The parties to the consolidated class action litigation arising out of the collapse of Washington Mutual – the largest bank failure in U.S. history -- have agreed to settle the suit for a combined $208.5 million. The settlement, which has a number of interesting features, actually consists of three separate agreements: one agreement to pay $105 on behalf of the individual defendants; another to pay $85 million on behalf of the underwriter defendants; and a third to pay $18.5 million on behalf of the company’s auditor, Deloitte & Touche. The settlement is subject to court approvals.
As reflected here, the first of the consolidated lawsuits was first filed in November 2007. Additional suits followed as the subprime meltdown continued to unfold during 2007 and 2008. Further suits followed WaMu’s September 2008 collapse (about which refer here).
The cases were consolidated in the Western District of Washington before Judge Marsh Pechman. The plaintiffs’ sprawling complaint asserted numerous allegations, but the gist is that the defendants: "(1) deliberately and secretly decreased the efficacy of WaMu’s risk management policies; (2) corrupted WaMu’s appraisal process; (3) abandoned appropriate underwriting standards; and (4) misrepresented both WaMus’ financial results and internal controls." Judge Pechman initially granted the defendants’ motions to dismiss (refer here), but she denied the defendants’ renewed motion to dismiss the plaintiffs’ amended consolidated complaints (refer here).
Following class certification as well as additional procedural wrangling well-detailed in Alison Frankel’s July 1, 2011 Thompson Reuters News & Insight article about the settlement (here) , the parties entered mediation, which ultimately resulted in the settlement
The settlement stipulation entered on behalf of the individual director and officer defendants (the “D&O settlement agreement”) can be found here; the underwriters’ settlement stipulation can be found here; and the Deloitte & Touche settlement stipulation can be found here.
The $105 million D&O settlement on behalf of seven officer defendants and 13 outside director defendants apparently will be funded entirely by D&O insurance. The bank’s D&O insurers for the May 1, 2007 to May 8, 2008 policy period are identified in the definition of the term “Directors’ and Officers’ Liability Insurance Policies” on pages 14-15 of the D&O settlement agreement. The bank’s 2007-2008 insurance program apparently consisted of $150 million of traditional D&O insurance (arranged in eleven layers), with an additional $100 million of Excess Side A DIC insurance (arranged in six layers). Given the bank’s holding company’s bankruptcy, presumably the full $250 was at least theoretically available for defense and settlement of claims against the insured persons.
The parties released in the D&O settlement agreement include the “Contributing Insurers” who are not themselves identified by name, but are described as those insurers that have exhausted their respective limits of liability in payment of defense expense, that were contributing their limits of liability in connection with this settlement; or that had exhausted their limit in settlement of other claims against the insured persons. The settlement agreement does not clarify whether the D&O settlement will exhaust the D&O limits that remain after payment of the individuals’ defense expenses.
The question whether or not the insurance is exhausted is a potentially important issue, as numerous other claims remain pending against various of the WaMu directors and officers, most notably the claim that the FDIC filed against three former WaMu offices and their spouses in March 2011 (refer here). As far as I could tell, the D&O settlement stipulation in the consolidate securities suit does not mention the pending FDIC action, which reportedly is moving toward settlement itself. According to news reports about the efforts to settle the FDIC action, the prospective settlement requires the approval of third parties, which could possibly refer to the D&O insurers.
There is no doubt that the FDIC and the shareholder plaintiffs are potentially in competition for scarce D&O insurance funds. It is probably not a coincidence that, at least according to news reports, the parties to the consolidated securities suit first reached their settlement in principle to resolve the securities suit within a week of the filing of the FDIC action.
If the March 2011 FDIC suit “relates back” to the policy period of the bank’s 2007-2008 program, the funds remaining for any FDIC settlement would appear to be substantially depleted by the consolidated securities suit settlement, as well as by defense expenses. On the other hand, if the FDIC suit triggered a later or a different insurance program, there may well be additional insurance funds available. Of course, the individual defendants to the FDIC action may also be compelled to contribute toward any FDIC settlement out of their own funds.
In any event, the aggregate WaMu settlement is the fourth largest securities lawsuit settlement so far as part of the wave of securities litigation that followed the subprime meltdown and the credit crisis. As reflected in my table of the credit crisis lawsuit resolutions, which can be accessed here, the only three larger settlements are the over $600 million Countrywide settlement (refer here), the $475 million Merrill Lynch settlement (refer here), and the Charles Schwab settlement, which as revised amounted to $235 million.The three larger settlements all involve either solvent companies or at least sovlent successors in interest. Due to WaMu's bankruptcy, its settlement was restricted by the amount of available insurance.
According to Alison Frankel’s Thompson Reuters article linked above, the $85 million underwriters’ settlement is the largest offering underwriter settlement of Section 11 claims since the $6 billion WorldCom settlement. According to a July 1, 2011 Seattle Times article (here), the WaMu settlement is the largest securities class action settlement ever in the Western District of Washington – although, according to the article, the WaMu investors stand to realize no more than 5 cents on the dollar through the settlement. The Seattle Times article also reports that the under the settlement agreements, the plaintiffs’ lawyers are to receive fees of $46.9 million and expense reimbursement of $5.8 million.
