In Re: Cendant Corporation Litigation

OPINION OF THE COURT

I. Introduction & Summaby. .217

II. Facts & Procedural History 221

*217 Background. to to

The Appointment of Lead Plaintiff and Lead Counsel to to to

Class Certification, the Filing of the Amended Complaint, and the Reaching of a Settlement . to to cn Cb

The Terms of the Settlement and the Plan of Allocation. to to -q

Preliminary Settlement Approval, the Settlement Notice, and the Fairness Hearing. to to OO

The Appeals and the Issues Presented by Each Appeal to to ZD ^

III. The FaiRNess of the Settlement and the Plan of Allooation. H CO (M

A. Approval of the Settlement: The Application of the Girsh Factors. H CO N

1. The First Girsh Factor: Complexity & Likely Duration of Litigation CO CO (M

2. The Second Girsh Factor: The Reaction of the Class. ^ .CO N

3. The Third Girsh Factor: The Stage of Proceedings. io CO (M

4. The Fourth Girsh Factor: The Risks of Establishing Liability . C-» CO (M

5. The Fifth Girsh Factor: The Risks of Establishing Damages. CO CO (M

6. The Sixth Girsh Factor: The Risks of Maintaining the Class Action Through Trial.■. to CO ZD

7. The Seventh Girsh Factor: The Ability of the Defendants to Withstand a Greater Judgment. CO CO

8. The Final Girsh Factors: The Range of Reasonableness of Settlement Fund in Light of the Best Possible Recovery & in Light of Litigation Risks.

9. Summing Up. the Girsh Factors.

B. Intra-class Conflicts.

1. Throenle’s Arguments.

a. The Lead Plaintiffs Alleged Conflicts of Interest

b. The Corporate Governance Changes.

2. Mark’s Arguments.

C. The Davidsons’Objections.

1. Class Certification Findings .

2. Notice of the Settlement.

3. Intra-Class Conflicts .

4. Alleged Flaws in the Plan of Allocation .

IV. Counsel Selection and Counsel Fees.254

A. Introduction: Attorney-Client Tension in the Class Action Context.254

1. The Problem With Class Actions .254

2. The Evolution of Judicial Review of Counsel Fees In Class Actions.255

3. The PSLRA.261

B. The Reform Act’s Procedures; Selection of the CalPERS Group As Lead Plaintiff.262

1. Legal Standards.262

a. Identifying the Presumptive Lead Plaintiff.262

b. Determining Whether the Presumption Has Been Rebutted.268

2. Application of the Standards Here.268

C. The Auction.270

1. May NYCPF Validly Object to the Auction? .271

2. Does the Reform Act Ever Permit an Auction?.'..273

3. Was the Auction in this Case Permissible?.277

D. Counsel Fees.280

V. Conclusion.286

I. Introduction & Summary

These are consolidated appeals from the District Court’s approval of a $3.2 billion settlement of a securities fraud class action brought against Cendant Corporation and its auditors, Ernst & Young, and the *218 Court’s award of $262 million in fees to counsel for the plaintiff class. Both the settlement and the fee award are challenged in these appeals. The enormous size of both the settlement and the fee award presages a new generation of “mega cases” that will test our previously developed jurisprudence.

This case is governed by the Private Securities Litigation Reform Act of 1995 (PSLRA or Reform Act). Under the Reform Act, one of a district court’s first tasks is to select a lead plaintiff. Once the lead plaintiff has been appointed, the statute provides that the lead plaintiff “shall, subject to the approval of the court, select and retain counsel to represent the class.” The District Court, after appointing a lead plaintiff, declined to approve its choice of counsel, instead choosing to select lead counsel by means of an auction. The most important question presented by these appeals is whether this decision was compatible with the PSLRA. Closely intertwined, and also of great importance, are issues involving the proper procedures for selecting a lead plaintiff and for awarding counsel fees in cases governed by the Reform Act.

