1017-00004 · Entities. Aurelius Global Media Group · Insurance

settlement-funds-allocation-memo.docx DOCUMENT Finance & Banking

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CALDERWOOD & HARKNESS LLP ATTORNEYS AT LAW 333 South Grand Avenue, Suite 5400 Los Angeles, California 90071

CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT This memorandum was prepared by counsel at Calderwood & Harkness LLP in connection with the provision of legal advice and reflects attorney work product. It is not intended for disclosure to third parties and should not be disclosed without the prior written consent of both the client and Calderwood & Harkness LLP.

MEMORANDUM

I. Purpose

This memorandum documents the allocation of the $14,750,000 Gross Settlement Amount (the "GSA") agreed upon in the consolidated class action Fuentes v. Aurelius Media Americas Inc., Los Angeles Superior Court Case No. 22STCV38214, as between the contribution from Aurelius Media Americas Inc.'s ("AMA") Employment Practices Liability ("EPL") carrier, Pemberton Mutual Assurance Co. ("Pemberton"), and AMA's self-funded portion. The memorandum is intended to provide a comprehensive framework for the internal allocation of settlement funds and to serve as a reference document for AMA's legal, finance, and accounting teams as the settlement proceeds through the court approval process.

In addition to the primary allocation analysis, this memorandum addresses three related topics. First, it provides a detailed analysis of the exhaustion status of the EPL Policy's Self-Insured Retention ("SIR"), including a breakdown of the components that have eroded and will continue to erode the SIR. Second, it provides a reconciliation of AMA's total out-of-pocket expenditure across both the Fuentes class action and the related Aldrich executive dispute matter, to give AMA's leadership a consolidated view of litigation expenditures arising from the engagement. Third, this memorandum offers accounting treatment recommendations to assist AMA in determining the appropriate financial statement presentation, disclosure, and coordination with AMA's external auditors.

This memorandum is informed by, and should be read in conjunction with, Pemberton's coverage counsel letter dated September 13, 2023, from Thornhill & Reade LLP (Hartford, Connecticut), which formally authorized Pemberton's settlement contribution in the amount of $9,250,000, subject to the conditions described herein. A copy of the Thornhill & Reade letter has been provided to Gregory Tanaka under separate cover and is maintained in the matter file as Document 143. Additionally, this memorandum references our prior Internal Memorandum re: EPL Coverage Analysis and Reservation of Rights dated January 5, 2023 (Document 10), as well as Calderwood & Harkness's letter to Pemberton re: Consent to Settlement and Demand for Policy Contribution dated September 10, 2023 (Document 142).

II. Settlement Background

On September 8, 2023, following two full-day mediation sessions before the Honorable Patricia Okoro (Ret.) of Westpark Dispute Resolution Inc. in Los Angeles, the parties to the consolidated Fuentes class action reached a tentative class-wide settlement with a Gross Settlement Amount of $14,750,000. The first mediation session was held on August 14, 2023, and resulted in a mediator's proposal that was conditionally accepted by both sides subject to further negotiation of settlement terms. The second session on September 8, 2023, resolved all remaining disputes regarding settlement structure, class definition, allocation methodology, and release scope, resulting in the parties' agreement in principle to the $14,750,000 GSA.

The Class Action Settlement Agreement and Release (the "Settlement Agreement") reflecting the terms agreed upon during mediation was finalized by the parties and executed on September 15, 2023. AMA intends to file its Motion for Preliminary Approval of the class settlement with the Los Angeles Superior Court on September 22, 2023. Based on customary timelines in the Central District of the Los Angeles Superior Court, we anticipate that the Preliminary Approval Order will be entered in mid-October 2023, following a hearing before the Honorable Robert K. Yamashita in Department 34.

The settlement resolves all class and PAGA claims arising from the operative facts alleged in the consolidated Fuentes and Halloran complaints. Specifically, the settlement resolves both the claims that were certified for class treatment and additional claims that were asserted but not certified. The certified claims include: (1) the first meal period auto-deduction claim, based on AMA's alleged practice of automatically deducting thirty minutes from hourly employees' time records for meal periods regardless of whether a compliant meal period was actually provided; (2) the wage statement claim under California Labor Code § 226, premised on the alleged failure to accurately report hours worked and applicable rates of pay on wage statements; and (3) the derivative claim under the Unfair Competition Law, California Business & Professions Code § 17200, predicated on the underlying Labor Code violations.

In addition to the certified claims, the settlement resolves the following non-certified claims: rest period violations; off-the-clock and overtime claims arising from AMA's alleged requirement that employees perform pre-shift and post-shift work without compensation; minimum wage violations; second meal period violations for shifts exceeding ten hours; and waiting time penalties under California Labor Code § 203 for employees who separated from AMA during the class period and allegedly did not receive timely payment of final wages.

The settlement includes a PAGA component of $750,000, which is allocated as required under California Labor Code § 2699(i): seventy-five percent ($562,500) to the California Labor and Workforce Development Agency ("LWDA"), and twenty-five percent ($187,500) to the aggrieved employees. The PAGA payment is included within — not in addition to — the $14,750,000 GSA. This structure was negotiated to ensure that the total settlement exposure remained fixed and that the PAGA component did not create incremental funding obligations beyond the GSA.

III. EPL Policy Summary

The following is a summary of the material terms of AMA's Employment Practices Liability insurance policy relevant to the allocation and funding of the Fuentes class action settlement:

Several features of the Policy warrant specific discussion in connection with the settlement allocation.

Self-Insured Retention. The Policy provides for a $5,000,000 SIR on a per-Claim basis. Pursuant to the batch clause set forth in Section III.B.4 of the Policy, all related claims arising from the same or related facts, circumstances, or allegations are treated as a single "Claim" for purposes of the SIR. Accordingly, the Fuentes class action, the Halloran action (LASC Case No. 22STCV39501, which was consolidated with Fuentes by order dated January 19, 2023), and the PAGA claims asserted by named plaintiff Fuentes are all treated as a single Claim subject to a single $5,000,000 SIR. Both defense costs and indemnity payments erode the SIR.

Reservation of Rights. Pemberton acknowledged coverage for the Fuentes matter on December 22, 2022, but did so subject to a reservation of rights. Pemberton's reservation of rights letter, issued through Thornhill & Reade LLP, reserved Pemberton's right to deny or limit coverage with respect to: (a) PAGA penalties, which Pemberton contended may fall within the Policy's Penalty Exclusion (§ IV.F); and (b) claims predicated on willful violations of law, which Pemberton contended may fall within the Policy's Intentional Acts Exclusion (§ IV.A). As discussed in Section VIII below, Pemberton has agreed not to enforce the Penalty Exclusion with respect to the PAGA component of the settlement, given the modest allocation.

Aggregate Limit. The Policy provides an aggregate limit of $15,000,000 for all Claims during the Policy Period. Pemberton's $9,250,000 contribution to the Fuentes settlement will reduce the remaining available aggregate limit to $5,750,000, as further discussed in Section V.D below.

Tender. AMA tendered the Fuentes matter to Pemberton on November 8, 2022, within twelve days of service of the original complaint. Calderwood & Harkness submitted the formal tender letter on AMA's behalf, together with copies of the complaint, the summons, and AMA's preliminary factual investigation memorandum.

IV. Allocation of Settlement Funds

A. Allocation Table

The $14,750,000 GSA is allocated between Pemberton's EPL Policy contribution and AMA's self-funded portion as follows:

This allocation reflects the negotiated outcome between AMA and Pemberton following the coverage demand process. As set forth in Calderwood & Harkness's letter to Pemberton dated September 10, 2023 (Document 142), AMA initially demanded that Pemberton contribute $11,000,000 toward the settlement, representing what AMA characterized as the full insured portion of the GSA after application of the SIR. Pemberton's response, through Thornhill & Reade, authorized a contribution of $9,250,000, reflecting Pemberton's position that certain components of the settlement — particularly the PAGA allocation, the waiting time penalties component, and a portion of the UCL restitutionary damages — were potentially excludable under the Policy. AMA accepted Pemberton's $9,250,000 contribution in the interest of expediting settlement funding and avoiding a protracted coverage dispute that could have jeopardized the settlement timeline.

B. Pemberton Contribution Details

Pemberton authorized a total contribution of $9,250,000 toward the GSA, as confirmed in the September 13, 2023 letter from Pemberton's coverage counsel, Thornhill & Reade LLP. The key terms and conditions of Pemberton's contribution are as follows:

Inclusion of PAGA Component. Pemberton's $9,250,000 contribution includes a pro rata share of the PAGA component ($750,000), notwithstanding Pemberton's prior reservation of rights regarding PAGA penalties under the Policy's Penalty Exclusion (§ IV.F). In its September 13, 2023 letter, Pemberton stated that "in the interest of global resolution and given the modest PAGA allocation, Pemberton will not insist on a carve-out of the PAGA component from its contribution." This concession by Pemberton is significant, as it eliminates the need for AMA to separately fund the PAGA component from its own resources and avoids a potentially contentious coverage dispute regarding the insurability of PAGA penalties under California law. We note that the legal landscape on insurability of PAGA penalties remains unsettled, and Pemberton's agreement to include the PAGA component should not be viewed as a precedent for future claims.

