In re Bear Stearns Companies Inc. Sec., 08 MDL 1963.

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Writing for the Court: SWEET, District Judge.
• 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.
• Docket Number: No. 08 MDL 1963.,08 MDL 1963.
• Decision Date: 19 January 2011

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.

No. 08 MDL 1963.

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.

OPINION SWEET, District Judge.

[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...