Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 1 of 50 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF GEORGIA ) In re ) CARTER’S, INC. ) Civil Action No. 1:08-CV-2940-AT SECURITIES LITIGATION ) DECLARATION OF JONATHAN GARDNER IN SUPPORT OF LEAD PLAINTIFF’S MOTION FOR FINAL APPROVAL OF CLASS ACTION SETTLEMENT AND PLAN OF ALLOCATION AND LEAD COUNSEL’S MOTION FOR ATTORNEYS’ FEES AND REIMBURSEMENT OF LITIGATION EXPENSES Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 2 of 50 JONATHAN GARDNER declares as follows, pursuant to 28 U.S.C. § 1746: 1. I am a member of Labaton Sucharow LLP (“Labaton Sucharow” or “Lead Counsel”), Court-appointed lead counsel for Plymouth County Retirement System (“Lead Plaintiff” or “Plymouth”) and the proposed Settlement Class in the above-captioned class action (the “Consolidated Action”).1 I am admitted to practice before this Court. 2. I have been actively involved in the prosecution of this case, am intimately familiar with its proceedings, and have personal knowledge of the matters set forth herein based upon my close supervision and participation in the Consolidated Action. 3. I respectfully submit this declaration in support of Lead Plaintiff’s motion, pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, for final approval of the settlement of the remaining claims in the Consolidated Action against defendant PricewaterhouseCoopers LLP (“PwC”) for $3,300,000 in cash (the “PwC Settlement” or “Settlement”), and the plan of allocation for distribution 1 All capitalized terms used herein, unless otherwise defined, have the same meaning as that set forth in the Stipulation and Agreement of Settlement with PricewaterhouseCoopers LLP, dated April 24, 2013 (the “Stipulation”) (ECF No. 156-3). 1 Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 3 of 50 of the net settlement proceeds (the “Plan of Allocation”).2 I also submit this declaration in support of Lead Counsel’s motion for an award of attorneys’ fees and reimbursement of counsel’s expenses incurred during the prosecution or resolution of the Consolidated Action. 4. Both the PwC Settlement and Lead Counsel’s motion for attorneys’ fees and reimbursement of litigation expenses have the support of Lead Plaintiff. See Declaration of William R. Farmer, Executive Director of Plymouth County Retirement System, in Support of Lead Plaintiff’s Motion for Final Approval of Class Action Settlement and Lead Counsel’s Motion for an Award of Attorneys’ Fees and Reimbursement of Litigation Expenses, annexed hereto as Ex. 1. 5. Lead Plaintiff previously settled all claims against Carter’s and the individual defendants for $20,000,000 (the “Carter’s Settlement”). The Court entered a final order and judgment with respect to the Carter’s Settlement on June 1, 2012. ECF No. 130. Lead Counsel’s previous motion for fees and expenses in the Carter’s Settlement was for all fees and expenses incurred in connection with 2 This declaration is submitted in support of a negotiated settlement and is, therefore, subject to Rule 408 of the Federal Rules of Evidence and inadmissible in any proceeding, other than in connection with this Settlement. In the event the Court does not approve the Settlement, this declaration and the statements contained herein and in any supporting memoranda are made without prejudice to Lead Plaintiff’s position on the merits. 2 Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 4 of 50 the prosecution or resolution of the Consolidated Action from inception until April 13, 2012. Accordingly, Lead Counsel’s motion for attorneys’ fees and reimbursement of litigation expenses in connection with the PwC Settlement will be for all fees and expenses incurred in litigating or resolving the Consolidated Action since April 13, 2012, i.e., from April 14, 2012 through August 16, 2013. I. THE BENEFITS TO THE SETTLEMENT CLASS 6. The PwC Settlement, which the Court preliminarily approved in its May 21, 2013 Preliminary Approval Order Providing for Notice and Hearing in Connection With Proposed Class Action Settlement with PricewaterhouseCoopers LLP (the “Preliminary Approval Order”) (ECF No. 159), provides for the gross payment of $3,300,000 to secure a settlement of the remaining claims alleged in the Consolidated Action against PwC. If approved, the PwC Settlement will finally resolve the Consolidated Action and release all claims (and related claims) against PwC in the Consolidated Action. 7. PwC has not admitted liability or any wrongdoing as part of the PwC Settlement, and vigorously maintains that it is not liable to the Settlement Class. 8. All eligible Settlement Class Members who timely submit valid Proofs of Claim (or who previously submitted a timely claim in the Carter’s Settlement) will receive a distribution from the Net Settlement Fund, which is the 3 Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 5 of 50 Settlement Fund, plus any accrued interest, minus administration expenses, Lead Counsel’s fees and expenses approved by the Court, and any taxes incurred on the interest income earned by the Settlement Fund. The Court will be asked to approve the distribution of the Net Settlement Funds for both settlements at a future date, once the administration is completed. 