The parties to the consolidated
class action litigation arising out of the collapse of Washington Mutual - the
largest bank failure in U.S. history -- have agreed
to settle the suit for a combined $208.5 million. The settlement, which has
a number of interesting features, actually consists of three separate
agreements: one agreement to pay $105 on behalf of the individual defendants;
another to pay $85 million on behalf of the underwriter defendants; and a third
to pay $18.5 million on behalf of the company's auditor, Deloitte & Touche.
The settlement is subject to court approvals.
the first of the consolidated lawsuits was first filed in November 2007.
Additional suits followed as the subprime meltdown continued to unfold during
2007 and 2008. Further suits followed WaMu's September 2008 collapse (about
which refer here).
cases were consolidated in the Western District of Washington before Judge
Marsh Pechman. The plaintiffs' sprawling complaint asserted numerous
allegations, but the gist is that the defendants: "(1) deliberately and
secretly decreased the efficacy of WaMu's risk management policies; (2)
corrupted WaMu's appraisal process; (3) abandoned appropriate underwriting
standards; and (4) misrepresented both WaMus' financial results and internal
controls." Judge Pechman initially granted the defendants' motions to
dismiss (refer here),
but she denied the defendants' renewed motion to dismiss the plaintiffs'
amended consolidated complaints (refer here).
class certification as well as additional procedural wrangling well-detailed in
Alison Frankel's July 1, 2011 Thompson Reuters News & Insight
article about the settlement (here)
, the parties entered mediation, which ultimately resulted in the
settlement stipulation entered on behalf of the individual director and officer
defendants (the "D&O settlement agreement") can be found here;
the underwriters' settlement stipulation can be found here;
and the Deloitte & Touche settlement stipulation can be found here.
$105 million D&O settlement on behalf of seven officer defendants and 13 outside
director defendants apparently will be funded entirely by D&O insurance.
The bank's D&O insurers for the May 1, 2007 to May 8, 2008 policy period
are identified in the definition of the term "Directors' and Officers'
Liability Insurance Policies" on pages 14-15 of the D&O settlement
agreement. The bank's 2007-2008 insurance program apparently consisted of $150
million of traditional D&O insurance (arranged in eleven layers), with an
additional $100 million of Excess Side A DIC insurance (arranged in six
layers). Given the bank's holding company's bankruptcy, presumably the full
$250 was at least theoretically available for defense and settlement of claims
against the insured persons.
parties released in the D&O settlement agreement include the "Contributing
Insurers" who are not themselves identified by name, but are described as those
insurers that have exhausted their respective limits of liability in payment of
defense expense, that were contributing their limits of liability in connection
with this settlement; or that had exhausted their limit in settlement of other
claims against the insured persons. The settlement agreement does not clarify
whether the D&O settlement will exhaust the D&O limits that remain
after payment of the individuals' defense expenses.
question whether or not the insurance is exhausted is a potentially important
issue, as numerous other claims remain pending against various of the WaMu
directors and officers, most notably the claim that the FDIC filed against
three former WaMu offices and their spouses in March 2011 (refer here).
As far as I could tell, the D&O settlement stipulation in the consolidate
securities suit does not mention the pending FDIC action, which reportedly is
moving toward settlement itself. According to news
reports about the efforts to settle the FDIC action, the prospective
settlement requires the approval of third parties, which could possibly refer
to the D&O insurers.
is no doubt that the FDIC and the shareholder plaintiffs are potentially in
competition for scarce D&O insurance funds. It is probably not a
coincidence that, at least according to news
reports, the parties to the consolidated securities suit first reached
their settlement in principle to resolve the securities suit within a week of
the filing of the FDIC action.
the March 2011 FDIC suit "relates back" to the policy period of the bank's
2007-2008 program, the funds remaining for any FDIC settlement would appear to
be substantially depleted by the consolidated securities suit settlement, as
well as by defense expenses. On the other hand, if the FDIC suit triggered a
later or a different insurance program, there may well be additional insurance
funds available. Of course, the individual defendants to the FDIC action may
also be compelled to contribute toward any FDIC settlement out of their own
any event, the aggregate WaMu settlement is the fourth largest securities
lawsuit settlement so far as part of the wave of securities litigation that
followed the subprime meltdown and the credit crisis. As reflected in my table
of the credit crisis lawsuit resolutions, which can be accessed here,
the only three larger settlements are the over $600 million Countrywide
settlement (refer here),
the $475 million Merrill Lynch settlement (refer here),
and the Charles Schwab settlement, which as
revised amounted to $235 million.The three larger
settlements all involve either solvent companies or at least
sovlent successors in interest. Due to WaMu's bankruptcy, its
settlement was restricted by the amount of available insurance.
to Alison Frankel's Thompson Reuters article linked above, the $85 million
underwriters' settlement is the largest offering underwriter settlement of
Section 11 claims since the $6 billion WorldCom settlement. According to a July
1, 2011 Seattle Times article (here),
the WaMu settlement is the largest securities class action settlement ever in
the Western District of Washington - although, according to the article, the
WaMu investors stand to realize no more than 5 cents on the dollar through the
settlement. The Seattle Times article also reports that the under the
settlement agreements, the plaintiffs' lawyers are to receive fees of $46.9
million and expense reimbursement of $5.8 million.
thanks to the several readers who sent me links about the WaMu settlement.
