In re Bear Stearns Companies, Inc.

398 Pages·2011·0.85 MB·English

Case 1:08-md-01963-RWS Document 168 Filed 01/19/11 Page 1 of 398
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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IN RE BEAR STEARNS COMPANIES, INC. 08 MDL 1963
SECURITIES, DERIVATIVE, AND ERISA
LITIGATION OPINION

This Document Relates To:

Securities Action, 08 Civ. 2793
Derivative Action, 07 Civ. 10453
ERISA Action, 08 Civ. 2804

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A P P E A R A N C E S:

Interim Co-Lead Counsel for the Securities Plaintiffs

KELLER ROHRBACK LLP
770 Broadway, 2nd Floor
New York, NY 10003
By: David S. Preminger, Esq.

1201 Third Avenue, Suite 3200
Seattle, WA 98101-3052
By: Lynn L. Sarko, Esq.
Derek W. Loeser, Esq.
Erin M. Riley, Esq.
Gretchen S. Obrist, Esq.

BARROWAY TOPAZ KESSLER MELTZER CHECK LLP
280 King of Prussia Road
Radnor, PA 19087
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
225 Broadway, Suite 1405
New York, NY 10007
Case 1:08-md-01963-RWS Document 168 Filed 01/19/11 Page 2 of 398
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.

425 California Street, Suite 2100
San Francisco, CA 94104
By: Joseph J. Tabacco, Jr., Esq.
Julie J. Bai, Esq.

LABATON SUCHAROW LLP
140 Broadway
New York, NY 10005
By: Thomas A. Dubbs, Esq.
James W. Johnson, Esq.
Michael W. Stocker, Esq.

Co-Lead Counsel for the Derivative Plaintiff

BROWER PIVEN, P.C.
488 Madison Avenue, Eighth Floor
New York, NY 10022
By: David A.P. Brower, Esq.

ROBBINS UMEDA LLP
610 West Ash Street, Suite 1800
San Diego, CA 92101
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
280 King of Prussia Road
Radnor, PA 19087
By: Joseph H. Meltzer, Esq.
Edward W. Ciolko, Esq.
Julie Siebert-Johnson, Esq.
Case 1:08-md-01963-RWS Document 168 Filed 01/19/11 Page 3 of 398
Peter H. LeVan Jr., Esq.
Shannon O. Lack, Esq.
Mark K. Gyandoh, Esq.
James A. Maro, Jr., Esq.

KELLER ROHRBACK LLP
770 Broadway, 2nd Floor
New York, NY 10003
By: David S. Preminger, Esq.

1201 Third Avenue, Suite 3200
Seattle, WA 98101-3052
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
225 Broadway, Suite 1405
New York, NY 10007
By: Milo Silberstein, Esq.

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
1285 Avenue of the Americas
New York, NY 10019-6064
By: Eric. S. Goldstein, Esq.
Brad S. Karp, Esq.
Lewis R. Clayton, Esq.
Douglas M. Pravda, Esq.

STEPTOE & JOHNSON LLP
1330 Connecticut Avenue, NW
Washington, DC 20036
By: Paul J. Ondrasik, Jr., Esq.
F. Michael Kail, Esq.

Attorneys for Defendant James E. Cayne

KRAMER LEVIN NAFTALIS & FRANKEL LLP
1177 Avenue of the Americas
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New York, NY 10036
By: David S. Frankel, Esq.

Attorneys for Defendant Alan D. Schwartz

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
4 Times Square
New York, NY 10036-6522
By: Jay B. Kasner, Esq.
Susan Saltzstein, Esq.

Attorneys for Defendant Samuel L. Molinaro, Jr.

SIMPSON THACHER & BARTLETT LLP
425 Lexington Avenue
New York, NY 10017
By: Michael Chepiga, Esq.
William T. Russell, Jr., Esq.

Attorneys for Defendant Alan C. Greenberg

SCHULTE ROTH & ZABEL LLP
919 Third Avenue
New York, NY 10022
By: Ronald Richman, Esq.
Jill L. Goldberg, Esq.

Attorneys for Defendant Warren J. Spector

WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, NY 10019
By: David B. Anders, Esq.
Meredith L. Turner, Esq.

Attorneys for Defendant Jeffrey Mayer

GREENBERG TRAURIG, LLP
200 Park Avenue
New York, NY 10166
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
200 Park Avenue
New York, NY 10166
By: Randy M. Mastro, Esq.
Robert F. Serio, Esq.

