KATHLEEN A. HERKENHOFF (168562) THE WEISER …blogs.reuters.com/alison-frankel/files/2016/04/cytrxcalifornia-der... · KATHLEEN A. HERKENHOFF (168562) ... In re Cendant Corp.,

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KATHLEEN A. HERKENHOFF (168562) [email protected] THE WEISER LAW FIRM, P.C. 12707 High Bluff Drive, Suite 200 San Diego, CA 92130 Telephone: (858) 794-1441 Facsimile: (858) 794-1450

Co-Lead Counsel for Plaintiffs [Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

IN RE CYTRX CORP. STOCKHOLDER DERIVATIVE LITIGATION This Document Relates To:

ALL ACTIONS.

) ) ) ) ) ) ) ) ) ) ) ) )

Master File No. 2:14-cv-06414-GHK (PJWx)

PLAINTIFFS’ MEMORANDUM IN SUPPORT OF MOTION FOR PRELIMINARY APPROVAL OF SHAREHOLDER DERIVATIVE SETTLEMENT Date: May 9, 2016 Time: 9:30 a.m. Judge: Hon. George H. King Ctrm.: 650

Case 2:14-cv-06414-GHK-PJW Document 78-1 Filed 04/04/16 Page 1 of 27 Page ID #:1001

i PLAINTIFFS’ MEMORANDUM IN SUPPORT OF NOTICE OF MOTION AND MOTION FOR

PRELIMINARY APPROVAL OF SHAREHOLDER DERIVATIVE SETTLEMENT

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TABLE OF CONTENTS

I. INTRODUCTION ........................................................................................... 1

II. FACTUAL BACKGROUND ......................................................................... 3

A. Procedural History ................................................................................ 3

B. Settlement Negotiations ........................................................................ 4

III. THE SETTLEMENT ...................................................................................... 5

IV. ARGUMENT .................................................................................................. 7

A. Legal Standard for Preliminary Approval ............................................ 7

B. The Settlement Satisfies the Standards for Preliminary Approval ................................................................................................ 9

1. The Settlement Confers Substantial and Material Benefits Upon CytRx and Its Shareholders .............................................. 9

2. The Settlement Was Reached Through Arms-Length Bargaining with the Assistance of A Highly Competent and Experienced Mediators ...................................................... 11

3. There Is No Evidence of Collusion in the Settlement and Plaintiffs Are Adequate Representatives .................................. 12

4. The Settlement Appropriately Balances the Significant Risks of Continued Litigation with the Substantial Benefits Conferred Upon CytRx and its Stockholders ............. 12

5. Plaintiffs’ Counsel Are Adequate Representatives .................. 14

C. The Fee Award Is Fair and Reasonable .............................................. 15

D. The Service Awards Are Fair And Reasonable ................................. 16

V. NOTICE ........................................................................................................ 17

VI. PROPOSED SCHEDULE OF EVENTS ...................................................... 18

VII. CONCLUSION ............................................................................................ 19


ii PLAINTIFFS’ MEMORANDUM IN SUPPORT OF NOTICE OF MOTION AND MOTION FOR


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TABLE OF AUTHORITIES

Page(s)

CASES

In re Apollo Grp., Inc. Sec. Litig., No. 04-cv-2147, 2008 U.S. Dist. LEXIS 61995 (D. Ariz. Aug. 4, 2008) ................................................................................................................... 13

In re Atmel Corp. Derivative Litig., No. C-06-4592, 2010 WL 9525643 (N.D. Cal. Mar. 31, 2010) ............... 9, 11, 16

Barovic v. Ballmer, 72 F. Supp. 3d 1210 (W.D. Wash. 2014) ........................................................... 15

Barovic v. Ballmer, No. 2:14-CV-00586-JCC, 2016 WL 199674 (W.D. Wash. Jan. 13, 2016) ................................................................................................................... 17

In re Cendant Corp., Derivative Action Litig., 232 F. Supp. 2d 327 (D.N.J. 2002)............................................................... 16, 17

In re Chickie’s & Pete’s Wage and Hour Litig., No. 12-cv-6820, 2014 WL 911718 (E.D. Pa. Mar. 7, 2014) .............................. 12

Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976) ............................................................................................. 4

Hensley v. Eckerhart, 461 U.S. 424 (1983) ........................................................................................... 15

In re Hewlett Packard Co. S’holder Derivative Litig., No. 12-cv-06003, 2015 WL 1153864 (N.D. Cal. Mar. 13, 2015).............. 8, 9, 11

Hopson v. Hanesbrands Inc., No. CV-08-0844 EDL, 2009 WL 928133 (N.D. Cal. Apr. 3, 2009) ........... 16, 18

Ingram v. Coca-Cola Co., 200 F.R.D. 685 (N.D. Ga. 2001) ........................................................................ 15

In re LDK Solar Sec. Litig., No. C 07-05182 WHA, 2010 WL 598361 (N.D. Cal. Feb. 17, 2010) ................................................................................................................... 18

Maher v. Zapata Corp., 714 F.2d 436 (5th Cir. 1983) ........................................................................ 13, 14

In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454 (9th Cir.2000) ............................................................................... 17

Mehling v. NY. Life Ins. Co., 246 F.R.D. 467 (E.D. Pa. 2007) ......................................................................... 11


iii PLAINTIFFS’ MEMORANDUM IN SUPPORT OF NOTICE OF MOTION AND MOTION FOR


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In re MRV Commc’ns, Inc. Derivative Litig., No. 08-cv-03800, 2013 WL 2897874 (C.D. Cal. June 6, 20 13) ..................... 8, 9

Nat ‘I Rural Telecomm’ns Coop. v. DIRECTV, Inc., 221 F.R.D. 523 (C.D. Cal. 2004) ....................................................................... 11

In re NVIDIA Corp. Derivative Litig., No. C-06-06110-SBA, 2008 WL 5382544 (N.D. Cal. Dec. 22, 2008) ............................................................................................................ passim

