Bear Stearns lawsuits start rolling in

Discussion in 'Wall St. News' started by buzzy2, Mar 18, 2008.

  1. Bear Stearns lawsuits start rolling in
    [Posted on March 18, 2008 at 12:43 PM]
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    Filed under: Banking | Distressed | Law | Law suits | M&A

    The blowback from the $2 per share acquisition of Bear Stearns Cos. is building fast. Before the end of trade Monday, multiple lawsuits had been filed in the Manhattan courts, and there looks to be plenty more on the way.

    A shareholder suit filed against Bear Stearns and its top brass including Bear Stearns chairman James Cayne and chief executive officer Alan Schwartz led the way. In a blog post, Kevin LaCroix, an attorney at OakBridge Insurance Services, took an in-depth look at the shareholder lawsuit. The attorneys for Joe Lewis, the British billionaire who is losing a cool $1 billion on the Bear Stearns deal, are also reportedly hard at work trying to block the sale and seeking alternatives like encouraging a white knight or voting flat out against the deal.

    Bear Stearns employees also sued the company and management after watching the value of their employee stock ownership plan disappear over the weekend. The suit alleges that Bear Stearns and its executives breached their fiduciary duties to plan participants by allowing their retirement savings to be invested in the company's stock despite knowing such an investment was imprudent.

    Considering the rock bottom price of the Bear Stearns sale, securities law firms smell a feast and are moving quickly. One of the early winners is Mark & Associates PC, which snagged the domain name in hopes of getting a head start on bringing disgruntled shareholders into a fraud case against Bear Stearns. Expect to see similar sites crop up as a number of other law firms put out press releases Monday saying they were investigating potential violations of the Employee Retirement Income Security Act of 1974. - George White

    Report: Bear's No. 2 shareholder seeks to block sale
    [Posted on March 18, 2008 at 8:28 AM]
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    Filed under: Banking | Dealmakers | M&A

    Joe Lewis, the British billionaire who is losing a cool $1 billion on Bear Stearns Cos.' $2 per share sale to J.P. Morgan Chase & Co. is reportedly trying to block the sale and exploring alternatives like encouraging a white knight or voting flat out against the deal.

    Lewis is Bear Stearn's second-largest single shareholder, holding 9.4% of the beleaguered company, London's Daily Telegraph noted Tuesday and said Lewis is also weighing legal action aimed at Bear's board. The largest shareholder is Old Mutual's Barrow, Hanley, Mewhinney & Strauss, a 9.7% stakeholder, while Bear employees own about 30% and would likely support any action to hold onto what is left of their investment, the Telegraph report said.

    On Monday, Eastside Holding Inc. was the first shareholder to bring suit in the matter, according to Bloomberg, filing in Manhattan federal court and asking for unreported damages and permission to bring a class-action suit on behalf of shareholders who purchased Bear stock between Dec. 14, 2006, and March 14, 2008. Mark & Associates PC set up a Web site to inform shareholders of their legal rights: - Carolyn Murphy

    JP Morgan To Buy Bear Stearns For $2 A Share
    Bear Stearns Shareholders have Legal Rights
    Bear Stearns was one of the oldest and most respected Wall Street banks. It had been viewed as a blue chip financial stock, and was a part of the portfolios of many conservative investors. Unfortunately, it appears that Bear Stearns shareholders may have been deceived by the company, and in just a few days lost almost all of their equity.

    The decline of Bear Stearns stock price and subsequent sale is one of the sharpest declines for a blue chip stock ever. On March, 12, 2008 the stock was trading at $61.58, and just four days later Bear Stearns, with apparently no other options but bankruptcy, agreed to be purchased for $2.00 per share.

    Bear Stearns CEO Reassures Investors on Monday, by Friday Company Needs Bailout
    Rumors about Bear Stearns tenous financial situation began to surface months ago, but really began to gain momentum in the last two weeks. With these rumors affecting the price of the stock and probably the confidence of the company's customers, Chief Executive Officer Alan Schwart, appeared on television on Wednesday afternoon to reassure the markets that the firm was stable. Just two days, later Bear Stearns announced that it was being bailed out by JP Morgan Chase and the federal government.

