In re Bear Stearns Companies Inc. Sec.
| Decision Date | 19 January 2011 |
| Docket Number | No. 08 MDL 1963.,08 MDL 1963. |
| Citation | 763 F.Supp.2d 423 |
| 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. |
| Court | U.S. District Court — Southern District of New York |
763 F.Supp.2d 423
In re BEAR STEARNS COMPANIES, INC. SECURITIES, DERIVATIVE, AND ERISA LITIGATION.This Document Relates To: Securities Action, 08 Ci
v.
2793 Derivative Action, 07 Ci
v.
10453 ERISA Action, 08 Ci
v.
2804.
United States District Court, S.D. New York.
Jan. 19, 2011.
[763 F.Supp.2d 439]
Keller Rohrback LLP, by: David S. Preminger, Esq., New York, NY, by: Lynn L. Sarko, Esq., Derek W. Loeser, Esq., Erin M. Riley, Esq., Gretchen S. Obrist, Esq., Seattle, WA, Barroway Topaz Kessler Meltzer Check LLP, by: Joseph H. Meltzer, Esq., Edward W. Ciolko, Esq., Peter H. LeVan Jr., Esq., Shannon O. Lack, Esq., Radnor, PA, for the Securities Plaintiffs.Dealy & Silberstein, LLP, by: Milo Silberstein, Esq., New York, NY, for the Securities Plaintiffs.Berman Devalerio, by: Jeffrey C. Block, Esq., Patrick T. Egan, Esq., Justin Saif, Esq., Boston, MA, by: Joseph J. Tabacco, Jr., Esq., Julie J. Bai, Esq., San Francisco, CA, Labaton Sucharow LLP, by: Thomas A. Dubbs, Esq., James W. Johnson, Esq., Michael W. Stocker, Esq., New York, NY, for Lead Securities Plaintiff State of Michigan Retirement Systems.Brower Piven, P.C., by: David A.P. Brower, Esq., New York, NY, Robbins Umeda LLP, by: Marc M. Umeda, Esq., George C. Aguilar, Esq., Shane P. Sanders, Esq., Gregory E. Del Gaizo, Esq., San Diego, CA, for the Derivative Plaintiff.Barroway Topaz Kessler Meltzer Check LLP, by: Joseph H. Meltzer, Esq., Edward W. Ciolko, Esq., Julie Siebert–Johnson, Esq., Peter H. LeVan Jr., Esq., Shannon O. Lack, Esq., Mark K. Gyandoh, Esq., James A. Maro, Jr., Esq., Radnor, PA, Keller Rohrback LLP, by: David S. Preminger, Esq., New York, NY, by: Lynn L. Sarko, Esq., Derek W. Loeser, Esq., Erin M. Riley, Esq., Gretchen S. Obrist, Esq., Seattle, WA, for the ERISA Plaintiffs.Dealy & Silberstein, LLP, by: Milo Silberstein, Esq., New York, NY, for ERISA Plaintiffs.Paul, Weiss, Rifkind, Wharton & Garrison LLP, by: Eric. S. Goldstein, Esq., Brad S. Karp, Esq., Lewis R. Clayton, Esq., Douglas M. Pravda, Esq., New York, NY, Steptoe & Johnson LLP, by: Paul J. Ondrasik, Jr., Esq., F. Michael Kail, Esq., Washington, DC, for Defendants The Bear Stearns Companies Inc., JPMorgan Chase & Co., Michael Minikes, Kathleen Cavallo, Stephen Lacoff, and Robert Steinberg.Kramer Levin Naftalis & Frankel LLP, by: David S. Frankel, Esq., New York, NY, for Defendant James E. Cayne.