In re Rambus Inc. Derivative Litig., No. C-06-3513, 2009 WL 166689 (N.D. Cal. Jan. 20, 2009) .............. 7, 9, 14, 16

Ryan v. Gifford, No. Civ. A. 2213-CC, 2009 WL 18143 (Del. Ch. Jan. 2, 2009) ........................ 17

Staton v Boeing, 327 F.3d 938 (9th Cir. 2003) .............................................................................. 17

Villanueva v. Morpho Detection, Inc., No. 13cv-05390, 2015 WL 4760464 (N.D. Cal. Aug. 12, 2015) ................. 11, 17

Yarrington v. Solvay Pharm., Inc., 697 F. Supp. 2d 1057 (D. Minn. 2010) .............................................................. 17

STATUTES, RULES, AND REGULATIONS

Fed. R. Civ. P. Rule 12(b)(6) ........................................................................................................ 3 Rule 23.l .............................................................................................................. 13 Rule 23.l(c) ........................................................................................................... 8 Rule 42(b) ............................................................................................................. 4

OTHER AUTHORITIES

7 Alba Conte & Herbert Newberg, Newberg on Class Actions § 22.110, at 476 (4th ed. 2002) ................................................................................ 8

Manual for Complex Litig., § 21.62 (4th ed. 2004) ......................................................................................... 17


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Lead Plaintiffs Jared Pankratz (“Pankratz”) and Jack Taylor (“Taylor” and

collectively with Pankratz, “ Plaintiffs”),1 by and through their undersigned counsel,

hereby submit this memorandum of law in support of their unopposed motion for

preliminary approval of the settlement (the “Settlement”) of the above-captioned

shareholder derivative action (the “Action”) brought on behalf of CytRx Corporation

(“CytRx” or the “Company”).

I. INTRODUCTION

The Action alleges claims for breach of fiduciary duty, unjust enrichment, gross

mismanagement, abuse of control and insider selling against certain current and

former senior officers and directors of CytRx.

On April 4, 2016, after months of negotiation, the Parties memorialized the

proposed settlement of the Action (the “Settlement”) in the Stipulation. The

Settlement provides substantial benefits to CytRx, as the Company has implemented

or agreed to implement comprehensive corporate governance measures (the

“Governance Measures”) to its corporate governance processes and procedures for a

period of five years. These Governance Measures include, among other things,

additional oversight by the Audit Committee and the Company’s General Counsel

with respect to potentially fraudulent or otherwise illegal practices regarding the

utilization of any investor and/or public relations firms; the creation of a Director of

Communications Compliance; additional duties and responsibilities of the Audit

Committee; the creation of a Lead Independent Director, and the appointment of a

new independent director to the Board of Directors (the “Board”). The Governance

Measures are targeted to redress the allegations in the Action. Accordingly, in

recognition of the substantial, valuable benefits conferred upon CytRx as a result of

1 All capitalized terms not defined herein shall have the same definitions as set

forth in the Stipulation of Settlement dated April 4, 2016 (the “Stipulation”). The Stipulation is filed as Exhibit A to the Declaration of Brett D. Stecker in Support of Motion for Preliminary Approval of Proposed Settlement (“Stecker Decl.”), filed contemporaneously herewith. All references herein to “Stipulation at __” are to Exhibit A to the Stecker Decl.


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the prosecution and settlement of the Action, the Stipulation provides for an award of

attorneys’ fees and reimbursement of expenses to Plaintiffs’ Counsel (the “Fee

Award”) in the amount of $700,000 to be paid by CytRx in the form of CytRx

common stock, which Defendants have agreed not to oppose.2 The Parties reached the

Settlement with the assistance of the Honorable Dickran R. Tevrizian (Ret.) (“Judge

Tevrizian”), acting as mediator.

Plaintiffs submit this Motion to seek preliminary approval of the proposed

Settlement. The Court should grant preliminary approval of the Settlement of the

Action because the Settlement provides substantial benefits to CytRx and its current

shareholders, the Settlement was unquestionably negotiated at arm’s-length by

experienced counsel, and the benefits of the Settlement substantially outweigh the

risks of continued litigation. In connection with this motion, Plaintiffs request that the

Court: (i) make a preliminary determination that the Settlement is within the range of

possible approval; (ii) approve the form of Notice of Pendency and Settlement of

Action (the “Notice”) to be disseminated to CytRx shareholders substantially in the

form attached as Exhibit C to the Stipulation; and (iii) set a time and date for a final

settlement hearing (the “Settlement Hearing”) at which the full merits of the

Settlement will be considered. The Parties have agreed that CytRx shall undertake the

administrative responsibility for giving notice to CytRx stockholders and shall be

responsible for all costs and expenses related to the Notice. See Stipulation ¶3.2.

Within ten business days of the Court’s entry of the Preliminary Approval Order,

CytRx shall commence mailing the Notice to CytRx stockholders who were

stockholders of record at the time of the entry of the Preliminary Approval Order.

This form of notice and means of dissemination have been approved by courts across

the country in similar shareholder litigation and will provide CytRx shareholders with

notice of the Settlement, as well as the Fee Award and Service Awards, and an

2 Plaintiffs are also moving for $5,000 in Service Awards as defined in the

Stipulation.


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opportunity to voice any objection. Accordingly, the Parties’ notice plan satisfies due

process and should be approved.

For these reasons and those set forth in greater detail herein, Plaintiffs

respectfully request that the Court enter the agreed-upon proposed Preliminary

Approval Order submitted herewith which: (i) grants preliminary approval of the

Settlement; (ii) directs that notice of the Settlement be given to CytRx shareholders;

and (iii) schedules the Settlement Hearing at which the Court will consider final

approval of the Settlement.

II. FACTUAL BACKGROUND

A. Procedural History

On August 14, 2014, plaintiff Pankratz filed his derivative action in this Court.

The following day on August 15, 2014, plaintiff Taylor filed his derivative action in

the same venue. The Court consolidated these two substantially similar cases on

October 8, 2014. Dkt. No. 17. The consolidated Action alleges claims for breach of

fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and insider

selling.

