Lehman Brothers Holdings Inc., which hopes next month to win court approval of its bankruptcy reorganization, agreed to a $40 million settlement of investor lawsuits that claimed $7.7 billion of damages from mortgage debt.
According to papers filed on Wednesday evening with the U.S. bankruptcy court in Manhattan, Lehman would pay $8.3 million toward the settlement, and insurers for officers and directors would fund the remaining $31.7 million.
Court approval is required.
This payout represents about one-half of 1 cent on the dollar of the alleged damages suffered by two investor groups that bought $20 billion of residential mortgage-backed securities packaged and sold by Lehman, once Wall Street's fourth-largest investment bank.
"The opportunity to effectuate a settlement that resolves billions of dollars of exposure to the debtors and their estates in exchange for a relatively de minimus contribution of $8.3 million is in the best interests of the debtors, their estates and their creditors," Lehman said in a court filing.
Steven Toll, a lawyer for many of the investors, said the settlement will resolve "the entire Lehman MBS litigation."
The $40 million sum "is modest given the potential damages in the case, but under the circumstances it is a good result," he said. "The problem is there was just no money to get. There was only a limited insurance policy available for all the remaining claims."
Lehman said the accord will nearly exhaust the remaining coverage under its 2007-2008 directors and officers liability insurance program, and that such coverage will run out before the end of the year.
A lawyer for Lehman did not return a call seeking comment.
The investors accused Lehman of misleading them about the safety of tens of billions of dollars of securities backed by subprime and other risky residential mortgages.
Lehman was accused of ignoring underwriting guidelines, not reviewing the quality of the loans, and running an "assembly line" to bundle the loans into securities and maximize profit.
According to court papers, one of the settling groups bought $12 billion of securities issued between 2005 and 2007 by Lehman's Structured Asset Securities Corp affiliate. This group is led by a pension fund for a Washington state unit of the International Union of Operating Engineers.
The other group bought $8 billion of other mortgage securities, and is led by the Public Employees' Retirement System of Mississippi, the papers show.
Lehman filed the biggest U.S. bankruptcy on Sept. 15, 2008. If its reorganization wins approval at a Dec. 6 hearing, Lehman hopes by early next year to start paying out about $65 billion to creditors holding an estimated $320 billion of claims.