[763 F.Supp.2d 440]
Skadden, Arps, Slate, Meagher & Flom LLP, by: Jay B. Kasner, Esq., Susan Saltzstein, Esq., New York, NY, for Defendant Alan D. Schwartz.Simpson Thacher & Bartlett LLP, by: Michael Chepiga, Esq., William T. Russell, Jr., Esq., New York, NY, for Defendant Samuel L. Molinaro, Jr.Schulte Roth & Zabel LLP, by: Ronald Richman, Esq., Jill L. Goldberg, Esq., New York, NY, for Defendant Alan C. Greenberg.Wachtell, Lipton, Rosen & Katz, by: David B. Anders, Esq., Meredith L. Turner, Esq., New York, NY, for Defendant Warren J. Spector.Greenberg Traurig, LLP, by: Richard A. Edlin, Esq., Ronald D. Lefton, Esq., New York, NY, for Defendant Jeffrey Mayer.Gibson, Dunn & Crutcher LLP, by: Randy M. Mastro, Esq., Robert F. Serio, Esq., New York, NY, for Defendants Henry S. Bienen, Carl D. Glickman, Michael Goldstein, Donald J. Harrington, Frank T. Nickell, Paul A. Novelly, Frederic V. Salerno, Vincent Tese and Wesley S. Williams, Jr.Wiggin & Dana LLP, by: Scott D. Corrigan, Esq., Jeffrey P. Wade, Esq., New York, NY, for Defendant Michael Alix.Willkie Farr & Gallagher LLP, by: Michael R. Young, Esq., Antonio Yanez, Jr., Esq., New York, NY, for Defendant Jeffrey M. Farber.Cravath, Swaine & Moore LLP, by: Max R. Shulman, Esq., New York, NY, for Defendant Deloitte & Touche LLP.
[763 F.Supp.2d 441]
TABLE OF CONTENTSI.
PRIOR PROCEEDINGS
443
II.
THE MOTION OF THE BEAR STEARNS DEFENDANTS TO DISMISS THE SECURITIES COMPLAINT IS DENIED
443
A.
The Parties
443
B.
Summary of the Securities Complaint
444
1.
Bear Stearns History
445
2.
Bear Stearns Securitization
447
3.
Leveraging
448
4.
The Hedge Funds
448
5.
Valuation and Risk
450
6.
False and Misleading Statements
453
7.
Accounting Standards Violations
467
a)
GAAP Overview
467
b)
Fraud Risk Factors
468
c)
Audit Risk Alerts
469
d)
Internal Controls
470
e)
Financial Statements
472
8.
Banking Regulations Violations
477
a)
Capital Requirements
477
b)
Incorrect Marks
478
c)
VaR Misrepresentations
479
9.
Scienter
479
10.
Loss Causation
483
11.
Additional Allegations
484
C.
The Applicable Standards
484
1.
Pleading Scienter
485
2.
Pleading Liability under Exchange Act § 20A
487
3.
Pleading Control Person Liability under Exchange Act § 20(a)
488
4.
Pleading Loss Causation
488
D.
The Allegations of Materially False and Misleading Statements by the Bear Stearns Defendants Are Adequate
488
1.
Statements Regarding Asset Values
488
2.
Statements Regarding Risk Management
489
3.
Statements Regarding the BSAM Write-downs
495
4.
Statements Regarding Bear Stearns' Liquidity
497
E.
The Alleged Misstatements by the Bear Stearns Defendants are Material
497
F.
The Securities Complaint Has Adequately Pleaded Scienter Against the Bear Stearns Defendants
499
1.
Motive and Opportunity
499
2.
Conscious Misbehavior or Recklessness
501
G.
The Allegations of Loss Causation are Adequate
505
H.
The Securities Complaint Has Adequately Pleaded a § 20A Claim
508
I.
The Securities Complaint Has Adequately Pleaded Control Person Liability under § 20(a)
509
III.
THE MOTION BY DELOITTE TO DISMISS THE SECURITIESCOMPLAINT IS DENIED
510
A.
The Allegations
510
B.
The Applicable Standard
511
C.
The Securities Complaint Has Adequately Alleged Deloitte's Misstatements and Scienter
511
1.
Valuation Models and Fair Value Measurements
512
2.
The Hedge Funds
516
3.
The Collapse of Bear Stearns Is Evidence Of Scienter
517
4.
Reckless Disregard Rather Than Hindsight
518
D.
The Securities Complaint Has Adequately Alleged Material Misstatements
518
E.
The Securities Complaint Has Adequately Alleged Loss Causation
520
IV.
THE MOTION TO DISMISS THE DERIVATIVE COMPLAINT IS GRANTED
522
A.
The Parties
522
B.
Summary of the Derivative Complaint
523
1.
Bear Stearns' Acquisition of Encore Credit Corp.
524
2.