Defendants filed two motions to dismiss Plaintiffs’ complaint on October 20,

2014. Dkt. Nos. 24, 25. One motion argued that Plaintiffs had failed to demonstrate

futility of demand and failed to state claims under Fed. R. Civ. P. 12(b)(6). Dkt. No.

24. The second motion argued that CytRx’s By-Laws contained a forum-selection

clause that required Plaintiffs to file their claims in the Delaware Chancery Court.

Dkt. No. 25. In the alternative, Defendants also moved to stay the Action pending the

resolution of the Federal Securities Action and/or parallel derivative litigation which

was then pending in the Delaware Chancery Court (the “Delaware Action”). Plaintiffs

opposed both motions on November 6, 2014. Dkt. Nos. 35, 36. The Parties

completed briefing by November 20, 2014. Dkt. Nos. 43, 44.

This Court ordered further briefing on Defendants’ motion to stay on December

8, 2014 (Dkt. No. 46) and subsequently issued a ruling on January 8, 2015 that


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granted Defendants’ motion to stay under Colorado River abstention, but denied the

motions to dismiss, without prejudice (Dkt. No. 50). Colorado River Water

Conservation Dist. v. United States, 424 U.S. 800 (1976).

Thereafter, on February 27, 2015, Plaintiffs moved to vacate the order staying

the Action. Dkt. No. 52. This motion to vacate the stay relied, in whole, on

statements made during oral argument by Delaware Action plaintiff’s counsel during a

motion to dismiss hearing. The Court issued a ruling vacating the stay on June 24,

2015. Dkt. No. 59.

On July 24, 2015, Defendants filed a renewed motion to dismiss on the grounds

of forum non conveniens. Dkt. No. 60. The Court granted Defendants’ motion to

dismiss on October 30, 2015 (the “Dismissal”). Dkt. No. 68. Thereafter, on

November 17, 2015, Plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of

Appeals. Dkt. No. 70.

On February 11, 2016, in light of the MOU and with the assistance of Ann

Julius, the Ninth Circuit mediator, the Parties filed a stipulated motion to dismiss the

Appeal voluntarily pursuant to Fed. R. App. P. 42(b), without prejudice to

reinstatement in the event that this Court does not enter a final order approving the

Settlement or such final order is not affirmed on appeal. The Ninth Circuit granted the

Parties’ stipulated motion on February 19, 2016.

The Parties jointly filed a Notice of Settlement and Request to Stay Proceedings

on February 25, 2016.

B. Settlement Negotiations

The Parties began engaging in settlement discussions beginning in February

2015, shortly after the Court consolidated the Action. See Declaration of Brett D.

Stecker in Support of Unopposed Motion for Preliminary Approval of Proposed

Settlement (“Stecker Decl.”) at ¶3. These talks culminated in an in-person mediation

before Judge Tevrizian on April 23-24, 2015. Id. The Parties did not settle the Action

at this mediation. Id. However, the Parties continued discussing a possible resolution


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of the Action, including discussions of the material terms of the settlement (the

specific Governance Measures adopted herein) in the months that followed. Id. The

Parties continued to make progress on a settlement with the continued assistance of

Judge Tevrizian. Id. With the susbtantial assistance of Judge Tevrizian, the Parties

were able to agree in principle on the material terms of the Settlement. These terms

were recorded in a Memorandum of Understanding (the “MOU”) that the Parties

executed on December 23, 2015. Id. at Exhibit B.

Only after the Parties reached agreement regarding the material terms of the

Settlement, including the Governance Measures, did the Parties begin negotiating the

remaining outstanding issues, including the Fee Award. Following the execution of

the MOU, the Parties also began drafting the Stipulation, the Notice, the Preliminary

Approval Order and Final Approval Order that the Parties submit contemporaneously

herewith.

III. THE SETTLEMENT

As a result of Plaintiffs’ prosecution and the Settlement of the Action, CytRx

has adopted or will adopt numerous Governance Measures designed to address the

allegations in the Action and to improve CytRx’s internal controls. These Governance

Measures are set forth in Exhibit A to the Stipulation. The Parties agree that the

Governance Measures confer a substantial benefit on CytRx and its shareholders, and

that the Action was a causal factor in the Company implementing and adopting the

Governance Measures. See Stipulation, ¶2. The Governance Measures adopted or to

be adopted by CytRx in connection with the prosecution and settlement of the Action

include, among others:

Annual Anti-Fraud Reforms: The Company’s senior management shall

conduct an annual inquiry and produce a written report detailing any potentially

fraudulent or illegal practices being engaged in by the Company with respect to the

utilization of any investor and/or public relations firms. The Company’s General


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Counsel will meet with senior management regarding this report and immediately

report any violations to the Board’s Audit Committee.

Communications with Public Relations Firms and/or Promotional

Activities: The Company will be required to ensure that all contracts with third party

agents who engage in promotional activities on behalf of CytRx disclose such

relationships to the extent required by law. CytRx’s senior management will have the

responsibility of reporting any third party agent who has failed to do so to the Audit

Committee for further action.

Position of Director of Communications Compliance: The Company shall

create the role of Director of Communications Compliance. This individual shall have

responsibility for managing communications with all public relations, investor

relations or promotional firms hired by the Company. This person shall also provide a

formal report concurrently to senior management and the Audit Committee at least

twice per year on these matters.

Forfeiture of Bonuses and Profits for Restatements: The Company will

adopt more stringent procedures for recovery of bonuses and incentive compensation

from the Company’s Chief Executive Officer and/or Chief Financial Officer in the

event the Company is required under Generally Accepted Accounting Principles to

prepare an accounting restatement to correct an accounting error on an interim or

annual financial statement included in a report on Form 10-Q or 10-K.

Audit Committee Oversight Reforms: The Audit Committee will have

additional oversight over CytRx’s quarterly and annual reports and interim

disclosures. The Audit Committee shall also independently determine whether

outside experts are required to investigate any potential violations of federal law, state

law or other rules or regulations. The Audit Committee is also required to meet at

least four times per year.