Conditions to Funding. Pemberton's contribution is expressly conditioned on the satisfaction of three requirements: (1) entry of a Final Approval Order by the Los Angeles Superior Court approving the settlement with prejudice; (2) a release that is binding on all class members who do not timely opt out of the settlement, including a release of Pemberton and its affiliates; and (3) AMA's funding of its self-funded share of the GSA ($5,500,000) into the settlement escrow account contemporaneously with or prior to Pemberton's funding. These conditions are customary for EPL carrier contributions to class action settlements and were anticipated in our initial coverage discussions with Pemberton.

Funding Timeline. Pemberton has committed to funding its $9,250,000 contribution within fourteen (14) days of the entry of the Final Approval Order, provided that all conditions to funding have been satisfied. The funds will be wired directly to the trust/escrow account maintained by the claims administrator, Meridian Settlement Services LLC, in accordance with wire instructions to be provided by Meridian in advance of the funding date.

C. AMA Self-Funded Portion

AMA's self-funded share of the class settlement is $5,500,000, representing the difference between the $14,750,000 GSA and Pemberton's $9,250,000 contribution. This amount is payable from AMA's general operating funds and should be budgeted and reserved accordingly.

AMA's self-funded share reflects both the SIR obligation (i.e., the first $5,000,000 in combined defense costs and indemnity payments that AMA is required to bear before Pemberton's coverage obligations are triggered) and the gap between AMA's initial coverage demand and Pemberton's authorized contribution. As discussed in Section V below, AMA's total class-action expenditure (including both defense costs and the self-funded settlement contribution) substantially exceeds the $5,000,000 SIR.

It is important to note that the separate Aldrich executive dispute settlement (anticipated at approximately $2,350,000 based on current mediation posture) is entirely self-funded by AMA. Pemberton denied coverage for the Aldrich matter in its December 22, 2022 reservation of rights letter, on the grounds that the Aldrich claims arise from an individual employment dispute that does not constitute a covered "Claim" under the EPL Policy. The Aldrich settlement is not addressed in the allocation set forth in this Section IV, but is included in the total out-of-pocket analysis in Section VI below for purposes of providing AMA's leadership with a comprehensive view of litigation expenditures.

V. SIR Exhaustion Analysis

A. SIR Threshold

The EPL Policy's Self-Insured Retention is $5,000,000, applied on a per-Claim basis. As noted above, the Policy's batch clause (§ III.B.4) aggregates related claims into a single "Claim" for purposes of the SIR. Accordingly, the Fuentes class action, the Halloran action (LASC Case No. 22STCV39501, consolidated with Fuentes by order dated January 19, 2023), and the PAGA claims asserted by named plaintiff Fuentes are all treated as a single Claim, requiring only one $5,000,000 SIR. This treatment was confirmed by Pemberton in its December 22, 2022 coverage acknowledgment letter and has not been disputed.

B. Components Eroding the SIR

Under the Policy, both defense costs and indemnity payments (including settlement payments) erode the SIR. AMA is responsible for the first $5,000,000 in combined defense costs and settlement/indemnity payments before Pemberton's coverage obligations are triggered. The following table sets forth the components that have eroded, or will erode, the SIR in connection with the Fuentes class action:

Defense costs of approximately $3,100,000 have been incurred by Calderwood & Harkness through September 2023, representing fees and expenses for all work performed in connection with the Fuentes and Halloran matters, including pleading and motion practice, discovery, class certification briefing, mediation preparation, and settlement negotiations. This figure is an estimate based on invoices submitted and paid through September 2023; final defense costs will be slightly higher upon engagement closure, reflecting post-settlement work including preparation and filing of the Motion for Preliminary Approval, class notice review, response to any objections, and the Final Approval Hearing.

C. SIR Status

AMA's total class-action expenditure of approximately $8,600,000 (comprising ~$3,100,000 in defense costs and $5,500,000 in self-funded settlement contribution) exceeds the $5,000,000 SIR by approximately $3,600,000. Accordingly, the SIR has been effectively exhausted, and Pemberton's coverage obligation has been triggered.

It is worth noting, however, that defense costs alone (~$3,100,000) have not yet fully exhausted the SIR. The SIR will be fully crossed at the point when AMA funds its $5,500,000 settlement share into escrow. At that point, AMA's cumulative expenditure in the class action will be approximately $8,600,000, which is well in excess of the $5,000,000 SIR. In practical terms, the SIR was effectively exhausted at the point when AMA's cumulative defense costs reached approximately $5,000,000 in combination with the first dollars of the settlement contribution — that is, the SIR was crossed when $1,900,000 of the $5,500,000 settlement contribution was allocated to the SIR (i.e., $3,100,000 in defense costs + $1,900,000 in settlement = $5,000,000 SIR threshold). The remaining $3,600,000 of AMA's self-funded settlement contribution represents AMA expenditure in excess of the SIR.

D. Remaining Policy Capacity

After Pemberton's $9,250,000 contribution to the Fuentes settlement, the remaining available aggregate limit under the Policy is calculated as follows:

$15,000,000 (aggregate limit) – $9,250,000 (Pemberton's contribution) = $5,750,000

This remaining limit of $5,750,000 is available for future Claims during the Policy Period, subject to the terms and conditions of the Policy. Given that the Policy Period is July 1, 2022 through June 30, 2023, and has likely been renewed or replaced by a successor policy, AMA should confirm with its insurance broker, Kestrel Risk Advisors Ltd. (contact: Samuel Okonkwo, Managing Director), whether the remaining $5,750,000 limit applies to the expired 2022–2023 Policy Period or to the current or successor policy period. If the Policy has been renewed on substantially similar terms, the remaining $5,750,000 under the 2022–2023 Policy should remain available for any Claims first made during that Policy Period, even if the settlement funding occurs after the Policy's expiration. However, this should be confirmed in writing with Pemberton or Thornhill & Reade.

VI. Total AMA Out-of-Pocket Analysis (All Matters)

For completeness, and to provide AMA's leadership with a consolidated view of litigation expenditures arising from the Calderwood & Harkness engagement, the following table summarizes AMA's total out-of-pocket expenditure across both the Fuentes class action and the Aldrich executive dispute:

¹ Defense costs through September 2023; final costs will be higher upon engagement closure, reflecting post-settlement work through the Final Approval Hearing and engagement wrap-up.

² Aldrich defense costs are included in the total Calderwood & Harkness engagement budget and have not been separately tracked on a matter-by-matter basis. For internal reporting purposes, we estimate that approximately $180,000 of the total C&H fees through September 2023 are attributable to the Aldrich matter, based on timekeeper allocation. However, this is an approximation and has not been formally segregated in our billing records.

³ Estimated total Calderwood & Harkness fees and expenses for the entire engagement (class action + Aldrich), per the preliminary engagement budget of $3,450,000 approved by Gregory Tanaka on November 15, 2022. Actual fees and expenses through September 2023 are approximately $3,100,000, with additional costs anticipated through engagement closure, including preparation and prosecution of the Motion for Preliminary Approval, responses to any objections, the Final Approval Hearing, and the Aldrich mediation scheduled for December 8, 2023.

The total net AMA out-of-pocket expenditure across both matters is estimated at approximately $11,130,000. This figure reflects AMA's self-funded settlement payments ($7,850,000), defense costs (~$3,280,000 estimated through engagement closure), offset by Pemberton's $9,250,000 contribution. The carrier contribution substantially reduces AMA's total expenditure from a gross exposure standpoint; absent the Pemberton contribution, AMA's total expenditure would have been approximately $20,380,000.

We note that the Aldrich settlement figure of $2,350,000 is an estimate based on the current mediation posture and preliminary settlement discussions. The standalone Aldrich mediation session is scheduled for December 8, 2023, before Stuart Edenfield of JAMS in Century City. If the Aldrich matter does not settle at mediation, additional defense costs will be incurred and the ultimate resolution value may differ from the estimate used herein.

VII. Accounting Treatment Recommendations

The following recommendations are provided to assist AMA's finance and accounting teams in determining the appropriate treatment of the class settlement, the insurance recovery, and related expenditures in AMA's financial statements. These recommendations are based on our understanding of generally accepted accounting principles and are provided for informational purposes only; they do not constitute accounting advice, and AMA should consult with its external auditor (as discussed in Section VII.C below) regarding the appropriate application of applicable accounting standards to these transactions.