Before we can reach these issues, however, we must decide whether the District Court abused its discretion in approving the settlement and the plan for allocation of damages, to which objections were interposed. Some objectors argue forcefully that the settlement was inadequate under the nine-factor test that this Court developed for reviewing the fairness, reasonableness, and adequacy of class action settlements in Girsh v. Jepson, 521 F.2d 153 (3d Cir.1975). Noting that the class’s case was exceptionally strong because Cendant (the main defendant) virtually conceded liability and because some of the plaintiffs’ claims (i.e., those presented under § 11 of the Securities Act of 1933) were strict liability claims, these objectors contend that, notwithstanding the threat of bankruptcy if the settlement was too high, a considerably higher figure could have been extracted under these favorable liability circumstances without running the risk that Cendant would seek bankruptcy protection. In their submission, the class should have received a fuller recovery of its alleged $8.8 billion loss.

These objections are weighty, but other Girsh factors counsel strongly in favor of approving the Cendant settlement — the reaction of the class, the stage of the proceedings, the risk of establishing damages, the range of reasonableness in light of the possible recovery and the litigation risks, and, though to a lesser degree, the complexity of the . litigation. Although we think that the question of the fairness of the settlement under the Girsh factors is closer than the District Court made it out to be, our application of those factors supports the conclusion that the District Court did not abuse its discretion in approving the Cendant settlement.

The issue is even clearer with respect to the settlement between the class and Ernst & Young (E&Y), against which the case was far more difficult. As with Cen-dant’s settlement, the reaction of the class, the risk of establishing damages, and the range of reasonableness of the recovery weigh in favor of approving the E&Y settlement. These factors are augmented by two other Girsh factors that weigh strongly in favor of the E&Y settlement: the complexity of litigation and the risk of establishing liability. Because the ability to withstand a greater judgment is the only Girsh factor that cuts against approving the E&Y settlement, we conclude that the District Court did not abuse its discretion in approving it.

One objector also argues that the District Court should not have approved the *219 settlement because the entities that comprise the lead plaintiff were too conflicted to represent the class adequately. The bases for this claim are two-fold. First, the institutional investors that make up the lead plaintiff continued to hold Cen-dant stock during the litigation and settlement process, and thus, the objector submits, had very different motives from other investors who had sold their stock. Second, the lead plaintiff negotiated as part of the settlement certain corporate governance changes that will benefit only those class members that continue to hold Cendant stock. We are unpersuaded by the first argument because it is clear that Congress, in passing the PSLRA, for better or for worse, anticipated and implicitly approved the notion that entities that continued to hold stock in the defendant corporation would serve as lead plaintiffs notwithstanding the existence of many class members who did not. With respect to the second argument, there is no evidence that the lead plaintiff gave up anything of value to the class members to induce Cendant to agree to the corporate governance changes. We therefore hold that the District Court did not abuse its discretion in approving the settlement.

We then turn to the objections regarding the allocation of the settlement fund. One objector contends that the claims under § 11 of the Securities Act of 1933, which only a subset of the class possesses, are legally stronger than the other claims held by class members, i.e., claims under § 10(b) of the Securities Exchange Act of 1934. Based on this disparity, the objector argues that the § 11 claimants should receive a larger share of the settlement proceeds. We conclude, however, that the §11 claims here are not necessarily legally stronger than the § 10(b) claims, and that, at any rate, the basis for measuring the different legal strengths of the claims involved is too speculative to support the objector’s contention. We thus hold that the District Court did not abuse its discretion in approving a settlement allocation that treated all claims more or less equally-

Having determined that the settlement may stand, we must examine the District Court’s award of counsel fees. Because the Reform Act establishes a detailed and integrated process for choosing a lead plaintiff, selecting lead counsel, and approving counsel’s fee, we discuss these issues sequentially. In this case, the District Court selected as lead plaintiff a group made up of three pension funds (the CalPERS Group or Lead Plaintiff). Following the dictates of the Reform Act, the court first identified that Group, which is made up of three huge government pension funds, as being the movant with the largest financial interest in the relief sought by the class. The court then made a preliminary determination that the Cal-PERS Group satisfied Federal Rule of Civil Procedure 23’s typicality and adequacy requirements, which, under the PSLRA, made it the presumptive lead plaintiff. The District Court ultimately appointed the CalPERS Group as lead plaintiff because it determined that no member of the plaintiff class had succeeded in rebutting the statutory presumption. We find no fault with the court’s decisions on this score.