Appointment of New Director: CytRx appointed one new independent

director, Cheryl Cohen, to the Board.


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Amendments to Compensation Policies: CytRx will make compliance with its

Code of Business Conduct and Ethics an element in evaluating the job performance of

all employees, officers and directors.

Whistle-Blower Hotline: The Company will amend its policies to provide for

receipt, retention and treatment of complaints anonymously submitted. The

Company’s General Counsel shall also report to the entire Board at least twice per

year on the allegations, status of investigations and findings of every whistleblower

complaint received in the preceding 12-month period.

Lead Independent Director: The Company will amend its policies to provide

that if the Chairman of the Board is not an independent director, the Board’s

independent directors will appoint a Lead Independent Director. The Board appointed

Dr. Joseph Rubinfeld to this position on April 30, 2015.

Corporate governance measures like those achieved here have routinely formed

the basis of settlements stockholder derivative actions, as strong corporate governance

is fundamental to a corporation’s well-being and success. Indeed, “[c]ourts have

recognized that corporate governance reforms such as those achieved here provide

valuable benefits to public companies.” In re NVIDIA Corp. Derivative Litig., No. C-

06-06110-SBA, 2008 WL 5382544, at *3 (N.D. Cal. Dec. 22, 2008) (citation

omitted); accord In re Rambus Inc. Derivative Litig., No. C-06-3513, 2009 WL

166689, at *3 (N.D. Cal. Jan. 20, 2009) (recognizing that the “substantial benefits” of

the derivative settlement which “provides long term remedial measures that are

specifically designed to protect the shareholders.”). This is particularly true in this

Action, where the majority of the Governance Measures were specifically tailored to

remedy the alleged breaches of fiduciary duties and other misconduct alleged in

Plaintiffs’ Complaint.

IV. ARGUMENT

A. Legal Standard for Preliminary Approval

“There is a strong policy favoring compromises that resolve litigation, and case


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law in the Ninth Circuit reflects that strong policy.” NVIDIA, 2008 WL 5382544, at

*2. “There is an overriding public interest in settling and quieting litigation.” Id.

(quoting MWS Wire Indus., Inc. v. Cal. Fine Wire Co., 797 F.2d 799, 802 (9th Cir.

1996)) (citations omitted). “Because shareholder derivative actions are ‘notoriously

difficult and unpredictable ... settlements are favored.’” Id. (quoting In re AOL Time

Warner S’holder Derivative Litig., No. 02-cv-6302, 2006 WL 2572114, at *3

(S.D.N.Y. Sept. 6, 2003)).

Settlement and dismissal of a stockholder derivative action requires court

approval. See Fed. R. Civ. P. 23.l(c); In re MRV Commc’ns, Inc. Derivative Litig.,

No. 08-cv-03800, 2013 WL 2897874, at *2 (C.D. Cal. June 6, 20 13).3 “[U]nder

Ninth Circuit precedent, [the] Court must grant preliminary approval of a settlement,

including approval of the notice to shareholders and the proposed method of notice,

before having the final settlement hearing.” NVIDIA, 2008 WL 5382544, at *2. See

also MRV Commc’ns, 2013 WL 2897874, at *2 (“[A]pproval of a derivative action

appears to be a two-step process, similar to that employed for approving class action

settlements, in which the Court first determines whether a proposed settlement

deserves preliminary approval and then, after notice of the settlement is provided to

class members, determines whether final approval is warranted.”) (citations omitted).

“In order to grant preliminary [approval], the Court need only conclude that the

settlement of the claims on the agreed upon terms is ‘within the range of possible

approval.’” Id. “To determine whether the Settlement is ‘within the range of possible

approval,’ the Court must evaluate whether the Settlement is ‘fair, reasonable, and

adequate[.]’” Id. “The preliminary determination establishes an initial presumption

of fairness.” Hewlett-Packard, 2015 WL 1153864, at *3 (citation omitted). “The

3 “The role of the court and the criteria considered in evaluating the adequacy and fairness of a derivative settlement are substantially the same as in the class action.” 7 Alba Conte & Herbert Newberg, Newberg on Class Actions § 22.110, at 476 (4th ed. 2002). See also In re Hewlett Packard Co. S’holder Derivative Litig., No. 12-cv-06003, 2015 WL 1153864, at *3 n. l (N.D. Cal. Mar. 13, 2015) (courts apply the factors relevant in evaluating a class action settlement “when reviewing proposed settlements in shareholder derivative suits.”) (citations omitted).


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district court must balance a number of factors, including ‘the strength of the

plaintiffs’ case; the risk, expense, complexity, and likely duration of further litigation;

... the amount offered in settlement; the extent of discovery completed and the stage of

the proceedings; [and] the experience and views of counsel.’” Id. (citations omitted).

“To determine whether a proposed settlement is ‘within the range of possible

approval,’ the Court also ensures it is ‘not the product of fraud or overreaching by, or

collusion between, the negotiating parties.’” Id. (citation and internal quotations

omitted).

As set forth below, based upon the record in this Action and the Governance

Measures achieved, these factors weigh in favor of granting preliminary approval of

the Settlement.

B. The Settlement Satisfies the Standards for Preliminary Approval

The Settlement should be preliminarily approved because it provides substantial

benefits to CytRx and its current shareholders, was negotiated at arm’s-length and

informed by considerable investigation and contentious litigation, and appropriately

balances the risks of litigation against the benefits of Settlement. Moreover, there is

no evidence of collusion between any of the negotiating parties. Accordingly, the

Settlement falls within the range of possible approval.

1. The Settlement Confers Substantial and Material Benefits Upon CytRx and Its Shareholders

“The principal factor to be considered in determining the fairness of a

settlement concluding a shareholders’ derivative action is the extent of the benefit to

be derived from the proposed settlement by the corporation, the real party in interest.”

In re Atmel Corp. Derivative Litig., No. C-06-4592, 2010 WL 9525643, at * 12 (N.D.

