On July 30, 2009, Eastern District of New York Judge Thomas C. Platt entered an order (here) preliminarily approving the settlement of the securities class action lawsuit that had been filed certain directors and officers of American Home Mortgage Investment Corporation. The total value of the settlement is $37.25 million, which alone makes the settlement significant. However, the settlement is also significant because it appears to be the first subprime-related securities lawsuit settlement to which the target company’s auditors and offering underwriters contributed toward settlement.


As reflected in greater detail here, plaintiffs first initiated the lawsuits in July 2007. Because American Home itself had filed a voluntary petition for bankruptcy under Chapter 11, the company itself was not named as a defendant. In addition to the individual directors and officers, the defendants named in the case included the company’s outside auditor, Deloitte & Touche LLP, as well the investment banks that had acted as offering underwriters in connection with the company’s August 9, 2005 and April 30, 2007 public offering of its securities. Deloitte issued reports as to the company’s financial statements that were incorporated into the offering documents.


American Home had been a real estate investment trust that engaged in the investment in and origination of residential mortgage loans. The complaint (which can be found here) essentially alleged that the company was experiencing an increasing level of loan delinquencies. The complaint alleged that this was due to the company’s shift from higher quality loans to higher risk subprime loans, though the company allegedly continued to represent that it was not a subprime lender. As a result of the decline in loan quality, the company allegedly was experiencing increasing difficulties selling its loans, which compelled the company to reduce prices, reducing profits and margins. The company allegedly was also failing to write-down the value of certain loans and mortgage-backed assets in its portfolio. As a result of these developments, the plaintiffs alleged, the company was overstating its financial results.


The plaintiff filed a motion for preliminary approval of the settlement (here) on July 7, 2009. According to the document, the settlement was reached while the motions to dismiss were still pending and as the result of formal mediation as well as settlement discussions. As reflected in the document and its attachments, the $37.25 settlement is actually a reflection of three separate settlement stipulations: a settlement of $24 million with ten individual defendants; a settlement of $4.75 million with Deloitte; and a settlement of $8.5 million with the seven underwriter defendants. (The details of the settlement are summarized here, see paragraph 8.)


According to the individual defendants’ stipulation of settlement, the company’s D&O insurers (who are named in the stipulation) "agreed to pay the Settlement Amount on behalf of the Settling Defendants."


While the settlement is noteworthy in and of itself, it is significant because the settlement includes significant monetary contributions from the offering underwriters and the company’s outside auditors. So far as I am aware, this is the first subprime-related securities class action lawsuit settlement in which either offering underwriter or audit firm defendants have made a monetary contribution toward settlement. These defendants’ settlement contributions are all the more noteworthy given that the motions to dismiss in the case had not even been heard in the case.


Many of the subprime and credit crisis related securities suits name offering underwriters or audit firms as defendants. Whether or to what extent these parties will find themselves contributing toward settlement in these other cases remains to be seen. But if they are required to participate in settlements in significant amounts as was the case in the American Home suit, the overall costs of litigation for these firms could quickly mount to some truly impressive aggregate figures.


The D&O insurers’ contribution toward the individuals’ settlement is also a reminder that these cases could wind up being collectively very expensive for the D&O insurance industry. There are still only a handful of settlements but the ones have been entered so far include some sizeable settlements, and if the settlements so far are representative, there could be some huge claims payments ahead.


Even the few settlements that have been entered so far would seem to be starting to have their impact on the insurers – for example, the recent $32 million settlement in the RAIT Financial subprime-related securities case (refer here) and the recent $22 million settlement in the American Home Lenders subprime-related securities case (here) were also entirely funded by the D&O insurers. If these settlements are any indication, the industry’s overall claim loss exposure from the subprime and credit crisis-related litigation wave could be enormous.


I have in any event added the American Home settlement to my list of subprime and credit crisis-related lawsuit resolutions, which can be accessed here.