Stunned Bear Stearns Investors Eye Legal Claims

March 17, 2008

Angry Bear Stearns Co. Inc. shareholders have wasted no time in calling their lawyers to pursue possible legal claims over the company’s $2-a-share fire sale to JPMorgan Chase & Co.

But while the deal may draw legal challenges from investors over its low price, it is unlikely the pact would be killed by the courts, legal experts say.

That’s because the venerable investment bank, which agreed to the emergency deal under pressure from the U.S. Federal Reserve as the credit crunch widens, appears to have few other options short of filing for bankruptcy, legal experts say.

Shareholders “could move to enjoin the deal, but that’s a tough hurdle,” said Michael Kelly, a partner at law firm McCarter & English in Wilmington, Delaware, who specializes in defending corporations in litigation. “I’m sure the board is going to say this is the best option in our judgment.”

Bear Stearns is being sold for just $236 million. The deal’s value is more than 90 percent below the company’s Friday closing share price of $30.85. But JPMorgan said the price tag would total about $6 billion to account for litigation and severance costs.

Shareholders hit by big losses on their Bear holdings are exploring all legal avenues, say class-action lawyers who specialize in bringing lawsuits against large companies. Possible plaintiffs include individual investors, institutions and company employees. The firm’s 14,000 staff own about 30 percent of the company.

“I can’t divulge privileged conversations, but shareholders don’t contact me when they are happy with the way things are going with their investments,” said Ira Press, a lawyer at New York-based class-action firm Kirby McInerney, which has spoken with dismayed Bear investors.

“This is a stock that has gone from $50 to $2 literally overnight, and I also know of people who had assumed that the worst had passed when it closed at $30,” he said.

Shareholders might sue Bear and its executives and officers for securities fraud, contending they failed to disclose the company’s true financial health, lawyers say.

Jeffrey Nobel, a partner at class-action law firm Schatz Nobel Izard in Hartford, Connecticut, said his firm had been contacted by both institutional and individual investors who bought the stock as recently as last week.

Some of these buyers, he said, took their positions after Bear CEO Alan Schwartz said in a televised interview on Wednesday that the company does not see any pressure on its liquidity and had about $17 billion in excess cash on its balance sheet.

“You have investors who are upset because they feel as though the company was not truthful in reporting its financial condition,” Nobel said.

Separate suits may be brought by Bear employees who hold company shares that are now virtually worthless, lawyers said.

Another type of lawsuit would challenge the buyout pact itself, but it may be tough for investors to argue that the company ignored other avenues that are better for shareholders and that there is a better way to proceed, Press said.

“There is a possibility that investors will challenge the fairness of the deal, though I would suspect that at this point Bear Stearns must be in dire straits” and that’s why it agreed to the buyout, he said.

Another class-action law firm, Bernstein Litowitz Berger & Grossmann in New York, is studying the situation and is in touch with Bear Stearns investors but has not yet made any decisions on filing a lawsuit, said partner Salvatore Graziano.

“It’s a fluid situation,” he said. “Clearly, we’re very focused on it.”

(Editing by Dave Zimmerman, Richard Chang)

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