Another federal judge is giving special scrutiny to a settlement that once might have been easily approved. This time, Manhattan federal district judge Lewis Kaplan wants to know how much money Richard Fuld has before he’ll decide whether to approve a $90 million proposed settlement with Lehman Brothers shareholders.
In a highly unusual ruling on Thursday, Kaplan ordered that the former Lehman CEO and four other former top Lehman officials hand over to him detailed information about their finances. Kaplan is concerned that the settlement, as it currently stands, would be covered by director and officer policies, and would not require the defendants to pay anything out of their own pockets. You can read Kaplan’s eight-page ruling here.
The ruling is all the more surprising because plaintiffs lead counsel at Bernstein Litowitz Berger & Grossmann had gone to unusual lengths to inform Kaplan about the defendants’ financial status. They had hired a former federal judge from the southern district of New York, John Martin Jr., to determine if the defendants’ combined liquid net worth exceeds $100 million. (According to Kaplan’s ruling, the defendants did this because they anticipated that a settlement that didn’t come out of the individuals’ pockets might cause a “hue and cry.”) The five defendants agreed to give Martin detailed questionnaires about their liquid net worth–including residences, aircraft, artwork, and jewelry–provided that he not share this information with plaintiffs counsel. Martin, now at Martin & Obermaier, LLC, concluded that the defendants’ combined “liquid worth” is “substantially less than $100 million.”
That wasn’t good enough for Kaplan, who expressed concern that the defendants might have substantial wealth beyond their liquid assets. In his ruling, he insisted that he see these questionnaires himself.
The individuals who are subject to this order are Fuld, former Lehman president Joseph Gregory, and former CFOs Ian Lowitt, Christopher O’Meara, and Erin Callen. Fuld is represented by Patricia Hynes of Allen & Overy; Gregory is represented by Israel David of Fried, Frank, Harris, Shriver & Jacobson; Callen’s counsel is Mark Davidson of Proskauer Rose: O’Meara is defended by Joshua Klein of Petrillo Klein & Boxer; and Lowitt is represented by Martin Auerbach of the Law Offices of Martin J. Auerbach. All the counsel either declined to comment, or did not return calls.
This $90 million settlement was reached last August less than a month after Kaplan largely denied defense motions to dismiss. Kaplan has approved a $426 million settlement with Lehman’s underwriters.
Rarely do officers or directors contribute their own money to settle shareholder claims, although it’s not unheard of. Kevin LaCroix, who writes the D&O Diary, points out the officer and director settlements in the Enron and Worldcom shareholder cases required those defendants to pay out of their pockets. And while some worried that those deals would set a precedent leading to more individuals personally contributing to settlements, that didn’t happen. “There was a lot of alarm that those cases would be a precedent, but they really weren’t,” said LaCroix.
LeCroix says this Lehman settlement could also be viewed as unique. “Lehman Brothers is such an unusual case,” he said. He added that he’s not surprised that Kaplan is giving this settlement so much scrutiny, but noted, “I don’t know if I’ve ever seen a court go to these lengths.”
Kaplan wants the information about the defendants’ finances turned over by May 10.
