One thing that was clear to everyone involved in the deal for JP Morgan Chase to take over Bear Stearns was that there would be lots of litigation. The unusual features of the deal—including JP Morgan’s option to buy the Bear Stearns headquarters even if the deal doesn’t close, the non-solicitation clause, and the option for JP Morgan to purchase 20% of Bear’s shares—amount to an extraordinarily firm lock-up, and the JP Morgan deal team wasn’t shy about mentioning their deal protection on Sunday night’s conference call.
It took less than a day for the first shareholder lawsuit over the collapse of Bear Stearns to be filed in federal court in New York. Coughlin Stoia Geller Rudman Robbins, a San Diego-based law firm, filed a suit yesterday alleging that Bear Stearns and its leaders made false statements about the firm's financial condition and failed to disclose information investors needed to know to evaluate the company's value, the New York Sun reports. The suit seeks certification for a class action on behalf of investors who bought Bear Stearns common stock between December 14, 2006, and March 14, 2008. James Cayne, Alan Schwartz, Warren Spector, Samuel Molinaro, and the chairman of the executive committee, Alan Greenberg are all named as defendants.
As Ted Frank points out on the Point of Law blog, one irony of the shareholder lawsuits is that the expectation of them wound up reducing the payout to Bear Stearns shareholders. “One of the reasons shareholders are getting so little is because of the billions of dollars of litigation reserves JP Morgan has built into the valuation,” he writes. The lawsuits are expected to generate hundreds of millions in litigation costs, and—very possibly—the litigation costs could actually exceed the purchase price JP Morgan plans to pay for the company.
Bear Stearns thoughts [Point of Law]
Amid Bear Stearns Rubble, Lawyers Swoop In [New York Sun]
Posted by Investorcluzo , Mar 18, 2008 11:35AM
enough about bear...anyone else listen to the lehman call? sounded like a big group hug, I thought I was going to tear up at the end. in fact, given all the doom and gloom the numbers looked good - those $20 puts don't look so good today, huh? they talked a lot about exposures ect. noting that high yield acquisition finance book dropped 25% from last quarter. however, that was largely on the back of a significant reduction in "contingent commitments" (thanks probably, in part, to a bunch of busted deals). what they didn't say was that "funded loans" went up by $200 million. this is the $hit that is going to take a haircut (or scalping depending on your view of the market). then they talked about paying their people competitively so comp as a percent of revenue went up. what you didn't hear (because they didn't want to tell the bankers still working there) was that comp and benefits was down 26% and headcount was up 4% from last year. ouch. but, what-evs' they're still employed (for now). half empty, half full...you decide.
Posted by guest , Mar 18, 2008 11:36AM
Shareholders suing themselves, always love the corporate class action.
Law firms collect huge fees as the shareholders right pocket, sues the left pocket. God Bless America.
Posted by guest , Mar 18, 2008 11:46AM
possible hedge - sue the joint and buy April puts at $5? Just a thought. Can't do this due to hold restrictions...
Posted by guest , Mar 18, 2008 11:59AM
Ted Frank is off point there. The reason for (and measure of) JP Morgan reserves for lawsuits is because of the exposure that Schwartz and team created by claiming everything was A-OK.
Posted by guest , Mar 18, 2008 12:19PM
JPM isn't going to get away with stealing Bear's assets. Nice try Jamie. Bear might be bankrupt, but your not going to come in and sodomize them like JPM likes to do to it's customers and employees. Just look at Paris in the 1930s, when JPM worked with Nazis. In any event, 383 Madison should go to auction. I don't work for bear either, nor have I ever. It would be nice to see the trillion dollar derivatives market blow up in the face of JPM, causing them to go belly up ;)
Posted by guest , Mar 18, 2008 12:37PM
assume you were aware Dimon wasnt even alive in 1930 right?
