Preliminary Approval Of $12 Million Settlement In New Century Class Action Granted

Preliminary Approval Of $12 Million Settlement In New Century Class Action Granted

LOS ANGELES - (Mealey's) A federal judge in California on Aug. 9 preliminarily approved a $125 million settlement agreement between shareholders, former officers and directors of subprime mortgagor New Century Financial Corp., the company's outside auditor and the underwriters of New Century's preferred stock (In re New Century Financial Corp. Securities Litigation, No. 07-0931, C.D. Calif.).

U.S. Judge Dean D. Pregerson of the Central District of California granted lead plaintiff New York State Teachers' Retirement System's (NYSTRS) motion for approval of the settlement after the Aug. 9 hearing on the matter.  The motion was filed July 30.  It followed NYSTRS's July 20 stipulation of settlement, which called for cash payments to shareholders by New Century's former officers and directors, outside auditor KPMG LLP and the underwriter defendants.

Under the terms of the settlement, which is still subject to final approval, KPMG will pay $44.75 million in cash, while the underwriters will pay $15 million and the former officers and directors will pay $65,077,088, which is part of a larger settlement the shareholders reached with the officers and directors that totaled more than $91 million.

Moreover, the parties agreed to a class of all purchasers of New Century common stock, New Century Series A Preferred stock, New Century Series B Preferred stock and/or all options and/or who sold New Century put options from May 5, 2005, to March 13, 2007.

New Century issued Series A and Series B preferred stock in June 2005 and August 2006.  In February 2007, New Century indicated that it would restate its financials because it misstated its financial reserves for loan delinquencies.  After the disclosures, New Century's stock experienced a 97 percent decline in value.

The investors sued New Century, its officers and directors, including Brad Morrice, who had served as vice chairman of the company's board, chief operating officer and CEO, auditor KPMG and the underwriters of the preferred stock, Bear, Stearns & Co. Inc., Deutsche Bank Securities Inc., Jefferies & Co. Inc., JMP Securities, Morgan Stanley & Co. Inc., Piper Jaffray & Co., Roth Capital Partners and Stifel, Nicolaus & Co. Inc.  The investors alleged that the defendants made false or misleading statements in violation of Sections 11 and 12(a) of the Securities Act of 1933 and securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

Judge Pregerson granted the defendants' motion to dismiss with leave to amend, ruling that the complaint "lack[ed] clarity in articulating the grounds for its claims."  The investors filed a second amended complaint, and the defendants again moved to dismiss.  Judge Pregerson, in a Dec. 8, 2008, opinion, denied the motions, ruling that the shareholders had properly pleaded their claims.

[Editor's Note:  Full coverage will be in the August issue of Mealey's Financial Services Litigation Report.  For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]

For more information, call editor Timothy J. Raub at 610-205-1127, or e-mail him at timothy.raub@lexisnexis.com.