valuable claims 5

9 which should not be released in exchange for the ephemeral relief offered by the settlement. After payment of attorneys fees, Qwest will receive $17,375,000 from the proceeds of insurance purchased by the company, or less than 1 percent of the proceeds of defendants insider trading. Qwest releases all claims against defendants, while they retain the right of indemnity against Qwest, as provided under the articles of incorporation and by-laws. 1 In essence, while substantially benefiting defendants, the Proposed Settlement provides little to Qwest and eliminates any possibility the defendants will be held accountable for the money they improperly obtained as a result of their breaches of fiduciary duty and other wrongdoing. This settlement bears a striking resemblance to the proposed settlement of derivative claims rejected by Judge Walker in In re Oracle Securities Litigation, 829 F. Supp (N.D. Cal. 1993). In Oracle, plaintiffs proposed a settlement of class-wide securities claims and shareholder derivative claims of a Delaware corporation. The derivative plaintiffs agreed to dismiss their claims without receiving any concrete, present consideration, and provided a broad release for the individual defendants. Id. at The derivative plaintiffs also informed the court that the settlement would reduce Oracle s future litigation expenses, and that Oracle had made certain changes to its insider trading and revenue recognition policies in light of the litigation. Id. In conjunction with the settlement, derivative plaintiffs counsel received $750,000 in fees 1 Article 6 of Qwest s By-Laws provides that Qwest will indemnify directors as to liability incurred in any proceeding in which the director was sued for serving in his official capacity, except where indemnification is expressly prohibited by applicable law, or where the judgment or settlement establishes that the directors acts were (1) in breach of the duty of loyalty, (2) not in good faith, involved intentional misconduct, or were a knowing violation of law, or (3) resulted in the director s receipt of an improper personal benefit. As the Proposed Settlement, by its terms, cannot be construed as an admission of defendants liability or wrongdoing, defendants indemnification rights will survive. 6

10 and expenses. Id. Judge Walker rejected the proposed settlement, concluding that its only significant beneficiaries were plaintiffs counsel and the individual defendants: [T]he settlement calls for Oracle to pay derivative counsel up to $750,000 and releases the individual defendants from any claims it might have against them. The derivative settlement thus confers a substantial benefit on the individual defendants and derivative plaintiffs counsel. [T]he brunt of the derivative settlement falls upon Oracle and indirectly, therefore, on its current shareholders. Id. at Judge Walker further explained that the depiction of the derivative claims as weak by counsel for plaintiffs and the individual defendants was insufficient to support approval of the settlement. The presentation of plaintiffs counsel is biased because the settlement offers them a substantial fee, regardless of the benefit conferred on the corporation and its shareholders. The presentation on behalf of the individual defendants is similarly biased in favor of settlement, because the settlement absolves them of liability without requiring them to part with any consideration. Id. Moreover, in the absence of an unbiased presentation by the corporation, it was impossible to determine whether the settlement reasonably protested the interests of Oracle and its shareholders. Id. at The Proposed Settlement in the Qwest litigation is similarly objectionable. The only true beneficiaries of the Proposed Settlement are plaintiffs counsel and the defendants. Accordingly, no credence should be given to plaintiffs contention that the meager consideration in the Proposed Settlement is an excellent outcome in light of the purported weakness of the derivative claims. (Plaintiff Thomas R. Strauss Unopposed Motion For Preliminary Approval Of Settlement And Memorandum Of Law In Support 7

11 Thereof ( Prelim. Approval Mot. ), at ) Indeed, without any evidence of support for the Proposed Settlement by disinterested directors, as required by Delaware law, the Court should deny plaintiffs request for final approval. In re Oracle, 829 F. Supp. at 1187 (applying Delaware law and rejecting proposed derivative settlement, because the record does not show that the directors who approved the settlement acted with the requisite independence and good faith ). Under Delaware law, a committee of disinterested directors may be granted authority to dismiss derivative litigation, if it is found to be detrimental to the corporation s best interests. Zapata Corp. v. Maldonado, 430 A.2d 779, 786 (Del. 1981). A court may approve the termination of a derivative suit only after (1) inquiring into the independence and good faith of the committee and the bases supporting its conclusions, and (2) applying its own independent business judgment to determine that termination is warranted. Id. at The Zapata test also applies to a court s approval of a proposed settlement of a derivative action. Carlton Investments v. TLC Beatrice Int l Holdings, Inc., C.A. No , 1997 Del. Ch. LEXIS 86 (Del. Ch. May 30, 1997). Courts applying Delaware law have rejected proposed settlements of derivative litigation where the corporation fails to demonstrate a thorough investigation of the facts underlying the claims by an independent committee. Electra Investment Trust PLC v. Crews, C.A. No , 1999 Del. Ch. LEXIS 36, at *17 (Del. Ch. Feb. 24, 1999) ( Thus, even though I am satisfied with many of the substantive terms of the Settlement Offer, I cannot conclude that the [Special Litigation Committee s] investigation was reasonably thorough. ). Here, as in Oracle and Electra, the Court should not approve the Proposed 8