A. Financial Statement Presentation

AMA should record the following entries in its financial statements for the fiscal period in which the settlement is finalized:

1. Settlement Expense (Class Action — AMA Self-Funded Portion).

AMA should record $5,500,000 as a settlement expense (or litigation loss contingency) in the period in which the Settlement Agreement was executed (September 2023), or, if AMA's accounting policy requires, in the period in which the Final Approval Order is entered by the court. Under ASC 450-20 (formerly SFAS No. 5), a loss contingency should be accrued when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Given that the Settlement Agreement was executed on September 15, 2023, and the settlement amount is fixed, both conditions are satisfied as of the execution date. Accordingly, we recommend that AMA accrue the $5,500,000 settlement expense in the third quarter of 2023 (or the corresponding fiscal period under AMA's and AGMG's reporting calendar), unless AMA's accounting policy or prior practice requires deferral until entry of the Final Approval Order.

2. Insurance Receivable / Recovery (Pemberton Contribution).

AMA should record $9,250,000 as an insurance receivable upon receipt of Pemberton's written authorization letter dated September 13, 2023. Pemberton's letter constitutes a binding commitment to fund the contribution subject to the conditions described in Section IV.B above. Because Pemberton's authorization is conditioned on entry of the Final Approval Order and AMA's contemporaneous funding, AMA should assess whether the receivable should be classified as a current asset or a contingent asset, depending on the probability of satisfaction of the conditions. Given that the conditions (Final Approval and AMA funding) are expected to be satisfied in the ordinary course of the settlement process, we believe recognition of the receivable is appropriate. The receivable should be reclassified to cash upon receipt of funds from Pemberton, which is expected within fourteen (14) days of the Final Approval Order.

Under applicable accounting standards (ASC 450-20 for loss contingencies and ASC 410-30 for insurance recoveries, or the IFRS equivalents — IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and IFRS 4 / IFRS 17 — if Aurelius Global Media Group ("AGMG") reports under IFRS), the insurance recovery should be presented separately from the settlement expense. Specifically, the settlement should not be presented "net" of the insurance recovery on the income statement. Instead, the gross settlement expense ($14,750,000 or, alternatively, AMA's $5,500,000 self-funded portion) should be presented as a litigation expense or loss contingency, and the insurance recovery ($9,250,000) should be presented as a separate line item (e.g., "insurance recovery" or "insurance reimbursement") either within the same expense category or as other income, depending on AMA's and AGMG's classification policy. Net presentation may, however, be appropriate on the balance sheet, where the net litigation liability (settlement obligation less insurance receivable) may be presented as a single line item.

3. Defense Costs.

Defense costs of approximately $3,100,000 incurred through September 2023 have been accrued and expensed as incurred in prior periods, consistent with the general principle that legal fees are period costs. No additional accrual is required for defense costs that have already been paid or accrued. Remaining defense costs through engagement closure (estimated at approximately $180,000–$350,000) should be accrued in the period in which they are incurred. AMA should note that defense costs fall within the SIR and are not reimbursable by Pemberton; accordingly, no insurance receivable should be recorded with respect to defense costs.

4. Aldrich Settlement.

AMA should record $2,350,000 (or the actual settlement amount, if different) as a separate settlement expense in the period in which the Aldrich settlement is finalized. This amount is entirely self-funded, as Pemberton denied coverage for the Aldrich matter per its December 22, 2022 reservation of rights letter. The Aldrich settlement expense should be presented as a separate line item from the Fuentes class action settlement expense to the extent practicable, particularly if the two settlements are finalized in different fiscal periods.

B. Disclosure Considerations

AMA (and AGMG at the parent level) should consider whether disclosure of the class settlement is required in its financial statements or public filings, particularly in light of the following considerations:

Note Disclosure Regarding Litigation Contingencies. Under ASC 450-20 (or IAS 37 for IFRS reporters), entities are required to disclose the nature and amount of accrued litigation contingencies, and, in certain circumstances, the range of reasonably possible additional loss. AMA and AGMG should assess whether the Fuentes settlement requires note disclosure in AGMG's consolidated financial statements, including disclosure of the settlement amount, the nature of the underlying claims, and the insurance recovery.

Material Litigation Disclosure in AGMG's Annual Report. The total resolution value of the Fuentes and Aldrich matters is $17,100,000 ($14,750,000 GSA + $2,350,000 Aldrich settlement). This total represents approximately 0.7% of AGMG's consolidated FY 2022 revenue of approximately $2.47 billion, and approximately 2.5% of AMA's standalone FY 2022 revenue of $687.4 million. While the settlement may not be "material" to AGMG at the parent level under traditional quantitative materiality thresholds, it may nonetheless warrant disclosure under a qualitative materiality analysis, particularly given the nature of the underlying claims (wage-and-hour class action), the regulatory interest in California wage-and-hour compliance, and the involvement of a PAGA component with an LWDA payment. AGMG should assess materiality in consultation with its external auditor and, to the extent applicable, with its SEC/LSE disclosure counsel.

Non-Reversionary Nature of the Settlement. The settlement is structured as a "non-reversionary" settlement — that is, AMA's obligation to fund the full GSA of $14,750,000 is fixed upon entry of the Final Approval Order, regardless of the claims rate among class members. Any unclaimed funds will be distributed to a cy pres recipient designated in the Settlement Agreement (the Legal Aid Foundation of Los Angeles), rather than reverting to AMA. Accordingly, AMA's settlement obligation should be recorded at the full GSA amount, without any reduction for anticipated unclaimed distributions.

C. Coordination with External Auditor

AMA should promptly consult with its external auditor, Graystone & Parr LLP (200 Park Avenue, Suite 3500, New York, NY 10166), regarding the appropriate financial statement presentation and disclosure for the class settlement, the insurance recovery, and the Aldrich settlement. This consultation should occur as early as practicable — ideally before the close of AMA's current fiscal quarter — to ensure that the accounting treatment is agreed upon in advance and that no issues arise during the year-end audit process.

In particular, Graystone & Parr should be provided with copies of the following documents to support the accounting entries and disclosure:

(a) The Class Action Settlement Agreement and Release (execution version, dated September 15, 2023);

(b) Pemberton's coverage authorization letter dated September 13, 2023 (from Thornhill & Reade LLP);

(d) The Final Approval Order (when entered by the court, anticipated February 2024).

We recommend that Gregory Tanaka coordinate with AGMG's Chief Financial Officer, Malcolm Dunmore, to ensure that Graystone & Parr is notified of the settlement terms and the anticipated accounting entries in a timely manner. To the extent that the settlement will be reflected in AGMG's FY 2023 financial statements, early engagement with the auditor will be essential to avoid delays in the audit timeline.

VIII. PAGA Allocation Detail

The PAGA payment of $750,000 is included within the $14,750,000 GSA and is allocated in accordance with California Labor Code § 2699(i) as follows:

• 75% to the California Labor and Workforce Development Agency (LWDA): $562,500

• 25% to the aggrieved employees: $187,500

The PAGA allocation represents 5.1% of the total GSA ($750,000 / $14,750,000 = 5.08%). This allocation was negotiated between the parties during the September 8, 2023 mediation session, with input from the mediator, Judge Okoro, and reflects the parties' assessment of the relative strength and value of the PAGA claims in the context of the overall settlement.

As discussed in Section IV.B above, Pemberton initially reserved rights on PAGA penalties under the Policy's Penalty Exclusion (§ IV.F). The Penalty Exclusion provides, in relevant part, that the Policy does not cover "Loss arising from or attributable to fines, penalties, or punitive or exemplary damages imposed by law." Pemberton's initial position was that PAGA penalties fall within this exclusion and that its contribution should be reduced by the amount of the PAGA allocation. However, in its September 13, 2023 authorization letter, Pemberton agreed to include the PAGA component in its $9,250,000 contribution, stating that it would not "insist on a carve-out of the PAGA component from its contribution" given the modest allocation. This resolution avoids a coverage dispute that could have delayed settlement funding by weeks or months, and potentially required AMA to absorb the full PAGA component from its own funds.

Tax Considerations. For tax and accounting purposes, the PAGA payment to the LWDA ($562,500) should be treated as a penalty or fine. Under Internal Revenue Code § 162(f), as amended by the Tax Cuts and Jobs Act of 2017, no deduction is allowed for any amount paid or incurred to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Because the LWDA's 75% share of PAGA penalties constitutes a payment to a governmental entity in relation to alleged Labor Code violations, the $562,500 LWDA payment may not be deductible under IRC § 162(f). AMA should consult with its tax advisors — and, as appropriate, with AGMG's tax department — regarding the deductibility of the PAGA payment and the proper characterization of the PAGA component for federal and California state income tax purposes. The 25% aggrieved employee share ($187,500) may be treated differently for tax purposes, as it constitutes a payment to private parties rather than a governmental entity; however, this treatment should also be confirmed with AMA's tax advisors.

