Claims firm overpays tens of millions—and then gets most of it back

AlternativesTO THE HIGH COST OF LITIGATION

INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION VOL. 26 NO. 2 FEBRUARY 2008

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TO THE HIGH COST OF LITIGATION

Publishers:Kathleen A. BryanInternational Institute for Conflict Prevention and Resolution

Susan E. Lewis John Wiley & Sons, Inc.

Editor: Russ BleemerJossey-Bass Editor: David FamianoProduction Editor: Ross Horowitz

VOL. 26 NO. 2 FEBRUARY 2008 ALTERNATIVES 19

Published online in Wiley InterScience (www.interscience.wiley.com).Alternatives DOI: 10.1002/alt

CLAIMS FIRM OVERPAYS TENS OF MILLIONS —AND THEN GETS MOST OF IT BACK

A broken conflict resolution-orientedclaims facility got ADR-like treatment lastmonth in a Brooklyn, N.Y., federal court.The process gave a federal judge a chanceto expound on the nature of settlement fa-cilities—in this case, related to a criminalproceeding—and class actions.

A California settlement administrationservices company overpaid claimants near-ly $60 million in a long-running fraud caseagainst Computer Associates InternationalInc., now known as CA Inc.

Equally awful for Gilardi & Co. LLC, a24-year-old San Rafael, Calif., firm cur-rently administering more than two dozenmatters, nearly all class action cases, it mis-takenly failed to pay anything to 2,000 ofthe investors hurt in an accounting scandalthat resulted in jail time for top ComputerAssociates executives.

New York Eastern District FederalCourt Senior Judge I. Leo Glasser in De-cember ordered the overpaid parties—more than 88,000 of them—to repay, andput Gilardi in the collection business.

Remarkably, less than a month afterGlasser’s order, Gilardi officers told thecourt that about $55 million of the overpay-ment had been returned to the company.

Glasser gathered the parties around atable in the middle of his courtroom onJan. 11 to hear about the returns on hismid-December order. Discussing and ne-gotiating, the judge led the seven partici-pants in mapping out a plan to collect andredistribute the remaining $5 million.

Glasser said that so far, the recovery ef-fort was “nothing short of monumental.”He agreed to sign a new order extendingthe original Jan. 4 payment date for thoseinvestors whose overpayments are still out-standing. Glasser said he would issue an-other order with a Feb. 8 deadline.

Rather than taking his place behind hisbench, Glasser sat at the head of the court-room’s large conference table—an increas-ing presence in federal courts in Brooklyn,and elsewhere. He was joined by two Gilar-di officials and the company’s outsidelawyer; two representatives from ChubbCorp., Gilardi’s error-and-omissions insur-er; an assistant U.S. attorney, and KennethFeinberg, a Washington, D.C., attorney,known for his facilities’ administrationwork, who was appointed as special masterin charge of the investor restitution fund inthe matter.

The group discussed the situation forabout 50 minutes before adjourning so Gi-lardi could draft a new order, and begin itspush for the final collections.

Gilardi dodged a bullet that could havecost the company tens of millions of dol-lars. After the hearing, Gilardi chief operat-ing officer, Peter Crudo, said that he hopedthat the company would not need to makean insurance claim for any missing funds,and that the current $5 million shortfallwas temporary pending the further collec-tion efforts. “Judge Glasser acknowledgedthat we have worked hard and diligently”to collect the overpayments, he said,adding that he was optimistic about the re-turn of most of the outstanding money.

Crudo wouldn’t comment on the insur-ance policy limits, and declined to projectwhether the policy would cover paymentsnot returned.

During the hearing, Glasser asked sev-eral questions about the insurance. TheChubb representatives said that a claim no-tice had been filed by Gilardi, and told

Glasser that Gilardi had completed the pre-liminary steps to make a claim under thepolicy if it is needed.

