In what is the largest settlements so far to arise out of the subprime meltdown-related securities class action litigation wave, and apparently the largest settlement ever of a securities suit filed solely under the Securities Act of 1933, the parties to the consolidated Wachovia Preferred Securities and Bond/Note Litigation have collectively agreed to settle the suit for a total of $627 million. The settlement is subject to court approval. The lead plaintiffs’ August 5, 2011 memorandum in support of the motion to approve the settlement can be found here, and the parties’ settlement stipulation can be found here.
The settlement amount of $627 million represents two different settlement funds: $590 million on behalf of the Wachovia defendants, including 25 former directors and officers of Wachovia, as well as 72 different financial firms that underwrote bond offerings for Wachovia between 2006 and 2008; and $37 million on behalf of Wachovia’s auditor, KPMG. According to data from Institutional Investor Services, the collective $629 million settlement, if approved, would represent the fourteenth largest securities class action settlement of all times.
As impressive as these aggregate numbers are, one ratio may be the most impressive number of all. According to the plaintiffs’ motion for settlement approval, the settlement recoveries “collectively represent roughly 30% to 50% of the reasonably recoverable total damages that Lead Bond/Notes Counsel would have been able to credibly present to a jury.” This percentage recovery represents a far higher figure than is usually the case in securities class action lawsuit settlements. (According to NERA Economic Consulting’s Mid-Year 2011 Securities Litigation Report, the average percentage of investor losses recovered in 2010 securities class action settlements was 2.4%, and only 1% for 2011 settlements through June 30, 2011.)
The plaintiffs’ claims related to the financial disintegration that Wachovia experience between its 2006 purchase of Golden West Financial Corporation and Wells Fargo’s 2008 acquisition of Wachovia. Folloing Wachovia’s collapse, securities litigation ensured, filed, on the one hand on behalf of Wachovia’s shareholders (about which refer here) and on the other hand on behalf of Wachovia’s bond and note holders (about which refer here).
In their May 2010 amended consolidated complaint, the lead bond/note plaintiffs alleged that in offering materials related to various Wachovia bond and note offerings, the defendants misrepresented the nature and quality of Wachovia’s mortgage loan portfolio and made material misstatements regarding the risk profile and quality of the $120 billion pick-a-pay adjustable rate residential mortgage portfolio that Wachovia acquired in the Golden West acquisition.
In a lengthy and detailed March 31, 2011 order (about which refer here), Southern District of New York Judge Richard Sullivan granted the defendants' motions to dismiss the equity securities actions, but he denied the motions to dismiss the bondholders' action, other than with respect to certain bond offerings in which the plaintiffs had not actually purchased any securities.
In granting the motions to dismiss the equity securities plaintiffs’ ’34 Act claims, Judge Sullivan held that the plaintiffs had not sufficiently alleged scienter. Judge Sullivan concluded that the “more compelling inference” is that “Defendants simply did not anticipate the full extent of the mortgage crisis and the resulting implications for the Pick-A-Pay loan portfolio. Although a colossal blunder with grave consequences for many, such a failure is simply not enough to support a claim for securities fraud.” He added that “bad judgment and poor management are not fraud, even when they lead to the demise of a once venerable financial institution.”
In concluding that the bondholders’ allegations were sufficient when the equity securities plaintiffs’ allegations were not, Judge Sullivan found that the bondholder plaintiffs had adequately alleged misrepresentation in the relevant offering documents with respect to loan to value ratios maintained in the mortgage portfolio and with respect to the alleged manipulation of the appraisal process to produce inflated appraisal values.
As I noted at the outset, the Wachovia bondholders’ settlement is the largest securities class action lawsuit settlement so far as part of the subprime and credit crisis-related litigation wave. The $627 collective million settlement amount is slightly larger than the $624 million settlement in the Countrywide case. Interestingly, both the Countrywide and Wachovia settlements included substantial settlement contributions from KPMG -- $37 million in the Wachovia case and $24 million in the Countrywide case. My running tally of the subprime and credit crisis-related settlements can be accessed here.
