The March 2008 collapse of Bear Stearns was, in the words of Southern District of New York Judge Robert Sweet, “an early and major event in the turmoil that has affected the financial markets and the national and world economies.” The securities class action litigation that followed the company’s collapse was among the highest profile of the cases that arose in the wake of the subprime meltdown and credit crisis.
The parties to the Bear Stearns securities litigation have now agreed to settle the case for $275 million, subject to court approval. The parties’ June 6, 2012 settlement stipulation, attached to the affidavit of plaintiffs’ counsel, can be found here. The parties’ motion for preliminary approval of the settlement can be found here.
As detailed here, the plaintiffs first sued Bear Stearns and certain of its directors and officers shortly after its March 2008 collapse and the company’s eleventh hour acquisition by J.P. Morgan Chase.
In their massive consolidated amended complaint (here) , the securities class action plaintiffs allege that in a series of statements during the class period, the defendants made material misrepresentations or omissions with regard to the company’s exposure to subprime mortgages; with respect to the performance of and valuations in connection with one of its hedge funds; with respect to the company’s liquidity; with respect to the company’s risk management and valuation practices. The company is alleged to have inflated its reported financial results and financial condition, among other things due to use of inappropriate models to value the company’s subprime-mortgage related assets. Deloitte & Touche, LLP, the company’s outside auditor, is alleged to have knowingly and recklessly offered materially misleading opinions about the company’s accuracy.
As detailed in greater length here, on January 19, 2011, in a gigantic 398-page opinion, Judge Sweet denied the defendants’ motion to dismiss the securities class action lawsuit. He did however grant defendants’ motions to dismiss the related shareholders’ derivative lawsuit and ERISA class action lawsuits.
On June 6, 2012, the parties to the Bear Stearns securities litigation filed their settlement papers with the court, in which they advised the court that they had agreed to settle the case for $275 million, following mediation. The parties to the settlement include Bear Stearns and seven former Bear Stearns directors and officers (including the former Bear Stearns CEO, Jimmy Cayne). However, the list of defendants to be released by the settlement does not include Deloitte & Touche LLP.
The Settlement Stipulation provides that Bear Stearns “shall pay, or cause to be paid” the $275 million settlement amount into escrow within a specified time of preliminary settlement approval. The settlement papers do not disclose whether any portion of the settlement amount is to be paid by insurance. However, the released parties include, among others, the defendants’ “insurers.”
There may well have been an insurance component of or contribution to this settlement, but unlike the $90 million settlement of the Lehman Brothers D&O lawsuit (about which refer here), the settlement was not dependent exclusively on dwindling D&O insurance proceeds. Bear Stearns may have collapsed, but it was acquired by J.P. Morgan Chase, so there was a solvent entity to contribute to the settlement. It is entirely possible that JP Morgan anticipated the possibility of this development at the time it acquired Bear Stearns; according to press reports at the time, in connection with the acquisition, JP Morgan set aside $6 billion to cover anticipated litigation costs (among other things).
There is nothing in the settlement papers to suggest that any of the individual defendants is being called upon to contribute in any way toward the settlement. The settlement stipulation provides only that the $275 million settlement proceeds will be paid by or on behalf of Bear Stearns.
The Bear Stearns settlement is one of the largest securities lawsuit settlements as part of the subprime and credit crisis-related litigation wave. It is by far the largest of the settlements so far in 2012, and overall, is exceeded only by the Wachovia Preferred Securities Settlement ($627 million, about which refer here); the Countrywide Settlement ($624 million, refer here); the Lehman Brothers Offering Underwriters’ settlement ($417 million, refer here); the Merrill Lynch Securities Settlement ($425 million, refer here); and the Merrill Lynch Mortgage Backed Securities Settlement ($315 million, refer here).
In any event, I have added the Bear Stearns settlement to my list of subprime and credit crisis-related case lawsuit resolutions, which can be accessed here.
SEC Awash in Whistleblower Reports: Since the enactment of the Dodd-Frank Act, which provided for rich whistleblower bounties under certain circumstances, there has been a great deal of anticipation that the provisions would lead to a flood of whistleblower reports. Indeed, the SEC’s early reports were that there had been a significant influx of whistleblower reports.
According to recent reports, the SEC is now awash in whistleblower reports. According to a June 5, 2012 Law 360 article entitled “SEC Enforcement Division Buries in Whistleblower Tips” (here, subscription required), the SEC is receiving an average of seven reports per day and the agency is “struggling to keep up.”
Even though only “two to three tips submitted per day are worth investigating,” according to an SEC source quoted in the article, the SEC may not have sufficient staff to investigate all of the reports. According to the article, “the SEC is trying to triage the tips it gets as best it can, making sure the best leads get sent to the enforcement division for investigation.”
Ironically, this surge of reports has developed even though the SEC is yet to make its first award under the Dodd-Frank whistleblower bounty provisions. According to one commentator quoted in the article, “This is going to explode once the first award comes down. The program is only going to get bigger and bigger.”