FirstEnergy $180 mln derivative deal wins final approval. Is it really over?

(Reuters) - U.S. District Judge Algenon Marbley of Columbus, Ohio, granted final approval on Tuesday to a $180 million global settlement that resolves consolidated shareholder derivative litigation against officers and board members of the corruption-scarred Ohio utility FirstEnergy Corp.

The judge awarded $36 million to the plaintiffs’ firms that litigated the case, which was less than they asked for but still a handsome payday for Bernstein Litowitz Berger & Grossmann, Saxena White and Cohen Milstein Sellers & Toll. Marbley concluded that they earned the fee by securing most of FirstEnergy’s $220 million in available insurance and by obtaining corporate governance reforms beyond those imposed in FirstEnergy’s deferred prosecution agreement with the U.S. Justice Department.

Marbley carefully considered objections raised by FirstEnergy shareholder Todd Augenbaum, who argued that the settlement may have released claims against FirstEnergy’s auditors and that the deal should have included personal contributions from FirstEnergy’s former CEO, Charles Jones, and other former executives implicated in a bribery scheme to pay millions of dollars to Ohio lawmakers in exchange for favorable legislation. (Jones' lawyer has previously denied that the ex-CEO broke the law or violated company policies.) Marbley concluded those objections were unwarranted: The settlement’s language, he said, did not preclude FirstEnergy’s potential claims against its auditors or the company’s salary clawback actions against former executives.

In a typical derivative case, Marbley’s ruling would be the last word. But as you know, the FirstEnergy derivative litigation has been anything but typical, with U.S. District Judge John Adams of Akron continuing to press for more discovery, including depositions of former FirstEnergy executives, even after Marbley granted preliminary approval to the proposed settlement. Adams, who is overseeing a lone derivative suit that he refused to transfer to Marbley, has criticized lead shareholder lawyers for seeking the Columbus judge's approval of the settlement, even though the derivative suit before him was the first to be filed. Adams has highlighted the public interest in exposing alleged FirstEnergy participants in the bribery scheme and has pointedly queried why the global deal did not include salary clawbacks from those alleged wrongdoers.

Last week, as I’ve reported, Adams said he intends to appoint the shareholder firms that represent settlement objector Augenbaum — Markovits, Stock & DeMarco and Abraham, Fruchter & Twersky — to resume litigating the derivative case he is overseeing.

So the question now, with Marbley’s approval of a deal that releases many of the company’s claims against former directors and officers, is whether there’s anything left for Adams to oversee.

Marbley’s opinion approving the settlement hinted at an answer. The opinion gently refuted some of Adams’ criticisms, including the Akron judge’s contention that shareholder lawyers forum-shopped. Marbley said it was appropriate for counsel he appointed to lead the consolidated case to seek his approval of the settlement. The discretionary "first filed" rule, he wrote, did not require plaintiffs to move for approval from Adams.

Marbley wrote that he was “keenly attuned to the comity considerations at play,” and that it would be up to Adams to decide whether to dismiss the case before him. But the Columbus judge also said that his final approval order “will mean a de facto resolution” of the Akron case, since the settlement stipulation calls for the two sides jointly to move for dismissal. Moreover, Marbley said, since the Akron and Columbus derivative cases were both brought on behalf of FirstEnergy and involve the same claims and defendants, “it seems to this court that res judicata and the ‘one recovery’ rule would apply even if the stipulation did not require that the other actions be dismissed.”

I left a message requesting comment from Adams about the Marbley opinion but didn’t hear back. I also reached out to Bernstein Litowitz and Saxena White, which led the case before Marbley; to Debevoise & Plimpton, which represents the FirstEnergy board’s special litigation committee; to Charles Jones' counsel Carole Rendon of BakerHostetler and defense counsel for several other individual defendants who are party to the settlement; and to the lawyers Adams has picked to resume the litigation in his court, Jeffrey Abraham and Michael Klein of Abraham Fruchter and Terence Coates of Markovits. No one got back to me.

In the most recent docket entry in the case before Adams, the judge set an Aug. 26 deadline for any objections to his appointment of the two new shareholder firms.

My best guess is that the entities that signed the settlement approved by Marbley will, as the settlement requires, seek to dismiss the remaining case before Adams – but that Adams will deny the motion. The settling parties will then appeal his ruling, as they are required to do under the settlement agreement. Abraham Fruchter and Markovits, meanwhile pledged in the discovery proposal they submitted to Adams to appeal Marbley’s approval of the settlement on behalf of their objecting shareholder client.

The 6th U.S. Circuit Court of Appeals, in other words, is likely to hear from all sides of this messy litigation before it’s over.

What claims could Abraham Fruchter and Markovits pursue in Adams’ court? Their discovery plan refers to potential clawback claims against former CEO Jones, but FirstEnergy is already trying to recoup a big chunk of money from him. The company disclosed in a July 26 quarterly report to the U.S. Securities and Exchange Commission that it has formally demanded the return of $56 million from Jones.

The new shareholder firms have also talked a lot about potential claims against FirstEnergy auditors PwC LLC and Clearsulting LLC and may try to litigate such claims before Adams. That would be a complicated undertaking. As Abraham Fruchter and Markovits noted in their discovery plan, Ohio law does not recognize a cause of action for abetting a breach of fiduciary duty.

Moreover, the shareholder firms would have to show why they – and not the FirstEnergy special litigation committee — are entitled to litigate claims against the company’s auditors. The firms said in their discovery plan that the FirstEnergy board committee had “constructively refused” their demand to investigate the auditors. But when Abraham Fruchter and Markovits made that point in their objection to the settlement before Marbley, FirstEnergy’s special litigation committee countered that it was continuing to investigate those potential claims.

You get the idea: Final judgment aside, this case isn’t over yet.

Read more:

FirstEnergy defendants call out judge blocking derivative deal. He is not amused

Boies Schiller tripped up in apparent conflict in FirstEnergy derivative suit

FirstEnergy settlement be damned, judge orders new plaintiffs' lawyers

Our Standards: The Thomson Reuters Trust Principles.