It seems that Southern District of New York Judge Jed Rakoff has been busy lately reviewing proposed settlements related to Merrill Lynch. But unlike his recent well-publicized refusal to accept the SEC’s proposed settlement of its enforcement action regarding the Merrill Lynch bonus disclosures, he did agree on August 21, 2009 to preliminarily approve the proposed $150 million settlement in the securities class action lawsuit brought on behalf of purchasers of certain Merrill Lynch bonds and preferred securities. A copy of Judge Rakoff’s August 21 order can be found here.


This settlement relates to what has come to be known as the "Bond Action," to differentiate it from the "Securities Action." As reflected here, the parties to the securities action had previously agreed to a $475 million settlement in that case (as well as a $75 million settlement of a related class action under ERISA).


As reflected at greater length here, the Bond Action was brought on behalf of those who invested in the more than $24 billion in preferred and debt securities that Merrill had issued to the public between October 2006 and May 2008.


As reflected in the plaintiffs’ Corrected Amended Complaint (here), the lead plaintiffs asserted claims on behalf of the class under Sections 11, 12 and 15 of the Securities Act. The defendants included not only Merrill itself and certain of its directors and officers, but also the offering underwriters as well.


The complaint alleged that the offering documents issued in connection with the specified securities offerings failed to "accurately disclose the existence and the value of tens of billions of dollar of complex derivative securities linked to subprime mortgages" that Merrill was carrying on its balance sheet. The complaint further alleges that these exposures "nearly wiped Merrill out by September 2008" and also "nearly toppled Merrill’s white knight acquirer," the Bank of America, and only a massive federal bailout rescued the banks’ merger.


There are several interesting things about this settlement, beyond just its size alone. The first is that the defendants entered the settlement while the motions to dismiss the amended complaint were still pending. While there may be any number of reasons for the timing of this development, it does (together with the timing of the prior Securities Action settlement) suggest that following its acquisition of Merrill, Bank of America moved quickly to clear the decks of Merrill litigation that predated the merger, even if substantial sums proved to be required to accomplish that goal.


The substantial sums of cash raises another interesting question, which is the omnipresent question for all bailed out financial institutions – is this being financed with federal bailout money? Or, to put it another way, are taxpayer funds going to pay off the plaintiffs and their lawyers in this case? (For an earlier discussion of the question whether TARP money would go to settle securities lawsuits, refer here.)


The bare face of Judge Rakoff’s order preliminarily approving the settlement does not broach any of these subjects. However, he did take a parting shot at the end of the order, by adding a handwritten paragraph just above his signature, stating that "notwithstanding any provision anywhere in this case that could otherwise be interpreted, no attorneys’ fees shall be paid or otherwise distributed until after all other authorized distributions of funds have occurred."


I have in any event added the Merrill Lynch Bond Action settlement to my register of subprime and credit crisis case resolutions, which can be accessed here.

Andrew Longstreth’s August 26, 2009 article in the American Lawyer about the settlement can be found here.

Special thanks to Adam Savett of the Securities Litigation Watch (here) for providing a copy of Judge Rakoff’s order.


And Speaking of Subprime-Related Securities Lawsuit Case Resolutions: In recent orders in separate subprime-related securities lawsuits, two separate courts granted renewed motions to dismiss after the plaintiffs had filed amended complaints seeking to address concerns noted in prior orders dismissing the plaintiffs’ initial complaints.


First, on August 4, 2009, in the Centerline Holding Company case (about which refer here), Judge Schira Scheindlin entered an order (here) granting defendants’ motion to dismiss the plaintiffs’ amended complaint. Judge Scheindlin had previously granted the defendants’ motion to dismiss plaintiffs’ initial complaint (as discussed here), but she had previously also allowed plaintiffs leave to amend. In her August 4 order, she denied plaintiffs leave to amend.


Second on August 21, 2009, Central District of California Judge John F. Walter granted the defendants’ motion to dismiss the plaintiffs’ second amended complaint in the Downey Financial case. A copy of Judge Walter’s opinion may be found here. As reflected here, Judge Walter had previously dismissed plaintiffs’ initial complaint with leave to amend. However, the dismissal entered on August 21 was with prejudice.


The Downey Financial case may be of particular interest, because Downey Financial represents one of the relatively few bank failures out of the recent wave of closures that has resulted in shareholder litigation. The plaintiffs’ lack of success in that case may suggest why plaintiffs’ lawyers’ have at least so far pursued relatively few lawsuits in connection with the bank failures. The dismissal could discourage others as well.


I have in any event added the two dismissals to my running tally of subprime and credit crisis-related securities lawsuits case dismissals and dismissal motion denials, which can be accessed here.