Tag Archives: M&A litigation

New Developments in Gordon v. Verizon Communications Class Action

There seem to be a good number of people trying to figure out what is going on in the securities class action suit in the New York State Supreme Court Gordon v. Verizon Communications, Inc., Index No. 653084/2013.  That is the case in which Judge Melvin Schweitzer famously rejected a proposed “merger tax” settlement in an opinion that received some attention.  It was a matter of some interest that a member of the New York State Bar, Gerald Walpin, filed successful papers in the case objecting to the settlement on policy grounds when the defense lawyers from the Wachtell Lipton firm stood mute in the effort to pay off the plaintiff’s counsel to allow the merger to proceed.  See Commentary on Abusive State Law Actions Following M&A Deals.

Some time ago I provided an update on developments in that case (Update on Status of Proposed Settlement in Gordon v. Verizon Communications, Inc.),  in which I noted that the plaintiff filed a notice of appeal, and that attorney Walpin sought to intervene in the case to pursue a motion for summary judgment, arguing that the defense lawyers in the case were conflicted by having agreed to the settlement.

Here is another update.  I provide this because it seems like a lot of class members are floundering around with no understanding of what is happening.

On August 3, 2015, Judge Anil Singh rejected several motions in the case, including the motion by Mr. Walpin to intervene and seeking summary judgment on behalf of the defendants, and a motion by by the plaintiff to introduce a new expert report addressing the proposed settlement and for reconsideration of Judge Schweitzer’s December 19, 2014 order denying the motion to approve that proposed settlement.  A copy of that decision is available here: Decision on motions in Gordon v. Verizon Communications.  On September 14, 2015, the plaintiff filed a Notice of Appeal of that order.  See Notice of Appeal in Gordon v. Verizon Communications.

That is pretty much all that the case docket sheet reveals.  By all outward appearances, the case is otherwise in stasis.

Since Judge Schweitzer’s decision, the “disclosure only” settlements of merger challenges — referred to by Judge Schweitzer as “merger tax” settlements — have come under attack and disrepute in a number of court decisions.  Most recently, several decisions in the Delaware Chancery Court have rejected such proposed settlements.  See Delaware Judge Tells Plaintiff Lawyers: The M&A ‘Deal Tax’ Game Is Over; Game Over?: Del. Chancery Court Rejects Disclosure-Only Settlement in H-P/Aruba Networks Merger Objection Lawsuit; and Transcript of Del. Chancery Court Hearing in Aruba Networks Stockholder Litigation, in which Vice Chancellor Laster addressed a proposed disclosure-only settlement in the H-P/Aruba merger challenge.

It seems that this sordid practice may be on the wane because judges finally are doing their jobs.  But in the meantime, the supposed beneficiaries of these cases — the shareholders — are kept totally in the dark about these developments.  Plaintiff’s counsel should be keeping these putative clients informed but, at least in this case, are obviously failing to do so, presumably because they see no vigorish in it.  What a “profession”!

Straight Arrow

October 16, 2015

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Update on Status of Proposed Settlement in Gordon v. Verizon Communications, Inc.

I’ve noticed a number of searches seeking further information on the status of the case Gordon v. Verizon Communications, Inc., Index No. 653084/2013, pending before Judge Melvin Schweitzer in the New York Supreme Court, New York County.  This is a putative class action challenging the acquisition by Verizon of Vodafone’s 45% minority stake in Verizon Wireless for $130 billion.  We previously discussed the objections lodged to a proposed settlement in that action, and Judge Schweitzer’s rejection of the settlement, in this post: Commentary on Abusive State Law Actions Following M&A Deals.  That was followed by a post on a scathing judicial statement on the impropriety of such “merger tax” cases (NY Court Flexes Muscles in Rejecting Bogus “Merger Tax” Settlement), which discussed a New York judge’s rejection of a proposed settlement in another knee-jerk merger challenge in the case City Trading Fund v. Nye, No. 651668/2014 (NY Sup. Ct.).  I recently received a note asking about where things stand in Gordon v. Verizon Communications, so here is an update.