Posted by guest , Mar 18, 2008 12:43PM
The sound of $2 sounds surprising, but it's not unreasonable. The $2 price is net of the estimated transaction expenses of $6bn. This means that JPM thought the core value of the firm was greater than the $3bn it was trading at on Friday. However, you have to expect a due diligence haircut / reserve / whatever you want to call it for only having 48 hours to look at the firm. Plus there are a ton of negative synergies: with so much overlap there is obvs a ton of severance built into the transaction cost number. The legal reserves also probably address concerns over bondholder lawsuits for third party MBS/ABS deals that BSC was an underwriter on. They were one of the largest underwriters on third party subprime/Alt-A deals. You also have to recognize that the value of the building is not $1bn+ for a buyer. That synthetic lease has bondholders on the other side so the net equity value is much less. There are buyers (regional banks that are now capital constrained) that could in theory pay more if they were interested since there would be less negative synergies (employee overlap, system conversions, moving expenses), but they weren't. So BSC got $230mm. Though some of the lockups may not be "traditional," having the future of BSC in the air is not in the interest of anyone working in the industry or any consumer or business that depends on financing.
Posted by guest , Mar 18, 2008 12:44PM
Lawyers making more than shareholders? Check
Must be America
Oh yeah - who makes the laws again?
Duh - why wouldn't they design a heads they win tails you lose system
Posted by Finnegan , Mar 18, 2008 12:49PM
@12:19
That's a really smart comment above my head, if smartness was a pile of, I dunno, poo. I am sure if the trillion dollar derivatives market blew up, it would affect more than JPM, no?
As for the theft of Bear assets, Bear was a bit like Iraq during the first Gulf War. You can keep fighting, and get destroyed (as in go bankrupt), or you can surrender on the cheap. Kind of surrender before destruction.
Such bitterness. And it's a bit late. Bear already auto-anal'd itself, and others (remember the two in-house hedge funds it let collapse). They have only their own lack of management skill to blame.
Posted by guest , Mar 18, 2008 12:55PM
I defy you to show a clear connection between the bear stearns hedge funds and the eventual collapse of the company, which was not based on any existing financial losses but rather on an unfounded solvency panic
Posted by Finnegan , Mar 18, 2008 1:10PM
@12:55
Defy all you want. Nobody claimed a causal relationship.
In a financial business, it's not just about financial losses. It's about trust. Thus, if your counterparties don't trust you, then you are, uhm, well, kind of in trouble, no?
Trust being a key ingredient, one way to indicate you are probably not trust worthy, is when you are perfectly willing to let your own businesses and partners collapse (the hedge funds). Or if in the past you were entirely unwilling to help your peers float. (LTCM)
And one way to avoid "solvency panics" is to probably manage your business better.
Posted by guest , Mar 18, 2008 1:26PM
So ... How many of you are buying Bear stock now???
Posted by guest , Mar 18, 2008 1:44PM
I agree with Finnegan. I think Bear lost its credibility when the two hedge funds collapsed so rapidly in June 2007 after assurances by the banker running them that they were doing just fine. When the solvency rumors started flying, people didn't want to give Bear the benefit of the doubt.
Posted by guest , Mar 18, 2008 1:58PM
Ridiculous. So many financial institutions have had failed hedge funds, insolvent SIVs, bailed out money market funds, etc. much larger than Bear Stearns, nobody gave you the play by play you just woke up on morning and there it was. If anything Bear had among the smallest loss of shareholders equity and/or earnings due to mortgage and other asset write-downs of the major capital markets firms in the country.
Posted by guest , Mar 18, 2008 2:08PM
What should have happened at the Bear on Sunday nite is what used to happen in the old days when financial devastation occurred and when corporate mismanagement and malfeasance were suspected.