The settlement will now go before Judge Sullivan for approval. The settlement itself does not include any agreement or understanding with respect to the plaintiffs’ attorneys fees, but the settlement papers indicate that the lead plaintiffs’ counsel intends to seek court approval of a fee recovery representing 17.5% of the collective settlement amount – that is, roughly $110 million. (By way of comparison, the fee award approved for lead plaintiffs in the Countywide case was $46.4 million, although I am sure the Wachovia bondholders’ counsel could explain important differences that would make this comparison irrelevant).
The settlement papers do not reveal whether or not any portion of the Wachovia bondholders’ settlement is to be funded by insurance, although the released Wachovia parties and the released KPMG parties identified in the settlement stipulation in both cases include the respective entities’ “insurers.” In addition the settlement stipulation funding provisions specify that the Wachovia defendants and the KPMG defendants respectively are obliged to pay “or to cause to be paid” the specified amounts into the escrow account within the specified time.
With the addition of the massive Wachovia bondholders’ settlement, the now 26 securities class action lawsuit settlements so far arising out of the subprime and credit crisis-related litigation wave total over $3.1 billion. With scores of cases still pending, the implications for aggregate amount for which all of these cases ultimately will be settled are truly staggering. The interesting thing is that the Wachovia bondholders’ case was not really on the radar screen as one of the big ones out there (compared, say, to the Citigroup, Lehman Brothers or BofA/Merrill Lynch merger cases). The fact that a below the radar case can result in a settlement of this magnitude is an arresting development, particularly in view of the fact that many of the cases that remain pending are, like this one, filed under the Securities Act of 1933.
As impressive as the amount of the Wachovia bondholders’ settlement is, the most ominous aspects of the settlement for other defendants and their insurers is the percentage of investor loss that the settlement represents. If this settlement percentage winds up becoming a point of reference, it could have very serious consequences in connection with attempts to settle the remaining cases.
One thing about this settlement is that it does seem to suggest that Wachovia’s purchase of Golden West is a serious candidate for the title of worst deal leading into or as part of the credit crisis-related financial transactions. There is a lot of competition in the worst transaction category, including Bank of America’s purchase of Countrywide. But there is no doubt that the Golden West dealis one of the real stinkers.
Speaking of Wells Fargo, the litigation consequences for the bank of the mortgage meltdown are becoming rather breathtaking. The Wachovia defendants’ $590 contribution to this settlement, which presumably is being funded in substantial part if not in whole by Wells Fargo, comes closely on the heels of the recently announced $125 million Wells Fargo mortgage backed securities case (about which refer here)
There were a number of interesting items about this settlement out in the blogosphere. Alison Frankel has a nice August 5, 2011 piece on Thomson Reuters News & Insight (here) about the Bernstein LItowitz firm, which is one of the co-lead plaintiffs’ firms in the Wachovia bondholders’ case. Susan Beck’s August 5, 2011 write-up about settlement for the AmLaw Litigation Daily can be found here, and Luke Green’s August 5, 2011 post about the settlement on the ISS Securities Litigation Insight blog can be found here.
Special thanks to the Bernstein Litowitz firm for providing me with links to the settlement papers.
Dismissal Denied in State Street Subprime Securities Suit: In an August 3, 2011 order (here) in a securities suit against State Street Corporation and involving in part subprime mortgage-related allegations, District of Massachusetts Judge Nancy Gertner denied the defendants’ motion to dismiss.
The case, which involves consolidated securities and ERISA class actions, involves allegations that the investors deceived investors in two ways: first that State Street impermissibly charged its clients different exchange rates than the one the bank actually used to execute foreign exchange (“FX”) trades for clients; and that State Street misled investors in the fall of 2008 with statements that debt securities in its investment portfolio and in four specific off-balance sheet commercial paper conduits – collateralized in part by mortgage-backed securities – were of “high quality.”
In ruling that the plaintiffs’ allegations about the company’s statements regarding its debt securities were sufficient, Judge Gertner said "it is clear that some of the State Street disclosures simply failed to provide sufficient warning or detail, while others actually obscured as much as they revealed."
Nate Raymond’s August 4, 2011 article in the Am Law Litigation Daily about Judge Gertner’s ruling in the State Street case can be found here.
I have added the State Street ruling to my running tally of dismissal motion rulings in the subprime related securities cases, which can be accessed here.