In one of the largest subprime-related securities lawsuit settlements so far, Moneygram Corporation has agreed to settle its subprime-related securities class action and accompanying derivative suit for $80 million, according to the company’s February 25, 2010 press release (here).
As reported here, the MoneyGram case represented the distinct group of subprime-related cases in which the allegation was not that the company was involved in originating or pooling subprime mortgages, but rather that the company had purchased the mortgage-backed securities as investments and misrepresented the value of these assets on its balance sheet.
MoneyGram’s global payment and money transfer business requires the company to hold, transfer or to guarantee payments of large amounts of cash. To secure these payments and guarantees, MoneyGram maintains an investment portfolio. At the beginning of the class period in January 2007, the majority of MoneyGram’s $5.85 billion portfolio was held in asset-backed securities, mortgage-backed securities and collateralized debt obligations, backed in part by residential mortgages.
By the end of the class period in January 2008, the value of the portfolio had significantly deteriorated. In order to be able to maintain adequate capital, the company entered a substantial financing transaction that forced the company to recognize over $1 billion in losses in its investment portfolio. The company’s share price declined nearly 50%, and securities litigation ensued.
The consolidated complaint alleges that during the class period, the defendants made a series of misleading statements regarding the composition, valuation and quality of the company’s investment portfolio, and about its investment valuation processes, standards and controls.
As discussed here, on May 20, 2009, District of Minnesota Judge David Doty had denied the defendants’ motion to dismiss, holding that "a reasonable person could find lead plaintiff’s fraud narrative to be cogent and at least as plausible as defendants’ opposing fraud narrative."
According to the company’s February 25 press release, the plaintiffs have agreed in principle to settle the claims for an $80 million cash payment, all but $20 million of which will be paid by the Company’s insurance coverage. The settlement of the derivative claims provides for changes to MoneyGram’s business, corporate governance and internal controls. The agreement in principle is subject both to final documentation and court approval.
The MoneyGram settlement is only one of a handful of subprime-related securities cases that have reached the settlement stage (and surprisingly, the first settlement of these kinds of cases announced since September 2009). As reflected in my running tally of subprime lawsuit settlements, which can be accessed here, there have only been ten settlements out of the over 200 subprime-related securities class action lawsuits that have been settled.
The short list of subprime-related lawsuit settlements is dominated by the massive Merrill Lynch related settlements, in which Merrill settled the subprime-related securities lawsuit for $475 million (refer here), its related bond action for $150 million (here), and the subprime-related ERISA class action for $75 million (here). These massive settlements were all reached shortly after the BofA acquisition closed and are perhaps best understood in that context.
Outside of the massive Merrill Lynch settlements, the $80 million MoneyGram settlement is the largest subprime-related securities class action settlement so far. The next largest is the $37.25 million American Home settlement, which included contributions of $8.5 million from seven offering underwriter defendants and $4.75 million from the company’s auditor.
There undoubtedly will be many more settlements to come, particularly among cases like MoneyGram where the plaintiffs have managed to survive a motion to dismiss. But in thinking about these likely future settlements, it is worth noting here that the $80 million MoneyGram settlement included a $60 million contribution from the company’s D&O insurers, which is a reminder of how massive a hit these subprime-related cases are likely to be in the aggregate to the D&O insurers – keeping in mind, too, that the $60 million settlement contribution is on top of the likely substantial defense expenses that the insurers undoubtedly incurred.
Before all is said and done, the mountain of subprime-related litigation is likely to impose an enormous amount of loss costs on the D&O insurers. I would hesitate to guess how big the aggregate total will be, but I know for sure it will be a very large number.
So How Do Public Pension Funds and Plaintiffs’ Firms Get Hooked Up?: Those who may wonder how pension funds and plaintiff’ firms get matched up will want to take a look at the article (oddly, dated March 15, 2010) by Peter Beller in Forbes entitled "Paying Public Pensions to Sue."
The article describes how plaintiffs’ firms have "created a multibillion-dollar business lining up public funds as plaintiffs to sue publicly traded corporations whose stocks don’t do well." The article focuses in particular on various conferences the law firms sponsor, in which pension fund representatives are invited to places such as New York or San Diego and feted with Broadway shows, dinners and other entertainments. The article describes the ways in which the firms are caught up in an "arms race to line up suit-happy state local and union pension funds," which has led to "all manner of wining, dining and dishing out of cash."
The article concludes by noting that "a curious irony of all this flattery of pension officials is that the ostensible purpose of securities litigation is to keep corporate managers honest."
And Speaking of Plaintiffs’ Lawyers: The February 25, 2010 Financial Times has a review (here) of a new book by Patrick Dillon and Carl Cannon about Bill Lerach, once one of the leading plaintiffs’ class action attorneys and now a convicted felon. The book, which is entitled "Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to its Knees," apparently was written with Lerach’s cooperation, and the FT review is quite favorable, noting the value of having a couple of Pulitzer-Prize winning journalists involved as authors.
Everyone here at The D&O Diary is hoping for an early opportunity to read this book, which according to the publisher’s website will be available on March 2, 2010. We hope to publish our own review of the book shortly.
And Finally: "Ten Wall Street Blogs You Need to Bookmark Now" (according to the Wall Street Journal) – find the list here.