According to Popular, Inc.'s January 27, 2011 press
the Puerto Rican bank holding company has reached an agreement in principle to
settle the subprime related securities lawsuit pending against the company, as
well as in the related ERISA lawsuit. The securities suit has settled for $37.5
million, and the ERISA suit has settled for $8.2 million. The settlement is
subject to court approval.
The plaintiffs' complaint focused on the company's
accounting for a deferred tax asset. In the three years preceding the beginning
of the class period (which went from January 24, 2009 to February 2009), the
company had recorded tax loss carry forwards that totaled over $1 billion,
largely as a result of the company's U.S. subprime and other lending
operations. The benefit of these deferred tax assets could only be realized if
the company experienced sufficient U.S.-based gains within 20 years.
To offset the possibility the company might not fully
realize the value of the deferred tax assets, accounting rules require
reporting companies to take a valuation allowance, but the company recorded no
material valuation allowance of this asset until late 2008. The company
ultimately recorded an allowance for the full value of the asset. Following the
announcement of this action, the company's share price fell substantially.
The plaintiffs allege that the increasing, multiyear
U.S.-based operating losses prevented it from anticipating sufficient taxable
income to realize the full value of the deferred tax asset prior to the
expiration of the 20-year period, yet failed to take a valuation reserve
because doing so would have lowered the bank's risk-based capital ratio below
regulatory requirements. The financial picture the company's treatment of the
asset portrayed allowed the company to raise over $300 million in a May 2008
As discussed here, on August 2, 2010, District of Puerto
Rico Judge Gustavo
Gelpi granted in part and denied in part the defendants' motion to dismiss.
According to the company's press release,
"management expects" that approximately $30 million of the $37.5
million securities class action settlement and all of the $8.2 million ERISA
settlement will be funded by insurance. The parties expect to submit a joint
motion for preliminary approval of the settlements within 45 days.
The press release also notes that the company has not yet
reached settlement of the separate but related derivative lawsuit. As discussed
on August 11, 2010, District of Puerto Rico Judge Jay
Garcia-Gregory denied in part and granted in part the defendants' motion to
dismiss the derivative lawsuit.
Finally, the press release states that the company is
aware of a separate lawsuit filed by individual claimants on January 18, 2011
but that the company has not yet been served.
The Popular securities lawsuit settlement is the first of
subprime-related securities class action lawsuit settlement of the year. As I
noted here, and as Cornerstone Research also noted in it recently released
year-end securities litigation, the subprime-related securities suits have been
taking longer to resolve than have securities cases generally.
Read the article in its entirety at the D&O Diary, a blog by Kevin LaCroix