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UPDATE - First Circuit Upholds Method of Distribution of Notice in Hill v. State Street Corp., But Cautions Against Practice of Delivering Late Notice to Small Investors

The United States Court of Appeals for the First Circuit recently issued a summary dismissal denying a number of objections to the Settlement Agreement reached in Hill v. State Street Corporation. The decision further sheds light on what constitutes the proper dissemination of notice to potential settlement claimants in complex class action litigation matters.

The objectors’ appeal arose out of the settlement of a securities class action brought on behalf of all those who purchased the common stock of State Street Corporation over a three-year period. After an agreement on the settlement was reached between the parties, the lead plaintiffs began distributing notice of the settlement – including the right to opt out or object – on August 18, 2014, by mailing notice packets to over 7,000 potential class members and the nominee owners who held potential members’ stock in street name.

While this plan was implemented to ensure that all large investors received ample notice of their right to opt out or object, it caused foreseeable delays in the forwarding of notice from the nominee owners to the small investors themselves. As a result, on September 4, 2014, the district court moved the date of the final settlement hearing from October 27, 2014 to November 20, 2014. However, the notices distributed after that date continued to publish an objection deadline of October 6 and a hearing date of October 27.

The objectors did not receive notice until October 4, 2014, two days before the published deadline to object. They argued before the district court that they were given too little time to register their objections. The district court rejected these objections, concluding that the lead plaintiff’s method of disseminating notice constituted adequate notice under both Fed. R. Civ. P. Rule 23 and due process, despite the fact that the method of dissemination led to a number of small investors receiving notice shortly before, or even after, the published deadline to object.

On appeal, the U.S. Court of Appeals for the First Circuit was less satisfied with the method of distributing notice. It stated that “[a]s far as the time given objectors to object, it does seem that the delivery of a notice on or around October 4 informing objectors that they had until October 6 to object was likely unreasonable.” Regarding the lead plaintiff’s argument that small investors who held their stock in street name assumed the risk of late notice, it added that “it is not clear why such a routine and known practicality of investing common to small investors should mean that those investors get late or no notice. It was apparently feasible to send the notice directly to them once names and addresses were obtained from the investment intermediaries.”

Despite the Court’s apparent issues with the method of distribution, however, the Court concluded that the issue of whether the notice was defective was moot. It held that the district court remedied any defect by delaying the final settlement hearing to November 20, 2014, and by allowing objectors to make their objections notwithstanding the published deadline of October 6, 2014.

The Court’s decision is noteworthy for institutional investors. While the district court did not take issue with the method of dissemination, the First Circuit’s decision certainly seems to indicate that it was not satisfied with a procedure which necessarily gave notice of settlement to small investors on or after the published deadline to object or opt out. Had the district court not cured this defect, it appears possible that the First Circuit would have reversed the district court’s approval of the settlement on appeal.

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