Emp. Retirement Sys. of St. Louis v. Charles Jones ( 2024 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 24a0066n.06
No. 23-3512
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
EMPLOYEES RETIREMENT SYSTEM OF )
THE CITY OF ST. LOUIS (20-cv-4813), ) FILED
ELECTRICAL WORKERS PENSION FUND, ) Feb 16, 2024
LOCAL 103, I.B.E.W. (20-cv-5128), and ) KELLY L. STEPHENS, Clerk
MASSACHUSETTS LABORERS PENSION )
FUND, (2:20-cv-5237), derivatively on behalf of )
FirstEnergy Corp., )
)
Plaintiffs-Appellees,
)
) ON APPEAL FROM THE UNITED
TODD AUGENBAUM,
) STATES DISTRICT COURT FOR THE
Objector-Appellant, ) SOUTHERN DISTRICT OF OHIO
)
v. ) OPINION
)
CHARLES E. JONES; et al., )
Defendants-Appellees. )
)
FIRSTENERGY CORPORATION, )
)
Nominal Defendant-Appellee. )
Before: BATCHELDER, STRANCH, and DAVIS, Circuit Judges.
JANE B. STRANCH, Circuit Judge. Shareholders of FirstEnergy Corporation filed this
derivative action against current and former FirstEnergy executives to mitigate losses from the
Company’s role in the “HB6 Scandal,” a bribery, racketeering, and pay-to-play scheme between
FirstEnergy executives and Ohio politicians that, once exposed, cost the Company upwards of
$1 billion in cumulative fallout. After the Plaintiffs defeated a motion to dismiss and completed
substantial discovery, the parties reached a settlement agreement that secured shareholders a $180
million recovery and a series of corporate governance reforms. The district court notified
No. 23-3512, Emps. Ret. Sys. of City of St. Louis v. Jones
FirstEnergy shareholders of the proposed settlement, and one of those shareholders, Todd
Augenbaum, timely objected. Over Augenbaum’s objections, the district court approved the
settlement and entered a final settlement order. Augenbaum now appeals the district court’s entry
of that order. For the reasons that follow, we AFFIRM.
I. BACKGROUND
This consolidated derivative action stems from the “HB6 Scandal,” a public corruption
scheme through which FirstEnergy funneled approximately $60 million to Ohio public officials,
including Ohio Speaker of the House Larry Householder, in exchange for those officials advancing
and passing a favorable nuclear energy bill, House Bill 6, that bailed out Ohio nuclear energy
companies like FirstEnergy. The scheme became public in July 2020 when the Department of
Justice filed a criminal complaint against Householder and two FirstEnergy lobbyists in the U.S.
District Court for the Southern District of Ohio.
One year later, in July 2021, the Government entered a deferred prosecution agreement
with FirstEnergy. Under the terms of the agreement, FirstEnergy acknowledged that its executives
“conspired with public officials and other individuals and entities to pay millions of dollars to and
for the benefit of public officials in exchange for specific official action for FirstEnergy Corp.’s
benefit,” and agreed “to pay a criminal monetary penalty totaling $230,000,000.”
This $230 million fine, coupled with the $60 million FirstEnergy disbursed in bribes, $100
it million paid in compensation to culpable executives, and $37.5 million it spent to settle a separate
class action lawsuit, amounted to “at least $427.5 million in measurable direct costs,” on top of
which FirstEnergy incurred “other indeterminate damages, such as reputational harm, ongoing
defense costs, and prospective liabilities in the remaining class actions and regulatory
investigations,” all of which likely pushed “the total harm over $1 billion.” The Company’s stock
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price also fell 45% after the Householder prosecution was announced, “eliminating billions of
dollars of shareholder value.”
In response to the Householder indictment and FirstEnergy’s accompanying financial
losses, FirstEnergy shareholders filed a series of derivative actions against the Company’s
executives. The first two lawsuits were brought in Ohio state court in July 2020. A federal
derivative action was subsequently filed in the Northern District of Ohio in August 2020. Ten
more derivative actions, which underlie this appeal, followed in the Southern District of
Ohio. Three of those suits were voluntarily dismissed, and the district court consolidated the
remaining seven into this case.
