In Re Aqua Metals, Inc. Securities Litigation

Background

The court had consolidated three related securities class actions involving Aqua Metals, Inc. The operative amended complaint asserted claims under Section 10(b) of the Securities Exchange Act and related Rule 10b-5 provisions, as well as control-person liability claims under Section 20(a), against Aqua Metals and Stephen R. Clarke, Thomas Murphy, and Selwyn Mould. The claims concerned alleged misrepresentations and omissions about Aqua Metals’ AquaRefining lead-recycling technology and alleged declines in the company’s stock price after the truth was revealed.

The court had previously dismissed some claims and allowed others to proceed. After discovery, mediation, and further litigation, the parties entered into a settlement agreement on July 2, 2021. The Plymouth County Group moved for preliminary approval of that agreement.

Proposed Settlement

The proposed Settlement Class covered persons and entities that purchased or otherwise acquired Aqua Metals common stock or options to purchase that stock between May 19, 2016, and November 9, 2017, and were damaged as a result, subject to stated exclusions. Aqua Metals, on behalf of all defendants, would provide a $7 million non-reversionary Settlement Fund: $6.5 million in cash funded by Aqua Metals’ directors-and-officers insurance carriers, plus $500,000 in Aqua Metals common stock or cash at Aqua Metals’ option.

After deductions for taxes, administration costs, litigation expenses, attorneys’ fees, and any incentive award, the Net Settlement Fund would be distributed to authorized claimants under a Plan of Allocation. The plan used a recognized-loss formula based on factors including when securities were acquired and sold, the amounts involved, and the timing of alleged inflation and corrective disclosures. The opinion estimated an average distribution of $0.49 per damaged share before court-approved fees and expenses, assuming all eligible class members submitted valid claims.

The agreement provided for a possible cy pres distribution of remaining funds to Loyola University School of Law’s Institute for Investor Protection if redistribution to class members was not cost-effective. It also required class members to release covered claims relating to the allegations and transactions in the action and the purchase, holding, or sale of Aqua Metals securities during the class period. Claims enforcing the settlement and certain derivative claims were excluded from the release.

Provisional Class Certification

For settlement purposes, the court found the requirements of Federal Rule of Civil Procedure 23 satisfied. It found numerosity because the proposed class included thousands of estimated members; commonality because members shared questions about alleged securities-law violations, scienter, and market fraud; typicality because the Lead Plaintiff’s claims were legally and factually similar to those of the proposed class; and adequacy because the court found no conflicts and found that the Lead Plaintiff and counsel had prosecuted the case vigorously.

The court also found predominance and superiority under Rule 23(b)(3). Common questions about the alleged scheme, defendants’ knowledge or deliberate recklessness, and causation could be addressed with classwide proof, while differences in individual damages calculations did not defeat certification for settlement purposes. The court appointed the Plymouth County Group as class representative and Berman Tabacco and Levi & Korsinsky as class counsel.

Preliminary Approval Analysis

The court applied the requirement that a class settlement be fundamentally fair, adequate, and reasonable, with heightened review because the settlement was reached before final class certification. The court found no indication of collusion or conflicts requiring rejection of the settlement. It noted that the agreement was non-reversionary, did not contain a provision preventing defendants from opposing a fee request, and did not condition the settlement on an attorneys’ fee award.

Lead Counsel intended to seek no more than 25 percent of the settlement amount in fees, approximately $1,750,000, plus litigation expenses not exceeding $135,000. The Lead Plaintiff intended to seek a cost-and-expense award not exceeding $5,000. The court did not finally decide those requests; it stated that it would examine them at the final approval stage.

The court found a sufficient connection between the proposed cy pres recipient and the class because both the action and the Institute for Investor Protection focused on combating securities fraud. It also found that the proposed incentive award did not require rejection of the settlement, while reserving the question of whether any award and amount were reasonable for the final fairness hearing.

The court concluded that the $7 million settlement fell within the possible range of approval in light of the estimated recovery, the risks of continued litigation, defendants’ challenges to causation and the class period, anticipated challenges to class certification and liability, and the delay that could result from trial and appeals. After reviewing the confidential Supplemental Agreement, the court found that its termination provision, which could be triggered by the number of opt-outs, did not affect the settlement’s fundamental fairness. The court found no obvious deficiencies.

Allocation, Notice, and Disposition

The court preliminarily approved the Plan of Allocation because it distributed the fund pro rata according to recognized losses while accounting for the timing and number of securities involved. It approved A.B. Data Ltd. as claims administrator and approved the proposed notice plan, which included mailed notices, notice through brokers and other nominees, publication, a settlement website, and a claim process. The court found that the proposed notice was reasonably calculated to inform class members and contained the information required by Rule 23.

The court GRANTED Plaintiffs’ motion for preliminary approval of the class-action settlement. It also preliminarily approved the settlement and Plan of Allocation, provisionally certified the settlement class, approved the class representative and class counsel, approved the claims administrator and notice plan, and directed the parties to submit a schedule and implement the notice process. This order granted preliminary approval; it did not constitute final approval of the settlement, attorneys’ fees, litigation expenses, or any incentive award.