States Jockeying To Control Suit Over Bear Stearns Demise

The high-stakes jockeying to direct the case and pick the lawyers who will pursue it comes as some lawyers are advising employee-stockholders who lost money in Bear's implosion to sue independently and not take part in any class-action settlement that may be brokered.

Winning the designation of lead counsel in the Bear Stearns class action could mean tens of millions of dollars in legal fees for the plaintiffs' firm selected. Under federal law, the choice is usually made by whichever investor can show the largest loss and a willingness to pursue the legal claims.

"In this case, as every lawyer knows, you're going to have very lucrative class-action litigation," an attorney urging Bear employees to "opt out" of the group lawsuit, Brett Sherman of Demarest, N.J., said.

Legal papers filed last week in federal court in Manhattan suggest that retirement funds overseen by the state of Michigan are most likely to take the lead in the case. Pensions for schoolteachers, police officers, judges, and other state employees sustained reported losses of more than $62 million on Bear Stearns stock between December 2006 and March 2008.

The Michigan funds are represented by Labaton Sucharow LLP of Manhattan and Berman DeValerio Tabacco Burt & Pucillo, which is based in San Francisco and Boston.

State retirement funds from Massachusetts are also seeking to lead the case, claiming losses of $21 million. The Bay State plaintiffs are represented by Bernstein, Liebhard & Lifshitz LLP of Manhattan. A third claim for lead status came from a San Antonio pension fund in concert with a Spanish investment company, SICAV Inversiones Campos del Montiel.

Judge Robert Sweet is expected to make the lead plaintiff and counsel designations as soon as next month. Bear Stearns investors are to vote Thursday on whether to approve the merger with JPMorgan & Co., which the Federal Reserve arranged after Bear faced a liquidity crunch in March. The deal initially valued Bear's shares at $2 each; the figure was later raised to $10.

There is no sign that some of the largest losers in the Bear Stearns implosion plan to lead the class action. The Michigan pension losses pale in comparison with those incurred by a British investor, Joseph Lewis, who reportedly lost about $1 billion when Bear went south.

Mr. Sherman said settlements in cases involving other companies indicate that Bear employees and others who may have lost $200,000 or more may be better off pursing their own suit and passing up any settlement that may be offered to the class. "Not all would have done better, but probably most of them would have done better," he said.

In recent years, an increasing number of institutional investors have opted out of class-action settlements in order to seek better results through free-standing litigation. In some instances, the breakaway investors have done so well as to raise questions about whether individual investors who stayed in the class got a fair shake.

A settlement relating to Time Warner's ill-fated merger with America Online delivered only a few pennies for each dollar of investor losses. However, The New York Sun reported in 2006 that the state of Alaska cut a $50 million side deal that the state's lawyers said amounted to 83 cents on the dollar. Lawyers for the University of California claimed the $246 million payment the school negotiated from Time Warner was between 16 and 24 times more lucrative than the class-action settlement, while CalPERS said its $118 million payment was 17 times greater than it would have gotten in the class.

While most who opt out of class securities settlements are institutions with losses in the tens of millions of dollars, Mr. Sherman said he thinks such a strategy could work even for those who lost much less. "I absolutely think it's viable," he said.

The lawyer also warned that Bear is asking employees taking severance packages to sign a "comprehensive waiver" that would preclude joining any securities suit against the company or its likely successor, JPMorgan.

The mere fact that Bear's share prices dropped does not give rise to legal liability on the part of the company or its officers. However, the securities lawsuits allege that Bear misled investors about its financial condition, including the value of assets backed by so-called subprime mortgages. The suits also point to rosy statements by the firm's CEO, Alan Schwartz. "Bear Stearns's balance sheet, liquidity, and capital remain strong," he told CNBC two days before the firm was all but forced to sell out to JPMorgan at a fire sale price. "Our liquidity position has not changed at all, our balance sheet has not changed at all."

JPMorgan's CEO, Jamie Dimon, predicted last week that transaction-related costs of the merger, including litigation, would be about $9 billion, up from an earlier projection of $6 billion. In addition to the shareholder suit, JPMorgan will inherit a variety of litigation on behalf of Bear's retirement plans, business partners, and even the owner of the land beneath the company's Manhattan headquarters.