The December 2014 opinion rejecting the settlement in Gordon (which can be found here: Decision and Order in Gordon v. Verizon Communications) was followed by the following:

  1.   One of the objectors, New York attorney Gerald Walpin, filed a motion for summary judgment on January 6, 2015, asking that the judge dismiss the plaintiff’s claim with prejudice.  The filing in support of that motion can be found here.  The plaintiff opposed that motion, in papers that can be found here.  Mr. Walpin filed this reply brief in favor of the summary judgment motion.  The briefing on that motion appears to have been completed on January 24, 2015.
  2.   The plaintiff then did two things: (i) on January 21, 2015, she filed a notice of appeal of the decision denying approval of the settlement (the notice of appeal can be found here); and (ii) on February 3, 2105, she filed a motion for reconsideration and reargument of the motion for approval of the settlement (the brief in support of the motion for reconsideration can be found here).  In other words, the plaintiff filed an appeal of the decision and then afterward asked that the same decision be reconsidered.  These are mutually inconsistent steps.  If the decision is appealed, the lower court loses jurisdiction over it and no longer can consider a reconsideration motion.  On the other hand, if a timely motion for reconsideration is filed, the earlier decision cannot properly be appealed until that motion is acted upon.  Filing the reconsideration motion after the notice of appeal might well be sanctionable.  The appeal seems flawed in any event because normally an appeal cannot occur before a case is finally decided.  Since Judge Schweitzer only denied a motion to approve the settlement, leaving the underlying case still pending in his court, there would appear to be no decision by him that is immediately appealable, absent a special order allowing an interlocutory appeal to occur.  The oppositions to the motion for reconsideration and reargument by the two objectors can be found here (opposition by Mr. Walpin), and here (opposition by objector Jonathan Crist).  Plaintiff’s reply brief in support of the motion for reargument is here.
  3.   As far as I can tell, no further action has occurred on either the motion for summary judgment or the motion for reconsideration of the denial of the settlement.  They each appear to be fully briefed.  Until some further action occurs, the proposed settlement is rejected and the case remains pending.

For those interested in the case, and in particular in the hearing held by Judge Schweitzer to consider the proposed settlement, a copy of the transcript of that hearing is available here:  Transcript of December 2, 2014 Hearing in Gordon v. Verizon Communications, Inc. on the motion for approval of proposed settlement.

Straight Arrow

March 2, 2015

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NY Court Flexes Muscles in Rejecting Bogus “Merger Tax” Settlement

We recently wrote two posts about abuses in bogus plaintiff’s actions challenging merger transactions — litigation designed to generate legal fees for plaintiff’s counsel and not benefits to the company or shareholders.  See Commentary on Abusive State Law Actions Following M&A Deals, and Hi-Crush Securities Class Action Settlement Benefits Lawyers and No One Else.  The first post described a New York state court judge’s willingness to reject a proffered collusive settlement designed to generate unearned benefits to plaintiff’s counsel in return for dismissal of the action and a broad set of releases for the defendants.  The second described a federal court judge’s unfortunate willingness to sign off on a settlement that lined the pockets of plaintiff’s lawyers but gave no real benefit to the purportedly defrauded shareholders.

Today we can report on another enlightened action by a New York state court judge in such a case: City Trading Fund v. Nye, No. 651668/2014 (NY Sup. Ct.).  The opinion includes a remarkable discussion of the nature of frivolous “merger tax” litigation, and includes an unusually frank discussion of why the filing of such cases renders to plaintiff, and the plaintiff’s law firm, unfit to serve as class representatives or class counsel.

The case involved alleged misleading disclosures in connection with an acquisition of Texas Industries, Inc. by Martin Marietta Materials, Inc.  Just before a scheduled hearing on a motion for a preliminary injunction to enjoin the shareholder vote on the proposed transaction, the parties entered into a settlement.  As the court describes, it was “disturbed by the settlement, which presents significant public policy concerns.”  It ordered defendants to file a memorandum addressing the settlement, which was needed because otherwise the defendants would stand mute, as implicitly required by the settlement.