9. Those Settlement Class Members who previously submitted a proof of claim in connection with the Carter’s Settlement by May 21, 2013 (the date the Court preliminarily approved the PwC Settlement) need not submit another proof of claim for the PwC Settlement, as the previously submitted proof will be used to determine payment eligibility for the PwC Settlement. To be eligible for payment in the PwC Settlement, which relates only to claims regarding the accommodations fraud, Settlement Class Members must have purchased Carter’s common stock, or purchased a call option on Carter’s common stock, or sold a put option on Carter’s common stock, in the “Eligibility Period” from March 16, 2005 through November 9, 2009 inclusive. The two alleged disclosure dates relating to the accommodations fraud are October 27, 2009 and November 10, 2009. 10. The PwC Settlement provides an immediate and substantial recovery to Carter’s investors, who faced a significant risk of no recovery at all from PwC. Indeed, the risks of complex securities litigation are magnified against outside 4 Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 6 of 50 auditing firms like PwC. For example, the claims could be dismissed on PwC’s pending motion for reconsideration, for failure to satisfy the pleading standards of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), or after PwC’s likely motion for summary judgment following the completion of fact and expert discovery. 11. As set forth below, PwC’s defenses include that its audits complied with all professional standards, and that corporate insiders concealed the fraud from PwC and Carter’s internal accounting department by creating false documentation regarding accommodations. Moreover, PwC could assert that independent investigations by the United States Department of Justice (“DOJ”), the U.S. Securities and Exchange Commission (“SEC”), and Carter’s independent audit committee are inconsistent with Lead Plaintiff’s theory of scienter as alleged in the Second Amended Complaint. Even if Lead Plaintiff were to establish liability, PwC would likely argue that Lead Plaintiff could not demonstrate a corrective disclosure regarding PwC and that the PSLRA’s proportionate liability, 90 day look-back rule, and settlement set-off provisions would apply to reduce any recovery. 12. Even if the Second Amended Complaint survived PwC’s motion for reconsideration, Lead Plaintiff would still need to overcome additional hurdles 5 Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 7 of 50 before the Settlement Class could possibly recover any damages, including class certification, summary judgment, and trial. Given these and other difficulties that the Settlement Class faced in pursuing the claims against PwC, the PwC Settlement provides an excellent and immediate guaranteed recovery. 13. Lead Plaintiff’s consulting damages expert estimated that Lead Plaintiff’s aggregate damages attributable to the accommodations fraud, the only fraud alleged against PwC, was $64.5 million. Thus, the $3.3 million Settlement Amount represents approximately 5% of the maximum recoverable amount, and a very good recovery against an external auditor. When combined with the $20 million settlement amount in the Carter’s Settlement, the total settlement recovery is $23.3 million, or approximately 36% of the maximum recoverable amount attributable to the accommodations fraud, a strong overall result for the Settlement Class. 14. The PwC Settlement was reached only after extensive investigative efforts by Lead Counsel. Lead Counsel identified 168 potential witnesses, contacted 114 potential witnesses, and interviewed approximately 68 third parties. Lead Counsel also conducted a thorough review of publicly available information, prepared and filed three detailed consolidated complaints, and researched and prepared Lead Plaintiff’s oppositions to: (1) PwC’s motion to dismiss the First 6 Case 1:08-cv-02940-AT Document 163 Filed 08/30/13 Page 8 of 50 Amended Complaint; (2) PwC’s subsequent motion to dismiss the Second Amended Complaint; and (3) PwC’s motion for reconsideration following the Court’s denial of the motion to dismiss. Lead Counsel consulted an accounting expert regarding the substantive accounting issues in the alleged accommodations fraud, and further explored the factual and legal issues regarding loss causation by consulting a damages expert. Lead Counsel also performed confirmatory discovery, reviewing the workpapers PwC produced to the SEC during its investigation of Carter’s. These efforts provided Lead Plaintiff with a clear understanding of the strengths and weaknesses of its claims before it entered into the PwC Settlement.