Attorneys for Defendant Michael Alix

WIGGIN & DANA LLP
450 Lexington Avenue, Suite 3800
New York, NY 10017
By: Scott D. Corrigan, Esq.
Jeffrey P. Wade, Esq.

Attorneys for Defendant Jeffrey M. Farber

WILLKIE FARR & GALLAGHER LLP
787 Seventh Avenue
New York, NY 10019-6099
By: Michael R. Young, Esq.
Antonio Yanez, Jr., Esq.

Attorneys for Defendant Deloitte & Touche LLP

CRAVATH, SWAINE & MOORE LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
By: Max R. Shulman, Esq.
Case 1:08-md-01963-RWS Document 168 Filed 01/19/11 Page 6 of 398

TABLE OF CONTENTS

I.  PRIOR PROCEEDINGS..........................................2 
II.  THE MOTION OF THE BEAR STEARNS DEFENDANTS TO DISMISS
THE SECURITIES COMPLAINT IS DENIED.........................4 
A.  The Parties ............................................4 
B.  Summary of the Securities Complaint ....................6 
1.  Bear Stearns History ...............................7 
2.  Bear Stearns Securitization .......................13 
3.  Leveraging ........................................17 
4.  The Hedge Funds ...................................18 
5.  Valuation and Risk ................................24 
6.  False and Misleading Statements ...................31 
7.  Accounting Standards Violations ...................71 
a)  GAAP Overview ............................................................................................................. 71 
b)  Fraud Risk Factors ......................................................................................................... 74 
c)  Audit Risk Alerts ............................................................................................................ 77 
d)  Internal Controls ........................................................................................................... 80 
e)  Financial Statements ..................................................................................................... 84 
8.  Banking Regulations Violations ...................100 
a)  Capital Requirements .................................................................................................. 101 
b)  Incorrect Marks ........................................................................................................... 104 
c)  VaR Misrepresentations .............................................................................................. 104 
9.  Scienter .........................................105 
10. Loss Causation ...................................117 
11. Additional Allegations ...........................120 
C.  The Applicable Standards .............................121 
1.  Pleading Scienter ................................124 
2.  Pleading Liability under Exchange Act § 20A ......129 
3.  Pleading Control Person Liability under
Exchange Act § 20(a) .............................129 
4.  Pleading Loss Causation ..........................130 
D.  The Allegations of Materially False and Misleading
Statements by the Bear Stearns Defendants Are
Adequate .............................................131 
1.  Statements Regarding Asset Values ................131 
2.  Statements Regarding Risk Management .............133 
3.  Statements Regarding the BSAM Write-downs ........151 
4.  Statements Regarding Bear Stearns’ Liquidity .....154 
E.  The Alleged Misstatements by the Bear Stearns
Defendants are Material ..............................155 
F.  The Securities Complaint Has Adequately Pleaded
Scienter Against the Bear Stearns Defendants .........159 
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1.  Motive and Opportunity ...........................160 
2.  Conscious Misbehavior or Recklessness ............165 
G.  The Allegations of Loss Causation are Adequate .......176 
H.  The Securities Complaint Has Adequately Pleaded a §
20A Claim ............................................183 
I.  The Securities Complaint Has Adequately Pleaded
Control Person Liability under § 20(a) ...............186 
III.  THE MOTION BY DELOITTE TO DISMISS THE SECURITIES
COMPLAINT IS DENIED......................................189 
A.  The Allegations ......................................190 
B.  The Applicable Standard ..............................191 
C.  The Securities Complaint Has Adequately Alleged
Deloitte’s Misstatements and Scienter ................193 
1.  Valuation Models and Fair Value Measurements .....195 
2.  The Hedge Funds ..................................206 
3.  The Collapse of Bear Stearns Is Evidence Of
Scienter .........................................207 
4.  Reckless Disregard Rather Than Hindsight .........210 
D.  The Securities Complaint Has Adequately Alleged
Material Misstatements ...............................212 
E.  The Securities Complaint Has Adequately Alleged
Loss Causation .......................................216 
IV.  THE MOTION TO DISMISS THE DERIVATIVE COMPLAINT IS
GRANTED..................................................222 