Cal. Mar. 31, 2010) (citations omitted). Corporate governance measures such as those

achieved here provide valuable benefits to public companies. See NVIDIA, 2008 WL

5382544, at *3; Rambus, 2009 WL 166689, at *3; Hewlett-Packard, 2015 WL

1153864, at *5; MRV Commc’ns, 2013 WL 2897874, at *4. As a result of the Action


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and the Settlement, CytRx has adopted or will adopt the Governance Measures that

constitute a substantial benefit to CytRx and its shareholders for a period of five years,

as described herein. The Settlement is an outstanding resolution for CytRx of a case

of substantial complexity and cost and it positions CytRx and its stockholders to reap

the long-term benefits of strong corporate governance. Thus, the Settlement is within

the range of possible approval and should be preliminarily approved.

“An evaluation of the benefits of settlement must also be tempered by a

recognition that any compromise involves concessions on the part of all the settling

parties.” NVIDIA, 2008 WL 5382544, at *3 (citing Officers for Justice v. Civil Serv.

Comm’n of City & Cty. of San Francisco, 688 F.2d 615, 624 (9th Cir. 1982)). Indeed,

“the very essence of a settlement is compromise, ‘a yielding of absolutes and an

abandoning of highest hopes.’” Id. Despite the inherent concessions of any

compromise, Plaintiffs negotiated a settlement that directly addresses the breaches of

fiduciary duties alleged by Plaintiffs in their Complaint. At heart, this Action was

about the Board’s alleged failure to ensure that its third party agents disclosed their

ties to CytRx in promotional campaigns. Plaintiffs alleged that by failing to do this

with respect to the Dream Team, the Board had breached their fiduciary duties and

harmed the Company. The bulk of the Governance Measures directly address this

problem by creating policies, a new senior officer position and expanded Board

oversight and responsibilities in this area of third party communications oversight. In

short, the Governance Measures are designed to prevent a recurrence of the events that

Plaintiffs alleged damaged CytRx.

Finally, settling Plaintiffs’ claims with the substantial Governance Measures

negotiated here, but without monetary compensation going back to CytRx, is within

the realm of reasonableness given that the Delaware Action already settled Plaintiffs’

claims relating to the timing of option grants. The settlement of the Delaware Action

was approved by an Order and Final Judgment entered by the Delaware Court on


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November 20, 2015.4 These now-settled claims represented the lion’s share of the

“monetary” damages Plaintiffs alleged that CytRx suffered.

2. The Settlement Was Reached Through Arms-Length Bargaining with the Assistance of A Highly Competent and Experienced Mediators

A settlement enjoys a presumption of fairness if it “is recommended by ...

counsel after arm’s-length bargaining.” Villanueva v. Morpho Detection, Inc., No. 13-

cv-05390, 2015 WL 4760464, at *6 (N.D. Cal. Aug. 12, 2015) (citation omitted).

Here, the Settlement was reached after extensive arm’s-length negotiations between

counsel for the Parties. These negotiations included Plaintiffs sending Defendants

multiple detailed settlement demands, a two day in-person mediation session, and

numerous follow-up calls with Judge Tevrizian, an experienced and well-respected

mediator who is well-versed in the field of complex litigation. This factor thus weighs

in favor of preliminary approval of the proposed Settlement. See, e.g., NVIDIA, 2008

WL 5382544, at *3 (derivative settlement preliminarily approved where the settlement

“appears to be the result of good faith arm’s-length bargaining.”); Mehling v. NY. Life

Ins. Co., 246 F.R.D. 467, 473 (E.D. Pa. 2007) (settlement preliminarily approved

where the parties engaged in “hard-fought and lengthy negotiation[s]” that lasted more

than one year); Hewlett-Packard, 2015 WL 1153864, at *5 (derivative settlement

preliminarily approved where the settlement “involved extensive negotiations

conducted on behalf of all parties by experienced and informed counsel.”).5

As provided in the Stipulation, the Parties did not begin negotiating the amount

4 The release provision set forth in the settlement agreement in the Delaware

Action specifically excluded the release of the Plaintiffs’ derivative “claims asserted in [the Federal Action], other than any and all allegations and claims relating to the issuance of stock option grants.” 5 Moreover, the arm’s-length negotiation of the Settlement was conducted by

highly-qualified counsel, who have extensive experience in stockholder derivative litigation, which militates in favor of preliminarily approving the Settlement. See, e.g., Nat ‘I Rural Telecomm’ns Coop. v. DIRECTV, Inc., 221 F.R.D. 523, 528 (C.D. Cal. 2004) (“Great weight is accorded to the recommendation of counsel, who are most closely acquainted with the facts underlying litigation.”); Atmel, 2010 WL 9525643, at *13 (“the involvement of multiple counsel from different firms suggests a lack of collusion.”).


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of the Fee Award to Plaintiffs’ Counsel until after the Parties reached agreement on all

of the substantive terms of the Settlement. See Stipulation ¶5.1. This factor further

demonstrates the fairness of the arm’s-length Settlement because “the amount of

attorneys’ fees could not have affected the amount of Plaintiffs’ recovery.” In re

Chickie’s & Pete’s Wage and Hour Litig., No. 12-cv-6820, 2014 WL 911718, at *4

(E.D. Pa. Mar. 7, 2014).

3. There Is No Evidence of Collusion in the Settlement and Plaintiffs Are Adequate Representatives

Counsel for the Plaintiffs do not have a conflict of interest based on their

representative of Plaintiffs derivatively on behalf of CytRx. Plaintiffs’ Counsel has no

relationship with either of the Plaintiffs other than that of an attorney and a client in

this Action. See Stecker Decl. at ¶6; Exhibits C-D. In addition, neither The Shuman

Law Firm (the “Shuman Firm”) nor The Weiser Law Firm, P.C. (the “Weiser Firm”)

have any connections to any Defendant, or to any of Defendants’ counsel. Id.