The Lead Plaintiff then asked the District Court to appoint as lead counsel two firms with which it had previously negotiated a Retainer Agreement, Bernstein, Li-towitz, Berger, & Grossmann of New York City, and Barrack, Rodos & Bacine of Philadelphia. The court declined initially to approve the Lead Plaintiffs choice, deciding instead to select lead counsel via an auction, but giving the CalPERS Group’s chosen counsel the option to match what the court determined to be the lowest *220 qualified bid. Those firms exercised this' option and were appointed as lead counsel. Following the settlement of the case, and consonant with the results of the auction, Lead Counsel petitioned for and was awarded a sum of $262 million in counsel fees, even though that amount was at least $76 million higher than that provided for under the Retainer Agreement.

We conclude that the court’s decision to hold an auction to select lead counsel was inconsistent with the Reform Act, which is designed to infuse lead plaintiffs with the responsibility (and motivation) to drive a hard bargain with prospective lead counsel and to give deference to their stewardship. Although we believe that there are situations under which the PSLRA would permit a court to employ the auction technique, this was not one of them. Here, inasmuch as the Lead Plaintiff conducted its counsel search with faithful observance to the letter and spirit of the Reform Act, it was improper for the District Court to supplant the CalPERS Group’s statutorily-conferred right to select and retain lead counsel by deciding to hold an auction. In sum, we hold that the District Court erred in using an auction to appoint lead counsel; rather it should have done so pursuant to the terms of the Retainer Agreement.

Because the District Court’s process resulted in the firms chosen by the Lead Plaintiff being appointed lead counsel anyway, this error was harmless (with regard to the selection of lead counsel). However, because the terms of the Retainer Agreement required the prior approval of the pension funds comprising the CalPERS Group, and that prior approval was not obtained, the fee request here was improper. The fee award must therefore be set aside and this matter remanded to the District Court with instructions to dismiss the fee application and to decline to accept any further applications that are submitted without the prior approval of the Funds.

It goes without saying that the principal focus after remand will be the counsel fee application which will be resubmitted. The parties have extensively briefed and argued the fee award issue, understanding that if the award is set aside the District Court will need guidance on remand. Having this need in mind — along with the fact that this case, in its various facets, has been before this Court seven times now— we will set forth the standards that the court should follow in evaluating a properly-submitted fee request in Reform Act cases so as to help bring this now protracted matter to a close. Although in general the court should use the same seven-factor test that our cases have developed for reviewing fee requests in other class action contexts, review in PSLRA cases must be modified to take into account the changes wrought by the Reform Act. The biggest change, we believe, is that courts should afford a presumption of reasonableness to fee requests submitted pursuant to an agreement between a properly-selected lead plaintiff and properly-selected lead counsel.

This is not to say, however, that this presumption cannot be overcome. There is an arguable tension between the general schema of the PSLRA on the one hand and its overarching provision that requires the court to insure that counsel fees not exceed'a reasonable amount, see 15 U.S.C. § 78u-4(a)(6), on the other. We hold that the presumption will be rebutted when a district court finds the fee to be (prima facie) clearly excessive.

For the past decade, counsel fees in securities litigation have generally been fixed on a percentage basis rather than by the so-called lodestar method. Consistent with that approach, we have held that, when the percentage fee is challenged, the *221 Court’s obligation to award a reasonable fee will be best exercised by application of the factors described in Gunter v. Ridgewood Energy Corp., 223 F.3d 190 (3d Cir.2000). Gunter itself allows for the possibility of a lodestar cross-check, see id. at 200, even though the lodestar approach is no longer favored. We conclude that, in determining whether the retainer agreement between the Lead Plaintiff and Lead Counsel is clearly excessive, the court should first use the Gunter factors to evaluate it, for the lodestar cross-check is quite time consuming. But if the court cannot otherwise come to a resolution, it can consider a lodestar cross-check.

In determining whether the presumption of reasonableness of a properly submitted fee request has been rebutted here, the District Court will have to consider the powerful arguments of the objectors that: (1) this was a simple case in terms of liability; (2) the settlement was achieved without a great deal of work by lead counsel; and (3) both the fee award of $262 million under the auction and (potentially up to) $187 million under the Retainer Agreement are staggering in their size, and, on the basis of the evidence in the record, may represent compensation at an astonishing hourly rate (as well as an extraordinarily high lodestar “multiplier”).

We conclude by explaining that, if the court’s deliberations were to confirm that the fee agreed to by a lead plaintiff and lead counsel was clearly excessive, the court will need to set a reasonable fee according to the standards our previous cases have set down for class actions not governed by the PSLRA.

