On May 7, 2009, a jury in the Northern District of Illinois entered a mixed verdict finding in plaintiffs’ favor on several counts in the Household International securities fraud securities class action lawsuit, a long-running case with overtones of the current subprime meltdown. Background regarding the case can be found here.
The verdict form the jury entered (which can be found here) is quite complex and very detailed. The jurors were asked to make specific findings with respect to 40 allegedly false and misleading statements. The jury found in favor of the defendants with respect to 23 of the statements. However, the jury found in favor of the plaintiffs with respect to 17 of the statements. Table A to the verdict form identifies and assigns a number to each of the 40 statements.
As detailed in by Adam Savett of the Securities Litigation Watch blog (here), the jury found that all four defendants acted recklessly with respect to the 16 statements on which the jury found in favor of plaintiffs. In addition, with respect to an additional statement (Statement No. 14), two defendants (Household and former Chairman and CEO William Aldinger) were found to have acted knowingly, one defendant (Gary Gilmore, the former Vice-Chair of Consumer Lending was found to have acted recklessly, and one defendant (David Schoenholz, the former CFO and COO) was found not liable.
With respect to the recklessly misleading statements, the jury assigned 55% of the responsibility to Household; 20% to Aldinger; 20% to Schoenholz; and 10% to Gilmer.
The jury found that from March 23, 2001 (the date of Statement No. 14, with respect to which two of the defendants were found to have acted knowingly), the allegedly misleading statements inflated Household’s share price by as much as $23.94.As the class period progressed, however, the amount of inflation the jury found changed; it ranged between $23.94 a share and negative $4.66 a share. (Negative share inflation is a puzzling concept that I am sure will have to be sorted out at a later date.)
The available record does not explain how these findings will translate into damages. However, as discussed in press coverage at the time the trial commenced (here), the case was bifurcated with liability issues to be tried first and damages to be tried later if necessary. Apparently there will be further proceedings, based on the jury’s findings in the initial phase, the fix the amount of damages.
Significance for Current Subprime Cases?: The verdict in the Household case arguably has significance with respect to many of the cases filed in connection with the current subprime litigation wave. Even though the Household case was initially filed in 2002, it involved allegations in connection with representations about residential real estate lending practices.
In their complaint, the plaintiffs had alleged that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme." The plaintiffs had alleged that 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.")
Securities Lawsuit Trials Are Very Rare: Trials in subprime related securities class action lawsuits are extremely rare. According to data compiled by the Securities Litigation Watch (here), only 21 cases have gone to trial since the PSLRA was enacted in 1995. Only seven of those 21 cases involved conduct that occurred after the PSLRA’s enactment.
Two recent high profile securities class action 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.
Not only are verdicts susceptible to post-trial motions, but they are also susceptible to reversal on appeal, as happened in connection with the defense verdict in the Thane International case, where the Ninth Circuit overturned the jury verdict on appeal and ordered a new trial (about which refer here). The retrial in the Thane case resulted in a defense verdict.
With the inclusion of the Household International verdict and adjusting for the post-trial motion in the Apollo Group case and the post-appeal verdict in Thane, the scoreboard for the seven post-PSLRA trials – as adjusted for post-trial proceedings-- now stands at three wins for the plaintiffs and four for the defendants.
Analysis: While there are further procedures yet to go, the verdict in the Household case nevertheless represents a significant development. The subprime overtones in the case and the defendants’ connection to financial giant HSBC guarantee that the verdict will be very high profile, and it could well cast a shadow over the many other more recently filed cases where questionable lending practices are involved. It is unlikely that many other litigants will be encouraged to push their cases to trial, but the settlement potentially could influence settlement discussions in the other cases.
The way that plaintiffs might try to use the Household verdict in the current litigation can be clearly discerned in the statement from Patrick Coughlin, whose firm Coughlin Stoia Geller Rudman & Robbins represented the plaintiffs in the Household case. Coughlin states that “The jury’s verdict is a victory for the million of Americans suffering as a result of deceptive predatory lending practices and a victory for all investors fighting for greater corporate transparency, honesty and integrity. “
Andrew Longstreth of AmLaw Daily has a May 7, 2009 article about the Household verdict, here.
Securities Litigation Update: On Friday May 8, 2009, I will be participating in a webinar sponsored by Advisen in which Advisen’s finding regarding 1Q09 securities lawsuit filings will be discussed. The hour-long webinar, which is free, will begin at Noon EDT. Registration for the webinar is available here. Advisen’s report on first quarter filings can be accessed here.