Following a motion to approve the settlement, and the mandated filing by the defendants, Judge Shirley Kornreich of the New York Supreme Court wrote a scathing opinion describing in detail the cynical and abusive nature of the claims asserted and the practice of the plaintiff’s law firm, the Brualdi Law Firm, of filing such claims on behalf of a supposed investor which, in fact, held a portfolio of stocks for the purpose of being able to file what the judge calls “merger tax lawsuits.”  She wrote in detail about why the claims asserted were meritless, and then took the unusual step of describing the sordid practice of the plaintiff’s firm and its “client” as follows:

Plaintiffs allege that CTF is a general partnership and that Bass and Carullo are its partners.  CTF, however, is not a business, at least in the sense that it does not engage in commerce.  It does not sell or manufacture products nor does it provide services.  Rather, CTF is the name of an E*Trade brokerage account belonging to Bass and Carullo.  Before the merger, CTF owned 10 shares of MMM, which was worth approximately $1,200 in April 2014.

This is the modus operandi of Bass and the Brualdi Law Firm.  They purchase nominal amounts of shares in publicly traded companies.  Then, when one of the companies announces a merger, the partnership engages the Brualdi Law Firm to file a merger tax lawsuit.  Since 2010, the Brualdi Law Firm has filed at least 13 lawsuits in this court in the name of different partnerships.  Aside from this lawsuit, the Brualdi Law Firm has filed lawsuits on behalf of entities called RSD Capital (Index No. 651883/2010), Broadbased Equities (Index No. 652413/2011), Broadbased Fund (Index No. 653236/2011), Special Trading Fund (Index No. 653253/2012), Reliant Equities (Index No. 651230/2012), Sector Grid Trading Company (Index No. 650121/2013), Broadway Capital (Index No. 650143/2013), Gotham Investors (Index No. 651831/2013), Realistic Partners (Index No. 654468/2013), Rational Strategies Fund (Index Nos. 653566/2012 & 651625/2013), and Equity Trading (Index No. 650112/2014).  The Brualdi Law Firm resists disclosure of the relationship between these partnerships unless, in the face of an objection, such as GBL § 130, it must disclose who is really behind the curtain.

The Brualdi Law Firm’s recent wave of litigation in this court appears to be a continuation of a business strategy it previously carried out in the Delaware Court of Chancery, which went awry.  See In re SS & C Techs., Inc. S’holders Lit., 948 A2d 1140, 1150 (Del Ch 2008) (“those entities and that relationship raise very disturbing questions and may well disqualify those partnerships or the persons associated with them from serving in a representative capacity in the future”).  The SS & C court sanctioned the Brualdi Law Firm in a merger lawsuit based on immaterial disclosures, which led to the court rejecting the settlement.  See id. at 1142.  Vice Chancellor Lamb held that “the record did not support a finding that plaintiffs’ counsel adequately represented the interests of the class or that the settlement terms [were] fair and reasonable.'”  Id.  After the settlement was rejected, defendants discovered that the Brualdi Law Firm was filing lawsuits on behalf of “a web of small investment partnerships for the sole purpose of bringing stockholder lawsuits”, similar to the CTF-like entities in this court.  See id. at 1144.  Sanctions were imposed for a pattern of unethical conduct, including making false statements to the court, which were compounded by further false statements made to hide the original inaccuracies. See id. at 1145.

In sum, this litigation is “pernicious” for reasons best articulated by defendants’ counsel:

First, permitting Mr. Brualdi’s clients—fictitious entities with no purpose for existing and no economic interests apart from the generation of attorneys’ fees—to act on behalf of classes of other, real investors with actual money staked on the financial health of public companies poses a stark conflict of interest.  Second, that fundamental conflict causes the Brualdi Law Firm to adopt inequitable litigation tactics and to advance meritless claims directed not at vindicating the rights of real shareholders but at maximizing the chance Brualdi Brand litigation will settle, resulting in awards of attorneys’ fees that are wholly out of proportion to any real benefit conferred on shareholders. Making this conflict even worse is the fact that ultimately, the shareholders themselves are (through their ownership of the companies Mr. Brualdi sues) responsible for paying fees awarded to Mr. Brualdi.  Allowing the Brualdi Law Firm’s tactics to succeed wastes judicial resources, undermines the public’s faith and confidence in the courts of this State and impairs the State’s reputation as a fair, welcoming place for companies to do business.

Dkt. 87 at 7-8.  The court could not agree more.

Slip op. at 14-16 (footnotes omitted).