II. Facts & Procedural History

A. Background

Cendant Corporation, the main defendant, was formed by a December 17, 1997 merger of CUC International, Inc. (CUC) and HFS Incorporated (HFS). Pursuant to a Registration Statement and Joint Proxy Statement/Prospectus, HFS shareholders tendered their shares in exchange for CUC shares. HFS was then merged into CUC and the combined company was renamed Cendant. Cendant is currently one of the world’s largest consumer and business service companies; among its more well-known businesses are Avis, Century 21, and the Ramada and Howard Johnson hotel franchise chains.

On March 31, 1998, Cendant filed its Form 10-K Annual Report with the SEC, which included the company’s 1997 financial statements. Two weeks later, after the close of trading on April 15, 1998, Cendant announced that it had discovered “accounting irregularities” in certain units of the former CUC. The notice stated that Cendant expected to restate its annual and quarterly financial statements for 1997 and possibly for earlier periods as well; it also stated that Cendant had retained the law firm Willkie Farr & Gallagher (Willkie Farr) to conduct an investigation into its past financial statements and the allegations of fraud made by some Cendant employees. The next day, Cendant’s stock fell 47%, from $35-% to $19-%6 per share, triggering several class action lawsuits on behalf of investors who purchased CUC or Cendant stock during 1997.

On July 14, 1998, Cendant announced that it would also restate CUC’s annual and quarterly financial statements for 1995 and 1996. Following this announcement, Cendant’s stock fell by another 9%, to $15-uAe per share. On August 28, 1998, Cen-dant filed Willkie Farr’s report of its investigation, with the SEC. The report revealed that Cendant would restate its 1995, 1996, and 1997 financial statements by approximately $500 million. On August 31, 1998, the first trading day after Cendant’s *222 disclosure of the Willkie Farr report, Cen-dant’s stock fell another 11%, to $11-%. The disclosure of the report triggered several more lawsuits arising from purchases of CUC securities during the broader period of alleged fraud. All told, Cendant shareholders lost more than $20 billion in market capitalization.

Between April and August 1998, at least sixty-four putative securities fraud class action lawsuits were filed nationwide as a result of the above disclosures. Generally speaking, the lawsuits alleged that, from 1995 to 1998, CUC/Cendant had issued a series of materially false and misleading statements in the form of quarterly reports, annual reports, registration statements, prospectuses, and press releases, and that these statements artificially inflated CUC/Cendant’s stock price. The lawsuits named as defendants Cendant, its officers and directors, and other parties— including E&Y, which had acted as CUC’s independent public accountant from 1983 until the time of the creation of Cendant. E&Y had also performed a post-merger audit of the financial statements of Cen-dant Membership Services, a wholly-owned subsidiary of Cendant, for the year ending December 31, 1997. The lawsuits alleged that E&Y had issued unqualified reviews and audit opinions certifying CUC’s quarterly and annual reports, and that E&Y had failed to adhere to Generally Accepted Auditing Standards and thus lacked any reasonable basis for its opinions and reports.

Cendant eventually filed a cross-claim against E&Y, detailing allegations that E&Y became aware of the fraud long before it was made public but chose to conceal and facilitate it, thereby continuing to garner millions of dollars in fees. Alternatively, Cendant alleged that E&Y was negligent in failing to discover the fraud earlier. E&Y strenuously denied all the allegations made in the amended cross-claim, pointing out that Cendant had not provided any evidence or documentation to back up the allegations.

By order of the Judicial Panel on Multi-district Litigation, all cases relating to Cendant’s accounting irregularities were transferred to the United States District Court for the District of New Jersey. On May 29, 1998, the District Court consolidated all of them under the caption In re Cendant Corporation Litigation.

B. The Appointment of Lead Plaintiff and Lead Counsel

After consolidation, two of the District Court’s first responsibilities were to appoint a lead plaintiff and lead counsel to represent the putative class. The PSLRA lays out detailed procedures for courts to follow in making these decisions, directing them to appoint “the most adequate plaintiff” as the lead plaintiff, and instructing them to “adopt a presumption” that the most adequate plaintiff is the movant that “has the largest financial interest in the relief sought by the class” and “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.” 15 U.S.C. § 78u-4(a)(3)(B)(i) & (in)®. 1 The presumption “may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff will not fairly and adequately protect the interests of the class or is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” Id. § 78u-4(a)(3)(B)(iii)(II). With regard to the selection of lead counsel, the statute provides that “[t]he most adequate plaintiff shall, *223 subject to the approval of the court, select and retain counsel to represent the class.” Id. § 78u-4(a)(3)(B)(v).

