They aren’t the first subprime lawsuit settlements, but the two massive settlements Merrill Lynch announced this past Friday are unquestionably the largest subprime subprime securities lawsuit settlements so far, and they certainly suggest the enormous stakes that may be involved in the mass of subprime and credit crisis-related litigation cases that remain pending.
In a January 16, 2009 filing on form 8-K (here), Merrill Lynch announced that the Lead Plaintiff, the Ohio State Teachers’ Retirement System, had accepted Merrill Lynch agreement to pay $475 million cash in settlement of the consolidated securities class action settlement pending against the company and certain of its directors and officers. As reflected more fully here, the consolidated case involved the claims of a variety of claimants, the basic allegations in the litigation were that the defendants
knew or recklessly disregarded that (i) the Company was more exposed to CDOs containing subprime debt than it disclosed; and (ii) the Company’s Class Period statements were materially false due to their failure to inform the market of the ticking time bomb in the Company’s CDO portfolio due to the deteriorating subprime mortgage market, which caused Merrill’s portfolio to be impaired.
My initial post about the filing of the Merrill Lynch subprime-related securities class action lawsuit can be found here.
In addition to the consolidated securities settlement, Merrill Lynch also announced on January 16 that it had entered into a proposed settlement of the class action brought on behalf of Merrill Lynch employees who invested in or held Merrill Lynch stock in their retirement plans. Merrill Lynch will pay $75 million in cash under the terms of this settlement.
Both consolidated cases focused primarily on Merrill Lynch’s subprime-related losses and related disclosures during the class period, and both settlements are subject to court approval.
The $475 million securities class action settlement ranks among the largest ever; according to a review of RiskMetrics data, it appears to be in the top 20 securities class action settlements of all time. The $75 milion settlement of the employees' claims is also one of the largest ERISA class action settlements ever; based on my informal survey, it may be among the top five largest of all time.
But the significance of the Merrill Lynch settlements may not be what they represent in and of themselves, but rather what their size may suggest for the remaining mass of subprime and credit crisis-related litigation.
To be sure, many of these cases may not be anywhere near the magnitude of the Merrill Lynch case, and many of the cases will be winnowed out through motions to dismiss. Yet among the over 140 subprime and credit crisis related securities lawsuits are many others that also involve huge shareholder losses, and many cases will survive the winnowing process of the motions to dismiss. If it is any indication of what may be yet to come, the Merrill Lynch settlements suggest the aggregate settlements of these cases could represent a staggering sum.
There are a couple of interesting things about the Merrill Lynch settlements. The first is that they came before any ruling on the many pending motions to dismiss in the consolidated cases. While the timing of the settlements, prior even to a ruling on the motions to dismiss, might be due to any number of factors, one likely possibility is that Merrill’s new owner, Bank of America, moved quickly to put the litigation in the past.
The other interesting thing about these settlements is that the 8-K does not mention the involvement of insurance money. That of course does not mean for sure that there will be no insurance contribution toward the settlements, but it does seem at least to make that suggestion. As I have noted elsewhere (here, for example), due to the insurance structures that many large banks have employed in recent years (some of which include only Side A insurance, which would not be triggered in many of these cases), insurance may not be a factor in many of the subprime and credit crisis-related cases involving the larger banks, which is a consideration that may mitigate the overall losses to the insurance industry from these lawsuits.
In any event, I have added the Merrill Lynch settlement to my table of subprime and credit crisis related securities lawsuit settlements, dismissals, and dismissal denials, which can be found here.
And Finally: The January 18, 2009 Washington Post has an article entitled "Livid Investors Launch a Volley of Lawsuits" (here) that describes how investors angered by their investment losses are turning to the courts to seek recompense. (Full disclosure: I was interviewed in connection with the article.)