Glasser noted at the outset that Gilar-di’s Crudo had written on Dec. 13 to alertthe court to a processing error in sendingout the settlement checks. The judge at thehearing asked for an explanation, andCrudo replied, “I don’t have a reason otherthan human error.” Crudo confirmed thatthe missed payees were part of a list of set-tling parties from a separate civil action.

The Brooklyn case sought to distributefunds from the criminal case against thecompany and its officers. The error had oc-curred when Gilardi paid nearly $290 mil-lion to investors in November. The moneythat had come from CA Inc., as well as thecompany’s former president, Sanjay Ku-mar, and sales executive Stephen Richards,among others.

Both men were ordered to prison byGlasser last year, and to provide millionsfor the restitution fund, after pleadingguilty to securities fraud and conspiracycharges for their roles in inflating revenueat Islandia, N.Y.-based CA, one of theworld’s largest mainframe software manu-facturers.

Nevertheless, Glasser opened the courtsession with a warning that the settlementfacility had been misunderstood and mis-characterized. Because of the nature of thefacility, “there is a misconception aboutwhether this is a class action,” said Glasser.“It’s not.”

The judge later explained that abouthalf a dozen former executives were incar-cerated because of the scandal. “ComputerAssociates was a defendant in a criminalcase with significant restitution [obliga-tions],” he said, emphasizing that the facil-ity was “not a class action settlement.” Healso focused on the importance the govern-ment’s role, and the small return—“a pit-tance,” he later said—the defrauded in-vestors received for their losses.

The Gilardi error was first reported inNewsday on Dec. 19. Glasser said that inthe wake of the disclosure, he had receiveda letter from a patent attorney saying theadministrative error demonstrated why

(continued on next page)

ADR BRIEFS • ADR BRIEFS • ADR BRIEFS

Car

toon

by

John

Cha

se

“YES THINGS WENT VERY WELL RIGHT

UP TO THE POINT WHERE

MR. HAVERSON ATE MR. WILDER!”

ALT26_2 2/4/08 3:20 PM Page 19

VOL. 26 NO. 2 FEBRUARY 200820 ALTERNATIVES


class action reform is needed. The judgesaid public criticism was unwarranted, ex-plaining that the Feinberg-administered fa-cility wasn’t the result of a class-action fil-ing. He said the restitution program wasconstructed as part of a plea deal negotiat-ed with the U.S. attorney’s office by Com-puter Associates and the former officers.

“This error is unique in my experiencein administering these funds,” said Fein-berg after the hearing. Still, he said, the sit-uation could be instructive for parties inrestitution and civil settlement facility cas-es in conceptualizing the efforts. Specifical-ly, he said, it shows the need to be vigilantabout the distinction between the process-es of determining who gets what, and thedistribution’s mechanics.

In walking Judge Glasser through thecollection efforts, Gilardi’s Peter Crudo,along with company general counsel DanBurke, explained that the fast repaymentsoccurred because 3,000 investors returningmoney were predominantly institutionalinvestors.

Still, some major investors’ repaymentsremained outstanding, including bigbanks. Crudo emphasized he was reportingresults tallied Jan. 9, two days before thehearing, and on Jan. 10, the day before thehearing, $1.3 million had been returnedthat hadn’t been reconciled.

Crudo explained that after the mistakewas found and retrieval had begun, in-vestors who had been overpaid by morethan $10,000 had been contacted by tele-phone. The response, he said, was general-ly positive, particularly among big organi-zations—even though about a dozen tele-phone numbers didn’t work.

“A court order is a court order,” addedBurke. “They obey it.”

Crudo turned to the specifics:

• 155 investors still owed more than$10,000 each.

• 277 total investors owed more than$5,000, and

• 905 total investors owed more than$1,000.

Crudo confirmed that there were “a

few” with more than $100,000 in outstand-ing overpayments. Expanding on Burke’srequest for “a more refined and directedcourt order,” Prudo told Judge Glasser thatthe lack of returns for even some of the larg-er institutions could be attributed to “third-party filers,” which are companies whomanage the investments on behalf of share-holders, and were the record holders on theoriginal restitution requests.