    Bear Stearns CEO Calls $2.00 Per Share Acquisition "Best Outcome"
    "The past week has been an incredibly difficult time for Bear Stearns," said Alan Schwartz, president and CEO of Bear Stearns. "This transaction represents the best outcome for all of our constituencies based upon the current circumstances." This incredible statement was made after the Bear Stearns agreed to be acquired for a mere $2.00 per share by JP Morgan Chase. Again, just days before Mr Schwartz appeared on national television, and told investors that the company was stable.

    Free Legal Consultation for Bear Stearns Shareholders
    If you are a current or former Bear Stearns shareholder, you may have valuable legal rights. Contact Mark & Associates, P.C. today to have a securities fraud attorney evaluate your case for absolutely free. To request a free case consultation, simply complete the inquiry form on this page or call 1-866-507-4448.

    Bear Stearns: The Lawsuit - And a Lawsuit Against Deutsche Bank, Too.
    Posted on March 17, 2008 by Kevin LaCroix

    We knew it was coming but it sure got here fast. On March 17, 2008, plaintiffs’ counsel initiated a securities class action lawsuit in the United States District Court for the Southern District of New York against Bear Stearns and certain of its directors and officers. A copy of the plaintiffs’ lawyers’ press release can be found here, and the complaint can be found here.

    According to the press release, the complaint alleges that during the class period between December 14, 2006 and March 14, 2008, defendants issued false and misleading statements, as a result of which “Bear Stearns stock traded at artificially inflated prices … reaching a high of $159.36 per share in April 2007.” The press release further states that:

    In late June 2007, news about Bear Stearns’ risky hedge funds began to enter the market and its stock price began to fall. On March 10, 2008, information leaked into the market about Bear Stearns’ liquidity problems, causing the stock to drop to as low as $60.26 per share before closing at $62.30 per share. On March 13, 2008, news that Bear Stearns was forced to seek emergency financing from the Federal Reserve and J.P. Morgan Chase hit the market and Bear Stearns stock fell to $30 per share. Then, on Sunday, March 16, 2008, it was announced that J.P. Morgan Chase was purchasing Bear Stearns for $2 per share. By midday on Monday, March 17, 2008, Bear Stearns stock had collapsed another 85% to $4.30 per share on volume of 75 million shares.

    The press release states that the defendants’ statements during the class period “due to defendants’ failure to inform the market of the problems in the Company’s hedge funds due to the deteriorating subprime mortgage market, which would cause Bear Stearns to have to rescue the funds, cause the Company and its officers possible criminal liability and hurt the Company’s reputation.”

    The principals at JP Morgan clearly anticipated this development. According to a March 17, 2008 article (here), JP Morgan is “setting aside $6 billion to cover potential litigation” as well as other transaction and severance costs arising out of JP Morgan’s acquisition of Bear Stearns JP Morgan’s own March 16 press release (here) announcing the transaction does not mention any reserve or set aside for transaction expenses, but the March 18, 2008 Wall Street Journal (here) also says that “J.P. Morgan plans to set aside about $6 billion in reserves to cover the potential exposure and other costs.”

    (Perhaps it is an idle thought but one does wonder why the $6 billion was not applied directly to the acquisition price. …)

    Yet another possibility that may yet arise is that individual Bear Stearns investors might choose to pursue their own litigation separately. According to the March 17, 2008 Wall Street Journal (here), there are individual investors whose losses from the Bear Stearns collapse approach $1 billion. According to the March 18, 2008 Wall Street Journal (here), “billionaire investor Joseph Lewis, one of Bear Stearns's biggest shareholders, with a 9.4% stake, rejected [J.P. Morgan’s] offer, saying it doesn't represent the true value of Bear Stearns. Mr. Lewis, though a spokesman, said the offer ‘is derisory, and I do not believe that shareholders will approve it.’” Certainly individual losses of that magnitude, if nothing else, raise the possibility of their proceeding on their own rather than as part of a larger shareholder class.

    Update: According to news reports (here), an action has also been filed against Bear Stearns and its executives on behalf of Bear Stearns employees alleging that they "breached their fiduciary duties to plan participants by allowing their retirement savings to be invested in the company's stock despite knowing such an investment was imprudent." The complaint alleges that the investment bank failed to disclose material adverse facts regarding its financial well-being, the potential consequences of its "substantial entrenchment in the subprime mortgage market," that the firm's stock price was artificially inflated and heavy investment of retirement savings in company stock would inevitably result in significant losses to the plan and its participants.