The Hedge–Fund Collapse
524
3.
Individual Defendants' Allegedly False and MisleadingStatements Issued During the Relevant Period
524
4.
The Improper Buyback and Insider Selling
525
5.
Bear Stearns' Subprime Disclosures and Their Aftermath
525
6.
The Acquisition of Bear Stearns by JPMorgan
526
7.
The Counts
528
C.
Derivative Plaintiff Does Not Have Standing
535
1.
Derivative Plaintiff Does Not Come within the “Fraud Exception”
535
2.
Derivative Plaintiff Fails to Establish a Double Derivative Suit
537
D.
The Derivative Claims Fail to Satisfy Rule 23.1(b)(3)'s Demand Requirement
539
1.
Derivative Plaintiff Fails to Establish the Futility of a Demand on the JPMorgan Board
541
E.
The Class Claim is Dismissed on Res Judicata and Collateral Estoppel Grounds
543
1.
Count XIII is Dismissed Under Res Judicata
543
2.
Count XIII is Dismissed through Collateral Estoppel
546
F.
The Derivative Defendants' Motion to Dismiss the § 10b, § 20A, § 20(a), and Common Law Claims Is Not Reached
547
V.
THE MOTION TO DISMISS THE ERISA COMPLAINT IS GRANTED
547
A.
The Parties
547
B.
The Plan
549
C.
Summary of the ERISA Complaint
551
1.
The Counts
551
2.
Bear Stearns Stock was an Imprudent Investment
555
3.
Notice of Excessive Risk
555
4.
Concealment of Risk
561
5.
Failure to Provide Complete and Accurate Information
562
6.
Conflicts of Interest
563
7.
Causation
564
D.
The Applicable Standard
564
E.
The ERISA Complaint Fails to State a Prudence Claim in Count I
564
1.
The Plan Agreement Does Not Establish a Duty to Divest the Plan of Bear Stearns Stock
565
2.
The ESOP Committee Does Not Have the Fiduciary Duty to Diversify or Divest Plan Investments
566
3.
Bear Stearns is Not a Fiduciary of the Plan
567
a)
Bear Stearns' Ability to Make Contributions to the Plan in Stock or Cash Does Not Establish a Duty of Prudence
568
b)
Bear Stearns is Not Liable as an ERISA Fiduciary Through the Fiduciary Duties of its Employees
568
4.
Bear Stearns Had No Discretion and Duty to Divest the ESOP of Bear Stearns Stock
570
5.
The ERISA Complaint Fails to Overcome the MoenchPresumption
570
6.
Defendants Had No Duty to Disclose and No Liability forMisleading Statements
575
a)
Defendants Had No Duty to Disclose Bear Stearns'Financial Condition
575
b)
Defendants Were Not Acting as Plan Fiduciaries When They Allegedly Made Affirmative Misrepresentations
577
F.
The ERISA Complaint Fails to State a Claim for Conflicts of Interest in Count II
578
G.
There Is No Liability for Defendants' Duty to Monitor and No Co–Fiduciary Liability
580
VI.
LEAD PLAINTIFF'S MOTIONS TO MODIFY THE STAY AND STRIKE EXTRANEOUS DOCUMENTS ARE DENIED
581
A.
Lead Plaintiff's Motion to Modify the Stay of Discovery is Denied as Moot
581
B.
Lead Plaintiff's Motion to Strike Extraneous Documents is Denied
581
VII.
CONCLUSION
584
[763 F.Supp.2d 442]
By Order dated August 18, 2008, the MDL Panel assigned a number of actions filed in United States District Courts for the Southern and Eastern Districts of New York to this Court. An Order dated January 6, 2009 consolidated the actions, appointed lead counsel, and scheduled the filing of consolidated complaints in the actions captioned In re Bear Stearns Companies, Inc. Securities, Derivative and ERISA Litigation.
These actions arose out of the March 2008 collapse of Bear Stearns, a well-regarded investment bank founded in 1923. This was an early and major event in the turmoil that has affected the financial markets and the national and world economies.
Motions to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) have been made by the Defendants with respect to each of the three consolidated
[763 F.Supp.2d 443]
complaints. The motions to dismiss the Securities Complaint are denied, and the motions to dismiss the Derivative Complaint and the ERISA Complaint are...
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