On January 25, 2021, the Plaintiffs filed a consolidated verified shareholder derivative
complaint. The Defendants moved to dismiss the complaint, and the district court denied the
motion. Discovery opened on June 14, 2021, and continued until the parties reached a proposed
settlement agreement (the “Settlement Agreement”) on March 11, 2022.
The Settlement Agreement requires FirstEnergy to “obtain a $180 million recovery funded
by the Company’s insurers” and to implement “a series of internal governance reforms, crafted
with the assistance of Columbia Law Professor and corporate governance expert Jeffrey
Gordon.” The “reforms include the departure of six Directors, active Board oversight of
FirstEnergy’s political spending and lobbying activities, and specific disclosures in the annual
proxy statements issued to shareholders.” Professor Gordon submitted a declaration explaining
that these reforms would “significantly improve shareholder welfare at FirstEnergy” because they
would “significantly reduce the likelihood of a recurrence of the corrupt conduct identified in the
criminal proceedings.” The Agreement also requested $48.6 million in attorney’s fees.
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The district court granted preliminary approval of the Settlement Agreement on May 9,
2022, and directed the parties to notify FirstEnergy shareholders of the proposal. FirstEnergy filed
the agreed upon notice (the “Notice”) with the Securities and Exchange Commission in its Form
8-K, published a summary notice, and posted the Notice to its investor relations webpage. One
shareholder, Augenbaum, who owns 200 FirstEnergy shares or 0.000035% of the company, timely
objected to the Agreement. The Company’s Shareholder Litigation Committee also objected to
the amount of requested attorney’s fees. The court heard these objections at a fairness hearing on
August 4, 2022.
On August 23, 2022, the district court approved the Settlement Agreement over
Augenbaum’s objections and entered an order of final settlement approval. It revised the
attorney’s fee award, however, reducing it from the requested $48.6 million to $36
million. Augenbaum filed a motion for reconsideration, which the court denied, and then this
appeal.
II. ANALYSIS
The scope of this appeal is limited to Augenbaum’s objections to the district court’s final
settlement approval and attorney’s fees award. Augenbaum argues that (1) FirstEnergy’s
shareholders were provided inadequate notice of the settlement; (2) settlement approval was
improper in the first instance because the parties both colluded and conducted inadequate
discovery; (3) subsequent developments undermined the settlement’s validity; (4) the Settlement
Agreement required approval from the U.S. District Court for the Northern District of Ohio; and
(5) the district court awarded excessive attorney’s fees. The district court’s management of the
settlement and accompanying attorney’s fee award are reviewed under an abuse of discretion
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standard. See Granada Invs., Inc. v. DWG Corp., 962 F.2d 1203, 1205 (6th Cir. 1992); Gascho v.
Glob. Fitness Holdings, LLC, 822 F.3d 269, 294 (6th Cir. 2016).
A. Forfeiture
As a preliminary matter, Appellees explain that we need not reach the merits of
Augenbaum’s appellate arguments because they are forfeited. An appellant forfeits arguments
raised for the first time in a motion for reconsideration or on appeal. Evanston Ins. Co. v. Cogswell
Properties, LLC, 683 F.3d 684, 692 (6th Cir. 2012); Bannister v. Knox Cnty. Bd. of Educ., 49 F.4th
1000, 1011 (6th Cir. 2022). A forfeited claim in a civil case may be considered on appeal only “in
‘exceptional’ circumstances or when a ‘plain miscarriage of justice’ would otherwise result.”
Bannister, 49 F.4th at 1011 (quoting Ohio State Univ. v. Redbubble, Inc., 989 F.3d 435, 445 (6th
Cir. 2021)); see Friendly Farms v. Reliance Ins. Co., 79 F.3d 541, 545 (6th Cir. 1996).