The court went on to discuss why the supposed “corrective disclosures” agreed to as part of the settlement were not at all meaningful to shareholders because they were “grossly immaterial.”  See id. at 16-21.  It then says: “Plaintiffs’ counsel wants $500,000 for bringing this lawsuit.  This lawsuit has already cost the shareholders tens of (or possibly hundreds of) thousands of dollars to defend.  This is a problem.”  Id. at 22 (footnote omitted).

The court then proceeds to bemoan “the current state of merger litigation,” and mentions “proposed reforms to corporate by laws” to address these concerns (presumably referring to the current discussion of “loser pays” derivative actions provisions in corporate bylaws), as follows:

It is no secret that when a public company announces a merger, lawsuits follow. There is nothing inherently wrong with this phenomenon.  If the merger price is woefully unjustifiable or if shareholders are not given adequate disclosure to cast an informed vote, a lawsuit is very much the proper way to redress these matters.  However, the ubiquity and multiplicity of merger lawsuits, colloquially known as a “merger tax”, has caused many to view such lawsuits with a certain degree of skepticism.  The lawsuits are filed only a relatively short time before the shareholder vote, and all it takes is a remote threat of injunction or delay to rationally incentivize settlement, even if defendants firmly and rightfully believe the lawsuit has no merit and would be disposed on a motion to dismiss or at the summary judgment stage.  Most commonly, the lawsuits are brought on behalf of the company being acquired, and the claim is that the shareholders are not being bought-out at a high enough price. This court is well acquainted with such lawsuits. . . .  Likewise, this court, and presumably all counsel in this action, are aware of the proposed reforms to corporate bylaws aimed at addressing the concerns many have with the way in which this litigation occurs.  The wisdom of these reforms and their legality are hotly contested issues. Compelling arguments have been made by a variety of stakeholders. Aside from what one thinks of the proposed reforms, that such reforms are such a hot topic suggests a growing frustration with the current realities of merger taxes.

No one, not even plaintiffs, disputes this reality.  The defendant corporation’s cost-benefit calculus almost always leads the company to settle.  Even a slight change of an adverse outcome will induce a company to rationally settle given the costs.  Here, defendants provide countless examples of such costs, none of which are contested by plaintiffs. See Dkt. 87 at 23-24 (discussing impact on information technology, human resources, sales and marketing, finance, accounting, tax, and regulatory matters); see also In re Delphi Fin. Group S’holder Lit., 2012 WL 729232, at *19 (Del Ch 2012) (“if the merger is enjoined, the deal may be lost forever”); In re CheckFree, 2007 WL 3262188, at *4 (“The theoretical harm to plaintiffs here is not particularly substantial” and “the public interest requires an especially strong showing where a plaintiff seeks to enjoin a premium transaction in the absence of a competing bid”).  The very nature of this lawsuit incentivizes settlement, regardless of its frivolity.

Slip op. at 22-24 (footnotes omitted).

The court finally determines that it “will not certify the class nor will it approve the settlement because it is not in the best interest of the class.”  Judge Kornreich refers to Judge Schweitzer’s “highly persuasive opinion in Gordon v Verizon Communications, Inc., which was the subject of the earlier post Commentary on Abusive State Law Actions Following M&A Deals.  A copy of that opinion is available here: Decision and Order in Gordon v. Verizon Communications.  She concludes: “Here, had plaintiffs alleged material omissions or settled for material supplemental disclosures, the court would have approved the settlement.  Even if the court did not think the supplemental disclosures were worth much, if they were legally material, the court would have withheld any criticism of plaintiffs’ counsel until the final approval stage, when the court, as guardian of the best interests of the class, would have limited the attorneys’ fees award to an amount commensurate with the value of the disclosures.  However, in this case, the supplemental disclosures are utterly immaterial for the reasons discussed earlier. The settlement, therefore, should not be approved. . . .  Approving the settlement in this case would both undermine the public interest and the interests of MMM’s shareholders.  It would incentivize plaintiffs to file frivolous disclosure lawsuits shortly before a merger, knowing they will always procure a settlement and attorneys’ fees under conditions of duress — that is, where it is rational to settle obviously frivolous claims.  Without the court serving as a gatekeeper, plaintiffs who file such ligation will continue to unjustifiably extract money from shareholders, who get no benefit from the litigation but nonetheless end up paying two sets of attorneys, both plaintiffs’ and defendants’.  This is a perverse result.”  Slip op. at 32-33 (footnotes omitted).

