In an interesting twist on a long -running credit-crisis
related securities suit, Wells Fargo has agreed to pay $75 million to settle
the Wachovia equity investor securities class action lawsuit, even though their
suit had been dismissed at the district court level and was on appeal at the
time of the settlement. The parties' November 21, 2011 notification of the
settlement to Southern District of New York Judge Richard Sullivan can be found
Victor Li's December 3, 2011 Am Law Litigation Daily article about the
settlement can be found here.
The settlement relates to litigation brought by former
equity shareholders and bondholders of Wachovia Corporation. The equity
securities holders' and bondholders' actions arise from financial
disintegration Wachovia experienced between its 2006 purchase of
Golden West Financial Corporation and its 2008
merger with Wells Fargo & Company. The allegations are based on the
difficulties Wachovia experienced as a result of the Golden West "Pick-A-Pay"
mortgage portfolio. Further background regarding the equity securities
litigation can be found here and
background regarding the bondholders' litigation can be found here.
As discussed here,
on March 31, 2011, Southern District of New York Judge Richard Sullivan granted
the defendants' motions to dismiss the equity securities litigation, but he
denied the motion to dismiss the bondholders' action, other than with respect
to certain bond offerings in which the plaintiffs had not actually purchased
any securities. A copy of Judge Sullivan's opinion can be found (here),
Judge Sullivan granted the defendants' motions to dismiss
the equity securities plaintiffs' '34 Act claims, finding that the plaintiffs
had not sufficiently alleged scienter. Judge Sullivan concluded that the "more
compelling inference" is that "Defendants simply did not anticipate the full
extent of the mortgage crisis and the resulting implications for the Pick-A-Pay
loan portfolio. Although a colossal blunder with grave consequences for many,
such a failure is simply not enough to support a claim for securities fraud."
He added that "bad judgment and poor management are not fraud, even when they
lead to the demise of a once venerable financial institution."
Judge Sullivan also granted the defendants' motion to
dismiss the equity securities plaintiffs' '33 Act claims, finding that their
"scattershot pleadings" failed to "afford proper notice, much less provide
facially plausible factual allegations." He added that he could not conclude
"that the relevant offering documents contained material omissions in violation
of affirmative disclosure obligations."
Thereafter, the bondholders, whose case survived Judge
Sullivan's dismissal motion rulings, went on to settle their lawsuit for a
total of $627 million, which, as discussed here,
is the largest settlement to date as part of the subprime and credit
crisis-related litigation wave. The settlement amount of $627 million
represented two different settlement funds: $590 million on behalf of the
Wachovia defendants, including 25 former directors and officers of Wachovia, as
well as 72 different financial firms that underwrote bond offerings for
Wachovia between 2006 and 2008; and $37 million on behalf of Wachovia's
Meanwhile, the Wachovia equity investors, whose action
Judge Sullivan had dismissed, had appealed the dismissal to the Second Circuit.
In an apparent move to avoid having the case revived on appeal, Wells Fargo has
now agreed to pay $75 million to settle the equity investors' suit. The case
must be remanded from the Second Circuit in order for the settlement to be
presented to the district court for approval.
As I noted at the time of the $627 million settlement
with the Wachovia bondholders, Wachovia's purchase of Golden West has to be one
of the leading candidates for the title of worst deal leading into or as part
of the credit crisis-related financial transactions. There is a lot of
competition in the worst transaction category, including Bank of America's
purchase of Countrywide. But there is no doubt that the Golden West deal is one
of the real stinkers.
From the perspective of Wells Fargo, the litigation
consequences for the bank from the mortgage meltdown are becoming rather
impressive. When you consider this $75 million settlement and he Wachovia
defendants' $590 contribution to the bondholders' settlement, which came on the
heels of the $125 million Wells Fargo mortgage backed securities settlement
(about which refer here),
it looks like the financial crisis litigation consequences for Wells Fargo have
been massive . The bank's current aggregate settlement costs of $790 million
may provide some explanation why it preferred to settle this case than to run
the risk that the securityholders might succeed in having the dismissal of
their case overturned on appeal.
The $75 million Wachovia equity investors' settlement
comes on the heels of the public disclosure of the $315 million Merrill Lynch
mortgage-backed securities settlement, which Alison Frankel first reported in a
November 18, 2011 article on Thomson Reuters News & Insight (here).
Though the fact and amount of the settlement have been public for a couple of
weeks, the parties have only just now filed their actual stipulation
of settlement, dated December 5, 2011 (here). The $315
Merrill settlement dwarfs Wells Fargo's earlier $125 million MBS settlement,
which has stood as the largest MBS-related settlement so far.
In the Merrill Lynch MBS lawsuit, the plaintiffs alleged
that the defendants (Merrill Lynch and related Merrill entities; certain other
underwriter defendants and certain Merrill officers) had mislead investors who
purchased the MBS securities, through statements in the securities' offering
documents that misrepresented the quality of the loans and the adequacy of the
collateral within the loan pools.
Like Wells Fargo, Merrill and its acquirer Bank of
America have also now paid out or at least agreed to pay out an impressive
aggregate amount in subprime and credit crisis-related securities lawsuit
settlements. As discussed here,
Merrill had previously settled the subprime-related securities lawsuit brought
by its shareholders for $475 mm, and had also settled the related ERISA lawsuit
for $75 million. Merrill separately settled the subprime-related
lawsuit brought by its bondholders for $150 million (refer here).
With the addition of the recent $315 MBS settlement, Merrill's aggregate
settlements are now up to $1.015 bb.
And to line up everything in its proper category, the
$624 million Countrywide settlement, in addition to the $1.015 bb of Merrill
settlements, all arguably belong on BofA's ledger. The Merrill and Countrywide
settlements altogether total about $1.639 billion, or fully 40 percent of all
of the subprime and credit crisis related lawsuit settlement amounts so far
(which total about $3.913 billion). These Merrill and Countrywide settlements
plus the Wells Fargo settlements total $2.48 billion, which reresents almost
64% of the aggregate amount of the subprime and credit crisis related lawsuits
settlements to date
What the Merrill, Countrywide and Wachovia/Wells Fargo
settlements have in common, in addition to representing the largest of the
subprime and credit crisis related lawsuit settlements, is that in each case
the corporate defendant is now part of a financially strong successor in interest.
This circumstance contrasts significantly with other subprime and credit crisis
cases - like those involving Lehman Brothers and Washington Mutual, for
instance - where the corporate defendants are defunct and there is no solvent
successor in interest. Securities suits involving these defunct companies have
settled for much smaller amounts that those involving solvent companies.
I have in any event added the Wachovia equity investors'
settlement and the Merrill MBS settlement to my running tally of subprime and
credit crisis-related securities class action lawsuit 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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