hsbcOn June 16, 2016, HSBC, as successor in interest to Household Finance, announced that the parties to the long-running Household International securities class action litigation had agreed to settle the case for $1.575 billion. Subject to court approval, the settlement will bring to a close an epic case that has been pending for fourteen years. The case is one of the few securities class action lawsuits ever to go to trial; the post-trial judgment of $2.46 billion in the case, which was the largest judgement ever in a securities fraud trial, was later set aside by the Seventh Circuit. The case was poised to go to trial again when the parties reached the recently announced settlement. HSBC’s June 16, 2016 press release about the settlement can be found here. The plaintiffs’ law firm’s June 16, 2016 press release about the settlement can be found here.


As detailed here, the plaintiffs first filed their lawsuit back in 2002 on behalf of all persons who acquired Household International securities between October 23, 1997 and October 11, 2002. The plaintiffs contended that during the class period, the defendants concealed that Household “was engaged in a massive predatory lending scheme.”


According to the complaint, Household “engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques.” Household also reported “false statistics” that were intended to “give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was.” The plaintiffs allege that the “defendants’ scheme” allowed them “to artificially inflate the Company’s financial and operational results.”


In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings.


The defendants in the lawsuit included Household International and its mortgage finance subsidiary, Household Financial Corporation, and Household’s former CEO and CFO, as well as certain other former officers and directors. The company’s offering underwriters were also initially named as defendants, but they were later dismissed from the case. The plaintiffs also reached a prior settlement with the company’s former auditor, Arthur Anderson.


As detailed here, trial in the case commenced on March 30, 2009. Judge Guzman bifurcated the case into two parts, with a damages phase to follow the initial liability phase.


As detailed here, on May 7, 2009, the jury returned a mixed verdict in which the jury found for the plaintiff on a number of – but not all – counts. The jurors were asked to make specific findings with respect to 40 allegedly false and misleading statements. The jury found in favor of the defendants with respect to 23 of the statements. However, the jury found in favor of the plaintiffs with respect to 17 of the statements.


The ultimate October 2013 judgment order, arriving as it did some four and a half years after the verdict, followed several post-trial defense motions to invalidate the verdict as well as defense objections to thousands of class members’ claims. The Court also considered and ruled on issues concerning the reliance of absent class members on defendants’ statements.


The judgment was entered against Household International; its former Chairman and CEO William Aldinger; its former CFO and COO David Schoenholz; and its former Vice-Chair of Consumer Lending Gary Gilmer. The company, Aldinger and Schoenholz were hold jointly and severally liable for the judgment and Gilmer was liable for 10% of the judgment.


The defendants appealed the verdict to the Seventh Circuit. The defendants primarily challenged the judgment on loss causation grounds. They also argued that the trial judge had improperly instructed the jury on the basis on which the jury was to determine whether or not a defendant had “made” the misleading statement at issue. Finally, the defendants argued that during the damages phase rulings the trial court made improperly prevented them from challenging individual plaintiffs’ reliance on the misleading statements.


As discussed here, in a May 21, 2015, a unanimous three-judge panel of the Seventh Circuit reversed the trial court judgment with respect to the liability phase and remanded the case to the trial court for further proceedings. The appellate court concluded that the plaintiffs’ expert’s trial testimony did not adequately account for the possibility that firm-specific nonfraud related information may have affected the decline in Household’s share price during the relevant period. The appellate court also found that the trial court had erroneously instructed the jury as far on what it means to “make” a false statement under the Supreme Court’s holding in the Janus Capital Group case (about which refer here).


According to Law 360’s article about the settlement, the case settled “hours before the kickoff of a second settlement in the case.” According to the plaintiffs’ law firm press release about the settlement, the $1.575 billion settlement is the largest ever following a securities fraud class action trial; the largest securities fraud settlement in the Seventh Circuit; and the seventh largest settlement ever in a post-PSLRA securities fraud case.  According to published reports, the case was just the seventh securities fraud case tried to a verdict since the passage of the PSLRA.


The amount of the settlement in U.S. dollars is $1.575 million, but it an even 1 billion U.K. pounds.


Special thanks to a loyal reader for sending me a link to the settlement announcement.