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Originally published Friday, July 1, 2011 at 10:31 AM

WaMu shareholders may get 5 cents a share in $208.5 million settlement

A $208.5 million settlement has been reached in the lawsuit brought by a group of Washington Mutual shareholders against the failed lender's former top executives, directors, underwriters and accountants.

Seattle Times business reporter

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A nickel a share.

That's how much Washington Mutual shareholders could receive, on average, as part of a $208.5 million proposed settlement in the lawsuit brought by a group of pension plans, investment funds and individual investors against the failed lender's former top executives, directors and others.

According to papers made public Friday in federal court in Seattle, the executives and directors — a group that includes former Chief Executive Kerry Killinger — will pay $105 million, but the money will come from WaMu's insurance company, not the executives' pockets. A group of 14 securities firms will pay $85 million, and accounting firm Deloitte & Touche will pay $18.5 million.

It would be the largest federal securities class-action settlement ever in Western Washington, according to the lead plaintiffs' attorneys. It also would be one of the largest class-action settlements resulting from the financial crisis, trailing a $624 million settlement by Countrywide Financial and its accountant, KPMG, and $475 million by Merrill Lynch.

But it pales against the estimated 1.43 billion shares of WaMu common stock, 10.2 million shares of WaMu preferred stock, and millions of dollars' worth of notes and other securities that would be covered by the settlement.

The class action consolidated several lawsuits filed around the country dating to 2007, when WaMu began to stagger under the weight of its deteriorating mortgage portfolio.

Seattle-based WaMu was seized by federal regulators in September 2008 in the nation's largest bank failure and sold to JPMorgan Chase for $1.9 billion.

The suit alleged that WaMu and its leaders pursued high-risk, high-profit mortgage loans while assuring potential investors that "the company's rigorous underwriting standards and meaningful risk controls would protect the company against losses from borrower defaults. These assurances were false."

The plaintiffs said that violated federal securities laws because investors relied on those assurances when buying WaMu's stock and notes.

The securities firms named in the suit, including such big names as Goldman Sachs, Morgan Stanley and JP Morgan Securities — an arm of the same firm that later acquired WaMu's retail-banking operations — helped market the securities. Deloitte signed off on the financial statements that accompanied the offerings.

The settlement money would be allocated based on a complex formula reflecting what type of securities investors owned, when they bought and sold them, and what price they paid or received. The period covered by the lawsuit runs from Oct. 19, 2005 through July 28, 2008.

Plaintiffs' attorneys estimate that if everyone eligible to participate in the settlement chooses to do so, and all their claims are allowed, common shareholders would recover just 7 cents per share. Attorneys' fees would take 2 cents, leaving a nickel for the stockholder.

The attorneys, who've been working on the case without pay for more than three years, plan to request fees amounting to 22.5 percent of the total settlement amount, or $46.9 million, and up to $5.8 million in expense reimbursement.

Holders of the other securities covered by the settlement would receive different amounts — up to $7.23 per share of preferred stock, which sold for $1,000 a share when it was issued in December 2007. Shares of common stock in WaMu traded above $40 a share for much of that year. By Sept. 25, 2008, when WaMu's banking operations were sold to Chase, it was down to $1.69 a share.

The deal must be approved by U.S. District Judge Marsha Pechman. Dissatisfied class members would be able to opt out and pursue their claims on their own.

The plaintiffs asked Pechman to give preliminary approval so that eligible investors can be notified. They proposed a hearing for final approval be held in early November.

A key driver of the settlement was fear that the pool of insurance money might be depleted by ongoing litigation, including a suit brought in March by the Federal Deposit Insurance Corp. against Killinger, former chief operating officer Stephen Rotella and former home-loans president David Schneider, all defendants in the class action.

Trial in the shareholder lawsuit was set to start next year.

Brad Keller, of Byrnes Keller & Cromwell, one of the plaintiffs' attorneys, said the two sides began exchanging information as far back as October, but negotiations did not begin in earnest until February. The talks included "multiple mediation sessions" overseen by retired federal Judge Layn Phillips of Oklahoma.

Agreements in principle were reached with the executives and directors March 23 — less than a week after the FDIC sued Killinger, Rotella and Schneider — and with Deloitte a day later. However, attorneys on both sides said the FDIC suit had little or no impact on the settlement talks.

After another week of "intense" negotiations, the securities firms agreed on the outlines of a deal on March 30.

Killinger, Rotella and Schneider also have been negotiating with the FDIC to settle that case. But despite mediation sessions scheduled earlier this week, the two sides apparently are not ready to strike a deal.

The three former executives, as well as the wives of Killinger and Rotella, formally asked Pechman to dismiss the FDIC's suit. Friday was the deadline for them to respond; Pechman had moved back the deadline two weeks in order to give the two sides a chance to settle.

In their responses, the executives argued that the law generally prevents corporate managers from being held liable for business judgments made in good faith. They also repeated an argument that they've made before in other venues: that regulators, including the FDIC and the Office of Thrift Supervision, had plenty of chances to rein in WaMu's lending practices during the mortgage bubble, but failed to do so.

Shares of WaMu's bankrupt holding company, which continue to trade on the so-called Pink Sheets, closed at 12.8 cents Friday, down a fraction of a penny.

Current WaMu shareholders continue to hope for some recovery in the bankruptcy, which has become snarled in conflicting claims by different creditor groups over the company's remaining assets.

Five insurers who own WaMu bonds also are pursuing a case against JPMorgan Chase, alleging the banking giant improperly pressured the FDIC to seize WaMu and sell its retail-banking operations to JPMorgan at an unfairly low price.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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