Bear Stearns lawyers at Paul Weiss are slapping them self on the back today after stockholders and pension funds who sued Bear executives for misleading them about the health of the company months before it failed agreed to a cash settlement of only $275 million on Wednesday. The suit’s settlement lead by Michigan’s retirement fund, who lost $61 million in the collapse of Bear’s stock in March 2008, is being hailed as the 5th largest class action suit by bank shareholders. But considering the evidence that has come out in the last for years regarding what Bear executives like Tom Marano and Alan Schwartz knew about the health of the firm in late 07 early 08 while they were pushing shareholders to buy more stock this settlement number and the terms tied to it is a joke!
Beside the fact that the Bear executives named in the suit didn’t have to admit guilt neither do they have to take a hit to their fat wallets. According to a person familiar to the settlement the Directors and Officers Insurance Bear held is picking up the whole damn tab. But even if JP Morgan, Bear’s successor owner, wanted to encourage the insurance company to pass on any settlement payment responsiblity to the likes of Tom Marano, Alan Schwartz, Jimmy Cayne, Sam Molinaro, & Ace Greenberg they can’t.
“At the time of the Bear Stearns merger with JP Morgan the Bear bylaws were changed so that the Bear executives have indemnification rights from JP Morgan,” says securities attorney Brett Sherman.
“It’s the scam that never ended” wrote Sherman on Wall St. Law Blog. “As late as October 2007, Bear mortgage chief Tom Marano bragged at the firm’s investor day that Bear had a ‘mortgage franchise for all seasons’. Remember that, mostly due to mortgages, Bear Stearns took a write-down of nearly $2 billion about a month later, and in December 2007, the company announced an $850 million loss for the quarter.”
An amended complaint filed by monoline Assured Guaranty against Bear/JPM last year showed Marano was shorting the stock of some institutional investors buying the very Bear issued RMBS because he knew the mortgage securities market was tanking and they’d be stuck with billions of worthless securities. Meanwhile lawsuits outline Marano was telling institutional investors that the Bear traders were invested in these securities also when in fact they were selling out of them.
In the case of Bear’s CEO Alan Schwartz the legal argument isn’t really about what he knew or didn’t know. The point is he had an obligation to know and instead went on TV (CNBC) to do damage control. Bear’s COO of fixed income describes it best in William Cohen’s book House of Cards – Paul Friedman on liquidity (remember that Schwartz was on CNBC wed):
“I had spent the first part of the week, Monday, Tuesday, open till Wednesday noon, almost every waking minute, talking to customers and lenders… I could take them through our whole liquidity profile.
But by Wednesday, I couldn’t do it with a straight face and feel I wasn’t breaking the law, and so I had a series of conference calls set up for Wednesday afternoon and I just canceled them all.”
Emails found in discovery have shown a mirror of double talk by multiple senior levels of executives at Bear. You can see some of this behavior in Nick Verbitsky’s documentary film, Confidence Game, about the failure of Bear Stearns that is currently being played on the international film festival circuit.
The crux of theses shareholders suits is really that Bear’s business model – which revolved around manufacturing and selling fraudulent mortgage bonds – was a sham. Because the revenues generated by this business model were a fraud, everything from Bear’s public statements about its risk-appetite to its financial condition were materially misleading to Bear shareholders. Securities attorneys point out the essence of securities fraud is that you cannot deprive investors of the right and ability to make informed decisions about whether to buy or sell stocks.
“When the main revenue driver of your business is a charade, how can investors possibly make informed decisions? They can’t. And that is fraud,” says Sherman.
The likes of Michigan Retirement Services fund might be willing to fold for pennies on the dollar in a toothless class action suit but keep in mind there is still an active SEC securities fraud suit/investigation against Bear. If there was an enforcement action lobbed on some of the players involved, who currently still make millions working on the Street (Schwartz is at Guggenheim Capital, Marano at ResCap/Alley Bank) the individual shareholders suing who opted out of a class action suit and are litigating Bear for selling a totally bogus image of the firm to the public could have a better recovery than what we’ve seen today.
Keep in mind a New York federal judge will still have to approve the settlement so it’s not a done deal yet.
According to Sherman, managing attorney of The Sherman Firm, “former Bear shareholders unwilling to participate in low-ball the class settlement are not stuck. They still have the right to opt-out of the settlement and pursue claims on their own.”
But for now the lawyers for Bear execs at Paul Weiss basically earned their clients another get of jail free card this week.
The case is: Bear Stearns Companies Inc Securities, Derivative and ERISA Litigation, U.S. District Court, Southern District of New York, No. 08-md-01963