At the fairness hearing stage in the district court, Augenbaum filed five objections to the
Settlement Agreement. He claimed that the Agreement (1) unnecessarily released “potentially
valuable claims against” third parties; (2) failed to articulate FirstEnergy’s expected liabilities in
collateral litigation and the amount of insurance coverage that would be left available to satisfy
those liabilities; (3) left $40 million of insurance coverage “on the table” by accepting a $180
million settlement despite the Company’s $220 million insurance policy; (4) released certain
FirstEnergy executives from individual liability without requiring those individuals to release the
Company from reciprocal liability for their termination; and (5) unreasonably released additional
unknown claims of untold value. See R. 181, Augenbaum Objections, PageID 4025-34. The
district court rejected each of these objections in its order of final settlement approval.
After the district court approved the Settlement Agreement, Augenbaum moved for
reconsideration. His motion contended that the district court had erred because (1) the Notice
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failed to provide due process; (2) the Settlement Agreement should not have been approved in the
first instance given evidence of collusion and inadequate discovery; (3) subsequent developments
undermined the court’s assessment of the Agreement; and (4) the attorney’s fee award was
excessive. See R. 197-1, Mem. in Support of Mot. for Reconsideration, PageID 5093-5100.
As set out above, Augenbaum’s appellate arguments are that the Settlement Agreement
(1) provided inadequate notice (raised for the first time in the motion for reconsideration);
(2) suffered from collusion and inadequate discovery (raised for the first time in the motion for
reconsideration); (3) was undermined by subsequent developments (raised for the first time in the
motion for reconsideration); (4) requires approval from the U.S. District Court for the Northern
District of Ohio (raised for the first time on appeal); and (5) awarded excessive attorney’s fees
(raised for the first time in the motion for reconsideration).
Augenbaum asserts that he could not have raised these objections earlier because their
factual basis emerged “for the first time in” the Plaintiffs’ “reply brief in support of settlement
approval” when the Plaintiffs disclosed that “only $72.28 million of the $180 million settlement
fund” was “attributable to insurance that would not otherwise have been available to FirstEnergy.”
The district court found, however, that Augenbaum could have discovered this fact himself through
“the slightest amount of reasonable diligence.” Augenbaum provides us with no reason to believe
that finding was erroneous.
All told, Augenbaum forfeited each of his appellate arguments by raising them for the first
time in his motion for reconsideration or on appeal and has provided no justification for
entertaining them despite the forfeiture. We can affirm the district court on that basis alone. For
the sake of completeness, however, and because the district court considered the merits of
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Augenbaum’s arguments at the motion for reconsideration stage, we will also briefly address the
substance of his objections.
B. Notice
Starting with the first step of the settlement approval process, Augenbaum objects to the
Notice that was distributed to FirstEnergy shareholders. The parties to a proposed settlement
agreement in a shareholder derivative action must distribute a reasonable notice to all shareholders
“‘who would be bound’ by the settlement.” UAW v. Gen. Motors Corp., 497 F.3d 615, 629 (6th
Cir. 2007) (quoting Fed. R. Civ. P. 23(e)(1)(B)). “The notice should be ‘reasonably calculated,
under all the circumstances, to apprise interested parties of the pendency of the action and afford
them an opportunity to present their objections.’” Id. (quoting Mullane v. Cent. Hanover Bank &
Tr. Co., 339 U.S. 306, 314 (1950)).
Augenbaum’s main objection to the Notice is that it did not “disclose that the purported
$180 million settlement only consisted of ‘$72.28 million of insurance that would not have
otherwise been available to FirstEnergy.’” The Notice did explain, however, that the monetary
component of the Settlement Agreement would be paid by the Defendants’ “insurers,” R. 170-3,
Mot. for Approval of Settl., PageID 2580, and the district court found that Augenbaum could have
discovered the insurance allocation through “the slightest amount of reasonable diligence.”
