In Re Bear Stearns Companies Inc. Securities, 08 MDL 1963

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: ROBERT W. SWEET
• Parties: IN RE BEAR STEARNS COMPANIES, INC. SECURITIES, DERIVATIVE, AND ERISA LITIGATION This Document Relates To: Securities Action, 08 Civ. 2793 Derivative Action, 07 Civ. 10453 ERISA Action, 08 Civ. 2804
• Docket Number: 08 MDL 1963
• Decision Date: 19 January 2011

IN RE BEAR STEARNS COMPANIES, INC. SECURITIES, DERIVATIVE, AND ERISA LITIGATION
This Document Relates To:
Securities Action, 08 Civ. 2793
Derivative Action, 07 Civ. 10453
ERISA Action, 08 Civ. 2804

08 MDL 1963

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

Filed: January 19, 2011

OPINION

APPEARANCES:

Interim Co-Lead Counsel for the Securities Plaintiffs

KELLER ROHRBACK LLP
By: David S. Preminger, Esq.

By: Lynn L. Sarko, Esq.
Derek W. Loeser, Esq.
Erin M. Riley, Esq.
Gretchen S. Obrist, Esq.

BARROWAY TOPAZ KESSLER MELTZER CHECK LLP
By: Joseph H. Meltzer, Esq.
Edward W. Ciolko, Esq.
Peter H. LeVan Jr., Esq.
Shannon O. Lack, Esq.

Interim Liaison Counsel for the Securities Plaintiffs

DEALY & SILBERSTEIN, LLP

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By: Milo Silberstein, Esq.

Attorneys for Lead Securities Plaintiff
State of Michigan Retirement Systems
BERMAN DEVALERIO
One Liberty Square
Boston, MA 02109
By: Jeffrey C. Block, Esq.
Patrick T. Egan, Esq.
Justin Saif, Esq.

By: Joseph J. Tabacco, Jr., Esq.
Julie J. Bai, Esq.

LABATON SUCHAROW LLP
By: Thomas A. Dubbs, Esq.
James W. Johnson, Esq.
Michael W. Stocker, Esq.

Co-Lead Counsel for the Derivative Plaintiff
BROWER PIVEN, P.C.
By: David A.P. Brower, Esq.

ROBBINS UMEDA LLP

By: Marc M. Umeda, Esq.
George C. Aguilar, Esq.
Shane P. Sanders, Esq.
Gregory E. Del Gaizo, Esq.

Interim Co-Lead Counsel for the ERISA Plaintiffs

BARROWAY TOPAZ KESSLER MELTZER CHECK LLP

By: Joseph H. Meltzer, Esq.
Edward W. Ciolko, Esq.
Julie Siebert-Johnson, Esq.

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Peter H. LeVan Jr., Esq.
Shannon O. Lack, Esq.
Mark K. Gyandoh, Esq.
James A. Maro, Jr., Esq.

KELLER ROHRBACK LLP

By: David S. Preminger, Esq.

By: Lynn L. Sarko, Esq.
Derek W. Loeser, Esq.
Erin M. Riley, Esq.
Gretchen S. Obrist, Esq.

Interim Liaison Counsel for ERISA Plaintiffs

DEALY & SILBERSTEIN, LLP

Attorneys for Defendants The Bear Stearns
Companies Inc., JPMorgan Chase & Co.,
Michael Minikes, Kathleen Cavallo,
Stephen Lacoff, and Robert Steinberg

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

By: Eric. S. Goldstein, Esq.
Brad S. Karp, Esq.
Lewis R. Clayton, Esq.
Douglas M. Pravda, Esq.

STEPTOE & JOHNSON LLP

By: Paul J. Ondrasik, Jr., Esq.
F. Michael Kail, Esq.

Attorneys for Defendant James E. Cayne

KRAMER LEVIN NAFTALIS & FRANKEL LLP

Page 4

By: David S. Frankel, Esq.

Attorneys for Defendant Alan D. Schwartz

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP

By: Jay B. Kasner, Esq.
Susan Saltzstein, Esq.

