When asked to approve a $90 million settlement (which was to be paid by insurance coverage) between class action plaintiffs and the directors and officers in the In re: Lehman Bros. Sec. and ERISA Litig., Judge Lewis Kaplan issued a May 3, 2012 Memorandum and Order directing certain defendants (five officers), who had already allowed a retired Judge (specially retained to assist in the parties’ discussions) to review information regarding their assets, to provide that same financial information to the Court for an in camera review. Judge Kaplan will review that information in order to make a determination regarding the fairness of the settlement.

UPDATE: After reviewing the information, in a Memorandum and Order on May 24, 2012, Judge Kaplan approved the settlement, holding that, although he was "concerned at the lack of any contribution by the former director and officer defendanst to the settlement, Lead Counsel’s judgment that the $90 million bird in the hand is worth at least as musch as whatever is in the bush, discounted for the risk of an unsuccessful outcome of the case, is rasonable." 

The Court summarized the history of the settlement discussions (and impact of the litigation on insurance coverage):

• the insurance coverage for the individual defendants was originally $250 million;

• by late 2010, due to costs of defending that suit, the coverage was down to $180 million;

• the parties met with a mediator (retired Judge Daniel H. Weinstein) and during those sessions defense counsel stated that: (a) the directors and officers would not contribute anything toward a settlement beyond what was covered by the insurance; and (b) the specifics of the individual defendants’ financial information would not be disclosed to Lead Plaintiffs or their counsel;

• lead plaintiffs and their counsel were concerned about an objection from the public if the directors and officers "[got] off the hook without paying any money," and wanted to prevent such an objection;

• the parties engaged a former Judge (John S. Martin, Jr.) to evaluate whether the individuals had liquid assets (excluding primary residences and pensions) in excess of $100 million;

• Judge Martin had five officer defendants respond to confidential questionnaires containing that information;

• Judge Martin concluded that the assets were substantially less than $100 million.

In December 2011, Plaintiffs’ Lead Counsel submitted a proposed settlement with the directors and officers for $90 million. As Judge Kaplan described the latter settlement:

The entire $90 million, it is proposed, would come from insurance previously purchased by Lehman. The former directors and officers, despite the fact that each of them, if the settlement were approved, would pay nothing, yet would be released from all claims that were or might have been asserted against them in this action.

In reviewing a class action settlement for fairness, the Court is required to consider a number of factors, including the ability of the defendants to withstand a greater judgment and the reasonableness of the settlement in light of the risks of litigation.

At an April 12, 2012 fairness hearing, Judge Kaplan expressed the concern that it did not have "sufficient information regarding the ability of the directors and officers to satisfy a judgment in that case in the event the plaintiffs did not settle with them and ultimately prevailed." Counsel for Lead Plaintiff argued that the settlement was an "excellent" result and provided the Court with additional information (including a Declaration from Judge Weinstein regarding the mediation and the record from the proceedings before Judge Martin – but not the financial information disclosed by the officer defendants).

Judge Kaplan concluded that, if it were time consuming, difficult or costly to gather the information regarding the financial condition of the individual officers, he might not require it. However, in this case, the information regarding the officer defendants already had been gathered and submitted to Judge Martin (Judge Kaplan concluded that the likelihood of recovery against the officer defendants was higher than the possibility of recovery against the director defendants). He recognized that the officer defendants may not want to share information with Lead Plaintiffs or their counsel, but found there was no sound reason why the information that already had been provided to Judge Martin should not also be provided to the Court in camera. He directed them to submit the information by May 10, 2012.

Professor Barbara Black’s Securities Law Prof Blog has an interesting discussion of the case here.