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A federal judge in Los Angeles has approved a $601.5 million class action settlement between Countrywide Financial Corp. and its shareholders — the largest securities agreement to come out of the housing crisis. “The amount which is offered in this settlement, which is over $600 million, is very large,” said U.S. District Judge Mariana Pfaelzer in Los Angeles at a hearing on Feb. 25. “It’s among the largest settlements in the cases of this nature.” Pfaelzer gave her final approval of the deal, despite the fact that more than two dozen large institutional investors opted out of the settlement, forcing both sides to reduce the value from $624 million. In the revised agreement, the parties set aside $22.5 million in additional funds for Countrywide to resolve future settlements with opt-out investors. In court, Joel Bernstein, senior partner at New York’s Labaton Sucharow and lead plaintiffs’ counsel, played down the significance of the opt-out investors, noting that about 970 institutions stayed in the deal. The funds that opted out suffered losses that represented less than 8% of the total settlement dollars, a “relatively small portion of the entire pie,” he said. He said the agreement was the largest securities settlement to come out of the financial crisis. Many of the funds were very large, however. They include the nation’s largest public pension fund, California Public Employees’ Retirement Pension System, and institutional investors such as T. Rowe Price Associates Inc. and BlackRock Investment Management LLC. Funds representing employees of the states of Oregon and Michigan,and Fresno County, Calif., filed separate suits last month against Countrywide and its former officers and directors. Pfaelzer, while taking the actions of those funds into consideration, said their decisions didn’t persuade her to shelve the deal. “I’m satisfied the settlement was the result of a fully informed and arm’s length negotiations,” she said. “There’s no reason to think there was a lack of fairness in the negotiations.” She also noted that a recent settlement between the U.S. Securities and Exchange Commission and three former senior executives of Countrywide would provide an additional $48.1 million to shareholders in the class action. Still, Pfaelzer appeared surprised by the enormous expense of the case, particularly when the discussion came to attorney fees. “It’s startling how much litigation costs,” she said. “It’s always far more substantial than I think in terms of expenses.” Labaton Sucharow sought $46.5 million in attorney fees, nearly $1 million less than its initial request, which represented 7.59% of the total settlement. The new request represents 7.73% of the total agreement. Labaton Sucharow sought $8 million in expenses. The firm was hired on a contingent fee basis by the lead plaintiffs, which include New York State Comptroller Thomas DiNapoli — who administers several pension funds for employees of the state of New York — and various pension funds for employees of New York City. Another lawyer, J. Michael Hennigan, founding partner of Los Angeles-based Hennigan Dorman, told the judge that the entire legal team for the class reviewed nearly 30 million pages of documents — enough banker’s boxes to equal seven times the size of the Empire State Building. Such an effort cost $70 million of professional time, he said. Pfaelzer, who confessed she is “not as a rule very generously disposed toward attorney’s fees of this size,” said she was shocked by the sheer magnitude of the request in this case. But she also recognized that the percentage sought was below average when compared to similar settlements. “It’s very, very expensive to litigate a case like this,” Pfaelzer said. “I cannot predict what the outcome would’ve been.” In court, both sides recognized the risks incurred in going to trial. Although he had experts ready to testify that damages could reach $2.8 billion, Bernstein recognized the complexities of having to put dueling economists on the stand before a jury. He acknowledged that it would be difficult to prove that Countrywide and the individual defendants knowingly committed fraud. Countrywide’s lawyer, Brian Pastuszenski of Goodwin Procter, noted that “this case has played on during the past three years during one of the most tumultuous and catastrophic periods in this country.” He added that Countrywide and the individual defendants admitted to no illegal acts as part of the agreement. Instead, he said, Countrywide agreed to settle because “litigation is an expensive and time-consuming process.” Countrywide was the nation’s largest mortgage lender, originating more than $490 billion in housing loans in 2005. During the housing boom, the company engaged in riskier lending practices, offering pay-option loans and expanding its underwriting guidelines, and sold those loans as mortgage-backed securities. As its shares plummeted amid the economic meltdown, Countrywide was sold to Bank of America Corp. in 2008. The settlement resolves securities fraud claims on behalf of investors who purchased Countrywide shares between 2004 and 2008. Pfaelzer, at the end of Friday’s hearing, remarked about the developing case law that has come out of the housing crisis. “Anyone who is a participant in this settlement should be assured this has been thus far a real fight — a real legal fight,” she said. “We have a lot more to learn about the cases that still remain.” Contact Amanda Bronstad at [email protected].

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