Much happened in recent days while The D&O Diary was away on extended travel. Some of the developments were significant. What follows is a brief summary of the more significant events over the last few days.
Subprime-Related Citigroup Bondholders Action Settles for $730 Million: In what is the second-largest settlement of a subprime and credit crisis-related securities class action lawsuit, the parties to the Citigroup bondholders’ action have agreed to settle the case for $730 million. The settlement is subject to court approval. A copy of the plaintiffs’ lawyers’ March 18, 2013 memorandum regarding the settlement can be found here. The plaintiffs’ lawyers’ March 18, 2013 press release regarding the settlement can be found here.
The settlement relates to a series of suits consolidated in the Southern District of New York and alleging that in connection with approximately 48 bond offerings between May 2006 and August 2008, Citigroup had misrepresented its exposure to subprime mortgages and related bonds as well as to subprime-related collateralized debt obligations. The consolidated litigation is described in greater detail here. As discussed here, on July 12, 2010, Southern District of New York Judge Sidney Stein substantially denied the defendants’ motion to dismiss the bondholders’ action.
The defendants in the consolidated litigation included not only Citigroup itself but also 28 current or former Citigroup directors and officers and nearly eighty investment banks that served as offering underwriters in the bond offerings. According to the parties’ March 18, 2013 stipulation of settlement (here), the settlement appears to resolve all of the claims against all of the defendants. However, the only payment mentioned in the stipulation of settlement is Citigroup’s agreement to pay the full $730 million settlement amount into escrow within the specified time following court approval. Of course, there may have been other arrangements between and among the other defendants with regard to the settlement amount.
As massive as this $730 million settlement is, there is a note of defensiveness about the settlement in the plaintiffs’ lawyers’ memorandum. The memo take great pains to emphasize that while the case was pending, the Second Circuit entered its opinion in Fait v. Regions Financial Corp. (about which refer here), in which the appellate court held that securities suit defendants cannot be held liable for statements of “opinion” unless the claimants can plead and prove that the defendants did not actually hold the stated opinions. The plaintiffs’ lawyers underscore the fact that the defendants would likely argue in motions before the court that many of the valuation and reserve misstatements on which the Citigroup bondholder claimants rely are mere statements of opinion that are not actionable in the absence of allegations that the defendants did not actually believe the opinions. In their discussion of this issue as well as in other features of their memorandum, the plaintiffs’ lawyers — by highlighting the vulnerabilities of their case — appear to be anticipating criticism that the settlement is not even larger than it is. (As an aside, it will be interesting to see if in connection with this settlement, as there have been with several of the large subprime and credit crisis securities suits, a number of significant opt-outs from the settlement class.)
Just the same, among settlements of subprime and credit crisis-related securities class action lawsuits, this latest settlement is exceeded only by the massive $2.43 billion BofA/Merrill Lynch merger settlement, which is discussed in greater detail here. According to the plaintiffs’ lawyers’ memorandum regarding the latest settlement, the $730 million bondholders’ settlement, if approved by the court, would also represent the second largest recovery in a securities class action lawsuits brought on behalf of purchasers of debt securities, as well as one of the three largest recoveries in a case that does not involve a financial restatement. The settlement also ranks among the fifteen largest recoveries in any securities class action lawsuit.
The $730 million Citigroup bondholders’ action settlement also significantly exceeds the $590 million settlement in the separate subprime-related Citigroup shareholders’ action, about which refer here. I have updated my running tally of the subprime and credit crisis case resolutions to reflect this latest settlement. The tally can be accessed here. Here is an updated list of the ten largest subprime and credit crisis-related securities class action lawsuit settlements.
BofA/Merrill Lynch Merger
Citigroup Bondholders’ Action
Wells Fargo/Wachovia Bondholders Action
Citigroup Shareholders’ Action
Lehman Brothers (including offering underwriters’ settlement)
Merrill Lynch Mortgage-Backed Securities
FDIC Failed Bank Litigation Update: As the FDIC has been doing on a monthly basis as the current banking crisis has evolved, the FDIC has updated the page on its website describing the failed bank litigation that the agency has been filing. In the latest update, as of March 19, 2013, the agency states that is has now authorized litigation against the former directors and officers of 106 failed banks (up from 102 as of February 15, 2013).
The agency has also now filed a total of 53 failed bank lawsuits against former directors and officers of 52 failed banks (up from 51 lawsuits involving 50 failed institutions as of February 15, 2013). The number of approved lawsuits (which is inclusive of the lawsuits that have been filed) suggests that there may be as many of 53 additional as yet unfiled lawsuits waiting to be filed – however, at least some of these lawsuits may be resolved though pre-lawsuit negotiation.