    Securities Suit Against Deutsche Bank for Auction Rate Securities: On March 17, 2008, a different plaintiffs’ firm launched a securities lawsuit in the United States District Court for the Southern District of New York against Deutsche Bank and its wholly owned broker–dealer subsidiary, on behalf of a class of persons who purchased auction rate securities from Deutsche Bank and the broker dealer between March 17, 2003 and February 13, 2008, inclusive (the “Class Period”), and who continued to hold such securities as of February 13, 2008. A copy of the plaintiffs’ counsels’ press release can be found here and a copy of the complaint can be found here.

    According to the press release, the plaintiffs allege that the defendants violated the securities laws “by deceiving investors about the investment characteristics of auction rate securities and the auction market in which these securities traded.” The press release states that the defendants failed to disclose that:

    (1) the auction rate securities were not cash alternatives, like money market funds, but were instead, complex, long-term financial instruments with 30 year maturity dates, or longer; (2) the auction rate securities were only liquid at the time of sale because Deutsche Bank and other broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) Deutsche Bank and other broker-dealers routinely intervened in auctions for their own benefit, to set rates and prevent all-hold auctions and failed auctions; and (4) Deutsche Bank continued to market auction rate securities as liquid investments after it had determined that it and other broker dealers were likely to withdraw their support for the periodic auctions and that a “freeze” of the market for auction rate securities would result.

    The auction rate securities purchasers’ lawsuit against Deutsche Bank is not the usual class action securities lawsuits brought against a publicly trade company by its own shareholders. The Deutsche Bank auction rate securities lawsuit is, however, subprime-related and it is a class action that alleges violations of the federal securities laws. For those reasons, I have added it to my running tally of subprime-related securities lawsuits, which can be found here. On a going forward basis, I will try to keep the parallel tallies too, taking into account the different kinds of litigation within the larger running tally.

    With the addition of the Bear Stearns and Deutsche Bank securities lawsuits, the current tally of subprime-related securities lawsuits now stands at 51, twelve of which have been filed so far in 2008. Of these 51, two are securities lawsuits filed by mortgage–backed securities investors against the asset securitizers, and one (as noted above) was filed by purchasers of auction rate securities. The remaining 48 are more traditional securities class action lawsuits by public company shareholders.

    Bear Ironies and Morgan Echoes: Bear Stearns shareholders can be forgiven if they fail to appreciate it, but there is a certain irony that Bear Stearns was the bailout recipient last Friday. This weekend’s whirlwind meetings involving the Fed and the lions of Wall Street present an uncanny echo of the closed door meetings at the New York Fed on September 23 1998, when government officials and Wall Street bankers were struggling to avert the collapse of Long Term Capital Management that all feared might trigger global financial panic. As colorfully told in the prologue of Roger Lowenstein’s excellent book about LTCM, When Genius Failed (here), the government’s rescue efforts nearly aborted because one Wall Street bank refused to cooperate in the government’s rescue plan - none other than Bear Stearns, whose then CEO and current Chairman James Cayne refused to play along.

    This past weekend’s events also harken back to an even earlier episode, one in which JP Morgan Chase’s founder and primary namesake played the central role. As described in Robert Bruner and Sean Carr’s readable recent book, The Panic of 1907 (here), a capital crisis that originated from a liquidity drain following the 1906 San Francisco earthquake culminated in October 1907 in runs on a series of New York banks. J.P. Morgan himself, in effect functioning as the central banker in the absence of any more formal institution, caused his firm to intervene to provide liquidity to the Trust Company of America, declaring, to his colleagues “This is the place to stop the trouble, then.”

    A century later, his firm is once again playing a central role in an effort to avert a financial crisis, and while some may argue that an important difference is that in 1907 Morgan didn’t acquire any of the rescued banks, it is a fact that one of the steps Morgan took in 1907 was a U. S. Steel-led buyout of Tennessee Coal, Iron & Railroad Company, a move claimed at the time was designed to avoid a collapse that could have undermined the stock market. The TCI & R rescue efforts, for which he and his firm were later criticized and subjected to a congressional investigation, ultimately proved to be good both for the Morgan firm as well as for the financial markets.