There is a reason that when class action settlements are
announced, they are described as preliminary and subject to final approval -
sometimes the settlements fall apart before the case is finally put to rest.
That appears be what has happened with the Schwab YieldPlus subprime-related
securities class action lawsuit.
As discussed here, in April 2010, the parties to the Schwab YieldPlus
securities suit announced a preliminary settlement of the plaintiffs'
securities claims. At the time, the settlement did not include plaintiffs'
separate state law claims. In May 2010, Schwab announced the separate
settlement of the state law claims. The total value of the agreed settlements
was about $235 million.
However, in a November 8, 2010 press release (here), Charles Schwab Corporation announced that it had
notified the plaintiffs in the case that it was invoking the termination
provisions of the settlement agreement and withdrawing from the case.
As reflected in the November 8, 2010 notice of withdrawal
that Schwab filed with the court, a copy of which can be found here, after the parties initially reached their
settlements, the plaintiffs contended that the remained free to pursue certain
state law claims on behalf of non-California residents. The specific claims at
issue are asserted under the California Business & Professions Code Section 17200.
Schwab had contended that the form of judgment agreed
upon as part of the settlement had been designed to release all claims.
However, in an October 14, 2010 order (here), Northern District of California William Alsup,
referring to the Section 17200 claims as "the governance claim," said
that "at no time was the governance claim certified for class treatment
for anyone residing out of California" and he cited language in the
settlement notice that the Section 17200 claims were "not released in the
settlement." He concluded that, as a result, the non-California residents'
claims "were never extinguished by the settlement," and "federal
securities class members residing outside of California are free to sue under
In its motion to withdraw, Schwab commented that it had
"agreed to a generous settlement," but only in exchange for "an
end to all litigation," adding that "now that Plaintiffs have reneged
on the primary consideration Schwab was to receive...Schwab has no choice but to
withdraw from the joint motions for final approval."
It is hard to tell from the outside exactly what happened
here - that is, whether there was some problem or misunderstanding about the
way the release was put together, whether the plaintiffs somehow sandbagged the
defendants, or if there was just some massive misunderstanding with respect to
whether or not all of the Section 17200 claims had been settled.
The conclusion that there is no way to tell from the
outside what is going on is reinforced by Judge Alsup's October 14 order. My
initial instinct was to be sympathetic with Schwab's complaint that it had
thought it was buying complete repose for its millions, but that clearly is not
the conclusion that Judge Alsup reached. All in all, this is a little bit of a
The one thing is clear is that as a result of Judge
Alsup's order, Schwab concluded that it had no choice except to blow up the
settlement. Perhaps that will mean the case will now go forward, but of course
there is always the possibility that the motion to withdraw was a form of
negotiation carried out by other means.
I recently noted that it seemed as if not many of the
subprime related cases were settling, even though scores of the subprime cases
have survived dismissal motions. Well, now there is one fewer subprime cases.
Perhaps the Schwab settlement debacle explains why so few other cases have
settled - these cases are complex and the settlement efforts are tricky.
I have modified my list of subprime and credit crisis
related case resolutions, which can be accessed here, to reflect Schwab's motion to withdraw from the
Pretty Soon You're Talking About Real Money: It
just in August that the lawyers in the Lehman Brother proceedings had
approached the bankruptcy court to request the release an additional $35
million from the company's D&O insurance policies. (My post about the prior
request can be found here.) The total amount of insurance that the court has now
authorized, including the $35 million, is $70 million.
Now the lawyers are back. Only this time the lawyers want
more. A lot more.
On October 27, 2010, the lawyers for the debtors request
a fresh $90 million, which Wayne State Law Professor Peter
Henning, writing on the New York Times Dealbook blog (here), interprets to mean that "the government could
be closer to ending its civil and criminal investigations and moving ahead with
some type of enforcement." A copy of the latest motion can be found here.
As Henning explains, Lehman had one $250 million D&O
insurance tower for the period May 2007 to May 2008, and a second $250 million
insurance tower for the period May 2008 to May 2009. The prior payments were
made under the first of these two towers. The prior $35 million was exhausted
in part by the settlement of a securities arbitration against Lehman's former
CEO, Richard Fuld. The remainder has gone to defense fees.
In their latest motion for relief from the automatic
bankruptcy stay, in order to permit the payment of the $90 million, the debtors
are requesting the authorization of payments from the fifth, sixth and seventh
excess D&O insurers in the 2007-08 tower in the total amount of $55
million, and payments of $35 million from the primary and first level excess
insurers in the D&O 2008-09 tower. According to the motion, the primary and
first level excess insurers in the 2008-09 towers have "recognized
coverage" for certain legal proceedings.
Assuming this request will be granted, a total of $135
million out of the $250 million total in the 2007-08 tower will have been
released, and now the erosion of the second tower has begun as well. The motion
does not explain why the requested amount has ramped up so rapidly from the
prior request, but the implications are, as Professor Henning notes, serious.
At the time of the prior request I suggested that the lawyers just might
succeed in depleting the entire $250 million of the 2007-08 tower. At this rate
they may get there even sooner than I previously supposed. And now they are
working on the second tower as well. The fees clearly are accumulating more
rapidly than the $5 million a month previously supposed.
My prior post has an detailed review of the implications of
these massive costs.
Special thanks to Professor Henning for providing me with
a link to his blog post.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.