With respect to the two lawsuits filed since the FDIC last updated its website, one, involving the failed Carson River Community Bank, was previously mentioned in a post earlier this month (here, refer to the fifth item in the post). The other new lawsuit involves the failed InBank of Oak Forest, Illinois, which failed on September 4, 2009. A copy of the FDIC’s complaint can be found here. The fact that the FDIC filed the complaint so far past the third anniversary of the bank’s closure suggests that the FDIC”s claims as receiver of the failed bank may have been the subject of a tolling agreement.
In addition to the FDIC’s website page regarding failed bank litigation, the FDIC has also significantly updated the page the agency recently added to its site in which the agency has indicated that it will provide information regarding its settlement of failed bank claims. As discussed in a recent post (here), the FDIC has been the target of media scrutiny for its failure to disclose claim settlements. In response to this media attention, the FDIC has added the settlements page to its website; at the time I reviewed the agency’s new website page a few days ago, the agency had posted only a few settlement agreements and indicated that it hoped that by March 31, 2013 the page would more completely reflect all settlements.
The agency has now substantially updated the settlements page and added links to numerous additional settlement agreements, including links to several settlement agreements that had not previously been publicly available. Just to cite a couple of examples of the previously undisclosed settlement agreements, readers may recall that December 2012 analysis of the FDIC’s failed bank litigation, Cornerstone Research included a review of failed bank lawsuit settlements (refer here, see page 11). In its list of failed bank lawsuit settlements, Cornerstone Research identified two cases – involving Heritage Community Bank and Corn Belt Bank and Trust Company – for which the settlement amounts had not been reported.
In the latest update to the new settlement agreements page on its website, the FDIC has now provided copies of the settlement agreements in these two cases for which the settlement details previously had not been reported.
As now reflected on the FDIC’s website, the August 2012 settlement agreement in the Heritage Community Bank failed bank lawsuit, which can be found here, shows that the case settled for $3.15 million, all of which apparently was to be funded by D&O Insurance.
The April 2012 settlement agreement in the Corn Belt Bank and Trust Company case, which can be found here, shows that the case settled for a total payment of $700,000, $266,000 of which is to be paid by the individual defendants and the remainder of which is to be paid by the failed bank’s D&O insurer (the insurer is a party to the settlement agreement).
The availability of this previously unavailable settlement information is very interesting. Given the volume of new information that the agency has added to the site – the agency has added information relating to settlements in connection with 29 different failed banks in 13 different states — I have not yet had a chance to work through it all. It is however clear that the agency’s new proactive willingness to provide settlement information will prove to be a rich source of information as the agency resolves the cases and claims that it has asserted as part of the current bank failure wave.
Freddie Mac Files Libor Scandal Suit Against Rate Setting Banks, British Bankers Association: In the wake of the three regulatory settlements that have arisen so far in the wake of the Libor-scandal, the government-sponsored mortgage finance company has now gotten into the act and filed its own lawsuit seeking recovery of billions of dollars of damages it alleges it sustained as a result of the manipulation of the benchmark rates. A copy of Freddie Mac’s complaint, which the agency filed on March 18, 2013 in the Eastern District of Virginia, can be found here.
There are a number of interesting things about this lawsuit. First of all, the only plaintiff in the case is Freddie Mac. The complaint is not asserted on behalf of its larger sibling agency, Fannie Mae, even though the body responsible for oversight of the two mortgage-finance entities had recommended that both agencies pursue claims based on an estimated more than $3 billion in Libor related damages. Undoubtedly Fannie Mae will be filing its own action shortly.
A second interesting thing about the lawsuit has to do with the defendants. Freddie Mac has not only named the Libor rate-setting banks themselves, but it has also named as a defendant the British Bankers Association itself, which acted as a clearinghouse for the rate-setting banks’ borrowing information, which served as the bases for the Libor benchmarks. As Wayne State University Law School Professor Peter Henning points out in his March 20, 2013 post on the Dealbook blog (here), Freddie Mac has alleged that the organization was aware of the manipulation and did nothing too stop it. As Henning notes, “the fact that one is aware of misconduct by others, and even that their services are being used, is usually not enough to show participation in a conspiracy.” Henning adds that there may also be an issue whether or not a U.S. court even has jurisdiction over the BBA.
Third, in addition to an antitrust claim, Freddie Mac has raised some additional allegations against certain of the bank defendants. Unlike many of the claimants in the various Libor scandal lawsuits, Freddie Mac had direct contractual relations with several of the rate-setting banks. Freddie Mac directly purchased swaps from several of the bank. The complaint alleges that when the banks pushed down Libor, the agency received lower payments from the swaps. Freddie Mac asserts separate breach of contract actions against eight of the banks (including Bof A, Citigroup, Deutsche Bank and UBS), alleging that the manipulation violated the terms of the agency’s agreements with the banks.
