According to papers filed on September 6, 2008, the
parties to the consolidated MBIA securities action pending in the Southern
District of New York have agreed to settle the lawsuit for $68 million. The
settlement is subject to court approval. As noted below, the settlement
has some interesting features.
The parties' stipulation of settlement can be found here
and the plaintiffs' motion for preliminary approval of the settlement can be
found here.
Nate Raymond's September 7, 2011 Am Law Litigation Daily article describing the
settlement can be found here.
As discussed here,
in January 2008, MBIA joined a group of several other bond insurers there were
sued in securities class action relating to their alleged failures to
disclosure the exposures they had as a result of insurance guarantees they had
extended ion mortgage related securities. The lawsuit against MBIA
followed the company's disclosure of the extent of the guarantees the company
had extended on collateralized debt obligations. Among other things, the
disclosure revealed the extent to which the company had issued insurance on
so-called CDOs-squared.
As discussed here
(scroll down), in March 2010, the Court granted in part and denied in part the
defendants' motion to dismiss. The dismissal motion grants were without
prejudice to the plaintiffs' filing amended pleadings as to the dismissed
portions. In April 2010, the plaintiffs amended their complaint (refer here)
and the defendants renewed their motions to dismiss. While the motions were
pending, the parties began settlement negotiations.
In their motion seeking preliminary approval of the
settlement, the plaintiffs, in explanation of the amount of the settlement
state that
In light of MBIA's financial condition and likelihood
that this Action and other litigation against MBIA would substantially deplete
Defendants' insurance coverage, Lead Plaintiff and Lead Counsel also believed
that there was a substantial risk that, even if they were successful in
establishing liability at trial (and after appeals from any verdict),
Defendants would not have been able to pay an amount significantly larger than
the Settlement Amount or even as much as the Settlement Amount.
Obviously, this statement clearly implies that that at
least some portion of the settlement is to be funded with D&O insurance. However,
neither the motion papers nor the settlement stipulation specify what portion
of the settlement is to be funded by D&O insurance. There is nothing in the
filings to indicate whether the D&O insurers' settlement contribution will
deplete the remaining amount of insurance.
Without knowing one way or the other whether D&O
insurance is to fund the entire amount of this settlement, it is clear that the
fact that the D&O policy limits were rapidly eroding was a factor in this
settlement and may even have affected the amount of the settlement.
This settlement is only the latest in a series of
subprime and credit crisis related litigation in which the fact that the
remaining limits were rapidly eroding was a factor in the timing and even the
amount of the settlement. Other cases where there seems to have been a factor
are the recent settlement involving in the Lehman executives (refer here);
the recent Colonial Bank settlement (refer here);
the D&O portion of the WaMu settlement (refer here);
and the New Century Financial settlement (here).
As I discussed at length in my recent post about the
Lehman executives' settlement (here)
, the rapid depleting o f the D&O limits puts pressure on the
plaintiffs to reach a settlement quickly. If they play hardball and hold out
for a better settlement or try to holdout by demanding that individuals
contribute to the settlement out of their own assets, the plaintiff's lawyer
may manage only to reduce the ultimate recovery as the D&O insurance limits
drain away while negotiations drag on. This feature of many of these cases
makes many of the subprime and credit crisis-related cases particularly
challenging to try to settle, particularly where the defendant company is
insolvent or in poor financial condition. This feature may also result in lower
settlement amounts in many cases, at least where there is not solvent of
financially stable company to fund additional settlement amounts.
I have in any event added the MBIA settlement to my list
of subprime and credit crisis securities class action lawsuit settlements,
which can be accessed here. As
discussed here,
the subprime-related securities suit against another of the bond insurers,
Ambac, settled for a total of $33 million .
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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