Neither plaintiff Pankratz nor plaintiff Taylor have any connection to any

Defendant that could be interpreted as collusive. See Stecker Decl. at ¶7; Exhibits E-

F. Similarly, neither Pankratz nor Taylor have any relationship with Plaintiffs’

Counsel other than that of a typical attorney-client relationship from each firms’

respective representation in this matter. Id.

4. The Settlement Appropriately Balances the Significant Risks of Continued Litigation with the Substantial Benefits Conferred Upon CytRx Stockholders

The uncertainties and vagaries of further litigation of the Action demonstrate

that the proposed Settlement is within the range of approval, and that Plaintiffs’

motion should be granted. Although Plaintiffs believe and continue to believe that

their claims were meritorious, there existed significant risks in continuing to prosecute

the Action. In the first instance, this Court dismissed the Action after extensive

briefing on two separate motions to dismiss. Even if Plaintiffs were ultimately

successful in their appeal with the Ninth Circuit Court of Appeals, Plaintiffs would


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have had to establish they satisfied Federal Rule of Civil Procedure 23.1. Further, if

Plaintiffs succeeded in proving that pre-suit demand on the CytRx Board would have

been excused, liability was by no means a foregone conclusion. Defendants had

defenses available to them based on the business judgment rule and the exculpation

clause of the Company’s charter. Continued litigation would be extremely complex,

costly, and lengthy. Document discovery would need to be completed, depositions

would need to be taken, experts would need to be designated, and expert discovery

conducted. Defendants’ expected motions for summary judgment would have to be

briefed and argued and a trial would have to be held. Furthermore, even if liability

were established, the amount of recoverable damages would still have posed

significant issues and would have been subject to further litigation. See, e.g., NVIDIA,

2008 WL 5382544, at *3 (preliminarily approving the derivative settlement after

balancing the risks faced by plaintiffs and defendants).

It is also clear that even a victory at trial is no guarantee that the judgment

would ultimately be sustained on appeal or by the trial court. For example, in In re

Apollo Grp., Inc. Sec. Litig., No. 04-cv-2147, 2008 U.S. Dist. LEXIS 61995 (D. Ariz.

Aug. 4, 2008), the court on a motion for judgment as a matter of law overturned a jury

verdict of $277 million in favor of shareholders based on insufficient evidence

presented at trial to establish loss causation. Add to these post-trial and appellate

risks, the difficulty and unpredictability of a lengthy and complex trial – where

witnesses could suddenly become unavailable or the fact finder could react to the

evidence in unforeseen ways – and the benefits of the Settlement become all the more

apparent. The proposed Settlement eliminates these and other risks of continued

litigation, including the very real risk of no recovery after several more years of

litigation, while providing CytRx with substantial benefits immediately. See, e.g.,

Maher v. Zapata Corp., 714 F.2d 436, 466 (5th Cir. 1983) (derivative settlement

approved where “the parties’ conclusion that any possible benefit to Zapata from

pursuing the causes of action would be more than offset by the additional cost of


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litigation was based on an intelligent and prudent evaluation of their case”).6

5. Plaintiffs’ Counsel Are Adequate Representatives

Both the Shuman Firm and the Weiser Firm have extensive experience in

representative shareholder litigation throughout the United States.

The principal attorneys with the Shuman Firm have over 30 years combined

experience litigating securities fraud class actions and shareholder derivative actions.

The Shuman Firm has been appointed and has served as lead or co-lead counsel in

shareholder cases throughout the nation. See, e.g., DiLaura v. Scarlett et al., Case No.

15-cv-2989-CRB (N.D. Cal.); (b) In re OSI Sys., Inc. Derivative Litig., Case No. 1:14-

cv-2910 (C.D. Cal.); (c) In re STEC, Inc. S’holder Derivative Litig., Lead Case No.

30-2009-00320001-CU-SL-CXC (Cal. Sup. Court, Cnty. of Orange); (d) In re

Rentech, Inc. Derivative Litig., Lead Case No. BC 430553 (Cal. Sup. Court, Los

Angeles Cnty.); (e) In re SunPower Corp. S’holder Derivative Litig., Case No. 1:09-

cv-158522 (Cal. Sup. Court, Santa Clara Cnty.); and (f) Sabel v. Sheinbaum, et al.,

Case No. 15-cv-346 (AWT) (D. Conn.).

Courts have recognized the Shuman Firm’s accomplishments on behalf of

shareholders. For example, at a hearing to appoint lead plaintiffs, lead counsel, and

liaison counsel in In re Rhythms Sec. Litig., Case no. 02-cv-35-JLK-CBS (D. Colo.),

United States District Court Senior Judge John L. Kane complimented Kip Shuman,

Esq. on having done an “excellent job” in leading a number of shareholder actions

before that Court. The Shuman Firm has been at the forefront in shareholder

derivative actions wherein it is alleged that a company’s officers and directors have

breached their fiduciary duties. The Shuman Firm’s resume provides further detail

regarding the firm’s extensive experience in securities class action and shareholder

derivative litigation. See Stecker Decl. at Ex. G.

6 Maher recognized that the avoidance of further litigation expenses “both monetarily in the form of litigation fees and expenses, and non-monetarily in the form of disruption and distraction of management, and threatened impairment of the Corporation’s credit and goodwill, are important and valid reasons for seeking a settlement, and may warrant its approval.” Maher, 714 F.2d at 467.


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The Weiser Firm also has a sterling reputation in the field of shareholder

litigation, and its principals have been involved in some of the most successful

shareholder derivative actions in the United States, including cases (like the Action)

arising from allegations that a company’s board of directors and executive officers

breached their fiduciary duties to the company and its shareholders. See Stecker Decl.

at Ex. H.

As a result of prosecutions lead by the Weiser Firm, public corporations have

implemented diverse and far-reaching governance reforms, which protect the

corporation and its stockholders from future malfeasance. See, e.g., Barovic v.

Ballmer, Case No. 14-0540-JCC (W.D. Wash. 2014); In re Moody’s Corp. S’holder

Derivative Litig., Lead Case No. 1:08-cv-9323 (S.D.N.Y.); In re Synovus Fin. Corp.

