There is a reason that when class action settlements are announced, they are described as preliminary and subject to final approval – sometimes the settlements fall apart before the case is finally put to rest. That appears be what has happened with the Schwab YieldPlus subprime-related securities class action lawsuit.


As discussed here, in April 2010, the parties to the Schwab YieldPlus securities suit announced a preliminary settlement of the plaintiffs’ securities claims. At the time, the settlement did not include plaintiffs’ separate state law claims. In May 2010, Schwab announced the separate settlement of the state law claims. The total value of the agreed settlements was about $235 million.


However, in a November 8, 2010 press release (here), Charles Schwab Corporation announced that it had notified the plaintiffs in the case that it was invoking the termination provisions of the settlement agreement and withdrawing from the case.


As reflected in the November 8, 2010 notice of withdrawal that Schwab filed with the court, a copy of which can be found here, after the parties initially reached their settlements, the plaintiffs contended that the remained free to pursue certain state law claims on behalf of non-California residents. The specific claims at issue are asserted under the California Business & Professions Code Section 17200.


Schwab had contended that the form of judgment agreed upon as part of the settlement had been designed to release all claims. However, in an October 14, 2010 order (here), Northern District of California William Alsup, referring to the Section 17200 claims as "the governance claim," said that "at no time was the governance claim certified for class treatment for anyone residing out of California" and he cited language in the settlement notice that the Section 17200 claims were "not released in the settlement." He concluded that, as a result, the non-California residents’ claims "were never extinguished by the settlement," and "federal securities class members residing outside of California are free to sue under Section 17200."


In its motion to withdraw, Schwab commented that it had "agreed to a generous settlement," but only in exchange for "an end to all litigation," adding that "now that Plaintiffs have reneged on the primary consideration Schwab was to receive…Schwab has no choice but to withdraw from the joint motions for final approval."


It is hard to tell from the outside exactly what happened here – that is, whether there was some problem or misunderstanding about the way the release was put together, whether the plaintiffs somehow sandbagged the defendants, or if there was just some massive misunderstanding with respect to whether or not all of the Section 17200 claims had been settled.


The conclusion that there is no way to tell from the outside what is going on is reinforced by Judge Alsup’s October 14 order. My initial instinct was to be sympathetic with Schwab’s complaint that it had thought it was buying complete repose for its millions, but that clearly is not the conclusion that Judge Alsup reached. All in all, this is a little bit of a head-scratcher.


The one thing is clear is that as a result of Judge Alsup’s order, Schwab concluded that it had no choice except to blow up the settlement. Perhaps that will mean the case will now go forward, but of course there is always the possibility that the motion to withdraw was a form of negotiation carried out by other means.


I recently noted that it seemed as if not many of the subprime related cases were settling, even though scores of the subprime cases have survived dismissal motions. Well, now there is one fewer subprime cases. Perhaps the Schwab settlement debacle explains why so few other cases have settled – these cases are complex and the settlement efforts are tricky.


I have modified my list of subprime and credit crisis related case resolutions, which can be accessed here, to reflect Schwab’s motion to withdraw from the settlement.


Pretty Soon You’re Talking About Real Money: It just in August that the lawyers in the Lehman Brother proceedings had approached the bankruptcy court to request the release an additional $35 million from the company’s D&O insurance policies. (My post about the prior request can be found here.) The total amount of insurance that the court has now authorized, including the $35 million, is $70 million.


Now the lawyers are back. Only this time the lawyers want more. A lot more.


On October 27, 2010, the lawyers for the debtors request a fresh $90 million, which Wayne State Law Professor Peter Henning, writing on the New York Times Dealbook blog (here), interprets to mean that "the government could be closer to ending its civil and criminal investigations and moving ahead with some type of enforcement." A copy of the latest motion can be found here.


As Henning explains, Lehman had one $250 million D&O insurance tower for the period May 2007 to May 2008, and a second $250 million insurance tower for the period May 2008 to May 2009. The prior payments were made under the first of these two towers. The prior $35 million was exhausted in part by the settlement of a securities arbitration against Lehman’s former CEO, Richard Fuld. The remainder has gone to defense fees.


In their latest motion for relief from the automatic bankruptcy stay, in order to permit the payment of the $90 million, the debtors are requesting the authorization of payments from the fifth, sixth and seventh excess D&O insurers in the 2007-08 tower in the total amount of $55 million, and payments of $35 million from the primary and first level excess insurers in the D&O 2008-09 tower. According to the motion, the primary and first level excess insurers in the 2008-09 towers have "recognized coverage" for certain legal proceedings.


Assuming this request will be granted, a total of $135 million out of the $250 million total in the 2007-08 tower will have been released, and now the erosion of the second tower has begun as well. The motion does not explain why the requested amount has ramped up so rapidly from the prior request, but the implications are, as Professor Henning notes, serious. At the time of the prior request I suggested that the lawyers just might succeed in depleting the entire $250 million of the 2007-08 tower. At this rate they may get there even sooner than I previously supposed. And now they are working on the second tower as well. The fees clearly are accumulating more rapidly than the $5 million a month previously supposed.


My prior post has an detailed review of the implications of these massive costs.


Special thanks to Professor Henning for providing me with a link to his blog post.