Crudo also said Bank of America andClass Action Services LLC, of Sausalito,

Calif., both had large outstanding over-payments but had been in communica-tion with Gilardi about their respectivesituations.

Assistant U.S. Attorney Beth Schwartzsaid that the prosecution supported the col-lection efforts, but it wouldn’t help extractthe final $5 million from overpaid in-vestors. “It’s inappropriate for the govern-ment, which . . . collects for the victims, tocollect from the victims,” she told the court.

“Certainly,” responded Glasser, “itwould appear that the primary obligationis Gilardi’s.”

At Glasser’s urging, administratorKen Feinberg said he would consult withthe prosecutors on the appointment of anindependent auditor to review the re-turned monies.

Glasser also directed Gilardi to makecontacts directly with investors rather thanthird-party representatives.

The session closed with Glasser againaddressing critics. “I don’t think people un-derstood the need for the speed to get themonies returned,” he said. “That doesn’treflect on class actions.”

Gilardi’s Prudo thanked the group atthe courtroom negotiating table. “It wasnot a proud moment for us,” he said,adding, “It has not happened before.”

“The efforts show to me,” repliedGlasser, “that you have made a Herculeaneffort.” �

FOLLOW-UP: AFTER BEEFING UPADR, ITALY ALLOWS CLASS ACTIONS

Class actions were authorized by the ItalianParliament at year end, with the final leg-islative passage of the nation’s 2008 budget.

The Dec. 24 approval also backed anunusual ADR facility to administer classaction payments, institutionalizing aunique conflict resolution process into thelegislative scheme.

The proposed bill, and its ADR spin,were reported last month in “Italy May Al-low Class Actions, But With an ADRTwist,” 1 Alternatives 11 (January 2008).

Riccardo Buizza, a partner in the Mi-lan, Italy, office of Piergrossi BianchiniEversheds who has produced papers on thebill and the new law, states in an E-mailthat the conflict resolution provisions thatcame out of the process turned outstronger than those in the original propos-al. His firm is a member of London-basedinternational law firm Eversheds Interna-tional Ltd.

The law, Buizza explains, provides a“greatly enhanced” version of the “ADRChamber of Conciliation” compared withoriginal proposal. A bill for class actionswas introduced in the Italian Senate for thefirst time nearly four years ago, but thechamber didn’t appear until recent propos-als. The legislation passed the Senate inNovember, and was sent to the Parliamentfor final passage and enactment.

Paragraph 445 of Law No. 244 pro-

(continued from previous page)


‘...Not a Class Action...’

What happened? A settlement

fund administration firm failed

to pay 2,000 investors their

restitution shares. Other in-

vestors are overpaid by nearly

$60 million.

The problem: Getting the over-

payments back, very fast.

The miracle: About $55 million

was repaid to the claims fund

within a month.

ALT26_2 2/4/08 3:20 PM Page 20

VOL. 26 NO. 2 FEBRUARY 2008 ALTERNATIVES 21


vides for the ADR chamber. It will be usedwhere defendant and plaintiff award distri-bution proposals must be reconciled. Thechamber is post-trial, after a court issues ajudgment that sets the criteria for quantify-ing the amounts that the chamber will dis-tribute.

There are two choices for assemblingthe chamber: Either each side appoints apanel member, with the court appointingthe third, or an ADR provider is appointedto administer. For the second option, theprovider must be “recognized and regis-tered” with the Italian Ministry of Justice,according to Buizza.

