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It’s time to confront the third rail of shareholder litigation. It’s time to ask officers and directors to dig into their own pockets to settle shareholders suits. That’s what I’m hoping Manhattan U.S. district judge Lewis Kaplan decides to do as he reviews a proposed $90 million settlement of shareholder claims against the former officers and directors of Lehman Brothers. As the deal currently stands, the defendants—who include former Lehman CEO Richard Fuld and former president Joseph Gregory—won’t have to pay a penny of their own money to get rid of this litigation, which initially sought billions. Instead, Lehman’s director and officer insurance will pick up the tab. There’s nothing unusual about this, of course. No one expects an executive or director to suffer any personal financial consequences when they’re sued by shareholders, even when, as here, the plaintiffs are wiped out. Except, perhaps, Kaplan. The strong-willed judge has expressed concerns about this no-consequences settlement. As we previously reported, the judge earlier this month demanded more information about the defendants’ wealth before he’d decide whether to approve the $90 million deal. The plaintiffs lawyers, led by Max Berger of Bernstein Litowitz Berger & Grossmann, had anticipated that there might be some squawking over a settlement like this. So, before they presented the proposed deal to the court, they negotiated with Fuld, Gregory, and three former Lehman CFOs to find out if their combined liquid assets exceed $100 million. Mind you, the deal they struck was to evaluate only liquid assets, and not such things as real estate, pensions, art, antiques, or yachts. That was off limits. The defendants’ financial information was reviewed confidentially by retired federal judge John Martin Jr.; at the insistence of the defendants, the plaintiffs lawyers couldn’t see these documents themselves. Martin concluded that the five defendants had liquid assets substantially under $100 million, and presented that finding to Kaplan. But Kaplan wasn’t satisfied. “To let [the Lehman officers] off the hook without paying a nickel beyond the insurance, I’m being asked to buy a pig and a poke,” Kaplan objected at an April 12 hearing, according to the transcript. Simply being told that the defendants’ combined liquid assets were less than $100 million wasn’t enough for him. “What does that mean? Ninety-four million? Four million? I don’t know,” he said. He also pointed out that he “didn’t have the slightest idea” what assets these people had beyond liquid assets. So, in a May 3 ruling, he told the defendants to turn over to him the same information they gave Martin. Good for Kaplan. But there are some questions he hasn’t asked yet that I’d like to hear answers to. What’s with this $100 million threshold? Are you telling me that it would be unconscionable to entertain the thought of these five people pitching into a settlement if they didn’t have at least $100 million in liquid assets? And why was the inquiry limited to liquid assets? What would be wrong with Fuld or Gregory having to sell a yacht, or a second vacation home, or an antique apple peeler to help satisfy a settlement? These defendants aren’t collectively destitute by any means. The plaintiffs determined through public records that these five defendants own $53 million in real estate assets (net of mortgages). This figure includes Fuld’s half interest in a $13 million home in Jupiter, Fla.. Even though Fuld transferred his half interest to his wife for $100 in 2009, the plaintiffs assumed this transfer would be voidable as a fraud. In court filings here and here, the plaintiffs lawyers tout this $90 million settlement as an excellent result, compared to the uncertainties of taking the case to trial, or waiting longer to try to negotiate a different deal while the D&O insurance gets eaten up through lawyers’ fees and other legal costs. Plus, the defendants had made it clear that they weren’t paying a penny out of their pockets. No way. No how. “Counsel for the individual defendants consistently took the position that they would not contribute anything toward a settlement of this case,” the plaintiffs noted. Another problem for the plaintiffs is that none of the Lehman defendants have been sued by law enforcement, which weakens the plaintiffs’ bargaining position. The Securities and Exchange Commission hasn’t done anything, and neither has the Justice Department. (And that’s a topic for another day.) We contacted Berger, but he declined to comment. There was a brief moment in time, not so long ago, when it looked like officers and directors might be held a little more accountable for corporate scandals. In 2005 ten former directors of WorldCom contributed $18 million of their own money as part of a $54 million shareholder settlement. And ten former Enron directors paid $13 million of their own funds into a $168 million settlement of shareholder claims. And we’re talking directors here, who usually are much less culpable than officers. Was that just a fleeting anomaly? I hope not.

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