In this case, the traders and managers involved in the derivative activities (damn near everybody at Bear) would have had their computers locked out and their personal accounts frozen. Then when those high-flyers showed up at work Monday morning, they would have been handed a cardboard box, informed about the “locked out” and “frozen-up” events, told that it was done “pending an investigation into and resolution of any damages that their actions may have caused the firm”, had any of their company credit cards, cell phones, ID badges, and car keys confiscated, told to pack up their personal belongings (including the photos of their pole-dancing wives/girlfriends), told that they could file for COBRA healthcare through the proper channels, handed a voided copy of their employment contract, told that they were fired immediately, told not to expect any further paychecks, and then were escorted by security to the curb. Then we could tune in to CNBC and see them all standing on the Madison Avenue sidewalk with their dicks in their hands looking for a cab.
This is what should have happened to Stanley “Affirmative Action” O’Neal at Merrill, but nobody there had the balls to do it. Instead they gave Stan a $240 million going-away present, allegedly for “previously earned” income. I guess that the need for reparations to Merrill for the recent damages done by Stan didn’t matter when it came to Stan’s “previous earnings”.
Lawyers for these “plaintiffs” could file mole hills of toilet paper on their clients’ behalf, and they could burn through a lot of their clients’ funds doing so, but in the end, those “damages that their actions may have caused the firm” would loom very large.
Posted by guest , Mar 18, 2008 2:16PM
@1:58 - you do realize that the announced write downs and earnings all around the Street are to be taken with a grain of salt (maybe a shaker of salt), right? Really, this is circle the wagons, put on your very best face, and do your best to survive mode and it's been going on since the Summer. Everyone knows this and this along with doubt about Bear's solvency is what precipitated the panic. It's not like everyone flipped a coin one day and made a run on a random bank that happened to be Bear.
Posted by guest , Mar 18, 2008 2:17PM
BSC was run by a bunch of OPS retards who had no clue what they were doing. I worked there for a bit out of school, and couldnt wait to get the hell out of there. Bunch of Joey and Vinnies from Staten Island thinking they are hitters
Posted by guest , Mar 18, 2008 2:48PM
@12:43 Nice analysis. I've reasoned that the $2 was derived because the equity is worth essentially nothing (for the reasons you described), therefore assign to it the token price of $1. Then add $1 to avoid the appearance that its worth nothing.
Posted by guest , Mar 18, 2008 4:51PM
Hi All –
I work with a law firm that is investigating Bear Stearns, and whether the company protected employees’ interests during the recent stock collapse. Many Bear Stearns employees saw their retirement accounts decimated by recent events, and some are questioning whether Bear Stearns acted appropriately.
Specifically the firm is looking into whether Bear Stearns lived up to its fiduciary duty to employees who held Bear Stearns stock as part of the company’s pension plan.
If you are a Bear Stearns employee and are concerned that the company’s actions hurt you or your pension plan, you may want to contact Hagens Berman Sobol Shapiro (www.hbsslaw.com/bsc or info@hbsslaw.com) to learn more about the investigation or call the firm at 206-623-7292.
Posted by guest , Mar 18, 2008 5:04PM
Carney: you should send a bill to guest @4:51
Posted by Onegin , Mar 18, 2008 6:51PM
. . .and you've been injured in a car accident or slip and fall. . .
Posted by NotNasser , Mar 18, 2008 7:22PM
Any believers in the efficient capital markets hypothesis in the house?
I wonder, because if there's any truth to ECMH at all, even a little bit, then the value of Bear Stearns at the close of bidness Friday night was somewhere in the vicinity of $30.
There seem to be, logically speaking, only three choices here:
1. Bear lost 93 percent of its value on Saturday?
2. The ECMH is way off? or
3. JPM is attempting a heist.
My guess? subject to correction, is that (3) is the most likely.
Posted by guest , Mar 18, 2008 8:12PM
not so sure NN.. I think the flaw in yr thinking is in ignoring the fact that securities firms are highly levered. This leverage makes them more risky, meaning that their ECMH-predicted value is more volatile than say a manufacturing firm.
