A surprising percentage of conversations at Dealbreaker HQ go like this:
Bess: Can you really sue someone for [thing someone is suing someone else over]?
Matt: Anyone can sue anyone for anything.
Bess: Did you even go to law school?1
What you don’t learn in law school, though, is that “what the law says” and “what you can settle a case for” are two different things. One thing people love to sue about is “doing stupid shit with shareholder money.” Weirdly, though, the state law that governs who can do what with shareholder money not only allows but actively encourages doing stupid shit with shareholder money; if you go to Delaware state court and say “hey the CEO of my company did stupid shit with my money and now it’s gone” they will LAUGH AND LAUGH AND LAUGH at you and then make you go away.2
If you go to federal court and say “the CEO did stupid shit with my money” you will also be kicked out of court, but for purely technical reasons: that is not technically a thing federal courts care about. But you can fix it easily; all you have to do is say “the CEO did stupid shit with my money and then didn’t tell me about it.” This is called “securities fraud,” and it is something federal courts care deeply about. And a moment’s reflection should tell you that those sentences are essentially equivalent: how many companies have you seen issue press releases that say “hey, FYI, we did some stupid shit this quarter, but no one’s noticed yet”?
There are two big pieces of federal securities class action news today. The bigger one is that BofA settled a lawsuit over its acquisition of Merrill Lynch for $2.43 billion. There are many things worth saying about this, including:
But one other thing worth saying about this is: it is not actually a suit about doing stupid shit with shareholder money. BofA had to go get shareholder approval to acquire Merrill, and so sent out a proxy to shareholders, and held a shareholder meeting, all while neglecting to mention massive losses at Merrill Lynch that it knew about but that shareholders didn’t. It is thus conceptually distinct from, for instance, the lawsuit that Citi settled for $590 million because it owned a lot of crappy CDOs and didn’t tell shareholders how crappy they were. There, the shareholders lost money because they owned Citi shares that turned out to be worth less than they thought, which is something that happens when you own bank shares. Here, there’s at least a case that shareholders lost money because they were induced to vote for a deal on false premises.
The other piece of securities class action fun is off on its lonesome in Reuters’ legal section because (1) it’s UBS, whatever, and (2) it went away for zero dollars, and zero is less than 2.43 billion. But it’s a better case! Here is Reuters:
UBS AG won the dismissal Friday of a shareholder lawsuit accusing the Swiss-based bank of misrepresenting its exposure to mortgage-backed securities and its compliance with U.S. tax laws. …
“Although UBS made a series of bad bets with disastrous consequences for the company and its shareholders, those consequences alone are insufficient to establish and support a claim for securities fraud,” [Judge Richard] Sullivan wrote.
That sentence is … let me put it this way, if yesterday Bess had asked me “is making a series of bad bets with disastrous consequences for the company and its shareholders sufficient to establish and support a claim for securities fraud?,” I would have answered yes. I mean: legally it is not – the law requires not just the stupidity but also the deception – but practically speaking, “a series of bad bets with disastrous consequences” is not the sort of thing you normally want to defend in court, no? Citi didn’t: so it spent $590 million settling a case solely about making a series of bad bets with … well, I mean, surely even more disastrous consequences for Citi than for UBS.
Banks have done a lot of stupid things in the past, and will do lots of stupid things in the future. Some of these things are nefarious, but most are just genuinely stupid. The London Whale is a prominent one, and JPMorgan is being prominently sued over him, and on balance he looks stupid rather than evil, doesn’t he?4 The nefarious banks will look at the BofA settlement and gulp. The stupid banks, though, should take quite a bit of comfort from the UBS opinion. And if you like your settlements to reflect what the law says, rather than what plaintiffs’ lawyers can get away with, that UBS opinion should give you comfort too.
BofA to pay $2.43 billion to settle shareholder lawsuit [Reuters]
UBS wins dismissal of shareholder lawsuit [Reuters]
In re UBS AG Securities Litigation [SDNY]
Dealpolitik: BofA Settlement Reveals Further Weaknesses of Class Action System [Deal Journal]
1. Sort of, yes!
2. Unless you add “in connection with selling the company for cash,” in which case they are all ears. This is conceptually distinct however.
So the effect of this settlement will be that current shareholders of Bank of America will be paying persons who were shareholders of Bank of America at the time of the Merrill Lynch acquisition. …
And of course, as always, the big winners will be the lawyers. The plaintiffs’ lawyers’ fees –which will likely be hundreds of millions of dollars–will be based in large measure on the dollar amount of the settlement. The fact that much of it involves shifting cash from one pocket to the other is generally not considered.
4. I’m fond of Whaledemort so it’s worth saying that “stupid” here means more like “wrong ex post” than “actively stupid ex ante,” though the distinction can blur.