12 Settlement because Qwest has not introduced any evidence of compliance with the Zapata test. (b) The Proposed Settlement Lacks Meaningful Corporate Governance Reform The corporate governance reforms, particularly in the area of director independence, are simply inadequate. The Proposed Settlement would require the designation of a Lead Independent Director when the Chairman of the Board is also the Chief Executive Officer ( CEO ), such as the present circumstance in which Richard Notebaert serves in both capacities. CalSTRS submits that an individual who holds both titles is faced with inherent conflicts that preclude him from acting as an independent overseer of shareholder interests. CalSTRS shareholder proposal to mandate the separation of these two functions has been aggressively opposed by Qwest, despite the support of two of the nation s most prominent independent proxy advisors, Institutional Shareholder Services and Glass Lewis & Co. As Glass Lewis recently noted with respect to Qwest, the appointment of a lead independent director does not go far enough in ensuring shareholders interests are properly being sought. (Glass Lewis & Co, Proxy Paper: QWEST Communications International, May 10, 2004.) The Proposed Settlement s requirement that, for the next three years, at least twothirds of the members of the Board of Directors will be independent of management, as defined by New York Stock Exchange ( NYSE ) rules, is also insufficient. NYSE rules establish only minimum criteria for independence. Unlike the standards adopted by the Council of Institutional Investors ( CII ), NYSE rules do not preclude directors from having material financial entanglements with the company and do not require a true alignment of interests of directors and other shareholders. As with CalSTRS shareholder 9

13 proposal to separate the Chairman from the CEO, Qwest has actively opposed a shareholder proposal to implement the CII s standards on director independence. The reason for Qwest s hostility to more meaningful reform in this area is clear. Under NYSE rules, Qwest can, and presently does, assert that 11 of its 12 directors are independent. However, as Glass Lewis noted in its analysis of Qwest s recent proxy statement, eight of the twelve directors are either affiliated with the Company or are insiders. (Glass Lewis & Co, Proxy Paper: QWEST Communications International, May 10, 2004.) Accordingly, the corporate governance reform touted in the Proposed Settlement would result in absolutely no change to the operation, management and oversight of Qwest. (c) The Attorneys Fees Are Unreasonable Defendants stipulated that they would not oppose a request from plaintiffs counsel for up to $7.5 million in attorneys fees which amounts to 30 percent of the Fund allegedly designed to benefit Qwest. Such a percentage is patently unreasonable, as it bears no relationship to any benefit conferred upon Qwest by the Purported Settlement. As described above, in the absence of concrete financial consideration by the individual defendants or the implementation of meaningful corporate governance reform, the only benefit received by Qwest is the Fund of $25 million to which Qwest had previously been entitled as a result of the Insurance Settlement Agreement. As such a recovery is tantamount to no recovery at all, there is simply no basis for so great an award of attorneys fees. 10

14 Conclusion For the foregoing reasons, CalSTRS respectfully objects to the Proposed Settlement of the derivative action on behalf of Qwest and objects to the application of plaintiffs counsel for attorneys fees. CalSTRS requests that the Court vacate its prior Order granting preliminary approval. Respectfully submitted, SHUGHART THOMSON & KILROY P.C. Dated: May 26, 2004 By: Michael D. Murphy Independence Plaza th Street, Suite 2300 Denver, Colorado Tel: (303) GIRARD GIBBS & De BARTOLOMEO LLP Daniel C. Girard A.J. De Bartolomeo Aaron M. Sheanin 601 California Street, Suite 1400 San Francisco, California Tel: (415) Fax: (415) COCHETT, PITRE, SIMON & McCARTHY Joseph W. Cotchett Bruce L. Simon Steven N. Williams Nanci E. Nishimura San Francisco Airport Office Center 840 Malcolm Road, Suite 200 Burlingame, CA Tel: (650) Fax: (650) Counsel for Objector CalSTRS 11

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16 DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO Denver City and County Building 1437 Bannock St. Denver, CO COURT USE ONLY Plaintiff: THOMAS R. STRAUSS, trustee under the Thomas R. Strauss Living Trust, Derivatively on behalf of Qwest Communications International, Inc., a Delaware Corporation. v. Defendants: PHILLIP F. ANSCHUTZ, ANSCHUTZ COMPANY, LINDA G. ALVARADO, CRAIG R. BARRETT, THOMAS J. DONOHUE, JORDAN L. HAINES, CANNON Y. HARVEY, PETER S. HELLMAN, VINOD KHOSLA, RICHARD NOTEBAERT, FRANK POPOFF, CRAIG D. SLATER, W. THOMAS STEPHENS, JOSEPH P. NACCHIO, ROBIN R. SZELIGA, ROBERT R. WOODRUFF, STEPHEN M. JACOBSEN, DRAKE S. TEMPEST, MARC B. WEISBERG, JAMES A. SMITH, LEWIS O. WILKS, AFSHIN MOHEBBI, Case Number: 02-CV-8188 Ctrm.: 5 and Nominal Defendant: QWEST COMMUNICATIONS INTERNATIONAL, INC. (Attorney for Objectors CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM) Michael D. Murphy SHUGHART THOMSON & KILROY P.C. Independence Plaza th Street, Suite 2300 Denver, Colorado Tel: (303) DECLARATION OF CHRISTOPHER AILMAN IN SUPPORT OF CALSTRS OBJECTIONS TO PROPOSED SETTLEMENT

17 I, Christopher Ailman, declare as follows: 1. I am the Chief Investment Officer for the California State Teachers Retirement System ( CalSTRS ). I make this declaration in support of CalSTRS Objections To Proposed Settlement in the above-entitled action. I have personal knowledge of the facts stated herein and, if called on to do so, could and would testify competently thereto. 2. CalSTRS made numerous purchases of the common stock of Qwest Communications International, Inc. ( Qwest ) between 1998 and CalSTRS first purchased Qwest common stock on May 15, CalSTRS has continuously held Qwest common stock since its initial purchase. CalSTRS continues to hold approximately 5,760,000 shares of Qwest common stock. I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed on May 25, 2004, at Sacramento, California. CHRISTOPHER AILMAN 2

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