Judge Kornreich’s coda is an attack on The Brualdi Firm and the plaintiff “and why they are ill suited to be class counsel and class representative”:

[T]he court does believe they filed this class action because they had a genuine concern for the Company’s corporate governance.  Rather, they are simply trying to make money from litigation.  They and their counsel have accurately identified a massive inefficiency in the way in which courts adjudicate merger litigation, and have capitalized accordingly.  They are, in a word, shrewd investors. Their investment, unfortunately, is in litigation. . . . 

In merger litigation — unlike other class action litigation (e.g., securities fraud) where, if the case is frivolous, the court can dispose of it on a motion to dismiss — the time crunch incentivizes a payout to plaintiffs to settle all cases, even frivolous ones.  Thus, extra scrutiny is warranted when it appears that the incentives of the purported class representatives diverge from those of the shareholders.  Such a divergence of incentives may exist, as is the case here, where it appears that the original plaintiff, CTF — essentially a fictitious entity — seeks to obfuscate what it really is.  When a proposed class representative appears to be a fiction, there is the concern that it has no accountability, either to the class or to the court. . . .

Simply put, the secretive nature in which plaintiffs and their counsel choose to litigate, both here and in Delaware, along with the frivolity of their claims, is a strong indication that they are ill suited to represent the class. . . .

Slip op. at 34-37 (footnote omitted).

Bravo Judge Kornreich.  May the seeds strewn by you and Judge Schweitzer bear fruit in other judicial orchards.

The full opinion can be found here.

Straight Arrow

December 9, 2015

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Commentary on Abusive State Law Actions Following M&A Deals

I devote this post to a commentary in the January 6, 2015 Wall Street Journal by Gerry Walpin, a highly-regarded New York litigator.  His op-ed piece entitled “How To Stop a Class-Action Scam” can be found here.

Gerald WalpinGerald Walpin

Gerry describes the abusive process now prevalent in filing suits objecting to corporate mergers or acquisitions.  Virtually every corporate m&a deal is met by a private action, normally filed in state court, challenging the transaction.  The calculation is simple: the plaintiff’s lawyer knows that completing the transaction is the company’s first priority and the cost of settling such a case is minor in comparison to the overall deal costs.  So, with virtually no work, the lawyers can bank a fee for entering into a “settlement” that really does not provide any significant benefit to the company or shareholders.  Usually, such settlements, being supported by all parties to the action, are rubber-stamped with the necessary court approval.  The deal is completed, making company management happy, and the settlement payment of legal fees makes the plaintiff’s lawyers happy.  It’s win-win, right?  Well, maybe so, if you don’t consider the interests of the shareholders, or, perhaps more importantly, the public interest in avoiding such abusive scams.

Here’s some of what Gerry had to say:

If you own any stock, you know the frustration of getting a notice announcing settlement of a lawsuit, commenced by a lawyer on behalf of a class composed of all shareholders—you included.  The notice informs you that, under this settlement, you get nothing.  What that really means is you get zilch but you must pay a pro rata share of your corporation’s legal expenses and of the legal fees for the lawyer who commenced the lawsuit—often millions of dollars. . . .

As soon as a corporation announces an asset acquisition or sale, the [plaintiff’s] lawyer finds one of his ready-plaintiffs and files a class action to stop the transaction. Such behavior is ubiquitous.  As an analysis of merger litigation in the February 2014 Texas Law Review showed, the likelihood of a shareholder suit exceeds 90%.

The defendant corporation, seeking to close the transaction and avoid costly litigation, accepts a quick settlement.  Both sides agree to wallpaper the settlement with meaningless “supplemental disclosures,” supposedly to demonstrate that the plaintiff lawyer contributed something of value, and thereby justify his claim to millions in legal fees.  Also, the corporation is forced to agree not to oppose the fee application. . . .

Case in point: On Nov. 10, 2014, I received a class-settlement notice regarding my Verizon  stock.  It concerned a September 2013 lawsuit commenced by a plaintiff’s lawyer filed only three days after Verizon announced its $130 billion purchase of Vodafone’s 45% minority stake in Verizon Wireless. The claim was that Verizon paid an “excessive and dilutive price” and that the company failed to disclose material information regarding the fairness of the transaction.