Fourth, there is the court in which Freddie Mac filed the suit. The Eastern District of Virginia is notorious as the so-called “Rocket Docket.” As noted in the March 18, 2013 memorandum from the Hunton & Williams law firm (here, registration required), the Eastern District of Virginia moves with “lightening speed,” adding that “the average time from filing a civil case to trial is approximately 11 months, with 2012 constituting the fastest trial docket in the country for the fifth straight year.” Continuances are virtually unheard of. In other words, even though Freddie Mac’s case has only just been filed, it could accelerate past the other Libor cases that have been pending elsewhere for some time – that is, if Freddie Mac can keep the case in the E.D.Va.
The defendants undoubtedly will try to have the case transferred to the Southern District of New York and added to the consolidated litigation pending before Judge Naomi Buchwald. Freddie Mac will undoubtedly argue that its distinct breach of contract claims, as well as its unique status as a government-sponsored entity, militate against transfer and consolidation.
In a field of interesting Libor-related claims, this new case will be particularly interesting to watch. It will also be interesting to see if Fannie Mae jumps into the fray as well (seems likely to me).
Supreme Court Declines Cert in Goldman Sachs Subprime Suit: As I have noted in numerous blog posts, the Supreme Court has shown a significant propensity in recent years to take up securities cases, a propensity that has it turn led to a series of significant High Court decisions that have had a profound impact on securities litigation. However, the Court can have also a significant impact when it chooses not to act as well as when it chooses to get involved. A recent decision to deny a petition for a writ of certiorari arguably falls into the category of cases where the Court’s failure to act has great significance.
As I noted in a blog post at the time (here), in September 2012, the Second Circuit handed plaintiffs in subprime and credit crisis-related securities suits a significant victory on the issue of standing in a case involving Goldman Sachs.
The background on the decision has to do with the fact that many of the toxic mortgage-backed securities that were a key part of the subprime mortgage meltdown were sold in multiple separate offerings based on a single shelf registration statement but separate prospectuses. Each separate offering included multiple securities at varying tranches of seniority and subordination. In the litigation following the subprime meltdown, defendants in suits bought by mortgage-backed securities investors initially had considerable success in arguing that the claimants have standing only to assert claims only with respect to the specific offerings and tranches in which the claimants themselves had invested, and lacked standing to assert class claims on behalf of investors who purchased securities in other offerings and tranches.
In a September 6, 2012 opinion (here), the Second Circuit ruled — in a case involving mortgage-backed securities issued by a unit of Goldman Sachs — that the investor plaintiff had standing to assert claims relating not only to the specific offerings in which the plaintiff invested but also the claims of investors in other related offerings, to the extent that the securities in the other offerings were backed by mortgages originated by the same lenders that originated the mortgages backing the plaintiff’s securities. The Second Circuit also rejected the argument that the plaintiff lacked standing to assert claims on behalf of investors in the different tranches.
The Second Circuit’s recognition of the plaintiffs’ standing to assert claims even related to securities that the plaintiffs’ themselves had not purchased eliminated a significant tool in the defendants’ arsenal to try to narrow the claims involved in any given case. The elimination of this tool presented the prospect that securities defendants could face significantly broader claims than they might have faced had they been able to narrow the case.
In other words, Goldman was not the only securities litigation defendant that was interested in seeing if the Supreme Court might take up its case and review the Second Circuit’s holding; many defendants were interested in seeing if the Supreme Court might overturn the Second Circuit’s ruling. In its papers filed with the Supreme Court, Goldman had argued that letting the Second Circuit decision stand "will effectively increase by tens of billions of dollars the potential liability that financial institutions face in this and similar class actions."
However, as reflected in the Supreme Court’s docket sheet for the Goldman case, on March 18, 2013, the Court denied Goldman’s petition for a writ of certiorari. The Court’s refusal to take up the case not only means that the Second Circuit’s opinion stands in that Circuit; it also could be argued to suggest that the Court supported the Second Circuit’s analysis, an implication that plaintiffs might try to use to suggest that the Second Circuit’s analysis should be applied even where these other circuits (for example the First and Ninth Circuits) arguably have case law recognizing the narrower standing requirements that defendants would prefer. At a minimum, the broader standing analysis that the Second Circuit recognized in the Goldman decision now unquestionably applies in the Second Circuit itself, where so many of these cases are pending.
The Goldman bondholders claim will now go forward. The parties to the case undoubtedly will find the $730 million settlement in the Citigroup bondholders’ case of great interest.