On November 27, 2013, the parties to the consolidated Lehman Brothers securities litigation filed with the court a stipulation of settlement pertaining to the securities class action lawsuit brought by Lehman investors against the bankrupt company’s former auditors, Ernst & Young. The accounting firm has agreed to settle the investors’ claims for a payment of $99 million. A copy of the parties’ November 27, 2013 stipulation of settlement can be found here. A November 28, 2013 Bloomberg article about the settlement can be found here. The settlement is subject to court approval.


Lehman’s spectacular September 2008 collapse was one of the central events in the global financial crisis. In the wake of the company’s fall, investors filed a series of securities class action lawsuits against the company’s former directors and officers; offering underwriters; and former auditor. Background regarding the litigation, which was consolidated before Southern District of New York Judge Lewis Kaplan, can be found here and here.


Although there were numerous defendants named in the consolidated securities litigation, investors had specifically targeted the company’s former auditors. In part this was a result of the scathing March 11, 2010 report of Anton Valukas, the bankruptcy examiner, who concluded that the company had engaged in “balance sheet manipulation.”  (Background regarding the Lehman bankruptcy examiner’s report can be found here.) Among other things, his report detailed the company’s use of a device known as Repo 105 to manage its balance sheet. The bankruptcy examiner found that the company’s auditors were aware of but did not question the company’s use of Repo 105. His report also concluded that there were “colorable claims” against E&Y on the grounds that it “did not meet professional standards” for its “failure to question and challenge improper or inadequate disclosure.”


In their consolidated Third Amended Complaint, which was filed on April 23, 2010 (and which can be found here), the plaintiffs alleged that E&Y had falsely certified Lehman’s 2007 financial statements; falsely conducted represented that it had conducted its audits in accordance with Generally Accepted Accounting Standards; and falsely represented that Lehman’s interim financial statements during the class period required no material modification to confirm to GAAP.


On September 8, 2011, Judge Kaplan entered an order dismissing all of the claims the plaintiffs had asserted against E&Y under the Securities Act and with respect to all Exchange Act claims against E&Y based on purchases of Lehman stock prior to July 10, 2008. However, Judge Kaplan denied E&Y’s dismissal motion with respect to Exchange Act claims based upon purchases of Lehman stock after July 10, 2008, through September 15, 2008.


On November 27, 2013, the parties filed a stipulation of settlement reflecting E&Y’s agreement settle the claims against the firm based on the accounting firm’s agreement to pay $99 million. The settlement papers reflect that the plaintiffs’ attorneys’ intent to seek attorneys’ fees of $29.7 million, as well an amount not to exceed $5 million plus interest in reimbursement of litigation expenses.


The E&Y settlement is the latest in a series of settlements in the consolidated Lehman Brothers securities litigation. As reflected here, the parties had previously agreed to settle the claims against the former Lehman Brothers directors and officers for $90 million. The parties had also agreed to two separate settlements with the company’s offering underwriters; as reflected here, the first of these settlements was for $417 million, and, as reflected here, the second of these settlements was for $9.018 million. The parties had also agreed to a separate $120 million settlement with UBS on behalf of certain Lehman structured products investors, as reflected here.


With the addition of the E&Y settlements, the settlements to date in the consolidated Lehman Brothers securities litigation now total about $735 million. These settlements, viewed in the aggregate, collectively represent the second largest settlement amounts in any of the subprime and credit crisis related securities lawsuits, exceeded only by the massive $2.43 billion BofA/Merrill Lynch merger securities suit settlement (about which refer here). The $735 million in settlements in the consolidated Lehman Brothers securities litigation exceeds the next closest subprime and credit crisis-related securities suit settlement, the $730 million settlement in the Citigroup Bondholders settlement (about which refer here).