The chamber’s goal is to quantify thedamages and payment terms. The “minutesof the chamber’s decision” constitute an

enforceable award for the defendant.While the settlement facility is unusu-

al, the fact that Italy now allows class ac-tions in tort and unfair commercial prac-tices cases—still comparatively rare outsidethe United States—has drawn the bulk ofthe attention to the new law. Italian classactions will be more restrictive than theirU.S. counterparts. For example, it doesn’tappear that individuals may bring suit. Thelaw restricts plaintiffs to national consumerassociations, though it also seems to allowsuits by ad hoc groups formed for purpos-es of litigation. Individuals must opt intothe plaintiff ’s claims process—but if theydon’t, they aren’t barred from bringing in-dividual actions later.

Also, there are no punitive damages al-

lowed, only compensatory damages.Reuters reported in November that

pressure for instituting class actions hasmounted over individual investors’ expo-sure in corporate failures, including dairyproducer Parmalat. Consumer groups havestrongly backed the measure, but businesshas been wary. According to the Nov. 15Reuters article, business lobbying groupConfindustria called the proposed bill al-lowing class actions “a grave act of hostili-ty” toward companies.

More information on Italian class ac-tions can be found at www.classactioni-talia.com. �

DOI 10.1002/alt.20213

(For bulk reprints of this article, please call (201) 748-8789.)


CPR NEWS • CPR NEWS • CPR NEWS

article award was funded by Peter andLinda Hoffman, of New York.

* * *

Lord Harry Woolf was presented withthe James F. Henry Award. The award,established six years ago, recognizes out-standing individual achievement anddistinguished, sustained contributionsto ADR.

Lord Woolf is responsible for elevat-ing the use of conflict resolution process-es in the U.K. court system during hisfive-year tenure as Lord Chief Justice. Asa high-ranking Law Lord in the 1990s,he conducted an extensive inquiry intoEngland and Wales’ civil justice system.The resulting report led to an overhaulof civil court rules in 1998.

Woolf ’s reform efforts were rootedin his belief that there was “a grave needto move to a managed system of disputeresolution.” Under the reforms, LordWoolf turned judges into active casemanagers who boosted the use of ADRand negotiation to settle cases, ratherthan litigation.

In his report on the civil justice sys-tem, Woolf wrote “that although the pri-mary role of the court is as a forum fordeciding cases[,] it is right that the courtshould encourage the parties to considerthe use of ADR as a means to resolve theirdisputes. I believe that the same is true ofhelping the parties to settle a case.”

After the reforms were enacted andhe was elevated to Lord Chief Justice,Woolf was a strong ADR advocate onthe bench. In one case, he wrote:

The importance of this appeal isthat it illustrates that, even in a dis-pute between public authorities andthe members of the public forwhom they are responsible, insuffi-cient attention is paid to the para-mount importance of avoiding liti-gation whenever this is possible. . . .[A]lternative dispute resolution can. . . [resolve] disputes in a mannerwhich both meets the needs of theparties and the public and savestime, expense and stress.

Cowl & Others v. Plymouth City Council,[2001] EWCA Civ 1935 (Dec. 14, 2001)

(available at www.bailii.org/ew/cases/EWCA/Civ/2001/1935.html).

Since retiring in 2005 from the po-sition of Lord Chief Justice, Woolf haspracticed as a mediator and arbitrator atBlackstone Chambers in London.

Woolf was presented with the awardat the Jan. 17 luncheon by CPR BoardChairman Charles Renfrew, of SanFrancisco, who said “No person has hada greater impact in history, since Black-stone put pen to paper, on the civil jus-tice system in England.”

In his brief acceptance remarks,Woolf said that dispute resolution prac-tices were the most effective ways to re-solve disputes in all areas: commercially,“in personal relationships, [and] ingroups of people, particularly betweennations and when you come to considerrelationships between religions.”

Companies, he said, “must behaveethically or they won’t succeed—or de-serve to succeed.” Woolf closed notingthat business has been more successfulin providing conflict resolution leader-ship than judges. “What we have tohave is global companies showing us theway to do [conflict resolution],” he said.

(continued from page 18)

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Claims firm overpays tens of millions—and then gets most of it back