In a development that undoubtedly will attract comment
and controversy, fourteen former Lehman Brothers executives--including former
Lehman Chairman and CEO Dick
Fuld--have reached an agreement to settle the consolidated
securities class action litigation that has been filed against them for $90
million. In a separate development, seventeen former Lehman executives have
agreed to settle the separate lawsuit brought against them by the New Jersey
Treasury Department Investment Division for $8.25 million.
The entire amount of both settlements is to
be funded by D&O insurance. The settlements are subject to the consent
of the bankruptcy court to lift the stay in bankruptcy to allow the D&O
insurers to fund the settlement, as well as to the approval of the respective
courts in which the respective settled actions are pending. The executives'
motion for relief from the bankruptcy stay in connection with the equity and
debtholders' action can be found here. The
executives' motion for relief from the bankruptcy stay in connection with the
New Jersey action can be found here.
Peter Lattman's August 25, 2011 article on August 25,
2011 article on The New York Times Dealbook blog describing the
motions and the settlements can be found here.
Nate Raymond's August 25, 2011 article on The Am Law Litigation Daily about
the settlements can be found here.
Securities lawsuits had been filed against Lehman and
certain of its directors and officers both before and after its dramatic
collapse in September 2008. The cases ultimately were consolidated. On July 27,
2011, Judge Lewis Kaplan largely denied the motions to dismiss in the
consolidated securities class action lawsuit, as discussed here.
At the time the first of these actions was filed against
Lehman in early 2008, Lehman carried an aggregate of $250 million in D&O
insurance, consisting of a $20 million primary policy and sixteen layers of
excess insurance. A copy of the Lehman primary policy, which is included in the
bankruptcy pleadings, can be found here.
Further discussion of the details of the Lehman D&O insurance program can
be found here.
Following Lehman's bankruptcy filing, and as the
securities cases and other litigated matters went forward, from time to time
the parties would appear in bankruptcy court to seek relief from the stay to
allow the D&O insurers to fund ongoing defense expenses. As I noted in a
prior post (here)
anallyzing one of the prior requests from the relief from the stay, the defense
costs have been accumulating extraordinarily rapidly.
The executives' motions for relief from the bankruptcy
stay for purposes of these settlements show just how rapidly the defense
expenses and other items have been eroding the limits. In their motion with
respect the $90 million securities class action settlement, the executives
explain that they are seeking relief from the stay with respect to the sixth
through twelfth level excess insurers in Lehman's insurance program.
Footnote 4 of the motion identifies the excess insurers
involved (their policies are also attached to the motion) and also explains
that the sixth level excess insurer provide coverage of $25 million in excess of
$85 million, and the twelfth level excess insurer provides coverage of $20
million in excess of $180 million. (The equivalent motion with respect to the
New Jersey action seeks relief with respect to the sixth and if necessary the
seventh level excess insurers, so the $8.25 million New Jersey settlement is
assumed to have already eroded the limit for purposes of calculating the limits
available for the consolidated securities lawsuit settlement).
Taking all of this information into account, and assuming
the various stays and approvals are granted, the settlements, together with
prior defense expenses and other payments, will erode up to $200 million of the
$250 million tower. The two settlements together total $98.25 million.
There is nothing in any of the settlement papers to
suggest that the individual defendants will contribute to either of these
settlements out of their own assets. The settlements do not include the other
defendants in the cases; in the securities class action lawsuit, the remaining
defendants include Lehman's offering underwriters, as well as its auditor,
Not only was the Lehman bankruptcy the largest in U.S.
history, but the company's collapse very nearly triggered a global economic
catastrophe. The circumstances of its collapse have been the subject of
extensive investigation and commentary. The company's accounting prior to its
collapse has also been the subject of intense scrutiny, most notably in the report
of the bankruptcy examiner, who, among other things, he called the company's
quarter-end Repo 105 transactions "balance sheet manipulations," about which
Dick Fuld has become something of a poster child (or at least one of the poster
children) for problems on Wall Street that contributed to the economic crisis.
Given that context, the fact that the individual
defendants apparently are not going to contribute to this settlement is likely
to be controversial. Many commentators have already bewailed the fact that
cases of this type are settled exclusively with D&O insurance, and without
any personal contribution by the alleged wrongdoers. These kinds of concerns
will be even more exacerbated here, given the high profile nature of this case
and the vilification that has heaped on Fuld and other Lehman executives.
I have no insight into why the settlements were
structured the way they were. But I can speculate at least that a major factor
driving the timing, size and structure of these settlements was the alarming
erosion of the policy limits as defense expense reduced the amount of insurance
available with which to try to settle these cases.
The problem the plaintiffs' lawyers faced, which is the
one that claimants always face in the insolvency context, is that the
plaintiffs can always hang tough and hold out for the optimal settlement, but
in the meantime the policy proceeds out of which any settlement would have to
be funded are rapidly disappearing. These concerns were particularly abrupt
here because of the astonishing speed at which the policy limits were
disappearing. An added concern for the plaintiffs here is that if they held out
too long, they ran the risk that the SEC might suddenly file an enforcement
complaint against one or more Lehman executive, or the DoJ might file a
criminal action. If either of those things were to have happened, the rapid
depletion of policy limits would have leapt into hyperspeed.
So to those who say that the plaintiffs' lawyer here
should have demanded a settlement in which the individuals contributed out of
their own assets, I say that while that type of settlement might theoretically
have been more satisfying at some level, it might not have produced a better
result for the class members and other aggrieved parties. Indeed, if the
settlement talks had dragged on too much longer, there might soon have been no
insurance left at all out of which to settle the case.
I am realistic enough to know that not everyone will find
this appeal to practicality to be satisfying. There is a lot of emotion
associated with the Lehman collapse, and there undoubtedly will be those who
will be outraged that Fuld and others are "getting off" here without having to
contribute out of their own assets. This notion precedes from a basic sentiment
that these executives should be punished. From my perspective, it is the job of
the SEC and the DoJ to determine who needs to be punished. If the SEC and the
DoJ believe these individuals should be punished in some way, they will pursue
the appropriate sort of action. The types of private civil actions that are
under discussion here are meant to provide a way to compensate aggrieved
parties. That is the purpose of these settlements. Whether or not they are the
optimal settlements, they may have been the most economically beneficial and
viable settlements available given the rapid depletion of the policy limits.
I have in any event added these settlements to my running
tally of credit crisis related case resolutions, which can be accessed here.
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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