JPMorgan Sets Aside $6 Billion to Combat 'Stock Drop' Claims After Bear Stearns Rescue

Eyed by the plaintiffs bar, the deal represents one of the largest collapses in shareholder value in corporate history
JPMorgan Chase & Co. is setting aside $6 billion to cover potential litigation as it agrees to buy stricken Wall Street giant Bear Stearns for just $240 million. Following the announcement Sunday that it is buying the bank for a fraction of its previous value, JPMorgan said it is estimating the cost of the transaction at around $6 billion -- taking into account the potential of litigation stemming from the drop in Bear Stearn's stock value and severance costs.

Charlotte Edmond

Legal Week

2008-03-17 12:00:00 AM

JPMorgan Chase is setting aside $6 billion to cover potential litigation as it agrees to buy stricken Wall Street giant Bear Stearns for just $240 million.

Following the announcement Sunday that it is buying the bank for a fraction of its previous value, JPMorgan said it is estimating the cost of the transaction at around $6 billion -- taking into account the potential of litigation stemming from the drop in Bear Stearns' stock value and severance costs.

The deal will be closely watched by the U.S. plaintiffs bar, representing one of the largest collapses in shareholder value in corporate history, with Bear Stearns being valued last year as high as $140 billion.

U.S. class action specialist Stember Feinstein Doyle & Payne had already announced prior to the takeover that it was investigating possible legal action against Bear Stearns relating to its collapse in share price.

So-called stock drop cases have been among the most lucrative sources of contentious work for lawyers in the U.S., but securities litigation has dramatically fallen in recent years.

The deal also sees Skadden Arps Slate Meagher & Flom brought in to advise Bear Stearns, with the New York leader fielding a heavy-hitting team under corporate partner Peter Atkins and including financial institutions co-head Fred White, corporate partner Frank Gittes and tax partners David Rievman and Ed Gonzalez.

Sullivan & Cromwell has been instructed for Bear Stearns' board of directors under chairman Rodgin Cohen, along with financial institutions partner Mitchell Eitel and corporate partner Jay Clayton.

Meanwhile, Bear Stearns' financial adviser, Lazard, has turned to Cravath, Swaine & Moore corporate partners Robbins Kiessling, Richard Levin and Erik Tavzel.

The rescue -- already described as "America's Northern Rock" -- has been backed by the U.S. Federal Reserve, which will lend $30 billion.

Bear Stearns has been at the center of the U.S. mortgage debt crisis, with JPMorgan's takeover saving the bank from collapse. The $240 million acquisition price represents a substantial discount on its share price at the end of trading on Friday, which valued the bank at around $3.5 billion.