Fifteen individuals and groups filed motions to serve as lead plaintiff, and the District Court held a hearing on August 4, 1998. It soon became clear that the Cal-PERS Group — a consortium of the three largest publicly-managed pension funds in the United States: the California Public Employees’ Retirement System (Cal-PERS), the New York City Pension Funds (NYCPF), and the New York State Common Retirement Fund (NYSCRF) — had, by far, “the largest financial interest in the relief sought by the class.” According to the District Court, the members of the CalPERS Group alleged combined losses in excess of $89 million, while the largest amount alleged by any other movant was $10.6 million. See In re Cendant Corp. Litig., 182 F.R.D. 144, 147 (D.N.J.1998). This fact, in conjunction with the District Court’s express finding that it' satisfied Rule 23’s “adequacy” and “typicality” requirements, see id. at 147-48, rendered the CalPERS Group the presumptive lead plaintiff.

Two competing movants, the Joanne A. Aboff Family Trust (Aboff) and Douglas Wilson, offered three reasons why thé presumption had been rebutted, but the District Court rejected their claims. Aboff and Wilson: (1) contended that they were better suited to be lead plaintiff than the CalPERS Group because they had negotiated a lower fee schedule with their lawyers; (2) argued ■ that the CalPERS Group could not fairly and adequately protect the interests of the class because one of the Group’s chosen counsel had made substantial campaign contributions to the sole trustee of one of the funds that make up the CalPERS Group, thereby creating an appearance of impropriety; and (3) suggested that the District Court should select -lead plaintiff “through a process of competitive bidding.” Id.' at 148-49. The District Court concluded that the Cal-PERS Group could not fairly and adequately represent the interests of the holders of convertible Cendant derivative securities known as PRIDES, see id. at 149-50, and severed the PRIDES claims from the main action. 2 The court eventually appointed the CalPERS Group as lead plaintiff of the main Cendant action. See id. at 149. 3

The court then turned to selection of lead counsel. The CalPERS Group had *224 filed a motion seeking to have Barrack, Rodos & Bacine (BRB) and Bernstein Li-towitz Berger & Grossman LLP (BLBG) appointed lead counsel pursuant to a Retainer Agreement that it had negotiated with them, which dictated not only the formula for determining attorneys fees but also included a Plan for Monitoring Litigation, a section outlining a Theory of Recovery, and a part captioned Consultation Regarding Settlement Negotiations. 4 The District Court, however, decided to select lead counsel via auction. The court acknowledged that the PSLRA provides that “[t]he most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class.” 15 U.S.C. § 78u-4(a)(3)(B)(v); see Cendant Corp. Litig., 182 F.R.D. at 150 (quoting this language from the Reform Act). But it reasoned that “the Court’s approval is subject to its discretionary judgment that lead plaintiffs choice of representative best suits the needs of the class,” and *225 concluded that “mechanisms” other than the lead plaintiffs choice were available to assist the court in making that determination. Id. at 150. The court pointed to the “emerging trend” of using auctions “to simulate the free market in the selection of class counsel,” and stated that it would hold an auction to select lead counsel and to determine its fee. Id. at 150-51. Recognizing that the Reform Act confers upon the Lead Plaintiff the “opportunity” to “select and retain” lead counsel, the District Court ruled that counsel chosen by the CalPERS Group would have the chance to match what the court determined to be the lowest qualified bid. Id. at 151. Later, the District Court made clear that any winning bidder would have to agree to comply with all provisions of the Retainer Agreement that the Cal-PERS Group had negotiated with its chosen counsel (except, of course, the fee grid).

