Former shareholders of fallen mortgage giant Countrywide Financial Corp. are in line to recoup a fraction of their investments now that a Los Angeles judge has approved a settlement worth more than $600 million settlement.
The payoff doesn't come close to compensating for the money lost by investors. But it could prompt more lenders to settle legal disputes at the center of the housing bust.
Bank of America, which bought Countrywide two years ago, agreed to pay $600 million to end a class-action case filed against the company. KPMG, Countrywide's accounting firm, will pay $24 million.
Several New York pension funds who served as lead plaintiffs alleged that Countrywide hid how risky its business had become during the housing market's boom years. Calabasas, Calif.-based Countrywide was once the nation's largest mortgage lender.
The agreement stands to return about 40 cents per share of Countrywide's common stock, before legal fees and expenses. Consider that the stock peaked at $45 a share in February 2007, before the financial crisis. So an investor who held 100 shares could bank on receiving $40 for an investment that was once worth $4,500.
Shareholders did receive 0.1822 shares of Bank of America's stock for each share of Countrywide they owned when Bank of America acquired Countrywide. That worked out to about one share for every 5.5 shares of Countrywide stock. Shares of Bank of America closed at $14.34 on Tuesday. So that same 100 shares of Countrywide would be worth about $261 today in Bank of America stock.
Add the $40 from the settlement and those shares are now worth little more than $300.
Lawyers for the pension funds are requesting $56 million, or 4 cents per share, for fees and other costs.
Investors "will be compensated for a significant portion of the legal damages that they suffered as a result of what we believe was a violation of the securities laws," said Joel Bernstein, a lawyer for the pension funds. "They won't be compensated for every penny of that."
Bank of America has been trying to put Countrywide's legal problems behind it. In June, the Charlotte, N.C.-based company agreed to pay $108 million to settle the Federal Trade Commission's charges that Countrywide collected outsized fees from about 200,000 borrowers facing foreclosure.
It reached a settlement Monday primarily to keep legal fees from escalating, a bank spokeswoman said.
"Countrywide denies all allegations of wrongdoing and any liability under the federal securities laws," said Shirley Norton, a spokeswoman for Bank of America. "We agreed to the settlement to avoid the additional expense and uncertainty associated with continued litigation."
Plaintiffs attorneys have pursed lawsuits against numerous lenders and investment banks in the wake of the housing market's devastating downturn, and the Countrywide settlement could encourage even more such cases, said Paul Hodgson, a senior research associate at The Corporate Library, an independent corporate governance research firm.
"There are a lot of suits out there waiting to get launched," Hodgson said. "I think this is the opening of the floodgates."
Former Countrywide CEO Angelo Mozilo, former President David Sambol, former CFO Eric Sieracki and former board members were named in the litigation but are not contributing to the settlement.
But it does not end their legal problems. More than a year ago the Securities and Exchange Commission brought civil fraud charges against Mozilo and the two other former executives. Mozilo, the most high-profile individual to face charges from the government in the aftermath of the financial crisis, has denied any wrongdoing.
For Countrywide, "This is only a chapter and not the end of the book," said John Coffee, a securities law professor at Columbia University.
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