Countrywide settlement goes before judge
By Carlyn Kolker
NEW YORK Feb 25 (Reuters Legal) - A federal judge in Los Angeles on Friday was set to decide the fate of one of the largest class-action settlements stemming from the subprime mortgage crisis. The proposed $601.5 million settlement in a shareholder lawsuit against Countrywide Financial Corp. shows how tenuous shareholder class-action agreements can be: this one had to be renegotiated from an original proposal, inked in May, after major investors balked.
The case, filed in 2007 in federal court in Los Angeles, alleges that Countrywide, now a unit of Bank of America Corp. (BAC.N), misled investors about its financial condition and lending practices, failing to disclose the extent of subprime loans it held.
The original settlement was for $624 million, with Bank of America agreeing to pay $600 million and KPMG LLP, Countrywide's former auditors, paying $24 million. The agreement covered investors who held shares of Countrywide between March 2004 and March 2008.
But that settlement almost cratered in October when more than 30 investors, including large institutional shareholders such as the California Public Employees' Retirement System, Teachers Retirement System of Texas and BlackRock Investment Management LLC (BLK.N), said they would opt out of the deal. Under the terms of the agreement, if shareholders representing a certain amount of stock losses opted out of the settlement, the defendants had a right to pull out of the settlement. That threshold is confidential.
Court documents show that the threshold was triggered and the lead plaintiffs, represented by law firm Labaton Sucharow, were forced to renegotiate a new settlement with Bank of America and KPMG. They went back to the same team of mediators who chiseled out the initial settlement to work out a new deal.
OPT-OUTS
The new settlement -- the one before Judge Mariana Pfaelzer on Friday -- is for $601.5 million, with an additional so-called "set aside" of $22.5 million. That money can be used by Bank of America to settle future cases with the investors who opted out. If it's not used in two years, it will go to the shareholders in the current settlement.
Investors typically opt out of major settlements when they believe that they can get a better deal if they file their own lawsuits. They usually decide to do that after the lead plaintiffs have already cut a deal with the defendants, as happened in the Countrywide case.
"At this point, the company wants to wind it up and make it go away, so opting out might get (shareholders) a better deal than participating," said Michael Perino, a professor of securities law at St. John's University School of Law.
Some opt-out investors, including funds belonging to the states of Oregon and Michigan and retirees from Fresno, California, have already sued Bank of America separately.
"It is unfortunate that some investors chose to opt out of what we believe is a fair and equitable agreement to settle these issues," Bank of America spokeswoman Shirley Norton said in an e-mailed statement.
Others may be waiting in the wings. Blair Nicholas, a partner at Bernstein Litowitz Berger & Grossmann who represents 16 large institutional opt-outs, said he will "vigorously pursue" Bank of America. In the past he has represented opt-out claims on behalf of shareholders who sued Tyco International (TYC.N), Qwest Communications Q.N and Marsh & McLennan (MMC.N).
"I've got quite a track record doing it," said Nicholas, pointing to multi-million settlements he garnered.
Joel Bernstein of Labaton Sucharow said he will urge the court to approve the latest today. "If these institutions who opted out decide to bring their own cases, they will have their own battles," Bernstein said.
At the hearing, Judge Pfaelzer could also approve Labaton Sucharow's request for attorneys' fees. The firm, which represents New York state retirement funds, has cut its request to $46.47 from $47.37 million.
(Reporting by Carlyn Kolker of Reuters Legal; Editing by Eric Effron and Eddie Evans)
(This article first appeared on Westlaw News & Insight, www.westlawnews.com)
((carlyn.kolker@thomsonreuters.com; +1 646 223 8021)) Keywords: FINANCIAL/COUNTRYWIDE
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