Another Failed Bank Securities Lawsuit Settlement: On June 27, 2011, lead plaintiffs in the securities class
action lawsuit filed in the Southern District of Florida on behalf of
shareholders of the BankUnited Financial Corporation, the bankrupt holding
company for the failed BankUnited FSB, filed a notice that the
parties had reached an agreement to settle the case for $3 million. There
are a number of interesting things about this notice and about the case in
the notice states that "the settlement of this case is part of a larger
settlement that includes the FDIC and others who are not parties to this
case." The reference to the FDIC is interesting because as far as I know,
the FDIC has not yet filed a civil action against BankUnited's former directors
and officers. (The FDIC's online list of
failed bank lawsuits it has filed as part of the current wave of bank
failures does not list a lawsuit involving BankUnited.).
readers may recall my prior post (here),
in which I discussed the November
5, 2009 demand letter that the FDIC had sent to BankUnited's former
directors and officers. In the letter, the FDIC presented its "demand for
civil damages arising out of losses suffered as a result of wrongful acts and
omissions committed by the named Directors and Officers." The letter
explains that the demand for civil damages is "based on the breach of
duty, failure to supervise, negligence, and/or gross negligence of the named
Directors and Officers." Though the letter was nominally sent to the
individual directors and officers, the message in the letter was clearly
intended for the bank's D&O liability insurance carriers.
brings us to the second interesting thing about the lead plaintiffs' June 27
notice in the shareholder lawsuit. The notice specifically says that the
parties' settlement in principle is "subject to the approval of the Travelers
Insurance Company, as primary directors and officers liability insurance
carrier." What makes the reference to the bank's primary D&O insurer
interesting is the combination of this reference to the insurer together with
the reference to the fact that there is a larger settlement involving the FDIC.
appears to be the case in connection with WaMu, the FDIC and the
BankUnited shareholders were essentially competing with each other for the same
pool of insurance dollars. In addition, defense expenses incurred were reducing
the pool, and the longer the various proceedings dragged on the smaller would
be the pool of available proceeds.
discussed in my prior post about the FDIC's demand letter, according to court
filings in the bankruptcy proceedings, BankUnited carried $50 million in
directors' and officers' liability insurance, arranged in four layers. The
FDIC's motion papers in the bankruptcy proceeding explain that the FDIC sent
the demand letter to the bank's primary and first level excess D&O
insurers, but not to the second and third level excess D&O insurers,
because the second and third level excess insurer's policies "contain a
regulatory exclusion." In other words, the FDIC's prospective recovery (if
any) in these circumstances was even further constrained by possible
constraints on the availability of the insurance to provide coverage for any
claims it might bring.
circumstance illustrate the kinds of challenges the FDIC will face as it tries
to salvage losses the bank failures have caused the FDIC insurance fund.
In the S&L crisis, the FDIC faced some of these same challenges - for
example, there were coverage issues then, too. But during the S&L crisis,
the FDIC was rarely competing with shareholder claimants for scarce D&O
of the financial institutions that failed during the S&L crisis were small
and very few were publicly traded. By contrast, many of the failed institutions
involved in the current round of bank failures are larger, quite a few are
publicly traded, and the ownership of many of the privately held institutions
is widely distributed. The greater spread of ownership (particularly where the
shares are publicly traded) increases the likelihood that following a bank
failure, shareholders might pursue their own claims, putting them - as was the
case with BankUnited - in competition for scarce and dwindling D&O
insurance proceeds. These circumstances clearly represent a complicating factor
for the FDIC as it seeks to try to recover the losses associated with the
current wave of bank failures.
have in any event added the BankUnited settlement to my list of credit
crisis-related lawsuit resolutions, which can be accessed here.
Speaking of Failed Bank Shareholder Lawsuits:
According to the June 29, 2011 Santa Rosa Press Democrat (here),
shareholders of the failed Sonoma Valley Bank have filed a class action
shareholder lawsuit in Sonoma County (Calif.) Superior Court against eight
former director s and officers of the bank. The lawsuit accuses the defendants
of mismanaging over $40 million in loans. An earlier article about the
shareholders claim (here)
makes it clear that the purpose of the shareholder suit is to try to recover
from the bank's $20 million D&O insurance policy.
I said, shareholder suits against the former directors and officers of failed
financial institutions are a feature of the current wave of bank failures. The
news coverage about the Sonoma Valley Bank lawsuit underscores that the
litigation is all about trying to snag a recovery from the insurance proceeds.
And as the BankUnited example above underscores, the shareholders' efforts
in that regard put them in competition with the FDIC for scarce and dwindling
D&O insurance proceeds.
are in any event many more FDIC lawsuits yet to be filed. The FDIC's online page
describing the agency's efforts to pursue professional liability states that as
of June 14, 2011, the FDIC has authorized lawsuits against 238 directors and
officers of failed banks. However, as of that date the FDIC had only actually
filed a total of seven lawsuits involving only 52 directors and officers. The
difference of 186 directors and officers suggests that there are many more
lawsuits yet to come.
You Were Out: In case you missed it, on Friday
July 1, 2011, I published my analysis of securities class action lawsuit
filing trends for the second quarter and for the first half of the year. Refer here.
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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