The District Court solicited input about how the auction should be conducted and held a hearing on August 19, 1998. The court eventually required that bids be submitted pursuant to a grid it had designed, 5 and received nine bids to serve as lead counsel in the main Cendant action. 6 The District Court rejected the bid by counsel for appellant Aboff, which would have generated fees of 1-2% of the total settlement depending on the size of the settlement and the timing of the recovery, characterizing it as unrealistic and “quasi-philanthropic,” and stating that “[u]nless the eventual monetary recovery in this case is in the billions, such an apparently ‘cheap’ fee does not make professional sense.” 7 In contrast, the court expressly found that counsel proposed by the Lead Plaintiff was qualified and that' its proposed fee scale was “realistic,” but also concluded that another qualified bidder had submitted a lower “realistic” bid. Counsel chosen by the Lead Plaintiff exercised its power to meet this lower bid, and was thus appointed lead counsel.

C. Class Certiftcation, the Filing of the Amended Complaint, and the Reaching of a Settlement

After a case management conference, the newly-appointed Lead Plaintiff filed its Amended and Consolidated Class Action Complaint (the Complaint or Amended Complaint) along with a motion for class certification on December 14, 1998. The Complaint defined the class represented as

[a]ll persons and entities who purchased or otherwise acquired publicly traded securities ... either of Cendant or CUC during the period beginning May 31, *226 1995 through and including August 28, 1998 and who were injured thereby, including all persons or entities who exchanged shares of HFS common stock for shares of CUC stock pursuant to the Registration Statement.... Excluded from the Class are: (i) defendants; (ii) members of the family of each individual defendant; (iii) any entity in which any defendant has a controlling interest; (iv) officers and directors of Cendant and its subsidiaries and affiliates; and (iv)[sic] the legal representatives, heirs, successors or assigns of any such excluded party.

The Amended Complaint alleged claims under both § 10(b) of the Securities Exchange Act of 1934 [hereinafter “§ 10(b) claims”] and § 11 of the Securities Act of 1933 [hereinafter “§ 11 claims”], as well as numerous other claims that are not relevant for the purposes of our discussion and decision. The Complaint set out § 10(b) claims for all class members, but presented § 11 claims only for those class members who received Cendant stock via the HFS merger. CUC, however, acquired via merger fourteen other companies during the class period. As with the HFS merger, these other mergers involved the filing of registration statements with the SEC during the class period, and thus these mergers also gave rise to § 11 claims (as well as claims under § 12 of the Securities Act of 1933) for those who received CUC stock via these mergers.

On January 27, 1999, the District Court granted Lead Plaintiffs motion for class certification, defining the certified class as including “all purchasers or acquirers of Cendant Corporation or CUC International, Inc. publicly traded securities between May 31, 1995 and August 28, 1998 who were injured thereby.” Several of the defendants then filed motions to dismiss. In an order issued July 27, 1999, the District Court denied all of them except E&Y’s motion to dismiss § 10(b) claims against it that were related to stock purchases made after April 15, 1998. See In re Cendant Corp. Litig., 60 F.Supp.2d 354 (D.N.J.1999). On August 6, 1999, the court approved the form of the notice of the class action to be sent to potential class members and ordered its dissemination. The District Court required Lead Plaintiff to mail notice to all record holders of Cen-dant and CUC stock and to all brokers in the transfer records, and to publish notice of the class action on three different days in The Wall Street Journal, The New York Times (National Edition), and the Dow Jones Business Newswire. In all, the Class Administrator sent 261,224 notices.

Both the individually mailed and published notices included the definition of the Class as stated in the Complaint, and warned potential class members that if they failed to follow the specific procedures for opting out of the Class, they would be deemed class members and would be bound by any settlement or judgment. The notice stated that any class member who wanted to opt out had to file a written request for exclusion postmarked by December 27,1999, which served as the final opt-out date.

On December 7, 1999, almost three weeks before the final opt-out date, Cen-dant announced a proposed settlement that would require it to pay $2.85 billion to the class members, and ten days later the parties announced that a proposed settlement had been reached between E & Y and the Lead Plaintiff (collectively, “the Settlement”). On December 27, 1999, the opt-out period closed pursuant to the class notice. Out of over 100,000 class members, only 234 opted out before the deadline. See In re Cendant Corp. Sec. Litig., 109 F.Supp.2d 235, 257 (D.N.J.2000). On March 17, 2000, Cendant and the Lead *227 Plaintiff submitted settlement documents to the District Court, including a Plan of Allocation for the distribution of settlement proceeds among class members.

