According to Reuters, Deloitte & Touche LLP has come up with a settlement deal of $19.9 million with the former shareholders of Bear Stearns Co., which was acquired by JPMorgan Chase & Co. (JPM). Deloitte, the independent auditor of Bear Stearns, reached this resolution within a few days of the nation-wide litigation settlement by these shareholders, who accused Bear Stearns’ senior executives of providing misleading statements about its financials.
The investors led by Michigan Retirement Systems had alleged that Deloitte gave misleading statements regarding the audits it conducted on Bear Stearns’ financials for two years (2006-2007). The cash deal will be covering all those investors who had Bear Stearns’ common share and call options, as well as the sellers of Bear put options from December 14, 2006 till March 14, 2008.
Last week, the former management of Bear Stearns agreed to pay $275 million to settle a nation-wide litigation that accused them of misleading the investors regarding the deteriorating financial health of Bear Stearns in the run up to the financial crisis. However, the settlement deal does not specify how the money would be divided among the investors.
This deal also covered all the Bear Stearns investors who were involved in the Deloitte settlement deal. Additionally, both the agreements require the approval of U.S. District Judge in Manhattan.
The investors had alleged that Bear Stearns’ top management used deceiving models to increase the value of the company’s assets and liquidity positions. The plaintiffs also claimed that Bear Stearns’ management failed to deal with the risks stemming from the subprime and other mortgage-related securities. This led to the fall of two in-house hedge funds in 2007.
Further, during early 2008, Bear Stearns announced that the collapsed hedge funds would be investigated by the regulators. This led to a sharp decline in the company’s share price. Thus, in March 2008, in order to prevent it from collapsing, JPMorgan acquired Bear Stearns with the help of the Federal Reserve for $10 per share.
Similar Settlements
Earlier, there have been several similar litigation settlements reached by the investors. In July 2011, Washington Mutual Inc., bought by JPMorgan, decided to pay $208.5 million to settle a class-action lawsuit by Ontario Teachers' Pension Plan Board and other investors. Washington Mutual was accused of securities fraud, dubious business practices and misleading financial reports.
Similarly in August 2010, Countrywide Financial Corp., acquired by Bank of America Corporation (BAC), agreed to pay $600 million to end several class actions brought on behalf of the investors in Countrywide stock. The lawsuits had alleged that Countrywide masked its mounting risks during the housing boom.
Likewise in January 2009, Merrill Lynch & Co., also bought by Bank of America, settled a class-action suit by paying $475 million. The lawsuit was filed by Ohio state teachers' retirement system and other investors who sustained huge losses after Merrill Lynch wrote down a hefty amount of assets backed by subprime mortgages.
Conclusion
Such settlements provide a sort of relief to the companies and their shareholders as these reduces the litigation overhang. Further, this also reinstates investors’ confidence in the judicial system.
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