1:09-cv-01811-JOF (N.D. Ga.).

C. The Fee Award Is Fair and Reasonable

The details and reasons supporting the Fee Award will be fully addressed in

connection with briefing on the motion for final approval of the Settlement. Plaintiffs

will provide a robust justification for the proposed Fee Award, including information

sufficient to enable the Court to perform a lodestar cross-check.7 Defendants have

agreed not to oppose a Fee Award to Plaintiffs’ Counsel in an amount of $700,000, to

be paid in the form of CytRx common stock. See Stipulation ¶5.2. The payment of

the Fee Award in the form of CytRx common stock is critical, in that in preserves the

Company’s cash assets. The U.S. Supreme Court has endorsed this type of consensual

resolution of attorneys’ fees as the ideal towards which litigants should strive. See

Hensley v. Eckerhart, 461 U.S. 424, 437 (1983) (“A request for attorney’s fees should

not result in a second major litigation. Ideally, of course, litigants will settle the

amount of a fee”); see also Ingram v. Coca-Cola Co., 200 F.R.D. 685, 695 (N.D. Ga.

2001) (where, as here, there is no evidence of collusion and no detriment to the

7 Plaintiffs’ Counsels’ lodestar is at present significantly greater than the agreed

to Fee Award.


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parties, the court should give “substantial weight to a negotiated fee amount.”).

The Fee Award is appropriate in light of this Circuit’s recognition that

corporations (and shareholders) receive substantial benefits from changes in corporate

governance or policies that result from stockholder litigation. See Atmel, 2010 WL

9525643, at * 11 (“the Court concludes that the agreed-upon amount of attorneys’ fees

and costs ... is reasonable in light of the overall benefit of the settlement to Atmel and

its shareholders.”); Rambus, 2009 WL 166689, at *3 (“Attorneys who prosecute a

shareholder derivative action that confers ‘substantial benefit’ on the corporate are

entitled to an award of attorneys’ fees ... [C]ourts consistently have approved

attorneys’ fees and expenses in shareholder actions where the plaintiffs’ efforts

resulted in significant corporate governance reforms but no monetary relief.”)

(citations omitted).

D. The Service Awards Are Fair and Reasonable

The Service Awards in the amount of $5,000,8 are being requested by Plaintiffs

Taylor and Pankratz to be paid out of the Fee Award and should be preliminarily

approved. Hopson v. Hanesbrands Inc., No. CV-08-0844 EDL, 2009 WL 928133, at

*10 (N.D. Cal. Apr. 3, 2009) (“In general, courts have found that $5,000 incentive

payments are reasonable.”) (citations omitted).9 These modest awards should be

approved in light of the substantial benefits conferred upon CytRx stockholders as a

result of Plaintiffs’ willingness to step forward on behalf of CytRx and efforts in

obtaining the Settlement. But for the role that these Plaintiffs played in the Action,

the substantial benefits obtained for CytRx via the Settlement could not have been

achieved.

8 Pursuant to the terms of the Stipulation the Service Awards may be paid in

either cash or CytRx common stock.

9 “An incentive payment to come from the attorneys’ fees awarded to plaintiff’s

counsel need not be subject to intensive scrutiny, as the interests of the corporation, the public, and the defendants are not directly affected.” In re Cendant Corp., Derivative Action Litig., 232 F. Supp. 2d 327, 344 (D.N.J. 2002) (citing In re Presidential Life Sec., 857 F. Supp. 331, 337 (S.D.N.Y.1994)).


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There is a long history of federal and Delaware common law that authorizes

incentive awards for plaintiffs in complex cases brought for the benefit of others. See,

e.g., Ryan v. Gifford, No. Civ. A. 2213-CC, 2009 WL 18143, at *14 (Del. Ch. Jan. 2,

2009) ($5,000 incentive awards to two plaintiffs); Barovic v. Ballmer, No. 2:14-CV-

00586-JCC, 2016 WL 199674, at *5 (W.D. Wash. Jan. 13, 2016) ($5,000 incentive

award to each named plaintiff); In re Cendant Corp., Derivative Action Litig., 232 F.

Supp. 2d 327, 344 (D.N.J. 2002) ($25,000 incentive award to derivative plaintiff);

Yarrington v. Solvay Pharm., Inc., 697 F. Supp. 2d 1057, 1068 (D. Minn. 2010) (“The

Court finds that enhancement awards like the ones requested here are appropriate.

Small incentive awards, […] promote the public policy of encouraging individuals to

undertake the responsibility of representative lawsuits.”); In re Mego Fin. Corp. Sec.

Litig., 213 F.3d 454, 463 (9th Cir.2000); Manual for Complex Litig., § 21.62 n. 971

(4th ed. 2004) (incentive awards may be “merited for time spent meeting with class

members, monitoring cases, or responding to discovery”).

The Service Awards requested here are modest and in line with similar awards

granted by other courts. If the Court enters the Preliminary Approval Order, Plaintiffs

will submit a detailed discussion of the factors identified in Staton v Boeing, 327 F.3d

938, 977 (9th Cir. 2003) regarding incentive awards with their papers in support of

final approval of the Settlement. Accordingly, we respectfully submit that, as a matter

of policy, the awards to the Plaintiffs should be approved for purposes of Preliminary

Approval.

V. NOTICE

The purpose of providing shareholders notice of a proposed settlement is to

“apprise interested parties of the pendency of the action and afford them an

opportunity to present their objections.” Villanueva, 2015 WL 4760464, at *7

(citation omitted). The Parties have agreed, subject to Court approval, that CytRx will

provide notice of the proposed Settlement by mailing a copy of the Notice to all

CytRx shareholders of record as of the date the Court enters the Preliminary Approval


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Order. Stipulation ¶3.2.