Attorneys for Defendant Samuel L. Molinaro, Jr.

SIMPSON THACHER & BARTLETT LLP
By: Michael Chepiga, Esq.
William T. Russell, Jr., Esq.

Attorneys for Defendant Alan C. Greenberg

SCHULTE ROTH & ZABEL LLP

By: Ronald Richman, Esq.
Jill L. Goldberg, Esq.

Attorneys for Defendant Warren J. Spector

WACHTELL, LIPTON, ROSEN & KATZ

By: David B. Anders, Esq.
Meredith L. Turner, Esq.

Attorneys for Defendant Jeffrey Mayer

GREENBERG TRAURIG, LLP

By: Richard A. Edlin, Esq.
Ronald D. Lefton, Esq.

Attorneys for Defendants Henry S. Bienen,
Carl D. Glickman, Michael Goldstein,
Donald J. Harrington, Frank T. Nickell,
Paul A. Novelly, Frederic V. Salerno,

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Vincent Tese and Wesley S. Williams, Jr.

GIBSON, DUNN & CRUTCHER LLP
By: Randy M. Mastro, Esq.
Robert F. Serio, Esq.

Attorneys for Defendant Michael Alix

WIGGIN & DANA LLP
By: Scott D. Corrigan, Esq.
Jeffrey P. Wade, Esq.

Attorneys for Defendant Jeffrey M. Farber

WILLKIE FARR & GALLAGHER LLP
By: Michael R. Young, Esq.
Antonio Yanez, Jr., Esq.

Attorneys for Defendant Deloitte & Touche LLP

CRAVATH, SWAINE & MOORE LLP
Worldwide Plaza

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TABLE OF CONTENTS

I. PRIOR PROCEEDINGS.......................................... 11

II. THE MOTION OF THE BEAR STEARNS DEFENDANTS TO DISMISS THE SECURITIES COMPLAINT IS DENIED......................... 13

A. The Parties............................................ 13

B. Summary of the Securities Complaint.................... 15

1. Bear Stearns History............................... 16

2. Bear Stearns Securitization....................... 22

3. Leveraging........................................ 26

4. The Hedge Funds................................... 27

5. Valuation and Risk................................ 33

6. False and Misleading Statements................... 40

7. Accounting Standards Violations................... 80

a) GAAP Overview.............................................................................................................80

b) Fraud Risk Factors.........................................................................................................83

c) Audit Risk Alerts............................................................................................................86

d) Internal Controls...........................................................................................................89

e) Financial Statements.....................................................................................................93

8. Banking Regulations Violations...................109

a) Capital Requirements..................................................................................................110

b) Incorrect Marks...........................................................................................................113

c) VaR Misrepresentations..............................................................................................113

9. Scienter.........................................114

10. Loss Causation...................................126

11. Additional Allegations...........................129

C. The Applicable Standards.............................130

1. Pleading Scienter................................133

2. Pleading Liability under Exchange Act § 20A......138

3. Pleading Control Person Liability under Exchange Act § 20(a).............................138

4. Pleading Loss Causation..........................139

D. The Allegations of Materially False and Misleading Statements by the Bear Stearns Defendants Are Adequate.............................................140

1. Statements Regarding Asset Values................140

2. Statements Regarding Risk Management.............142

3. Statements Regarding the BSAM Write-downs........160

4. Statements Regarding Bear Stearns' Liquidity.....163

E. The Alleged Misstatements by the Bear Stearns Defendants are Material..............................164

F. The Securities Complaint Has Adequately Pleaded Scienter Against the Bear Stearns Defendants.........168

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1. Motive and Opportunity...........................169

2. Conscious Misbehavior or Recklessness............174

G. The Allegations of Loss Causation are Adequate.......185

H. The Securities Complaint Has Adequately Pleaded a § 20A Claim............................................192

I. The Securities Complaint Has Adequately Pleaded Control Person Liability under § 20(a)...............195

III. THE MOTION BY DELOITTE TO DISMISS THE SECURITIES COMPLAINT IS DENIED............................. 198

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