In a development that undoubtedly will attract comment and controversy, fourteen former Lehman Brothers executives – including former Lehman Chairman and CEO Dick Fuld (pictured) --have reached an agreement to settle the consolidated securities class action litigation that has been filed against them for $90 million. In a separate development, seventeen former Lehman executives have agreed to settle the separate lawsuit brought against them by the New Jersey Treasury Department Investment Division for $8.25 million.
The entire amount of both settlements is to be funded by D&O insurance. The settlements are subject to the consent of the bankruptcy court to lift the stay in bankruptcy to allow the D&O insurers to fund the settlement, as well as to the approval of the respective courts in which the respective settled actions are pending. The executives’ motion for relief from the bankruptcy stay in connection with the equity and debtholders’ action can be found here. The executives’ motion for relief from the bankruptcy stay in connection with the New Jersey action can be found here.
Peter Lattman’s August 25, 2011 article on August 25, 2011 article on The New York Times Dealbook blog describing the motions and the settlements can be found here. Nate Raymond’s August 25, 2011 article on The Am Law Litigation Daily about the settlements can be found here.
Securities lawsuits had been filed against Lehman and certain of its directors and officers both before and after its dramatic collapse in September 2008. The cases ultimately were consolidated. On July 27, 2011, Judge Lewis Kaplan largely denied the motions to dismiss in the consolidated securities class action lawsuit, as discussed here.
At the time the first of these actions was filed against Lehman in early 2008, Lehman carried an aggregate of $250 million in D&O insurance, consisting of a $20 million primary policy and sixteen layers of excess insurance. A copy of the Lehman primary policy, which is included in the bankruptcy pleadings, can be found here. Further discussion of the details of the Lehman D&O insurance program can be found here.
Following Lehman’s bankruptcy filing, and as the securities cases and other litigated matters went forward, from time to time the parties would appear in bankruptcy court to seek relief from the stay to allow the D&O insurers to fund ongoing defense expenses. As I noted in a prior post (here) anallyzing one of the prior requests from the relief from the stay, the defense costs have been accumulating extraordinarily rapidly.
The executives’ motions for relief from the bankruptcy stay for purposes of these settlements show just how rapidly the defense expenses and other items have been eroding the limits. In their motion with respect the $90 million securities class action settlement, the executives explain that they are seeking relief from the stay with respect to the sixth through twelfth level excess insurers in Lehman’s insurance program.
Footnote 4 of the motion identifies the excess insurers involved (their policies are also attached to the motion) and also explains that the sixth level excess insurer provide coverage of $25 million in excess of $85 million, and the twelfth level excess insurer provides coverage of $20 million in excess of $180 million. (The equivalent motion with respect to the New Jersey action seeks relief with respect to the sixth and if necessary the seventh level excess insurers, so the $8.25 million New Jersey settlement is assumed to have already eroded the limit for purposes of calculating the limits available for the consolidated securities lawsuit settlement).
Taking all of this information into account, and assuming the various stays and approvals are granted, the settlements, together with prior defense expenses and other payments, will erode up to $200 million of the $250 million tower. The two settlements together total $98.25 million.
There is nothing in any of the settlement papers to suggest that the individual defendants will contribute to either of these settlements out of their own assets. The settlements do not include the other defendants in the cases; in the securities class action lawsuit, the remaining defendants include Lehman’s offering underwriters, as well as its auditor, E&Y.
Not only was the Lehman bankruptcy the largest in U.S. history, but the company’s collapse very nearly triggered a global economic catastrophe. The circumstances of its collapse have been the subject of extensive investigation and commentary. The company’s accounting prior to its collapse has also been the subject of intense scrutiny, most notably in the report of the bankruptcy examiner, who, among other things, he called the company’s quarter-end Repo 105 transactions “balance sheet manipulations,” about which refer here. Dick Fuld has become something of a poster child (or at least one of the poster children) for problems on Wall Street that contributed to the economic crisis.
Given that context, the fact that the individual defendants apparently are not going to contribute to this settlement is likely to be controversial. Many commentators have already bewailed the fact that cases of this type are settled exclusively with D&O insurance, and without any personal contribution by the alleged wrongdoers. These kinds of concerns will be even more exacerbated here, given the high profile nature of this case and the vilification that has heaped on Fuld and other Lehman executives.
I have no insight into why the settlements were structured the way they were. But I can speculate at least that a major factor driving the timing, size and structure of these settlements was the alarming erosion of the policy limits as defense expense reduced the amount of insurance available with which to try to settle these cases.
The problem the plaintiffs’ lawyers faced, which is the one that claimants always face in the insolvency context, is that the plaintiffs can always hang tough and hold out for the optimal settlement, but in the meantime the policy proceeds out of which any settlement would have to be funded are rapidly disappearing. These concerns were particularly abrupt here because of the astonishing speed at which the policy limits were disappearing. An added concern for the plaintiffs here is that if they held out too long, they ran the risk that the SEC might suddenly file an enforcement complaint against one or more Lehman executive, or the DoJ might file a criminal action. If either of those things were to have happened, the rapid depletion of policy limits would have leapt into hyperspeed.
So to those who say that the plaintiffs’ lawyer here should have demanded a settlement in which the individuals contributed out of their own assets, I say that while that type of settlement might theoretically have been more satisfying at some level, it might not have produced a better result for the class members and other aggrieved parties. Indeed, if the settlement talks had dragged on too much longer, there might soon have been no insurance left at all out of which to settle the case.
I am realistic enough to know that not everyone will find this appeal to practicality to be satisfying. There is a lot of emotion associated with the Lehman collapse, and there undoubtedly will be those who will be outraged that Fuld and others are “getting off” here without having to contribute out of their own assets. This notion precedes from a basic sentiment that these executives should be punished. From my perspective, it is the job of the SEC and the DoJ to determine who needs to be punished. If the SEC and the DoJ believe these individuals should be punished in some way, they will pursue the appropriate sort of action. The types of private civil actions that are under discussion here are meant to provide a way to compensate aggrieved parties. That is the purpose of these settlements. Whether or not they are the optimal settlements, they may have been the most economically beneficial and viable settlements available given the rapid depletion of the policy limits.
I have in any event added these settlements to my running tally of credit crisis related case resolutions, which can be accessed here.