Plaintiffs in one of the biggest U.S. investor lawsuits stemming from the financial crisis got a boost from a judge, who said a case against fallen investment bank Bear Stearns and its outside auditor, Deloitte & Touche, can go forward.
The decision means that one-time Bear Stearns investors can move ahead with a proposed securities class-action fraud case, though the judge threw out two related lawsuits that had been rolled into the litigation. The investors accuse former Bear chiefs of painting a wildly misleading picture of the firm's finances ahead of its March 2008 unraveling.
Among the defendants is former Bear chief risk officer Michael Alix, who joined the Federal Reserve Bank of New York in November 2008 as a top bank regulation adviser. Alix's lawyer was not immediately available to comment.
Representatives from JPMorgan Chase & Co., which bought Bear Stearns at a bargain price at the start of the credit crisis were also not immediately available for comment.
"It is important to recognize that in ruling on the defendants' motions to dismiss, the court was required to assume that the allegations in the plaintiffs' complaint were true. At this stage of the case the court was not permitted to and did not consider whether those allegations actually are true or whether the plaintiffs have evidence to support their allegations," a Deloitte spokesperson said in a statement.
"Deloitte believes that the claims asserted against it are meritless and intends to defend this case vigorously," the spokesperson said.
Bear Stearns disintegrated when the firm faced a run on the bank following enormous mortgage losses. Bear became the first investment bank to collapse in a credit crisis that later claimed Lehman Brothers and Merrill Lynch & Co. Inc.
The fraud case is one of many investor lawsuits to grow out of the crisis, although plaintiffs in such cases have typically faced an uphill battle to prove their claims. Auditing firms so far have been largely successful in fighting investor lawsuits, although in this ruling the judge said Deloitte would also have to remain a defendant for its role as Bear's auditor.
In his ruling, U.S. District Judge Robert Sweet in Manhattan refused to dismiss a lawsuit against plaintiffs led by the Michigan Retirement System, which held Bear Stearns shares in its portfolio. That means the fund can continue to press their claims and possibly bring it to trial.
Reached on Sunday afternoon, Thomas A. Dubbs, a partner at Labaton Sucharow and co-lead counsel for the state of Michigan said: "We are pleased by the thorough and comprehensive opinion of the court and expect a detailed announcement from Michigan in the coming days."
But the judge tossed out two related cases. One was a separate investor lawsuit; the other was brought on behalf of Bear employees who held the firm's stock in a retirement plan.
The written ruling was made public late on Friday.
At the heart of the securities fraud case is an allegation that Bear Stearns and top executives inflated the investment bank's stock price by using misleading mortgage valuations to conceal potential losses in the housing market.
The investors also accuse Deloitte of recklessly ignoring red flags about Bear's financial statements and did not adequately scrutinize its mortgage valuation models. Deloitte's audits "were so deficient that the audit amounted to no audit at all," the plaintiffs argued in court papers.
The case is in re Bear Stearns Companies, Inc. Securities, Derivative, and ERISA litigation, U.S. District Court, Southern District of New York, 08-1963.
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