A rare jury trial has commenced in a long-running securities lawsuit that resonates with overtones of the current subprime mortgage meltdown. On March 30, 2009, Northern District of Illinois Ronald Guzman began empanelling a jury in the securities class action lawsuit styled as Lawrence E. Jaffee Pension Plan v. Household International, Inc., a case that has been pending since August 2002. Background regarding the case can be found here.
According to the plaintiffs’ consolidated amended complaint (here), the case was brought on behalf of all persons who acquired Household International securities between October 23, 1997 and October 11, 2002. The plaintiffs contend that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme."
According to the complaint, Household "engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques." Household also reported "false statistics" that were intended to "give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was." The plaintiffs allege that the "defendants’ scheme" allowed them "to artificially inflate the Company’s financial and operational results."
In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings. (In recent months, HSBC’s results have been significantly affected by losses in the subprime mortgage portfolio it acquired in the Household deal and its chairman has publicly admitted that "with the benefit of hindsight, this is an acquisition that we wish we had not undertaken.")
The defendants in the lawsuit include Household International and its mortgage finance subsidiary, Household FInancial Corporation, and Household’s former CEO and CFO, as well as one other former individual officer of the company, as well as the former company’s former directors. The company’s offering underwriters were also initially named as defendants, but they were later dismissed from the case (refer here). The plaintiffs also reached a prior settlement with the company’s former auditor, Arthur Anderson.
According to news reports (here), Judge Guzman has bifurcated the case into two parts, with a damages phase to follow the initial liability phase, which is expected to last four weeks, if the initial phase results in a finding of liability.
As most readers undoubtedly are aware, jury trials in securities class action lawsuits are extremely rare. According to data compiled by Adam Savett at the Securities Litigation Watch (here), only 20 cases have gone to trial since the PSLRA was enacted in 1995. Six of those 20 cases involved conduct that occurred after the PSLRA’s enactment.
Two recent high profile trials involved JDS Uniphase and Apollo Group. As noted here, on November 27, 2007, the jury in the JDS Uniphase trial returned a defense verdict. The Apollo Group trial initially resulted in a January 2008 plaintiffs’ verdict and an award of $277.5 million in damages, but as detailed here, on August 4, 2008, the judge granted the defendants’ motion for judgment as a matter of law, which set aside the jury verdict. A detailed discussion of the two cases can be found here.
With the adjustment for the post-trial motion in the Apollo Group case, the jury verdict scoreboard for the six post-PSLRA cases now stands at three each for the plaintiffs and defendants, as explained in my post regarding the Apollo Group post trial motion.
As for the question why this case is going to trial when so many others settle, there undoubtedly are many factors but one may be the "billion-dollar price tag" that news reports suggest that plaintiffs have put on the case.
A March 30, 2009 AmLaw Daily article discussing the case can be found here.