$125 Million Shareholder Settlement Approved in New Century Financial Collapse

A federal judge on Monday granted preliminary approval to a $125 million cash settlement for shareholders of bankrupt New Century Financial Corp., one of the largest lenders to collapse during the subprime mortgage meltdown.

The settlement involves three stipulations: Auditor KPMG LLP will pay $44.75 million; the underwriter defendants will pay $15 million; and New Century's former officers and directors collectively will pay more than $65 million.

During a hearing before U.S. District Judge Dean D. Pregerson in Los Angeles, Salvatore J. Graziano, a partner at New York's Bernstein Litowitz Berger & Grossman, called the settlement a "highly complicated matter" in which "each part really depended on the other."

Bernstein Litowitz, the lead plaintiffs counsel, represented the New York State Teachers' Retirement System. The settlement was reached during 11 mediation sessions that stretched out for more than one year, according to Bernstein Litowitz's unopposed motion for preliminary approval.

Six of the individual officer defendants, including former Chief Executive Officer Brad A. Morrice, former Chief Financial Officer Patti M. Dodge and Stergios Theologides, who was vice president and general counsel, were represented by Munger, Tolles & Olson.

Eight individual director defendants were represented by Gibson, Dunn & Crutcher. Paul, Hastings, Janofsky & Walker represented the underwriters, including J.P. Morgan Securities Inc., Deutsche Bank Securities Inc. and Morgan Stanley & Co. Inc.

Sidley Austin represented KPMG.

Morrice, Dodge and David N. Kenneally, the former controller, agreed on July 30 to a separate settlement with the U.S. Securities & Exchange Commission. Morrice will pay nearly $792,000, Dodge $550,000 and Kenneally more than $182,000.

The New Century Financial hearing came one week after U.S. District Judge Mariana P. Pfaelzer, also in Los Angeles, granted preliminary approval to a $624 million cash settlement for shareholders of Countrywide Financial Corp., another major subprime mortgager, now owned by Bank of America Corp. That agreement, in which Labaton Sucharow served as lead plaintiffs counsel, involved several former officers and directors of Countrywide and KPMG.

The SEC's case against Angelo Mozilo, Countrywide's former CEO, is pending.

(Published by The National Law Journal - August 10, 2010)