Yet the proposed nonmonetary settlement was limited to supplemental disclosures that added immaterial minutiae about the transaction, and Verizon’s agreement to obtain a fairness opinion from a financial adviser for “any transaction regarding assets of Verizon Wireless having a book value . . . in excess of $14.4 billion.”  Oh, and the plaintiffs lawyer sought $2 million in legal fees. . . .

[I] filed a 15-page objection with the court. . . .  In my objection, I detailed my reasons for concluding that this settlement was not in the interests of the shareholders the plaintiff’s counsel supposedly was representing.  Shareholders received nothing, while the plaintiff’s attorneys were to be paid $2 million, coming directly from shareholders. . . .

Happily, the New York Supreme Court judge on this case, Gordon v. Verizon Communications Inc., is Melvin L. Schweitzer, with an excellent reputation as conscientious, careful and courageous, and thus one who would not take the easy way to quickly close out a case by accepting any settlement.  [H]e rejected the proposed settlement and wrote that it would be “a misuse of corporate assets were plaintiff’s legal fees to be awarded.”  As for the supplemental disclosures, he ruled that they “fail to enhance the shareholders’ knowledge about the merger” and provide “no legally cognizable benefit to the shareholder class.”

Judge Schweitzer went on to decry the “tsunami of litigation” that abuses a “body of law meant to protect shareholder interests . . . turned on its head to diminish shareholder value by,” among other means, “imposing additional gratuitous costs, i.e. attorneys’ legal fees on the corporation.”

You can read an article in the New York Law Journal about Judge Schweitzer’s rejection of the settlement here And you can read Judge Schweitzer’s opinion here: Decision and Order in Gordon v. Verizon Communications.

Of course, Gerry Walpin is an experienced securities litigator who knew what to discuss in his objection, and Judge Schweitzer is perhaps more likely than many other judges to direct a jaundiced eye at the collusive settlement placed before him.  There was also another objector represented by counsel (Szenberg & Okun), who was reported as saying: “Lawyers should not be compensated for these type of actions and obtaining these useless settlements.”  The plaintiff’s law firm involved was Faruqi & Faruqi, a common player in these cases.

The state court judge is where the rubber really meets the road in these cases.  Even without a well-conceived objection filed by a knowledgeable shareholder, the judges in these cases should be turning away collusive settlements that do little other than line the pockets of opportunistic plaintiff’s lawyers — with the knowing assent of corporate abettors whose minds are focused elsewhere.  In the Verizon case, as Judge Schweitzer noted, the defense lawyers (heavy hitters Wachtell, Lipton, Rosen & Katz) were more focused on getting an extremely broad release of claims for the officers and directors than negotiating down the $2 million lawyer fees.  Court approval of these settlements is mandatory before they can proceed, and more judicial diligence is needed to make abusive practices like these unprofitable for the lawyers.

In some respects, the state of the law in this area is akin to federal securities class actions before 1995, when the Private Securities Litigation Reform Act was enacted to try to curb abusive practices in federal securities class actions.  Before then, federal securities class actions were virtually assured whenever a company suffered a significant stock price decline.  The statute made filing those actions a little more difficult.  Today, there are fewer abusive federal securities class actions filed, although the frequency of such filings is still significant, and more judicial skepticism for such claims is needed.

If state court judges are not willing to put the kibosh on the approval of extortion payments to plaintiff’s lawyers in order to complete these deals, statutory reform may be the only answer.  That would be difficult, though, because it would require changes to state laws governing the filing of such claims.  Delaware, the leading jurisdiction governing such corporate m&a transactions, tends to move through judicial, not legislative, reforms.  The recent brouhaha in Delaware over apparent judicial willingness to accept corporate “loser pays” by-laws for derivative actions could be where these issues are thrashed out.  But “loser pays” provisions won’t really do the job here, because it will be only the rare case that generates a judicial winner or loser, with collusive settlement being the norm.  There may be no recourse other than increased judicial willingness to hold the settling parties’ feet to the fire before approving such agreements.  Let’s hope that the state law judges will start earning their keep, as did Judge Schweitzer in the Verizon case.

Straight Arrow

January 6, 2015

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