Posted by guest , Mar 22, 2008 8:36PM
Maybe I am just not too swift but I find
it hard to understand why the FED has NO
problem propping up all the other brokerages with billions and billions of
dollars but decided to throw Bear under the
bus???? Would not extending the same 30
billion to Bear directly and the additional
assurances that they gave to JPM save the firm and prevent the spread of panic?
It appears to me they wanted to solve it
on the cheap and then realized they still
need to liquify all the other banks anyway.
This was not a bailout, it was a wholesale
rape and pillage operation.
Posted by guest , Mar 23, 2008 2:52AM
A thought to ponder...
JPM Prop traders were just given the fattest pitch of their career's. They had last Sunday to evaluate the risk/reward trades of what was in Bears Black Book...for the last week of options expiration. Max Leverage, Max time decay, Max buying pressure.
They could place a bunch of out of the money call positions on some home builders, some calls on some fellow IB's, buy some puts on the over extended commodities, and then have Bear cover its shorts and dump its longs into those positions, all week long, deleveraging until it caused the Mother of all Short rallies.
The reality is, Bear had ... HAD... to lower its real firm VAR. JPM just booked a mega legend, and didn't even need to burp afterwards... the current FED draw down on the 30 Billion was zip for the weekend...
So, JPM traders just had a chance to have a Big Sister go flat into their hands during the shortened options expiration week, with the FED making a nearly historic cut in the middle, and then a holiday to hide behind...
I cant wait for next week... Maybe Banks will go up 20-50% again next week, since as Barrons says, the worse is over now...
Posted by guest , Mar 24, 2008 1:46PM
A question arises why $10 dollars and not
$5 or $7 or $15? I suspect that a lot of
employees held stock options at $10 strike
price and having lost money on those options were likely to vote down the FED's desire to feed the fallen Bear carcass to JPM and sue JPM to boot. Now I surmise a lot of employees hold positions valued at
the strike or slightly above instead of below water and are less likely to sue.
I know there has a lot of "praise" for the
FED action, but I find their involvement in
this disaster seedy and not deserving much praise at all. All the idiotic talk of "moral hazard" is ridiculous considering that the FED is bailing out the shareholders of Citi, Merrill, Lehman, Goldman, Morgan Stanley and lining the pockets of JPM shareholders with taxpayer's money and money confiscated from the Bear shareholders.
Posted by guest , Mar 28, 2008 12:33PM
http://www.banking-fraud.com 3/28/08
Treason, Bank - Insurance and Securities Fraud.
JP Morgan Chase, Lexon Insurance and Always Consulting have violated the PATRIOT ACT with malice and forethought to intentionally defraud innocent Americans out of their life savings. They acted in collusion, committing serious crimes with reckless and negligent behavior causing wrongful deaths, monetary loss, loss of time and loss of health. I have lost a lot of money due to JP Morgan racketeering.
• JP Morgan Chase along with Lexon Insurance Company and Always Consulting Inc., have willingly and knowingly diverted investors money to terrorist organizations, such as Afghanistan, Al Quada, and the Columbian drug cartel.
• JP Morgan never opened segregated accounts (to this date) and Lexon still insures fictitious gas and oil well projects owned by known convicted felons.
• Always Consulting, Inc. operates in New York, California, Kentucky, Oregon, Seattle, Washington, Kansas, New Mexico, Oklahoma, Wyoming, and Texas.
• JP Morgan Chase and Lexon have a long history of cheating Americans, and have always gotten away with a slap on the wrist. There are 4300 such scams in Texas alone.
My name is Alfred Forsberg and I welcome your investigations. You may contact me at 914 779-3035 or at alf82@optonline.net. I reside in Yonkers, New York. 10710. If anyone or corporation thinks that I am slandering them or that I am guilty of libel - please sue me in court.
I will post as much contact and verifiable information as I am allowed and that I have. The web site will update daily. I consider all of this to be a sworn statement of fact.
Signed, Alfred Forsberg