Special thanks to the several readers who sent me links about the WaMu settlement.
Yet Another Failed Bank Securities Lawsuit Settlement: On June 27, 2011, lead plaintiffs in the securities class action lawsuit filed in the Southern District of Florida on behalf of shareholders of the BankUnited Financial Corporation, the bankrupt holding company for the failed BankUnited FSB, filed a notice that the parties had reached an agreement to settle the case for $3 million. There are a number of interesting things about this notice and about the case in general.
First, the notice states that “the settlement of this case is part of a larger settlement that includes the FDIC and others who are not parties to this case.” The reference to the FDIC is interesting because as far as I know, the FDIC has not yet filed a civil action against BankUnited’s former directors and officers. (The FDIC’s online list of failed bank lawsuits it has filed as part of the current wave of bank failures does not list a lawsuit involving BankUnited.).
However, readers may recall my prior post (here), in which I discussed the November 5, 2009 demand letter that the FDIC had sent to BankUnited’s former directors and officers. In the letter, the FDIC presented its "demand for civil damages arising out of losses suffered as a result of wrongful acts and omissions committed by the named Directors and Officers." The letter explains that the demand for civil damages is "based on the breach of duty, failure to supervise, negligence, and/or gross negligence of the named Directors and Officers." Though the letter was nominally sent to the individual directors and officers, the message in the letter was clearly intended for the bank’s D&O liability insurance carriers.
Which brings us to the second interesting thing about the lead plaintiffs’ June 27 notice in the shareholder lawsuit. The notice specifically says that the parties’ settlement in principle is “subject to the approval of the Travelers Insurance Company, as primary directors and officers liability insurance carrier.” What makes the reference to the bank’s primary D&O insurer interesting is the combination of this reference to the insurer together with the reference to the fact that there is a larger settlement involving the FDIC.
As appears to be the case in connection with WaMu, the FDIC and the BankUnited shareholders were essentially competing with each other for the same pool of insurance dollars. In addition, defense expenses incurred were reducing the pool, and the longer the various proceedings dragged on the smaller would be the pool of available proceeds.
As discussed in my prior post about the FDIC’s demand letter, according to court filings in the bankruptcy proceedings, BankUnited carried $50 million in directors’ and officers’ liability insurance, arranged in four layers. The FDIC’s motion papers in the bankruptcy proceeding explain that the FDIC sent the demand letter to the bank’s primary and first level excess D&O insurers, but not to the second and third level excess D&O insurers, because the second and third level excess insurer’s policies "contain a regulatory exclusion." In other words, the FDIC’s prospective recovery (if any) in these circumstances was even further constrained by possible constraints on the availability of the insurance to provide coverage for any claims it might bring.
These circumstance illustrate the kinds of challenges the FDIC will face as it tries to salvage losses the bank failures have caused the FDIC insurance fund. In the S&L crisis, the FDIC faced some of these same challenges – for example, there were coverage issues then, too. But during the S&L crisis, the FDIC was rarely competing with shareholder claimants for scarce D&O insurance proceeds.
Most of the financial institutions that failed during the S&L crisis were small and very few were publicly traded. By contrast, many of the failed institutions involved in the current round of bank failures are larger, quite a few are publicly traded, and the ownership of many of the privately held institutions is widely distributed. The greater spread of ownership (particularly where the shares are publicly traded) increases the likelihood that following a bank failure, shareholders might pursue their own claims, putting them – as was the case with BankUnited – in competition for scarce and dwindling D&O insurance proceeds. These circumstances clearly represent a complicating factor for the FDIC as it seeks to try to recover the losses associated with the current wave of bank failures.
I have in any event added the BankUnited settlement to my list of credit crisis-related lawsuit resolutions, which can be accessed here.
And Speaking of Failed Bank Shareholder Lawsuits: According to the June 29, 2011 Santa Rosa Press Democrat (here), shareholders of the failed Sonoma Valley Bank have filed a class action shareholder lawsuit in Sonoma County (Calif.) Superior Court against eight former director s and officers of the bank. The lawsuit accuses the defendants of mismanaging over $40 million in loans. An earlier article about the shareholders claim (here) makes it clear that the purpose of the shareholder suit is to try to recover from the bank’s $20 million D&O insurance policy.
As I said, shareholder suits against the former directors and officers of failed financial institutions are a feature of the current wave of bank failures. The news coverage about the Sonoma Valley Bank lawsuit underscores that the litigation is all about trying to snag a recovery from the insurance proceeds. And as the BankUnited example above underscores, the shareholders’ efforts in that regard put them in competition with the FDIC for scarce and dwindling D&O insurance proceeds.
There are in any event many more FDIC lawsuits yet to be filed. The FDIC’s online page describing the agency’s efforts to pursue professional liability states that as of June 14, 2011, the FDIC has authorized lawsuits against 238 directors and officers of failed banks. However, as of that date the FDIC had only actually filed a total of seven lawsuits involving only 52 directors and officers. The difference of 186 directors and officers suggests that there are many more lawsuits yet to come.
While You Were Out: In case you missed it, on Friday July 1, 2011, I published my analysis of securities class action lawsuit filing trends for the second quarter and for the first half of the year. Refer here.