A federal judge has ordered a group of lawyers to return more than $300,000 in fees they received under a settlement of a shareholder lawsuit they brought against drug manufacturer Akorn, as the judge said the lawsuit amounted to little more than another example of the “racket” of “worthless” shareholder class actions.
On June 24, U.S. District Judge Thomas Durkin issued an order, tossing out the settlement deal between a group of shareholder plaintiffs and Akorn in the legal action that followed Akorn’s attempted sale to German pharmaceutical company Fresenius.
The judge said the lawsuit should have been “dismissed out of hand,” because the settlement was simply an attempt by the plaintiffs to sidestep a judge’s review and allow the lawyers to get paid for securing “disclosures” to be added to the investors’ proxy statement issued by Akorn were “worthless to the shareholders.”
Judge Thomas Durkin
“Yet, Plaintiffs’ attorneys were rewarded for suggesting immaterial changes to the proxy statement,” Durkin wrote. “Akorn paid Plaintiffs’ attorney’s fees to avoid the nuisance of ultimately frivolous lawsuits disrupting the transaction with Frensenius.
“The settlements provided Akorn’s shareholders nothing of value, and instead caused the company in which they hold an interest to lose money.”
The judge ordered the plaintiffs’ attorneys, including lawyers Lewis S. Kahn, of Kahn Swick & Foti LLC, of Madisonville, La.; Christopher J. Kupka, of Levi & Korsinsky, of New York; and Paul D. Malmfeldt, of Blau & Malmfeldt, of Chicago, to return $320,000 in fees they received under the settlement.
The case had landed in court in 2017, when plaintiffs, identified as Shaun House, Robert Carlyle and Demetrios Pullos, filed suit against Akorn. They claimed the company had misled investors by failing to “disclose certain material information that is necessary for shareholders to properly asses the fairness” of Fresenius’ proposed acquisition of the Lake Forest-based Akorn.
The action came amid a spate of such actions against Akorn in the wake of the proposed Fresenius deal.
In this instance, House and his co-plaintiffs claimed Akorn’s proxy statement, filed with the U.S. Securities and Exchange Commission, included “incomplete and misleading information,” including “financial projections” for Akorn, “valuation analyses” performed by Akorn for JP Morgan and a lack of disclosure of “potential conflicts of interest JP Morgan faced as a result of its prior dealings with parties on both sides of the merger.”
Akorn and the plaintiffs reached a quick settlement in the case. Under that deal, Akorn revised its proxy statement to address the plaintiffs’ claims, and agreed to pay the lawyers $322,000 in fees.
Those fees drew the attention and objection of Ted Frank, director of the Center for Class Action Fairness at the Competitive Enterprise Institute. Frank also owned 1,000 shares of Akorn stock.
The judge turned down a request by Frank to intervene in the case, but allowed Frank to file an amicus, or friend-of-the-court, brief, explaining why the settlement should be undone. In his objections, Frank said such lawsuits hurt Akorn and its shareholders and don’t hold up the standard established by the U.S. Seventh Circuit Court of Appeals in its 2017 decision in the action docketed as In re Walgreen Co. Stockholder Litigation.
In that decision, the Seventh Circuit said “attorneys’ fees awards for disclosure suits … are generally ‘no better than a racket’” and “should be dismissed out of hand,” unless the added disclosures are “plainly material” and benefit shareholders.
Durkin last year demanded the plaintiffs prove why their lawyers’ fees were warranted under the Walgreen standard.
In his latest ruling, Durkin found they are not, and stand as an example of the “racket” cited by the Seventh Circuit in the Walgreen case.
“This is the ‘racket’ described in Walgreen,” the judge wrote. “… This sharp practice ‘must end.’”