The $99 million E&Y settlement in the consolidated Lehman Brothers securities litigation is not the first instance in which auditors have contributed significantly toward the settlement of a credit crisis related securities suit, but it may be the largest. KPMG did agree to contribute $37 million toward the $627 million Wachovia bondholders’ settlement. KPMG also agreed to contribute $24 million to the $624 million Countrywide settlement.


If Fraud on the Market is Dumped, Can Plaintiffs Still Get a Class Certified by Alleging Omissions?: As many commentators have noted (including this blog), the Supreme Court’s decision to revisit the “fraud on the market” theory in the Halliburton case could make the case the most important securities case before the Court in a generation. If the court invalidates the fraud on the market presumption, plaintiffs in misrepresentation cases under Section 10(b) of the Exchange Act would not be able to have classes certified in those cases. Without the presumption of reliance for class members, questions of individual reliance would predominate, which would bar class certification.


But as Doug Greene noted on his D&O Discourse blog (here), though this would mean very significant changes in the way securities suits are litigation, Halliburton “will not do away with securities litigation.” If the Supreme Court overturns the fraud on the market presumption in misrepresentation cases, the plaintiffs’ lawyers will adjust.


One of the ways that the plaintiffs’ lawyers will adjust is that they will change the way they plead their cases. The presumption of reliance based on the fraud on the market theory that the Supreme Court recognized in Basic v. Levinson relates to misrepresentation cases. As the Latham & Watkins law firm points out in its November 27 2013 memo about the Supreme Court’s decisions to take up the Halliburton case (here), a different presumption applies when the plaintiffs allege that investors were misled because the defendants omitted material information.


The Supreme Court has recognized that a plaintiff can’t show that it relied on an omitted fact. In 1972, in Affiliated Ute Citizens of Utah v. United States (here), the Supreme Court recognized a presumption of reliance on an omission of material fact by a party with a duty to disclosure that information. The Affiliated Ute presumption of reliance does not depend on the fraud on the market theory. The Affiliated Ute presumption could provide securities plaintiffs an alternative way to try to seek class certification, even if the Supreme Court overturns the fraud on the market presumption for misrepresentation cases. The plaintiffs could try to recast the way they plead their securities claims, based on allegations of material omissions rather than on material misrepresentations.


In a November 27, 2013 post on her On the Case blog (here), Alison Frankel takes a detailed look at the Affiliated Ute case. Among other things, Frankel notes that “it’s widely accepted that if the Supreme Court reverses Basic and does away with fraud-on-the-market reliance, class actions based on misrepresentations will be decimated. But not cases based on omissions, thanks to Affiliated Ute.” She concludes her post by noting that “if the Supreme Court undoes Basic, you can bet that … class action lawyers will be dusting off this ruling and recasting their claims.”


I don’t know what the Supreme Court will do in the Halliburton case. But I suspect we are going to be hearing a lot more about Affiliated Ute, particularly if the Halliburton case results in the setting aside of the fraud on the market presumption .


The ABA Journal Blawg 100 for 2013:Because I am concerned my first posting of this news might have been lost in the pre-Thanksgiving rush, I am repeating it again here. The news is that The D&O Diary has been selected once again for the ABA Journal’s Blawg 100, the publication’s annual list of the top 100 legal blogs. The Journal’s list of the 2013 Blawg 100 can be found here. The D&O Diary is listed in the “Niche” category.


It is an honor in and of itself to be recognized, but it is even more of an honor to have my blog associated with those of so many excellent bloggers whose work I follow and respect.


The ABA Journal is asking readers to weigh in and vote on their favorites in each of the Blawg 100’s thirteen categories. Readers can cast their ballot by visiting the Blawg 100 page on the Journal’s website, here. I would be honored if there are readers out there that would be willing to take the time to register to vote and to cast a ballot for The D&O Diary as their favorite blog in the “Niche” category. Voting ends at close of business on Dec. 20, 2013.


My very special thanks to the loyal readers who nominated me for be a part of the Blawg 100. I couldn’t maintain this blog without the tremendous reader support that I enjoy so much.