Looking Back, and Ahead, at Investor Class Settlements
Barring a potential U.S. Supreme Court ruling overturning Basic v. Levinson, 2014 could be another banner year for mega-settlements for securities investors. One key difference, however, is that there are likely to be fewer new major private settlements related to the financial crisis, because the bulk of those cases have passed the motion to dismiss stage.
"A lot of significant litigations were resolved last year," said Gerald Silk of Bernstein Litowitz Berger & Grossmann. "Many were products of the credit and mortgage crisis." Financial crisis cases represented half of the ten largest shareholder class settlements approved last year, including the top three—a $2.4 billion settlement by Bank of America Corporation over its acquisition of Merrill Lynch, a$590 million settlement by Citigroup Inc. over its disclosures about its exposure to subprime debt, and a $500 million settlement by BofA to close out its shareholder liability related to Countrywide's soured mortgage securities. Investor litigation sparked by the subprime crisis "is like the deer going through the boa constrictor," said Columbia Law School Professor John Coffee Jr. "It's almost all digested by now."
Further down the list, Lehman Brothers Holdings Inc. investors settled claims against Ernst & Young LLP for $99 million. Fannie Mae resolved shareholder claims for $153 million—the largest securities class action settlement in the D.C. federal courts since modern securities litigation laws went into effect in 1996.
Besides financial crisis settlements, the past year also produced a few show-stopping investor settlements with pharmaceutical companies. They include the fourth and sixth-largest settlements of 2013: a $473 million deal with Schering-Plough Corporation over the company's disclosures about its cholesterol drug Vytorin—the biggest ever against a pharma company, according to Labaton Sucharow; and a $215 million settlement with parent company Merck & Co. Inc., also over Vytorin and Zetia.
For the first time, the year's top deals included a settlement in a Canadian securities class action: a Ernst & Young agreed to pay $117 million related to the collapse of Sino-Forest Corp., which is listed on the Toronto Stock Exchange. A parallel U.S. case failed.
In 2014, the plaintiffs bar is following a batch of large claims against a wide variety of defendants. The splashiest filing may be investor litigation against JPMorgan Chase & Co. over the reported $6 billion loss related to its "London whale" trading scandal. A motion to dismiss is pending in the Southern District of New York.
Several other high-value securities class actions are awaiting decisions or have recently survived motions to dismiss—and thus may be riper for settlement. They include the Bear Stearns mortgage pass-through litigation, in which the face value of the certificates represents tens of billions of dollars, and a nearly four-year-old securities class action against Goldman Sachs Group Inc. stemming from its ABACUS settlement with the Securities and Exchange Commission.
There are also nearly a dozen consolidated investor and derivative claims related to Facebook Inc.'s 2012 IPO. The shareholder case survived a motion to dismiss last month. A big-ticket case against Hewlett-Packard Co. and its CEO related to its disastrous $11 billion acquisition of Autonomy Corp. also recently escaped dismissal.
Last, a potentially enormous class action against Merck & Co. Inc. stemming from its disclosures about painkiller Vioxx is now approaching trial after eight years.
Coffee cautions that all ongoing securities cases will be threatened if the U.S. Supreme Court takes up the appeal of Erica P. John Fund v. Halliburton and decides to roll back a primary driver of investor class actions‚ the fraud-on-the-market theory. Under that theory, plaintiffs lawyers don't have to show that each individual class member relied on a false or misleading piece of information disseminated by the company. "Halliburton is casting such a big shadow over this area," he said. "Nothing comes next, if the court overrules Basic."
Top 10 securities class action settlements in 2013, by value:
Bank of America Corporation (related to Merrill Lynch merger): $2.4 billion
Citigroup Inc.: $590 million
Bank of America (related to Countrywide): $500 million
Schering-Plough Corporation: $473 million
Massey Energy Co.: $265 million*
Merck & Company Inc.: $215 million
Federal National Mortgage Association: $153 million
Ernst & Young (related to Sino-Forest, Canadian: $117 million
Ernst & Young (related to Lehman Brothers Holdings Inc.): $99 million*
Verifone Holdings: $95 million
*preliminary settlement date
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