IX. Settlement Funding Timeline and Logistics

The following table sets forth the anticipated timeline for key settlement milestones and funding events:

The dates set forth above are estimates based on customary timelines in the Los Angeles Superior Court and the terms of the Settlement Agreement. Actual dates may vary depending on the court's calendar, the volume of opt-outs or objections, and other factors. Calderwood & Harkness will monitor all deadlines and provide updates to AMA as the settlement progresses through the approval process.

Settlement Administration. All settlement funds — both Pemberton's $9,250,000 contribution and AMA's $5,500,000 self-funded share — should be wired to the trust/escrow account maintained by the court-appointed claims administrator, Meridian Settlement Services LLC, at the following address:

Meridian Settlement Services LLC 1600 E. Fourth Street, Suite 240 Santa Ana, CA 92701 Contact: Angela Truong, Senior Settlement Administrator

Wire transfer instructions will be provided by Meridian in advance of the funding deadline. AMA should coordinate wire instructions with both Meridian and Pemberton well in advance of the anticipated Final Approval Order to ensure that funds are transmitted promptly and without delay. We recommend that AMA's treasury department and Pemberton's claims department each conduct a test wire or pre-authorization process at least two weeks before the anticipated funding date to identify and resolve any banking or compliance issues that could delay the transfer.

Concurrent Funding Requirement. As noted in Section IV.B, Pemberton's contribution is conditioned on AMA's contemporaneous funding of its $5,500,000 share. Accordingly, AMA should ensure that its funds are available for wire transfer on the same date that Pemberton is expected to fund, or, preferably, one to two business days in advance. This will avoid any argument by Pemberton that AMA's funding condition has not been satisfied and will ensure that the settlement administration process proceeds on schedule.

X. Recommendations

Based on the foregoing analysis, we offer the following recommendations for AMA's consideration:

1. Pemberton Coordination. Bernard Crawford should confirm wire instructions with Pemberton (through Thornhill & Reade LLP) and ensure that Pemberton has received, or will receive, all documentation required to trigger its funding obligation. In particular, Pemberton should be provided with a certified copy of the Final Approval Order promptly upon its entry by the court. Crawford should also confirm with Pemberton that no additional conditions to funding exist beyond those specified in the September 13, 2023 authorization letter, and should obtain Pemberton's written confirmation of the anticipated funding date.

2. AMA Internal Funding. Gregory Tanaka should coordinate with AMA's finance department — and, as necessary, with AGMG's Chief Financial Officer, Malcolm Dunmore — to ensure that $5,500,000 is available for wire transfer within the fourteen-day funding window following entry of the Final Approval Order. Given the magnitude of the funding requirement, we recommend that AMA begin the internal approval and budgeting process for the settlement payment immediately, rather than waiting until the Final Approval Order is entered. This will ensure that any internal corporate approvals, board resolutions, or intercompany funding arrangements required to effectuate the payment are completed in advance.

3. Auditor Notification. AMA should promptly notify Graystone & Parr LLP of the settlement terms and the anticipated accounting entries described in Section VII above, particularly if the settlement will be recorded in AGMG's FY 2023 financial statements. Early engagement with the auditor will help ensure that the accounting treatment is agreed upon in advance and that the year-end audit process is not disrupted by last-minute settlement-related inquiries.

4. Kestrel Risk Advisors. AMA should notify its insurance broker, Kestrel Risk Advisors Ltd. (Samuel Okonkwo, Managing Director), of the settlement terms and the carrier's $9,250,000 contribution, for purposes of policy renewal negotiations and claims history reporting. The Fuentes settlement will be a significant claims event for purposes of AMA's EPL insurance program, and Kestrel should be prepared to address the settlement in the context of the upcoming policy renewal cycle. Additionally, AMA should confirm with Kestrel whether the remaining $5,750,000 in aggregate policy capacity applies to the expired 2022–2023 Policy Period or to the current or successor policy, as discussed in Section V.D above.

5. Aldrich Self-Funding. AMA should separately budget for the anticipated Aldrich executive dispute settlement, which is estimated at approximately $2.0–$2.5 million based on the current mediation posture and preliminary settlement discussions. Because Pemberton has denied coverage for the Aldrich matter, the settlement will be entirely self-funded by AMA. The standalone Aldrich mediation session is scheduled for December 8, 2023, before Stuart Edenfield at JAMS in Century City. AMA's finance team should be advised of the potential funding requirement so that the necessary funds can be reserved or budgeted in advance.

We are available to discuss this memorandum and the underlying analysis at your convenience. Please do not hesitate to contact Bernard Crawford or me with any questions.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Nadia Petrov Senior Associate Direct: (213) 555-4718

Email: npetrov@calderwoodharkness.com

Attachments / References

The following documents are referenced in this memorandum and are maintained in the Calderwood & Harkness matter file (C&H Matter No. 1017-00004):

1. Pemberton Mutual Assurance Co. Coverage Authorization Letter dated September 13, 2023 (from Thornhill & Reade LLP, Hartford, CT) — Document 143

2. Employment Practices Liability Insurance Policy No. PMA-EPL-2022-00837, issued by Pemberton Mutual Assurance Co. (Policy Period: July 1, 2022 through June 30, 2023) — Document 3

3. Class Action Settlement Agreement and Release (execution version, dated September 15, 2023), Fuentes v. Aurelius Media Americas Inc., LASC Case No. 22STCV38214 — Document 144

4. Internal Memorandum re: EPL Coverage Analysis and Reservation of Rights, dated January 5, 2023, prepared by Nadia Petrov — Document 10

5. Letter to Pemberton Mutual Assurance Co. re: Consent to Settlement and Demand for Policy Contribution, dated September 10, 2023, prepared by Bernard Crawford — Document 142

CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT This memorandum is a confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with the provision of legal advice to Aurelius Media Americas Inc. It is protected from disclosure by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. This memorandum should not be disclosed, copied, or distributed to any person or entity without the prior written consent of Calderwood & Harkness LLP and Aurelius Media Americas Inc. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.

TO:

Bernard Crawford, Partner, Calderwood & Harkness LLP

FROM:	Nadia Petrov, Senior Associate, Calderwood & Harkness LLP
DATE:	September 14, 2023
RE:	Allocation of Settlement Funds Between Insured and Self-Funded Portions — Fuentes v. Aurelius Media Americas Inc., LASC Case No. 22STCV38214 (Consolidated)
C&H MATTER NO.:	1017-00004
Term	Detail
Carrier	Pemberton Mutual Assurance Co.
Policy Number	PMA-EPL-2022-00837
Policy Period	July 1, 2022 through June 30, 2023
Named Insured	Aurelius Media Americas Inc.
Self-Insured Retention (SIR)	$5,000,000 per Claim
Aggregate Limit	$15,000,000
Coverage Acknowledgment Date	December 22, 2022 (subject to reservation of rights)
Tender Date	November 8, 2022
Source	Amount	Percentage of GSA
Pemberton Mutual Assurance Co. (EPL Policy Contribution)	$9,250,000	62.7%
AMA Self-Funded	$5,500,000	37.3%
Total GSA	$14,750,000	100.0%
SIR Erosion Component	Amount
Defense costs incurred (Calderwood & Harkness fees and expenses through September 2023)	~$3,100,000
AMA self-funded settlement contribution	$5,500,000
Total AMA expenditure (class action)	~$8,600,000
Category	Class Action (Fuentes)	Aldrich	Total
Settlement payment (AMA-funded portion)	$5,500,000	$2,350,000	$7,850,000
Defense costs (C&H fees and expenses, estimated through resolution)	~$3,100,000¹	Included in total²	~$3,280,000³
EPL carrier contribution (offset)	($9,250,000)	$0	($9,250,000)

Net AMA out-of-pocket	~$8,600,000	~$2,530,000	~$11,130,000
Event	Anticipated Date
Settlement Agreement executed	September 15, 2023
Preliminary Approval Motion filed	September 22, 2023
Preliminary Approval Order (anticipated)	Mid-October 2023
Class Notice mailed to class members	~30 days after Preliminary Approval
Opt-Out / Objection Deadline	~60 days after mailing of Class Notice
Final Approval Hearing	~90 days after Preliminary Approval (estimated February 2, 2024)
Final Approval Order entered	~7 days after Final Approval Hearing
Settlement funding deadline	14 days after entry of Final Approval Order
Pemberton funds $9,250,000 to Meridian escrow	Within 14 days of entry of Final Approval Order
AMA funds $5,500,000 to Meridian escrow	Within 14 days of entry of Final Approval Order
Meridian distributes individual settlement payments	Within 30 days of receipt of settlement funds