Shareholders like Augenbaum thus had ample notice and opportunity to assess FirstEnergy’s
funding mechanism and raise any corresponding objections.
Augenbaum also argues that the Notice’s description of the Settlement Agreement’s claims
release was deceptive. The Notice represented that the Agreement would “not release any claims
by the Company for recoupment of compensation” against former FirstEnergy executives Charles
Jones, Michael Dowling, and Dennis Chack, “including such claims that the Company is pursuing
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or may pursue against” them. Augenbaum contends that the Plaintiffs intend to “confine” their
recoupment claims “to those made pursuant to the Recoupment Policy” while releasing their
breach of fiduciary duty claims in the Northern District, an approach he believes contradicts the
Notice. His suspicion is based on the declaration of FirstEnergy Senior Vice President and Chief
Human Resources Officer Christine L. Walker. Augenbaum views the declaration as evidence
that the Company plans to limit its “efforts to claw back compensation paid to” Jones, Dowling,
and Chack to offsets “under the Company’s Executive Compensation Recoupment Policy.”
Walker Decl. ¶ 4, Miller v. FirstEnergy Corp., 20-cv-01743 (N.D. Ohio Sept. 8, 2022), ECF No.
359-1.
Contrary to Augenbaum’s fears, the Company is actively pursuing recoupment. It has
offset payments otherwise due to Jones and Chack under the Company’s Executive Deferred
Compensation Plan, and it has entered a tolling agreement with Dowling that preserves its ability
to evaluate recoupment claims against him. Walker Decl. ¶¶ 7-12, Miller, 20-cv-01743. The
declaration contains no suggestion that the Company intends to abandon these efforts or to forgo
supplementing them through other avenues should they prove inadequate. The breach of fiduciary
duty claims the Plaintiffs dismissed in the Northern District are, moreover, separate and distinct
from the recoupment claims referenced in the Notice. The Company’s recoupment efforts are
therefore consistent with both the Settlement Agreement and the Notice.
Because the Notice accurately described the Settlement Agreement’s funding mechanism
and the nature of the claims the Agreement would release, Augenbaum has not shown that the
district court abused its discretion in approving it.
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C. Settlement Approval
Moving to the substance of the Settlement Agreement itself, Augenbaum asserts that the
district court abused its discretion in approving the Agreement in the first instance. A final
settlement agreement must be “reasonable, fair and adequate.” In re Wendy’s Co. S’holder
Derivative Action, 44 F.4th 527, 536 (6th Cir. 2022) (quoting In re Gen. Tire & Rubber Co. Sec.
Litig., 726 F.2d 1075, 1086 (6th Cir. 1984)). Various factors inform whether these requirements
are met, including: “(1) the risk of fraud or collusion; (2) the complexity, expense and likely
duration of the litigation; (3) the amount of discovery engaged in by the parties;” (4) the plaintiffs’
“likelihood of success on the merits; (5) the opinions of class counsel and class representatives;
(6) the reaction of absent class members; and (7) the public interest.” UAW, 497 F.3d at 631.
Augenbaum contends that the first and third factors, the risk of collusion and the sufficiency of
discovery, invalidate the Settlement Agreement.
Augenbaum’s principal objection—and the core of his appellate arguments—is that the
value of the settlement is overstated because although it purports to secure a $180 million return
for investors, “only $72.28 million of the $180 million settlement fund” would “not otherwise have
been available to FirstEnergy” as insurance against other claims. The value of this action is, in
Augenbaum’s view, capped at the $72.28 million FirstEnergy could not otherwise have recovered.
Characterizing its value as $180 million, he believes, is so misleading that it amounts to “evidence
of collusion” between the parties.
Augenbaum’s argument seems to be that when a collection of insurance claims exceeds the
insured’s total coverage amount, the real value of each claim must be understood as its pro rata
share of the total policy. Presumably, although Augenbaum does not explain the finer points, the
policy value would be allocated across claims in a manner that adjusts for the total potential value,
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likelihood of success, and cost of recovery for each claim and that is agnostic to the timing of claim
recovery throughout a coverage period. But Augenbaum offers no authority for the proposition
that such a method should be applied to shareholder derivative actions, supplies no proposal for
how such a formula would operate here, and, critically, fails to explain why such a mechanism is
necessary to accurately measure the value of a settlement from a shareholder standpoint.
