In re Lehman Brothers Equity/Debt Securities Litigation

Settled: May 24, 2012

$90 million settlement with the Directors and Officers and $426.2 million in settlements with 50 of the 51 underwriter defendants were obtained in this securities litigation arising from the subprime mortgage debacle. The case continues against UBS and E&Y.

On July 31, 2008, Labaton Sucharow's client City of Edinburgh Council as Administering Authority of the Lothian Pension Fund (Lothian) was appointed co-lead plaintiff, along with four other foreign and domestic pension funds, in a class action filed in federal court in the Southern District of New York on behalf of a class of investors who purchased or acquired the common stock of Lehman Brothers Holdings (Lehman) between September 13, 2006 and June 6, 2008 (the class period).

The complaint alleges that during the class period, Lehman and certain of its officers misrepresented the company's exposure to and losses from mortgage-backed assets and real estate investments—particularly those tied to subprime residential mortgages—and, consequently, overstated the company's earnings.

As numerous mortgage lenders (who issued the very loans that backed Lehman's investments) fell into bankruptcy, and the company's peer's acknowledged massive losses from their own mortgage-backed investments, Lehman insisted that its sophisticated hedging strategies insulated it from such risk.

After numerous inconsistencies in the company's public statements led to increasing questions from investors and analysts, Lehman acknowledged that it had incurred losses of $2.8 billion from investments tied to mortgages and real estate. The $2.8 billion write-down was nearly ten times the loss analysts had anticipated, and followed write-downs of $3.7 billion to mortgage-backed assets and real estate investments. The company also revealed that it raised $6 billion in capital—50 percent more than previously reported - through the sale of common and preferred stock. Following that disclosure, Moody's lowered its rating of Lehman to "negative" from "stable." In response, the price of Lehman shares fell roughly 12 percent, dropping from $32.29 to close at $28.47. On June 12, 2008, the company removed the defendant Erin Callan as CFO and the defendant Joseph Gregory as President, without specifying the reason. The lead plaintiffs filed an Amended Complaint removing Lehman Brothers as a defendant and naming numerous underwriters as defendants. Lehman Brothers filed for bankruptcy on September 15, 2008.

The defendants filed motions to dismiss all aspects of the case. The motions were fully submitted and the court heard oral argument on January 26, 2010. Before the court ruled on the motions, the Bankruptcy Examiner appointed in the Lehman Brothers Bankruptcy matter issued his report. In light of the Examiners Report, by order dated March 17, 2010, the court ordered plaintiffs to file an amended pleading. Consistent with the Court's directive, on April 23, 2010 plaintiffs filed a Third Amended Complaint (TAC). The defendants moved to dismiss the TAC. On July 27, 2011 the court granted in part and denied in part defendants' motions to dismiss the TAC. The court largely denied the Lehman related defendants' motions, but narrowed the case around the margins. The court mostly granted Ernst & Young's (E&Y) motion to dismiss, except the claims relating to one GAAP violation from the company's 2Q08 Form 10-Q. The court also dismissed two of the individual defendants but upheld the allegations against Fuld, O'Meara, and Gregory, members of the executive committee.

Lead counsel has entered into a $90 million settlement with the Directors and Officers and $426.2 million in settlements with 50 of the 51 underwriter defendants. The court held a Settlement Hearing regarding these settlements on April 12, 2012. Following the hearing the court approved both settlements. The only defendants left are UBS and E&Y. Fact discovery is ongoing. Lead counsel submitted a motion for class certification February 3, 2010, and briefing on class certification was completed on May 2, 2012.