CALDERWOOD & HARKNESS LLP ATTORNEYS AT LAW 333 South Grand Avenue, Suite 5400 Los Angeles, California 90071
CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT This memorandum was prepared by counsel at Calderwood & Harkness LLP in connection with the provision of legal advice and reflects attorney work product. It is not intended for disclosure to third parties and should not be disclosed without the prior written consent of both the client and Calderwood & Harkness LLP.
MEMORANDUM
I. Purpose
This memorandum documents the allocation of the $14,750,000 Gross Settlement Amount (the "GSA") agreed upon in the consolidated class action Fuentes v. Aurelius Media Americas Inc., Los Angeles Superior Court Case No. 22STCV38214, as between the contribution from Aurelius Media Americas Inc.'s ("AMA") Employment Practices Liability ("EPL") carrier, Pemberton Mutual Assurance Co. ("Pemberton"), and AMA's self-funded portion. The memorandum is intended to provide a comprehensive framework for the internal allocation of settlement funds and to serve as a reference document for AMA's legal, finance, and accounting teams as the settlement proceeds through the court approval process.
In addition to the primary allocation analysis, this memorandum addresses three related topics. First, it provides a detailed analysis of the exhaustion status of the EPL Policy's Self-Insured Retention ("SIR"), including a breakdown of the components that have eroded and will continue to erode the SIR. Second, it provides a reconciliation of AMA's total out-of-pocket expenditure across both the Fuentes class action and the related Aldrich executive dispute matter, to give AMA's leadership a consolidated view of litigation expenditures arising from the engagement. Third, this memorandum offers accounting treatment recommendations to assist AMA in determining the appropriate financial statement presentation, disclosure, and coordination with AMA's external auditors.
This memorandum is informed by, and should be read in conjunction with, Pemberton's coverage counsel letter dated September 13, 2023, from Thornhill & Reade LLP (Hartford, Connecticut), which formally authorized Pemberton's settlement contribution in the amount of $9,250,000, subject to the conditions described herein. A copy of the Thornhill & Reade letter has been provided to Gregory Tanaka under separate cover and is maintained in the matter file as Document 143. Additionally, this memorandum references our prior Internal Memorandum re: EPL Coverage Analysis and Reservation of Rights dated January 5, 2023 (Document 10), as well as Calderwood & Harkness's letter to Pemberton re: Consent to Settlement and Demand for Policy Contribution dated September 10, 2023 (Document 142).
II. Settlement Background
On September 8, 2023, following two full-day mediation sessions before the Honorable Patricia Okoro (Ret.) of Westpark Dispute Resolution Inc. in Los Angeles, the parties to the consolidated Fuentes class action reached a tentative class-wide settlement with a Gross Settlement Amount of $14,750,000. The first mediation session was held on August 14, 2023, and resulted in a mediator's proposal that was conditionally accepted by both sides subject to further negotiation of settlement terms. The second session on September 8, 2023, resolved all remaining disputes regarding settlement structure, class definition, allocation methodology, and release scope, resulting in the parties' agreement in principle to the $14,750,000 GSA.
The Class Action Settlement Agreement and Release (the "Settlement Agreement") reflecting the terms agreed upon during mediation was finalized by the parties and executed on September 15, 2023. AMA intends to file its Motion for Preliminary Approval of the class settlement with the Los Angeles Superior Court on September 22, 2023. Based on customary timelines in the Central District of the Los Angeles Superior Court, we anticipate that the Preliminary Approval Order will be entered in mid-October 2023, following a hearing before the Honorable Robert K. Yamashita in Department 34.
The settlement resolves all class and PAGA claims arising from the operative facts alleged in the consolidated Fuentes and Halloran complaints. Specifically, the settlement resolves both the claims that were certified for class treatment and additional claims that were asserted but not certified. The certified claims include: (1) the first meal period auto-deduction claim, based on AMA's alleged practice of automatically deducting thirty minutes from hourly employees' time records for meal periods regardless of whether a compliant meal period was actually provided; (2) the wage statement claim under California Labor Code § 226, premised on the alleged failure to accurately report hours worked and applicable rates of pay on wage statements; and (3) the derivative claim under the Unfair Competition Law, California Business & Professions Code § 17200, predicated on the underlying Labor Code violations.
In addition to the certified claims, the settlement resolves the following non-certified claims: rest period violations; off-the-clock and overtime claims arising from AMA's alleged requirement that employees perform pre-shift and post-shift work without compensation; minimum wage violations; second meal period violations for shifts exceeding ten hours; and waiting time penalties under California Labor Code § 203 for employees who separated from AMA during the class period and allegedly did not receive timely payment of final wages.
The settlement includes a PAGA component of $750,000, which is allocated as required under California Labor Code § 2699(i): seventy-five percent ($562,500) to the California Labor and Workforce Development Agency ("LWDA"), and twenty-five percent ($187,500) to the aggrieved employees. The PAGA payment is included within — not in addition to — the $14,750,000 GSA. This structure was negotiated to ensure that the total settlement exposure remained fixed and that the PAGA component did not create incremental funding obligations beyond the GSA.
III. EPL Policy Summary
The following is a summary of the material terms of AMA's Employment Practices Liability insurance policy relevant to the allocation and funding of the Fuentes class action settlement:
Several features of the Policy warrant specific discussion in connection with the settlement allocation.
Self-Insured Retention. The Policy provides for a $5,000,000 SIR on a per-Claim basis. Pursuant to the batch clause set forth in Section III.B.4 of the Policy, all related claims arising from the same or related facts, circumstances, or allegations are treated as a single "Claim" for purposes of the SIR. Accordingly, the Fuentes class action, the Halloran action (LASC Case No. 22STCV39501, which was consolidated with Fuentes by order dated January 19, 2023), and the PAGA claims asserted by named plaintiff Fuentes are all treated as a single Claim subject to a single $5,000,000 SIR. Both defense costs and indemnity payments erode the SIR.
Reservation of Rights. Pemberton acknowledged coverage for the Fuentes matter on December 22, 2022, but did so subject to a reservation of rights. Pemberton's reservation of rights letter, issued through Thornhill & Reade LLP, reserved Pemberton's right to deny or limit coverage with respect to: (a) PAGA penalties, which Pemberton contended may fall within the Policy's Penalty Exclusion (§ IV.F); and (b) claims predicated on willful violations of law, which Pemberton contended may fall within the Policy's Intentional Acts Exclusion (§ IV.A). As discussed in Section VIII below, Pemberton has agreed not to enforce the Penalty Exclusion with respect to the PAGA component of the settlement, given the modest allocation.
Aggregate Limit. The Policy provides an aggregate limit of $15,000,000 for all Claims during the Policy Period. Pemberton's $9,250,000 contribution to the Fuentes settlement will reduce the remaining available aggregate limit to $5,750,000, as further discussed in Section V.D below.
Tender. AMA tendered the Fuentes matter to Pemberton on November 8, 2022, within twelve days of service of the original complaint. Calderwood & Harkness submitted the formal tender letter on AMA's behalf, together with copies of the complaint, the summons, and AMA's preliminary factual investigation memorandum.
IV. Allocation of Settlement Funds
A. Allocation Table
The $14,750,000 GSA is allocated between Pemberton's EPL Policy contribution and AMA's self-funded portion as follows:
This allocation reflects the negotiated outcome between AMA and Pemberton following the coverage demand process. As set forth in Calderwood & Harkness's letter to Pemberton dated September 10, 2023 (Document 142), AMA initially demanded that Pemberton contribute $11,000,000 toward the settlement, representing what AMA characterized as the full insured portion of the GSA after application of the SIR. Pemberton's response, through Thornhill & Reade, authorized a contribution of $9,250,000, reflecting Pemberton's position that certain components of the settlement — particularly the PAGA allocation, the waiting time penalties component, and a portion of the UCL restitutionary damages — were potentially excludable under the Policy. AMA accepted Pemberton's $9,250,000 contribution in the interest of expediting settlement funding and avoiding a protracted coverage dispute that could have jeopardized the settlement timeline.
B. Pemberton Contribution Details
Pemberton authorized a total contribution of $9,250,000 toward the GSA, as confirmed in the September 13, 2023 letter from Pemberton's coverage counsel, Thornhill & Reade LLP. The key terms and conditions of Pemberton's contribution are as follows:
Inclusion of PAGA Component. Pemberton's $9,250,000 contribution includes a pro rata share of the PAGA component ($750,000), notwithstanding Pemberton's prior reservation of rights regarding PAGA penalties under the Policy's Penalty Exclusion (§ IV.F). In its September 13, 2023 letter, Pemberton stated that "in the interest of global resolution and given the modest PAGA allocation, Pemberton will not insist on a carve-out of the PAGA component from its contribution." This concession by Pemberton is significant, as it eliminates the need for AMA to separately fund the PAGA component from its own resources and avoids a potentially contentious coverage dispute regarding the insurability of PAGA penalties under California law. We note that the legal landscape on insurability of PAGA penalties remains unsettled, and Pemberton's agreement to include the PAGA component should not be viewed as a precedent for future claims.