At bottom, shareholder derivative actions are fiduciary ventures, brought “to enforce a right
of a corporation,” Owen v. Mod. Diversified Indus., Inc., 643 F.2d 441, 444 (6th Cir. 1981)
(quoting Fed. R. Civ. P. 23.1), and shareholders have a legitimate interest in taking a “bird in the
hand instead of a prospective flock in the bush,” UAW v. Gen. Motors Corp., No. 07-CV-14074-
DT, 2008 WL 2968408, at *25 (E.D. Mich. July 31, 2008) (abrogated on other grounds) (quoting
Oppenlander v. Standard Oil Co., 64 F.R.D. 597, 624 (D. Colo. 1974)). As the district court
explained, an “insurance policy is a wasting asset subject to erosion by ongoing defense costs,”
and settling provides certain, immediate returns that cannot be guaranteed by proceeding to trial
or by relying on the speculative prospect of recovery in other litigation. The Settlement Agreement
may deplete the potential of ancillary claims to draw down against the same policy, but it
nonetheless delivers a real, guaranteed return for FirstEnergy shareholders. The district court did
not abuse its discretion in assessing the benefit of the settlement at $180 million and the parties’
characterization of it as providing $180 million in value is not circumstantial evidence of collusion.
Augenbaum also contends that the parties cut short discovery that could have bolstered
claims against the individual defendants and produced more serious consequences for the
implicated executives. The district court’s summary of the discovery taken in this case catalogued
that “Plaintiffs served 10 sets of discovery requests, with 32 sets of responses and objections;
obtained over 500,000 pages of document discovery, including all documents produced to the DOJ
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and SEC; and subpoenaed 11 third parties.” It acknowledged that the Plaintiffs had taken no
depositions and that “more discovery would have been desirable,” but concluded that the
“document discovery” enabled the Plaintiffs to weigh “the strengths and weaknesses of their case”
against the “tradeoff of rising litigation costs and depletion of recoverable insurance.”
Augenbaum counters that additional discovery would have served “the public interest” by
exposing the culpability of individual executives and would have benefitted the company by
determining the extent to which its executives engaged in “wrongful conduct.” But shareholder
derivative actions serve fiduciary, not public, interests. Owen, 643 F.2d at 444. And Augenbaum
identifies no evidence that would have been revealed to shareholders through depositions that had
not already been uncovered through document discovery. The Plaintiffs had no duty to exhaust
every possible source of discovery without regard to litigation expense on the theory that continued
discovery could theoretically yield new, material evidence. The district court properly accorded
only “modest” weight to this factor, and did not abuse its discretion in concluding that the parties
conducted sufficient discovery to make an informed settlement decision that served their fiduciary
interests.
D. New Evidence
Augenbaum argues next that even if the initial approval was valid, two subsequent
developments have since undermined it. He contends first that the Plaintiffs’ dismissal with
prejudice in the Northern District undermines the premise relied upon by the district court that “a
second major recovery source—the compensation paid to Defendants Jones, Dowling, and
Chack—remains available for the Company to pursue via salary clawback claims.” As discussed,
however, the Company is pursuing salary clawbacks under the Recoupment Policy and has
retained its ability to do so through other mechanisms. This is consistent with the district court’s
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expectations and the assumptions underlying the Agreement, which did not state the specific forum
or sequencing through which the Company would pursue recoupment.
Augenbaum asserts second that newly discovered emails incriminating former FirstEnergy
CFO and CEO Steven E. Strah are so “damning” that the district court’s previous characterization
of the Plaintiffs’ claims as difficult to prove can no longer stand. The emails Augenbaum identifies
may be new to him, but the district court explained that they “were already in the record” and
available to the parties at the time of the settlement. Augenbaum does not dispute this and, as the
district court emphasized, does not show how they “are material and non-cumulative of the
information contained in the 500,000 pages of discovery present in the record.”
