Talk about your prodigious timing. On January 14, 2008 [on the morning of the very same day that Schering-Plough first disclosed, in the afternoon, the ENHANCE study results], a federal District Court Judge in Newark, New Jersey entered the final agreed order and opinion — including an attorneys’ fees award of about $9.8 million — in the 2001 Schering Plough Shareholders’ Derivative Action. That action, like the current ones, also named one Hans Becherer, who was then, and still is now, a director of Schering-Plough, personally.
One wonders why Schering did not oppose the almost $10 million of legal fees. The amount of the fees was increasd by a 30 percent lode-star multiplier, from an original $530 per hour fee that amounted to about $6 million. The Judge used a “merit lodestar multiplier“, to arrive at an enhanced $9.5 million fee, and $300,000 of allowed expenses, for counsel. So, effectively, the plaintiffs’ lawyers earned north of $700 per hour for their clearly very fine work, here. I am relly surprised Schering didn’t fight harder on that score — but i think we now know exactly why it didn’t.
To be clear, here, I believe those fees were most-certainly earned by counsel for the Schering-Plough shareholders — in acheiving [what were at the time] vast reforms of Schering’s worldwide corporate governance practices — from FDA good manufacturing practice monitoring and timely reporting, to prompt and coordinated global reporting of non-financial, but annual audit-related, risks. So — could it be that the company’s flexibility, in December 2007, and early January 2008 in this 2001 case, was driven in large part by its knowledge that the disclosure of ENHANCE — and its likely non- success — was looming? By December 2007, two Congressional Committees had sent letters of inquiry to Schering-Plough, because in November 2007, Schering had suggested it might change the endpoints for the ENHANCE study. That timing — coupled with the below — is entirely fascinating, no?
Knowing what we now know, the praise offered in the Judge’s opinion, below — for Schering’s reformed corporate governance programs, post 2001 — rings rather hauntingly hollow, no?
I would suggest that the Judge’s opinion was accurate — in so far as it went. No Judge, jury or opposing counsel was capable of seeing into the hearts, and minds, of those now controlling Schering [remember that an almost complete turnover in Schering’s senior management had been forced by this, and other, suits by 2003-2004]. Based on my experience, I would be willing to venture the opinion that — no matter how careful and comprehensive the new processes and procedures were, an executive (or executives) at the very top of the company’s house, if bent on acheiving a particular end (and aided and advised by compliant in-house counsel), could almost always circumvent (or neutralize) those very same compliance programs. Again, to be plain, I am not saying that happened in this case. . . . yet.
But I will note one other interesting fact — despite the complete management shake-up in 2003, a few core members of Schering-Plough’s board of directors remain, from those days in 2001 — the days when the mis-deeds that led to the below settlement order occured.
More on that angle in a future post. So now — I’ll leave you to read the salient portions of the agreed settlement order, and fee award, below:
Minutes of Proceedings
Judge Katharine S. Hayden
Case No. 01-1412
December 11, 2007 — Hearing held with oral argument regarding pending motion for settlement. Court adjourned this matter until January 14, 2008 at 10:00 a.m.
Time in court: 2 Hours.
Editor’s Note: Then, on the above-referenced January 14, 2008 date, Judge Katherine S. Hayden entered the following agreed order and opinion — quoting from that opinion, now:
. . . .[The Action alleged that] Defendants intentionally or recklessly ignored repeated, clear, and unmistakable warnings that essential Company production facilities -– responsible for the manufacture of virtually every significant prescription and over-the-counter drug Schering sells –- were plagued by severe and pervasive manufacturing and quality control system breakdowns and failures which threatened not only the Company’s good standing with federal regulatory authorities, but also its ability to successfully manufacture and market its most important products. . . .
[As a result of these allegations,] Schering paid over $1 billion to resolve several government investigations. The adoption of the corporate governance and compliance mechanisms required by the settlement can prevent breakdowns in oversight that would otherwise subject the company to the risk of regulatory action, or uncover and remedy a problem at the early stages before it becomes the subject of a government investigation. Effective corporate governance can also affect stock price by bolstering investor confidence and improving consumer perceptions. . . .
The monetary losses and the regulatory troubles with the FDA are the fruit of the same tree, stemming directly from a breakdown in Schering’s managerial structure. Thus, the most important motivation for maintaining this action was to prevent future losses of this ilk by changing how the corporation’s directors oversee the running of the corporation. In making a determination of whether the litigation accomplished this, the Court necessarily relies on the declarations provided to the Court by plaintiffs. . . .
The most important changes are perhaps at the Board-level, where both the elimination of a staggered board in favor of annual elections, which reduces the risk of director entrenchment, and the implementation of transparent Director compensation without committee fees promote Board independence. . . .
The litigation has led to the corporation hiring more compliance staff, centralizing the oversight functions, creating new compliance positions, and restructuring the oversight role of its Board. Importantly, [Plaintiffs’ expert on Corporate Law — The Thomas Aquinas Reynolds Professor of Law at the Georgetown University Law Center] concludes that Schering now has best-in-class governance and compliance practices. . . .
All the “best-in-class” programs, processes and procedures won’t ever amount to much, if one or more high-ranking officers are willing to walk. right. around. them.
Did that happen here? We do not yet know. But the 130-plus now-pending suits are, in the aggregate, highly-likely to reveal what actually happened, here.
Again, I am not saying it has happened in that way, this time. But that is, in fact, exactly what the plaintiffs (and their counsel), in Cain v. Hassan, et al., — the current Schering-Plough Shareholders’ Derivative Action (Amended Complaint, in Case No. 08-1022, U.S. Dist. Ct., NJ) — effectively swear happened. So, we shall see.
As ever, more to come.