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Originally published April 6, 2011 at 12:40 PM | Page modified April 7, 2011 at 6:50 AM

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WaMu shareholder lawsuit may settle with $200M-plus payout

Shareholders of Washington Mutual Inc. could see a bit of money for their virtually worthless stock if a tentative settlement cited in a federal court filing Wednesday becomes reality.

Seattle Times staff reporter

Shareholders of Washington Mutual Inc. could see a bit of money for their virtually worthless stock if a tentative settlement cited in a federal court filing Wednesday becomes reality.

The contemplated settlement is in excess of $200 million, according to an attorney familiar with the class-action lawsuit.

With 1.7 billion shares outstanding when the Seattle company became the nation's largest bank failure, such a settlement would amount to more than 11 cents a share — before subtracting attorney fees, which can run as high as 25 percent in a shareholders suit.

The settlement was reached within the past 10 days, the source said. It must gain approval of U.S. District Judge Marsha Pechman, in whose Seattle court the lawsuit has advanced slowly for the past three years.

Pechman, after being advised of the pending settlement, issued an order canceling a trial scheduled for 2012 and suspending other action in the case.

"The parties must feel pretty confident that they have a settlement," said Dave Simmonds, a Seattle shareholder-litigation attorney with Gordon, Tilden Thomas & Cordell who is not involved in the case.

Among other things, the suit alleges WaMu encouraged shoddy lending, inflated appraisals and made misleading statements about its financial condition; that its auditor, Deloitte & Touche, failed to audit WaMu properly; and that underwriters who prepared stock offerings didn't accurately disclose the company's true condition and risky business practices.

The suit names former WaMu Chief Executive Kerry Killinger; David Schneider, former head of WaMu's home-loans division; and Stephen Rotella, former chief operating officer.

The suit also targeted a blue-chip list of Wall Street investment banks, including Goldman Sachs, Lehman Brothers, Morgan Stanley and Deutsche Bank. They all have denied wrongdoing.

Several attorneys in the case either could not be reached or declined to comment, citing a confidentiality agreement.

The case consolidated more than 20 lawsuits filed against Washington Mutual Inc., the holding company for Washington Mutual Bank. Federal regulators seized the bank Sept. 25, 2008, and sold it to JPMorgan Chase for $1.9 billion. Thousands of local layoffs followed.

Pechman in October granted class-action status to the lawsuit, brought by plaintiffs including four pension funds — the Ontario Teachers' Pension Plan Board; police and firefighters retirement funds in Pompano Beach, Fla., and Detroit, Mich.; and a public employees retirement fund in Brockton, Mass.

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Much of the settlement money likely would come from insurance policies covering the defendants.

Killinger, Rotella and Schneider also are targets of a negligence lawsuit filed in federal court last month by the Federal Deposit Insurance Corp. (FDIC), which had sought $900 million from them before suing. The lawsuit doesn't specify an amount in damages sought.

Washington Mutual shares traded in the $40 range in early 2007 but fell to $1.69 before the bank was placed in FDIC receivership.

Even though settlement negotiations in class-action lawsuits typically take months, the FDIC suit "may have been the impetus to get this thing finalized," Simmonds said.

"It had to have been a factor."

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com

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