Conditions to Funding. Pemberton's contribution is expressly conditioned on the satisfaction of three requirements: (1) entry of a Final Approval Order by the Los Angeles Superior Court approving the settlement with prejudice; (2) a release that is binding on all class members who do not timely opt out of the settlement, including a release of Pemberton and its affiliates; and (3) AMA's funding of its self-funded share of the GSA ($5,500,000) into the settlement escrow account contemporaneously with or prior to Pemberton's funding. These conditions are customary for EPL carrier contributions to class action settlements and were anticipated in our initial coverage discussions with Pemberton.
Funding Timeline. Pemberton has committed to funding its $9,250,000 contribution within fourteen (14) days of the entry of the Final Approval Order, provided that all conditions to funding have been satisfied. The funds will be wired directly to the trust/escrow account maintained by the claims administrator, Meridian Settlement Services LLC, in accordance with wire instructions to be provided by Meridian in advance of the funding date.
C. AMA Self-Funded Portion
AMA's self-funded share of the class settlement is $5,500,000, representing the difference between the $14,750,000 GSA and Pemberton's $9,250,000 contribution. This amount is payable from AMA's general operating funds and should be budgeted and reserved accordingly.
AMA's self-funded share reflects both the SIR obligation (i.e., the first $5,000,000 in combined defense costs and indemnity payments that AMA is required to bear before Pemberton's coverage obligations are triggered) and the gap between AMA's initial coverage demand and Pemberton's authorized contribution. As discussed in Section V below, AMA's total class-action expenditure (including both defense costs and the self-funded settlement contribution) substantially exceeds the $5,000,000 SIR.
It is important to note that the separate Aldrich executive dispute settlement (anticipated at approximately $2,350,000 based on current mediation posture) is entirely self-funded by AMA. Pemberton denied coverage for the Aldrich matter in its December 22, 2022 reservation of rights letter, on the grounds that the Aldrich claims arise from an individual employment dispute that does not constitute a covered "Claim" under the EPL Policy. The Aldrich settlement is not addressed in the allocation set forth in this Section IV, but is included in the total out-of-pocket analysis in Section VI below for purposes of providing AMA's leadership with a comprehensive view of litigation expenditures.
V. SIR Exhaustion Analysis
A. SIR Threshold
The EPL Policy's Self-Insured Retention is $5,000,000, applied on a per-Claim basis. As noted above, the Policy's batch clause (§ III.B.4) aggregates related claims into a single "Claim" for purposes of the SIR. Accordingly, the Fuentes class action, the Halloran action (LASC Case No. 22STCV39501, consolidated with Fuentes by order dated January 19, 2023), and the PAGA claims asserted by named plaintiff Fuentes are all treated as a single Claim, requiring only one $5,000,000 SIR. This treatment was confirmed by Pemberton in its December 22, 2022 coverage acknowledgment letter and has not been disputed.
B. Components Eroding the SIR
Under the Policy, both defense costs and indemnity payments (including settlement payments) erode the SIR. AMA is responsible for the first $5,000,000 in combined defense costs and settlement/indemnity payments before Pemberton's coverage obligations are triggered. The following table sets forth the components that have eroded, or will erode, the SIR in connection with the Fuentes class action:
Defense costs of approximately $3,100,000 have been incurred by Calderwood & Harkness through September 2023, representing fees and expenses for all work performed in connection with the Fuentes and Halloran matters, including pleading and motion practice, discovery, class certification briefing, mediation preparation, and settlement negotiations. This figure is an estimate based on invoices submitted and paid through September 2023; final defense costs will be slightly higher upon engagement closure, reflecting post-settlement work including preparation and filing of the Motion for Preliminary Approval, class notice review, response to any objections, and the Final Approval Hearing.
C. SIR Status
AMA's total class-action expenditure of approximately $8,600,000 (comprising ~$3,100,000 in defense costs and $5,500,000 in self-funded settlement contribution) exceeds the $5,000,000 SIR by approximately $3,600,000. Accordingly, the SIR has been effectively exhausted, and Pemberton's coverage obligation has been triggered.
It is worth noting, however, that defense costs alone (~$3,100,000) have not yet fully exhausted the SIR. The SIR will be fully crossed at the point when AMA funds its $5,500,000 settlement share into escrow. At that point, AMA's cumulative expenditure in the class action will be approximately $8,600,000, which is well in excess of the $5,000,000 SIR. In practical terms, the SIR was effectively exhausted at the point when AMA's cumulative defense costs reached approximately $5,000,000 in combination with the first dollars of the settlement contribution — that is, the SIR was crossed when $1,900,000 of the $5,500,000 settlement contribution was allocated to the SIR (i.e., $3,100,000 in defense costs + $1,900,000 in settlement = $5,000,000 SIR threshold). The remaining $3,600,000 of AMA's self-funded settlement contribution represents AMA expenditure in excess of the SIR.
D. Remaining Policy Capacity
After Pemberton's $9,250,000 contribution to the Fuentes settlement, the remaining available aggregate limit under the Policy is calculated as follows:
$15,000,000 (aggregate limit) – $9,250,000 (Pemberton's contribution) = $5,750,000
This remaining limit of $5,750,000 is available for future Claims during the Policy Period, subject to the terms and conditions of the Policy. Given that the Policy Period is July 1, 2022 through June 30, 2023, and has likely been renewed or replaced by a successor policy, AMA should confirm with its insurance broker, Kestrel Risk Advisors Ltd. (contact: Samuel Okonkwo, Managing Director), whether the remaining $5,750,000 limit applies to the expired 2022–2023 Policy Period or to the current or successor policy period. If the Policy has been renewed on substantially similar terms, the remaining $5,750,000 under the 2022–2023 Policy should remain available for any Claims first made during that Policy Period, even if the settlement funding occurs after the Policy's expiration. However, this should be confirmed in writing with Pemberton or Thornhill & Reade.
VI. Total AMA Out-of-Pocket Analysis (All Matters)
For completeness, and to provide AMA's leadership with a consolidated view of litigation expenditures arising from the Calderwood & Harkness engagement, the following table summarizes AMA's total out-of-pocket expenditure across both the Fuentes class action and the Aldrich executive dispute:
¹ Defense costs through September 2023; final costs will be higher upon engagement closure, reflecting post-settlement work through the Final Approval Hearing and engagement wrap-up.
² Aldrich defense costs are included in the total Calderwood & Harkness engagement budget and have not been separately tracked on a matter-by-matter basis. For internal reporting purposes, we estimate that approximately $180,000 of the total C&H fees through September 2023 are attributable to the Aldrich matter, based on timekeeper allocation. However, this is an approximation and has not been formally segregated in our billing records.
³ Estimated total Calderwood & Harkness fees and expenses for the entire engagement (class action + Aldrich), per the preliminary engagement budget of $3,450,000 approved by Gregory Tanaka on November 15, 2022. Actual fees and expenses through September 2023 are approximately $3,100,000, with additional costs anticipated through engagement closure, including preparation and prosecution of the Motion for Preliminary Approval, responses to any objections, the Final Approval Hearing, and the Aldrich mediation scheduled for December 8, 2023.
The total net AMA out-of-pocket expenditure across both matters is estimated at approximately $11,130,000. This figure reflects AMA's self-funded settlement payments ($7,850,000), defense costs (~$3,280,000 estimated through engagement closure), offset by Pemberton's $9,250,000 contribution. The carrier contribution substantially reduces AMA's total expenditure from a gross exposure standpoint; absent the Pemberton contribution, AMA's total expenditure would have been approximately $20,380,000.
We note that the Aldrich settlement figure of $2,350,000 is an estimate based on the current mediation posture and preliminary settlement discussions. The standalone Aldrich mediation session is scheduled for December 8, 2023, before Stuart Edenfield of JAMS in Century City. If the Aldrich matter does not settle at mediation, additional defense costs will be incurred and the ultimate resolution value may differ from the estimate used herein.
VII. Accounting Treatment Recommendations
The following recommendations are provided to assist AMA's finance and accounting teams in determining the appropriate treatment of the class settlement, the insurance recovery, and related expenditures in AMA's financial statements. These recommendations are based on our understanding of generally accepted accounting principles and are provided for informational purposes only; they do not constitute accounting advice, and AMA should consult with its external auditor (as discussed in Section VII.C below) regarding the appropriate application of applicable accounting standards to these transactions.