Augenbaum has not identified any new development that undermines the Settlement
Agreement.
E. The Northern District of Ohio Action
As a final attack on the settlement order, Augenbaum contends that because the first
shareholder derivative action against FirstEnergy was filed and actively litigated in the Northern
District of Ohio, Federal Rule of Civil Procedure 23.1(c) and the “first-to-file” doctrine “required
that the action be presented” to the Northern District for approval.
Under the first-to-file principle, “when actions involving nearly identical parties and issues
have been filed in two different district courts, the court in which the first suit was filed should
generally proceed to judgment.” Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke
Corp., 511 F.3d 535, 551 (6th Cir. 2007) (internal quotation marks omitted) (quoting Zide Sport
Shop of Ohio, Inc. v. Ed Tobergte Assocs., Inc., 16 F. App’x 433, 437 (6th Cir. 2001)). The rule
is a “well-established doctrine that encourages comity among federal courts of equal rank.” Id.(quoting AmSouth Bank v. Dale, 386 F.3d 763, 791 n.8 (6th Cir. 2004)). It “is not a strict rule,”
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however, and “district courts have the discretion to dispense with” it “where equity so demands.”
Id. (first quoting AmSouth Bank, 386 F.3d at 791 n.8; and then quoting Zide Sport Shop, 16 F.
App’x at 437).
The district court acknowledged that the first federal derivative shareholder action was
filed in the Northern District, but exercised jurisdiction over the consolidated suit all the same. It
identified numerous reasons for litigating the suit in the Southern District: the court was already
managing the seven consolidated cases; the Southern District was the forum for both a related class
action suit against FirstEnergy and the criminal prosecution of Householder; the Northern District
case was not destined to completely resolve the Southern District claims given the more extensive
complaint filed in the Southern District; appearing in the Southern District imposed no identifiable
hardship on the Defendants; the Northern District plaintiff would have transferred that case to the
Southern District but for the Defendants’ objection; and the court saw no indicia of improper forum
shopping.
Augenbaum provides no basis for concluding that the district court abused its discretion in
declining to stay the Southern District litigation under the ordinary first-to-file doctrine, and
identifies no authority suggesting that a shareholder derivative settlement reached in one district
requires approval in every other district hosting concurrent litigation, particularly when no other
plaintiff has objected, nor does he offer any reason to believe the first-to-file rule is mandatory in
shareholder derivative actions. As a result, Augenbaum has failed to show that the existence of
the Northern District action undermines the validity of the Southern District settlement.1
1
The district court’s proper exercise of jurisdiction over the consolidated cases before it dispels Augenbaum’s
unsupported argument that the existence of ongoing litigation in a second district warrants reviewing the decision of
the district court here de novo.
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F. Attorney’s Fees
Augenbaum closes by arguing that even if the district court properly approved the
Settlement Agreement, it improperly awarded excessive attorney’s fees. As part of the initial
settlement proposal, the Plaintiffs sought $48.6 million in fees and expenses, or 27% of the $180
million recovery. The Defendants countered that no more than $24.3 million, 13.5% of the fund,
should be awarded. The district court arrived at the middle ground of $36 million, or 20%.
On appeal, Augenbaum does not object to the district court’s 20% multiplier but argues
that the court should have applied it to what he contends is the settlement’s real value: $72.28
million. This would produce a fee award of $14.5 million. We have already rejected Augenbaum’s
characterization of the settlement value, however, concluding that the district court acted within
its discretion in assessing the value at $180 million. Given that Augenbaum does not dispute the
20% multiplier, the attorney’s fee award was an equally proper exercise of discretion.
III. CONCLUSION
For the reasons discussed above, Augenbaum’s objections are forfeited and without merit.
The judgment of the district court is AFFIRMED.
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