D. The Terms of the Settlement and the Plan of Allocation

The defendants’ obligations under the Settlement consist of three primary elements:

1) Cash Payment: Cendant agreed to pay $2,851,500,000 and E&Y agreed to pay $335,000,000 into the settlement pool, which brings the total settlement money to approximately $3.2 billion. Interest will accrue on this money until it is paid out to the Class.

2) 50% of any recovery from E&Y: Cendant and the individual defendants from HFS Inc. are currently suing E&Y over E&Y’s role in the fraud. Fifty percent of any net recovery from this action will go to the Class.

3) Corporate governance changes: Cendant will institute corporate governance changes, including putting a majority of independent directors on its Board of Directors; placing only independent directors on the Board’s Audit, Nominating, and Compensation Committees; de-classifying the Board and providing for the annual election of all directors; and precluding the repricing of any employee stock option after its grant, except with the approval of a majority of voting shareholders.

In exchange for these undertakings, the Class has agreed to release Cendant, E&Y, the HFS individual defendants, and the CUC individual defendants from all claims that “are based upon, are related to, arise from or are connected with any facts, circumstances, statements, omissions, events or other matters raised or referred to in the pleadings in the Litigation or which could have been asserted against Cendant, the HFS Individual Defendants and the other Released Parties by the Lead Plaintiffs and any Class Member.” Stipulation of Settlement with Cendant Corp. and Certain Other Defs. at 12.

The Settlement also contains a Plan of Allocation, which will be used to allocate the settlement money among the class members. The specifics of the Plan of Allocation are somewhat complex because it involves calculating the “true value” of Cendant/CUC stock for any given day during the class period. To get the “true value” of Cendant stock on any given day, one has to remove from the actual price the artificial inflation that Cendant’s fraud caused in the price, a process made trickier by the fact that, unlike many other frauds, the fraudulent statements made by Cendant were not in the form of a surprising announcement that caused the stock to rise a certain amount which would provide a fair indication of how much the fraud affected the price. Instead, Cendant’s fraud consisted of releasing financial statements that met the market’s expectations, while the truth was that Cendant was falling far short of these expectations.

Cendant did, however, make several announcements revealing the fraud that caused the price of its stock to plummet, namely, the three announcements made on April 15, July 14, and August 28, 1998. The Plan of Allocation works backwards from these price drops to develop an equation for determining the true, non-artificially-inflated value of Cendant stock for any day during the class period. This “true value” is then compared to the actual price of Cendant/CUC stock on that day to determine how much that day’s purchasers of Cendant/CUC stock overspent. The Plan uses this amount of overpayment to determine the class members’ damages.

The Plan of Allocation also allows class members who had received their *228 stock in CUC’s merger with HFS to receive as damages the greater of (1) their damages calculated under § 10(b) as determined by the Plan, or (2) their damages as calculated under § 11, which would give them the difference between what they paid for the Cendant stock (i.e., the value of the HFS securities that they traded in to get the Cendant stock) and the value of the Cendant stock as of the day the lawsuit was brought (April 16, 1998, the date the first lawsuit was filed). This § 11 provision draws upon the text of the 1933 Act, described in the margin. 8

Lead Plaintiffs damages expert used the Plan of Allocation’s damage determination method to calculate the total damages suffered by the Class from the Cendant fraud as $8.8 billion. At oral argument on this appeal and in a supplemental affidavit, Lead Plaintiff represented that the Claims Administrator had received over 118,000 proofs of claim from class members, for a total of $4.9 billion claimed losses. The $3,185 billion cash payment in the Settlement thus represents approximately a 36% recovery rate on the Class’s total losses and a 64% recovery rate on the actually claimed losses. Of the $4.9 billion claimed losses, approximately $2.1 billion are losses claimed by class members who acquired Cendant stock in the HFS merger deal.

E. Preliminary Settlement Approval, the Settlement Notice, the Attorneys Fees Request, and the Fairness Hearing

On March 29, 2000, the District Court granted preliminary approval to the proposed settlement and enjoined all actions or claims that were contemplated by it. In early April, pursuant to the order containing the settlement approval, the Class Administrator mailed 478,000 notices of the Settlement and proof of claim form packages [hereinafter “the Settlement Notice”] to potential class members, and also published notices in The Wall Street Journal and The New York Times. The Settlement Notice summarized the course of the litigation and the terms of the Settlement, including Lead Plaintiffs Plan of Allocation of the settlement funds. It also informed the class members that Lead Counsel intended to submit an application for attorneys fees totaling 8.275% of the total settlement fund and for reimbursement of expenses in the amount of $15,855,000. The Notice stated that the District Court would conduct a fairness hearing on June 28, 2000, and contained information about how class members could go about objecting to the Settlement. It provided that any class member could appear at the fairness hearing to object to *229 the Settlement. Class members were also allowed simply to state an objection to the Settlement in writing, although, as we discuss below in Part III.A.2, there is some dispute over how clear the Settlement Notice was on this point.