A. Financial Statement Presentation
AMA should record the following entries in its financial statements for the fiscal period in which the settlement is finalized:
1. Settlement Expense (Class Action — AMA Self-Funded Portion).
AMA should record $5,500,000 as a settlement expense (or litigation loss contingency) in the period in which the Settlement Agreement was executed (September 2023), or, if AMA's accounting policy requires, in the period in which the Final Approval Order is entered by the court. Under ASC 450-20 (formerly SFAS No. 5), a loss contingency should be accrued when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Given that the Settlement Agreement was executed on September 15, 2023, and the settlement amount is fixed, both conditions are satisfied as of the execution date. Accordingly, we recommend that AMA accrue the $5,500,000 settlement expense in the third quarter of 2023 (or the corresponding fiscal period under AMA's and AGMG's reporting calendar), unless AMA's accounting policy or prior practice requires deferral until entry of the Final Approval Order.
2. Insurance Receivable / Recovery (Pemberton Contribution).
AMA should record $9,250,000 as an insurance receivable upon receipt of Pemberton's written authorization letter dated September 13, 2023. Pemberton's letter constitutes a binding commitment to fund the contribution subject to the conditions described in Section IV.B above. Because Pemberton's authorization is conditioned on entry of the Final Approval Order and AMA's contemporaneous funding, AMA should assess whether the receivable should be classified as a current asset or a contingent asset, depending on the probability of satisfaction of the conditions. Given that the conditions (Final Approval and AMA funding) are expected to be satisfied in the ordinary course of the settlement process, we believe recognition of the receivable is appropriate. The receivable should be reclassified to cash upon receipt of funds from Pemberton, which is expected within fourteen (14) days of the Final Approval Order.
Under applicable accounting standards (ASC 450-20 for loss contingencies and ASC 410-30 for insurance recoveries, or the IFRS equivalents — IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and IFRS 4 / IFRS 17 — if Aurelius Global Media Group ("AGMG") reports under IFRS), the insurance recovery should be presented separately from the settlement expense. Specifically, the settlement should not be presented "net" of the insurance recovery on the income statement. Instead, the gross settlement expense ($14,750,000 or, alternatively, AMA's $5,500,000 self-funded portion) should be presented as a litigation expense or loss contingency, and the insurance recovery ($9,250,000) should be presented as a separate line item (e.g., "insurance recovery" or "insurance reimbursement") either within the same expense category or as other income, depending on AMA's and AGMG's classification policy. Net presentation may, however, be appropriate on the balance sheet, where the net litigation liability (settlement obligation less insurance receivable) may be presented as a single line item.
3. Defense Costs.
Defense costs of approximately $3,100,000 incurred through September 2023 have been accrued and expensed as incurred in prior periods, consistent with the general principle that legal fees are period costs. No additional accrual is required for defense costs that have already been paid or accrued. Remaining defense costs through engagement closure (estimated at approximately $180,000–$350,000) should be accrued in the period in which they are incurred. AMA should note that defense costs fall within the SIR and are not reimbursable by Pemberton; accordingly, no insurance receivable should be recorded with respect to defense costs.
4. Aldrich Settlement.
AMA should record $2,350,000 (or the actual settlement amount, if different) as a separate settlement expense in the period in which the Aldrich settlement is finalized. This amount is entirely self-funded, as Pemberton denied coverage for the Aldrich matter per its December 22, 2022 reservation of rights letter. The Aldrich settlement expense should be presented as a separate line item from the Fuentes class action settlement expense to the extent practicable, particularly if the two settlements are finalized in different fiscal periods.
B. Disclosure Considerations
AMA (and AGMG at the parent level) should consider whether disclosure of the class settlement is required in its financial statements or public filings, particularly in light of the following considerations:
Note Disclosure Regarding Litigation Contingencies. Under ASC 450-20 (or IAS 37 for IFRS reporters), entities are required to disclose the nature and amount of accrued litigation contingencies, and, in certain circumstances, the range of reasonably possible additional loss. AMA and AGMG should assess whether the Fuentes settlement requires note disclosure in AGMG's consolidated financial statements, including disclosure of the settlement amount, the nature of the underlying claims, and the insurance recovery.
Material Litigation Disclosure in AGMG's Annual Report. The total resolution value of the Fuentes and Aldrich matters is $17,100,000 ($14,750,000 GSA + $2,350,000 Aldrich settlement). This total represents approximately 0.7% of AGMG's consolidated FY 2022 revenue of approximately $2.47 billion, and approximately 2.5% of AMA's standalone FY 2022 revenue of $687.4 million. While the settlement may not be "material" to AGMG at the parent level under traditional quantitative materiality thresholds, it may nonetheless warrant disclosure under a qualitative materiality analysis, particularly given the nature of the underlying claims (wage-and-hour class action), the regulatory interest in California wage-and-hour compliance, and the involvement of a PAGA component with an LWDA payment. AGMG should assess materiality in consultation with its external auditor and, to the extent applicable, with its SEC/LSE disclosure counsel.
Non-Reversionary Nature of the Settlement. The settlement is structured as a "non-reversionary" settlement — that is, AMA's obligation to fund the full GSA of $14,750,000 is fixed upon entry of the Final Approval Order, regardless of the claims rate among class members. Any unclaimed funds will be distributed to a cy pres recipient designated in the Settlement Agreement (the Legal Aid Foundation of Los Angeles), rather than reverting to AMA. Accordingly, AMA's settlement obligation should be recorded at the full GSA amount, without any reduction for anticipated unclaimed distributions.
C. Coordination with External Auditor
AMA should promptly consult with its external auditor, Graystone & Parr LLP (200 Park Avenue, Suite 3500, New York, NY 10166), regarding the appropriate financial statement presentation and disclosure for the class settlement, the insurance recovery, and the Aldrich settlement. This consultation should occur as early as practicable — ideally before the close of AMA's current fiscal quarter — to ensure that the accounting treatment is agreed upon in advance and that no issues arise during the year-end audit process.
In particular, Graystone & Parr should be provided with copies of the following documents to support the accounting entries and disclosure:
(a) The Class Action Settlement Agreement and Release (execution version, dated September 15, 2023);
(b) Pemberton's coverage authorization letter dated September 13, 2023 (from Thornhill & Reade LLP);
(c) The Preliminary Approval Order (when entered by the court, anticipated mid-October 2023); and
(d) The Final Approval Order (when entered by the court, anticipated February 2024).
We recommend that Gregory Tanaka coordinate with AGMG's Chief Financial Officer, Malcolm Dunmore, to ensure that Graystone & Parr is notified of the settlement terms and the anticipated accounting entries in a timely manner. To the extent that the settlement will be reflected in AGMG's FY 2023 financial statements, early engagement with the auditor will be essential to avoid delays in the audit timeline.
VIII. PAGA Allocation Detail
The PAGA payment of $750,000 is included within the $14,750,000 GSA and is allocated in accordance with California Labor Code § 2699(i) as follows:
• 75% to the California Labor and Workforce Development Agency (LWDA): $562,500
• 25% to the aggrieved employees: $187,500
The PAGA allocation represents 5.1% of the total GSA ($750,000 / $14,750,000 = 5.08%). This allocation was negotiated between the parties during the September 8, 2023 mediation session, with input from the mediator, Judge Okoro, and reflects the parties' assessment of the relative strength and value of the PAGA claims in the context of the overall settlement.
As discussed in Section IV.B above, Pemberton initially reserved rights on PAGA penalties under the Policy's Penalty Exclusion (§ IV.F). The Penalty Exclusion provides, in relevant part, that the Policy does not cover "Loss arising from or attributable to fines, penalties, or punitive or exemplary damages imposed by law." Pemberton's initial position was that PAGA penalties fall within this exclusion and that its contribution should be reduced by the amount of the PAGA allocation. However, in its September 13, 2023 authorization letter, Pemberton agreed to include the PAGA component in its $9,250,000 contribution, stating that it would not "insist on a carve-out of the PAGA component from its contribution" given the modest allocation. This resolution avoids a coverage dispute that could have delayed settlement funding by weeks or months, and potentially required AMA to absorb the full PAGA component from its own funds.