A.  The Parties ..........................................222 
B.  Summary of the Derivative Complaint ..................226 
1.  Bear Stearns’ Acquisition of Encore Credit
Corp. ............................................227 
2.  The Hedge-Fund Collapse ..........................228 
3.  Individual Defendants’ Allegedly False and
Misleading Statements Issued During the
Relevant Period ..................................229 
4.  The Improper Buyback and Insider Selling .........230 
5.  Bear Stearns’ Subprime Disclosures and Their
Aftermath ........................................231 
6.  The Acquisition of Bear Stearns by JPMorgan ......233 
7.  The Counts .......................................239 
C.  Derivative Plaintiff Does Not Have Standing ..........257 
1.  Derivative Plaintiff Does Not Come within the
“Fraud Exception” ................................259 
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2.  Derivative Plaintiff Fails to Establish a
Double Derivative Suit ...........................263 
D.  The Derivative Claims Fail to Satisfy Rule
23.1(b)(3)’s Demand Requirement ......................269 
1.  Derivative Plaintiff Fails to Establish the
Futility of a Demand on the JPMorgan Board .......274 
E.  The Class Claim is Dismissed on Res Judicata and
Collateral Estoppel Grounds ..........................280 
1.  Count XIII is Dismissed Under Res Judicata .......280 
2.  Count XIII is Dismissed through Collateral
Estoppel .........................................288 
F.  The Derivative Defendants’ Motion to Dismiss the §
10b, § 20A, § 20(a), and Common Law Claims Is Not
Reached ..............................................290 
V.  THE MOTION TO DISMISS THE ERISA COMPLAINT IS GRANTED.....291 
A.  The Parties ..........................................291 
B.  The Plan .............................................296 
C.  Summary of the ERISA Complaint .......................303 
1.  The Counts .......................................303 
2.  Bear Stearns Stock was an Imprudent Investment ...313 
3.  Notice of Excessive Risk .........................315 
4.  Concealment of Risk ..............................326 
5.  Failure to Provide Complete and Accurate
Information ......................................329 
6.  Conflicts of Interest ............................332 
7.  Causation ........................................334 
D.  The Applicable Standard ..............................335 
E.  The ERISA Complaint Fails to State a Prudence Claim
in Count I ...........................................335 
1.  The Plan Agreement Does Not Establish a Duty to
Divest the Plan of Bear Stearns Stock ............338 
2.  The ESOP Committee Does Not Have the Fiduciary
Duty to Diversify or Divest Plan Investments .....341 
3.  Bear Stearns is Not a Fiduciary of the Plan ......343 
a)  Bear Stearns’ Ability to Make Contributions to the Plan in Stock or Cash Does 
Not Establish a Duty of Prudence ................................................................................ 344 
b)  Bear Stearns is Not Liable as an ERISA Fiduciary Through the Fiduciary Duties 
of its Employees .......................................................................................................... 347 
4.  Bear Stearns Had No Discretion and Duty to
Divest the ESOP of Bear Stearns Stock ............350 
5.  The ERISA Complaint Fails to Overcome the
Moench Presumption ...............................351 
6.  Defendants Had No Duty to Disclose and No
Liability for Misleading Statements ..............363 
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a)  Defendants Had No Duty to Disclose Bear Stearns’ Financial Condition .................... 364 
b)  Defendants Were Not Acting as Plan Fiduciaries When They Allegedly Made 
Affirmative Misrepresentations .................................................................................. 369 
F.  The ERISA Complaint Fails to State a Claim for
Conflicts of Interest in Count II ....................372 
G.  There Is No Liability for Defendants’ Duty to
Monitor and No Co-Fiduciary Liability ................378 
VI.  LEAD PLAINTIFF’S MOTIONS TO MODIFY THE STAY AND STRIKE
EXTRANEOUS DOCUMENTS ARE DENIED..........................380 
A.  Lead Plaintiff’s Motion to Modify the Stay of
Discovery is Denied as Moot ..........................380 
B.  Lead Plaintiff’s Motion to Strike Extraneous
Documents is Denied ..................................381 
VII.  CONCLUSION...............................................389 

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Case 1:08-md-01963-RWS Document 168 Filed 01/19/11 Page 10 of 398
SWEET, D.J.

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 complaints. The
motions to dismiss the Securities Complaint are denied, and the
motions to dismiss the Derivative Complaint and the ERISA
Complaint are granted. The Lead Securities Plaintiff’s motions
to modify the PSLRA stay and to strike certain documents are
denied.