Prior to the fairness hearing, Lead Counsel petitioned the District Court for an award of $262,468,857 in attorneys fees and $14,628,806 in expenses. Lead Counsel noted that its fee request “adhere[d] precisely to the parameters in the lowest qualified bid proposal” established by the court’s auction. 9 At the hearing on the request to approve the Settlement and for counsel fees, six parties raised objections to the substantive provisions of the Settlement. Three were class members (Betty Duncan, Ann Mark, and Tere Throenle); two were not class members (Martin Deutch, a derivative plaintiff, and the State Board of Administration of Florida, which opted out of the Class); and one was a party whose class status is unclear (the Davidsons). 10 Four class members filed objections to the fee request; NYCPF (a member of the CalPERS Group); Aboff; Faye Schonbrunn; and Throenle.

August 15, 2000, the District Court formally approved the Settlement, entering two opinions and orders approving the Settlement and Plan of Allocation and rejecting all of the objectors’ objections. See In re Cendant Corp. Sec. Litig., 109 F.Supp.2d 235 (D.N.J.2000); In re Cendant Corp. Sec. Litig., 109 F.Supp.2d 273 (D.N.J.2000). On August 16, 2000, the District Court filed an opinion and order awarding Lead Counsel approximately $262 million in attorneys fees pursuant to the schedule that had been pre-set via the auction. See In re Cendant Corp. Sec. Litig., 109 F.Supp.2d 285 (D.N.J.2000). Several of the objectors appealed these rulings.

F. The Appeals and the Issues Presented by Each Appeal

This opinion addresses three appeals from the District Court’s approval of the *230 Settlement and the Plan of Allocation, and four appeals from its award of counsel fees. 11 These appeals were consolidated for argument. On appeal, the objectors to the Settlement and the Plan of Allocation are:

Tere Throenle (00-2708): Throenle challenges the overall fairness to the Class of the Cendant part of the Settlement, and contends that the Lead Plaintiff suffered from a conflict of interest that prevented it from fairly representing all class members because it continued to hold Cendant stock during and after the settlement negotiations. 12

Betty Duncan (00-2683): Duncan challenges the overall fairness to the Class of the E&Y part of the Settlement. 13

Ann Mark (00-2734): Mark claims that the proposed allocation of the settlement money among the Class is unfair because class members with § 11 claims should have received more than class members with § 10(b) claims. 14

The Davidsons (00-2709): The David-sons contend that the District Court erred by not making explicit Fed. R.Civ.P. 23 findings when certifying the Class; that the notice given to the Class was insufficient; that there are intra-class conflicts arising from the disparate treatment of class members under the terms of the Settlement; and that the Plan of Allocation is flawed. 15

Objector Deutch’s contentions are addressed in a separate opinion by this panel. See In re Cendant Corp. See. Litig. (Deutch), 264 F.3d 286 (3d Cir.2001). Objector State Board of Administration of Florida did not appeal.

The objectors to the court’s award of counsel fees are:

NYCPF (00-2769; 00-3653): NYCPF argues that the District Court’s decision to select lead counsel by means of an auction was inconsistent with the PSLRA, and contends that the Retainer Agreement negotiated between the Lead Plaintiff and Lead Counsel remains in effect. It also contends that the fee award approved by the District Court constitutes an excessively high percentage of the recovery given the circumstances.

Aboff (00-2520): Aboff argues that the fee award was “grossly excessive,” and also claims that the notices that were sent to class members did not contain sufficient information so as to allow them to evaluate the reasonableness of the fee request.

*231 Throenle (00-2708): Throenle contends that the fee request was improper and excessive.

Faye Schonbrunn (00-2733): Schon-brunn argues that the District Court ignored this Court’s jurisprudence governing fee requests, and claims that the court’s award was excessive.

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