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Own a Stock and Get Sued: Update

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November 21, 2012 – Comments (0)

Board: Macro Economics

Author: yodaorange

Back in March 2012, I posted about an unusual shareholder lawsuit.[1] There have been a few developments worthy of an update.

Brief synopsis of the lawsuit:

1. Lyondell Chemical went through a Leverage Buyout in 2007.

2. In 2008, the company went bankrupt, in large part due to high debt taken on in the buyout.

3. In 2010, the bankruptcy trustee sued all investors that owned >=$100k of stock the day the buyout was consummated. There were >2,000 shareholders, of which Yoda was one.

4. The trustee used a “fraudulent transfer” argument saying the shareholders should have known that the stock was not worth the buyout price. The trustee has asked the court to order stockholders to forfeit some amount of the stock price, regardless of when it was purchased.


Current status:

1. The bankruptcy case is still active in the ‘Southern District of New York” aka New York City.

2. The bankruptcy judge has NOT ruled on the many requests to dismiss the claims against shareholders.

3. The large shareholders like Vanguard, Merrill, and Fidelity have NOT settled. They are able to amortize the legal fees over a much larger base, like hundreds of million $’s.

4. MANY SMALLER SHAREHOLDERS HAVE SETTLED THE CASE, PAYING “NUISANCE MONEY.” Let’s say you owned $100k of shares back in 2007. Lord knows what your financial position is in 2012. The legal fees for a small shareholder can easily run into the tens of thousands. Plus there is a monthly burn rate for legal fees that can run into the several thousands.

Some of these shareholders have decided to cut their losses and write a check to the trustee to stop the bleeding. The exact amount or percentage it takes is confidential, so every negotiation is handled as an independent event.

5. There is NO end in sight to the case. The judge has given no indication of when he will rule. The large shareholders filed their request for dismissal in early 2011, so it is going onto two years waiting for a ruling.

6. Clearly, the bankruptcy trustee set the cutoff too high at $100k. With the success he has had, it would not surprise me to see him amend the case to go down to say $25k shareholders. He has to weigh the incremental cost of adding the additional shareholders versus how many will settle for “nuisance value.” I do not know the time limits on how long he can add additional stockholders to the case. Possibly, the cutoff window has already passed.

7. DUE TO THE SUCCESS OF THIS CASE, I HEAR THAT SEVERAL MORE CASES HAVE BEEN FILED FOR DIFFERENT LBO’S. I have not spent the time to investigate which companies were involved, but there have been at least a few LBO’s that did not work out. I am confident that the bankruptcy trustee will go after smaller shareholders; say down to $25k given the success in the Lyondell case.

8. Stockholders stand ZERO chance of recovering any legal fees spent defending their case. There is NO upside, only downside.

9. BOTTOM LINE is that you might want to set up a “reserve” account if you owned any stocks that fit this pattern. Since it is after the fact, there is nothing you can do short of deceasing that would limit your liability for past ownership. I guess you could file personal bankruptcy to limit the damage, but that is not exactly cost free. Going forward, you should avoid investing in any company that might be put into this situation. Don’t ask me how to do that. My crystal ball failed to detect this liability in 2007 and I don’t think it has gotten any better in 2012.

10. The good news is that many shareholders are helping grow GDP by employing all of these bankruptcy lawyers. The last I heard, the Lehman tab is greater than $1 billion. The American Airlines tab just passed $200 million. Yoda, wanting to do his part supporting the economy, has NOT settled and is continuing to support the bankruptcy bar.


Painful to type this. . .

Yodaorange

[1] Yodaorange METAR post: Own a stock and get sued
http://boards.fool.com/own-a-stock-and-get-sued-29924569.asp...

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