The proposed form of Notice (attached as Exhibit C to the Stipulation) sets

forth, inter alia, the date and location of the final settlement hearing, the Parties’

contentions, the reasons for the Settlement, and the procedure for objecting to the

Settlement, including the Fee Award and Service Awards. Accordingly, Plaintiffs

respectfully submit that the proposed form of Notice fully satisfies due process

requirements, as it will fairly and reasonably apprise CytRx stockholders of the

essential terms of the Settlement and afford them an opportunity to present any

objections thereto.

Indeed, numerous courts have held that direct mailing of notice in connection

with settlements of complex shareholder litigation provides adequate notice in

complex shareholder cases, thus confirming that the Parties’ proposed notice plan here

is appropriate. See, e.g., NVIDIA, 2008 WL 5382544, at *4; In re LDK Solar Sec.

Litig., No. C 07-05182 WHA, 2010 WL 598361, at *4 (N.D. Cal. Feb. 17, 2010);

Hopson, 2009 WL 928133, at *5.

VI. PROPOSED SCHEDULE OF EVENTS

Plaintiffs’ Counsel propose the following schedule for the publication of the

proposed Notice, the filing of submissions in support of final approval of the

Settlement, CytRx shareholder objections and any response thereto, and the

Settlement Hearing. This schedule is similar to those used and approved by courts in

derivative settlements and provides due process to CytRx shareholders with respect to

their rights concerning the Settlement.

Event Time for Compliance

Deadline for mailing Notice to CytRx

stockholders of record as of the entry

of the Preliminary Approval Order

Not later than ten (10) business days

following the entry of the Preliminary

Approval Order

Deadline for filing of papers in

support of the final approval of

Settlement

At least twenty-one (21) calendar days

prior to the Settlement Hearing


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Event Time for Compliance

Deadline for proof of mailing of the

Notice to be filed with the Court

At least twenty (20) calendar days


Deadline that any objections to the

Settlement must be filed with the Court

At least fourteen (14) calendar days


Deadline for filing of any response to

objections, if any, by current CytRx

stockholders of record as of the date of

entry of the Preliminary Approval

Order

At least seven (7) calendar days prior

to the Settlement Hearing

Settlement Hearing date Fifty-five (55) calendar days after entry

of the Preliminary Approval Order, or

later at the Court’s convenience

VII. CONCLUSION

The Settlement is an outstanding resolution of a case of substantial complexity

and costs. Accordingly, Plaintiffs respectfully request that the Court preliminarily

approve the Settlement and the issuance of the Notice, and schedule the Settlement

Hearing to consider final approval of the Settlement.

DATED: April 4, 2016 Respectfully submitted,

THE WEISER LAW FIRM, P.C. BRETT D. STECKER

s/ Brett D. Stecker BRETT D. STECKER

22 Cassatt Avenue Berwyn, PA 19312 Telephone: (610) 225-2677 Facsimile: (610) 408-8062 [email protected] [email protected] [email protected]


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KATHLEEN A. HERKENHOFF 12707 High Bluff Drive, Suite 200 San Diego, CA 92130 Telephone: (858) 794-1441 Facsimile: (858) 794-1450 [email protected]

Counsel for Jared Pankratz and Co-Lead Counsel for Plaintiffs

THE SHUMAN LAW FIRM KIP B. SHUMAN Post-Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: (303) 861-3003 Facsimile: (303) 484-4886 [email protected]

THE SHUMAN LAW FIRM RUSTY E. GLENN 600 17th Street, Suite 2800 South Denver, CO 80202 Telephone: (303) 861-3003 Facsimile: (303) 484-4886 [email protected]

Counsel for Jack Taylor and Co-Lead Counsel for Plaintiffs


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CERTIFICATE OF SERVICE

I hereby certify that on April 4, 2016, I authorized the electronic filing of the

foregoing with the Clerk of the Court using the CM/ECF system which will send

notification of such filing to the e-mail addresses denoted on the attached Electronic

Mail Notice List and that I caused to be mailed by United States mail to the addresses

listed on the attached Courtesy Copy Mail Service List.

I certify under penalty of perjury under the laws of the United States of America

that the foregoing is true and correct. Executed on April 4, 2016.

/s/ Brett D. Stecker

BRETT D. STECKER THE WEISER LAW FIRM, P.C. 22 Cassatt Avenue, First Floor Berwyn, PA 19312 Telephone: (610) 225-2677 Facsimile: (610) 408-8062 Email: [email protected]


4/4/2016 CM/ECF California Central District

https://ecf.cacd.uscourts.gov/cgibin/MailList.pl?110159972276307L_1_01 1/1

Mailing Information for a Case 2:14cv06414GHKPJW Jared Pankratz v. Steven A. Kriegsman et al

Electronic Mail Notice List

The following are those who are currently on the list to receive email notices for this case.

Jeffrey J Ciarlanto [email protected]

Kathleen Ann Herkenhoff [email protected],[email protected],[email protected],[email protected],[email protected]

Peter Bradley Morrison [email protected],[email protected]

Thomas Jerome Nolan [email protected],[email protected],[email protected],[email protected],[email protected],[email protected]

Clifford H Pearson [email protected],[email protected],[email protected],[email protected]

Kip Brian Shuman [email protected],[email protected]

Brett D Stecker [email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive email notices for this case (who therefore require manual noticing). You may wish to use your mouseto select and copy this list into your word processing program in order to create notices or labels for these recipients.

(No manual recipients)


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Courtesy Copy Mail Service List: Gerd Meyer Dr. - Executor of the Estate of Dr. Max Link Voltastrasse 35 CH-8044 Zuerich Mert Kokdemir Gokce sok, No. 11/A Caddebostan Kadikoy-Instanbul 34728 Turkey

Wassim Rachid Rasamny 1 Central Park West, # 38A New York, NY 10023 Shirley Selter 3016 Dona Susana Drive Studio City, CA 91604


Documents

KATHLEEN A. HERKENHOFF (168562) THE WEISER …blogs.reuters.com/alison-frankel/files/2016/04/cytrxcalifornia-der... · KATHLEEN A. HERKENHOFF (168562) ... In re Cendant Corp.,