Tax Considerations. For tax and accounting purposes, the PAGA payment to the LWDA ($562,500) should be treated as a penalty or fine. Under Internal Revenue Code § 162(f), as amended by the Tax Cuts and Jobs Act of 2017, no deduction is allowed for any amount paid or incurred to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Because the LWDA's 75% share of PAGA penalties constitutes a payment to a governmental entity in relation to alleged Labor Code violations, the $562,500 LWDA payment may not be deductible under IRC § 162(f). AMA should consult with its tax advisors — and, as appropriate, with AGMG's tax department — regarding the deductibility of the PAGA payment and the proper characterization of the PAGA component for federal and California state income tax purposes. The 25% aggrieved employee share ($187,500) may be treated differently for tax purposes, as it constitutes a payment to private parties rather than a governmental entity; however, this treatment should also be confirmed with AMA's tax advisors.
IX. Settlement Funding Timeline and Logistics
The following table sets forth the anticipated timeline for key settlement milestones and funding events:
The dates set forth above are estimates based on customary timelines in the Los Angeles Superior Court and the terms of the Settlement Agreement. Actual dates may vary depending on the court's calendar, the volume of opt-outs or objections, and other factors. Calderwood & Harkness will monitor all deadlines and provide updates to AMA as the settlement progresses through the approval process.
Settlement Administration. All settlement funds — both Pemberton's $9,250,000 contribution and AMA's $5,500,000 self-funded share — should be wired to the trust/escrow account maintained by the court-appointed claims administrator, Meridian Settlement Services LLC, at the following address:
Meridian Settlement Services LLC 1600 E. Fourth Street, Suite 240 Santa Ana, CA 92701 Contact: Angela Truong, Senior Settlement Administrator
Wire transfer instructions will be provided by Meridian in advance of the funding deadline. AMA should coordinate wire instructions with both Meridian and Pemberton well in advance of the anticipated Final Approval Order to ensure that funds are transmitted promptly and without delay. We recommend that AMA's treasury department and Pemberton's claims department each conduct a test wire or pre-authorization process at least two weeks before the anticipated funding date to identify and resolve any banking or compliance issues that could delay the transfer.
Concurrent Funding Requirement. As noted in Section IV.B, Pemberton's contribution is conditioned on AMA's contemporaneous funding of its $5,500,000 share. Accordingly, AMA should ensure that its funds are available for wire transfer on the same date that Pemberton is expected to fund, or, preferably, one to two business days in advance. This will avoid any argument by Pemberton that AMA's funding condition has not been satisfied and will ensure that the settlement administration process proceeds on schedule.
X. Recommendations
Based on the foregoing analysis, we offer the following recommendations for AMA's consideration:
1. Pemberton Coordination. Bernard Crawford should confirm wire instructions with Pemberton (through Thornhill & Reade LLP) and ensure that Pemberton has received, or will receive, all documentation required to trigger its funding obligation. In particular, Pemberton should be provided with a certified copy of the Final Approval Order promptly upon its entry by the court. Crawford should also confirm with Pemberton that no additional conditions to funding exist beyond those specified in the September 13, 2023 authorization letter, and should obtain Pemberton's written confirmation of the anticipated funding date.
2. AMA Internal Funding. Gregory Tanaka should coordinate with AMA's finance department — and, as necessary, with AGMG's Chief Financial Officer, Malcolm Dunmore — to ensure that $5,500,000 is available for wire transfer within the fourteen-day funding window following entry of the Final Approval Order. Given the magnitude of the funding requirement, we recommend that AMA begin the internal approval and budgeting process for the settlement payment immediately, rather than waiting until the Final Approval Order is entered. This will ensure that any internal corporate approvals, board resolutions, or intercompany funding arrangements required to effectuate the payment are completed in advance.
3. Auditor Notification. AMA should promptly notify Graystone & Parr LLP of the settlement terms and the anticipated accounting entries described in Section VII above, particularly if the settlement will be recorded in AGMG's FY 2023 financial statements. Early engagement with the auditor will help ensure that the accounting treatment is agreed upon in advance and that the year-end audit process is not disrupted by last-minute settlement-related inquiries.
4. Kestrel Risk Advisors. AMA should notify its insurance broker, Kestrel Risk Advisors Ltd. (Samuel Okonkwo, Managing Director), of the settlement terms and the carrier's $9,250,000 contribution, for purposes of policy renewal negotiations and claims history reporting. The Fuentes settlement will be a significant claims event for purposes of AMA's EPL insurance program, and Kestrel should be prepared to address the settlement in the context of the upcoming policy renewal cycle. Additionally, AMA should confirm with Kestrel whether the remaining $5,750,000 in aggregate policy capacity applies to the expired 2022–2023 Policy Period or to the current or successor policy, as discussed in Section V.D above.
5. Aldrich Self-Funding. AMA should separately budget for the anticipated Aldrich executive dispute settlement, which is estimated at approximately $2.0–$2.5 million based on the current mediation posture and preliminary settlement discussions. Because Pemberton has denied coverage for the Aldrich matter, the settlement will be entirely self-funded by AMA. The standalone Aldrich mediation session is scheduled for December 8, 2023, before Stuart Edenfield at JAMS in Century City. AMA's finance team should be advised of the potential funding requirement so that the necessary funds can be reserved or budgeted in advance.
We are available to discuss this memorandum and the underlying analysis at your convenience. Please do not hesitate to contact Bernard Crawford or me with any questions.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Nadia Petrov Senior Associate Direct: (213) 555-4718
Email: npetrov@calderwoodharkness.com
Attachments / References
The following documents are referenced in this memorandum and are maintained in the Calderwood & Harkness matter file (C&H Matter No. 1017-00004):
1. Pemberton Mutual Assurance Co. Coverage Authorization Letter dated September 13, 2023 (from Thornhill & Reade LLP, Hartford, CT) — Document 143
2. Employment Practices Liability Insurance Policy No. PMA-EPL-2022-00837, issued by Pemberton Mutual Assurance Co. (Policy Period: July 1, 2022 through June 30, 2023) — Document 3
3. Class Action Settlement Agreement and Release (execution version, dated September 15, 2023), Fuentes v. Aurelius Media Americas Inc., LASC Case No. 22STCV38214 — Document 144
4. Internal Memorandum re: EPL Coverage Analysis and Reservation of Rights, dated January 5, 2023, prepared by Nadia Petrov — Document 10
5. Letter to Pemberton Mutual Assurance Co. re: Consent to Settlement and Demand for Policy Contribution, dated September 10, 2023, prepared by Bernard Crawford — Document 142
CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT This memorandum is a confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with the provision of legal advice to Aurelius Media Americas Inc. It is protected from disclosure by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. This memorandum should not be disclosed, copied, or distributed to any person or entity without the prior written consent of Calderwood & Harkness LLP and Aurelius Media Americas Inc. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.
TO: | Gregory Tanaka, Vice President, Legal & Compliance, Aurelius Media Americas Inc.
Bernard Crawford, Partner, Calderwood & Harkness LLP
FROM: | Nadia Petrov, Senior Associate, Calderwood & Harkness LLP
DATE: | September 14, 2023
RE: | Allocation of Settlement Funds Between Insured and Self-Funded Portions — Fuentes v. Aurelius Media Americas Inc., LASC Case No. 22STCV38214 (Consolidated)
C&H MATTER NO.: | 1017-00004
Term | Detail
Carrier | Pemberton Mutual Assurance Co.
Policy Number | PMA-EPL-2022-00837
Policy Period | July 1, 2022 through June 30, 2023
Named Insured | Aurelius Media Americas Inc.
Self-Insured Retention (SIR) | $5,000,000 per Claim
Aggregate Limit | $15,000,000
Coverage Acknowledgment Date | December 22, 2022 (subject to reservation of rights)
Tender Date | November 8, 2022
Source | Amount | Percentage of GSA
Pemberton Mutual Assurance Co. (EPL Policy Contribution) | $9,250,000 | 62.7%
AMA Self-Funded | $5,500,000 | 37.3%
Total GSA | $14,750,000 | 100.0%
SIR Erosion Component | Amount
Defense costs incurred (Calderwood & Harkness fees and expenses through September 2023) | ~$3,100,000
AMA self-funded settlement contribution | $5,500,000
Total AMA expenditure (class action) | ~$8,600,000
Category | Class Action (Fuentes) | Aldrich | Total
Settlement payment (AMA-funded portion) | $5,500,000 | $2,350,000 | $7,850,000
Defense costs (C&H fees and expenses, estimated through resolution) | ~$3,100,000¹ | Included in total² | ~$3,280,000³
EPL carrier contribution (offset) | ($9,250,000) | $0 | ($9,250,000)
Net AMA out-of-pocket | ~$8,600,000 | ~$2,530,000 | ~$11,130,000
Event | Anticipated Date
Settlement Agreement executed | September 15, 2023
Preliminary Approval Motion filed | September 22, 2023
Preliminary Approval Order (anticipated) | Mid-October 2023
Class Notice mailed to class members | ~30 days after Preliminary Approval
Opt-Out / Objection Deadline | ~60 days after mailing of Class Notice
Final Approval Hearing | ~90 days after Preliminary Approval (estimated February 2, 2024)
Final Approval Order entered | ~7 days after Final Approval Hearing
Settlement funding deadline | 14 days after entry of Final Approval Order
Pemberton funds $9,250,000 to Meridian escrow | Within 14 days of entry of Final Approval Order
AMA funds $5,500,000 to Meridian escrow | Within 14 days of entry of Final Approval Order
Meridian distributes individual settlement payments | Within 30 days of receipt of settlement funds

CALDERWOOD & HARKNESS LLP ATTORNEYS AT LAW 333 South Grand Avenue, Suite 5400 Los Angeles, California 90071

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