Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, May 8, 2012

Judge Requests Financial Information From Former Lehman Officers Before Ruling on Fairness of Proposed Settlement

Before deciding whether to approve a proposed $90 million settlement with the former directors and officers of Lehman Brothers (to be paid entirely from D&O insurance), Judge Lewis Kaplan requested additional financial information to assess the ability of the individual officer defendants to satisfy a judgment in the event the plaintiffs did not settle and ultimately prevailed.  In re Lehman Brothers Sec. & ERISA Litig. (S.D.N.Y. May 3, 2012).  The memorandum and order offers a concise description of the realties of class action settlements involving individual defendants.  (Download Lehman.050712[1])

As Judge Kaplan explains, the individual defendants began the litigation with $250 million in insurance coverage.  By the end of 2010, the remaining coverage was down to $180 million, and there were many actual and potential claims against the fund in addition to this litigation.  In settlement negotiations, the insurance carrier took the position it would only contribute to a settlement that resolved all claims against the individual defendants. The individual defendants insisted that they would not make any financial contributions to a settlement and would not disclose personal financial information to the lead plaintiffs or their counsel.   

Because lead counsel was conscious of the bad press coverage that would likely result if the individual defendants did not contribute financially to a settlement, it sought to break the impasse by engaging a former federal district court judge, Judge Martin, to determine whether the five officer defendants' combined liquid assets exceeded $100 million.  Despite the focus on liquid assets, Judge Martin required the defendants to complete net worth questionnaires that disclosed all their assets, including non-liquid assets such as secondary residences, retirement accounts, artwork, jewelry, etc.  He then answered precisely the question asked of him: he was satisfied that the liquid net worth of the officer defendants was substantially less than $100 million.

Judge Kaplan, however, determined that he did not have sufficient information to sign off on the proposed settlement.  Acknowledging that lead counsel are able and distinguished, the judge allowed that "their judgment may prove to be within the range of reasonableness despite the modest amount of the settlement when considered against these defendants' potential exposure."  But the very limited charge they gave to Judge Martin -- focusing on liquid net worth -- does not provide the court with sufficient information to determine the fairness of the proposed settlement, including "the ability of the defendants to withstand a greater judgment."

Accordingly, Judge Kaplan ordered that the defendants' personal financial information that had previously been provided to Judge Martin be turned over to the court for an in camera review.

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