September 26, 2009 5:33 PM

LITIGATION DAILY: Boies Schiller Files Suit Against Bear Stearns, Claims Former Stockholder Was Fraudulently Induced to Retain Shares

Posted by Alison Frankel

This story was originally published by The Am Law Litigation Daily.

Boies, Schiller & Flexner is going Bear hunting.

The firm has been talking with what partner Richard Drubel told us is "a substantial number" of former Bear Stearns shareholders who aren't part of the pending securities class action against the defunct investment bank. These are shareholders, he explained, who didn't buy or sell shares in the time frame covered by the class action, but sustained huge losses because they held onto their Bear Stearns stock. They claim that they didn't sell because they received false assurances about Bear's health--and assert that they lost millions of dollars as a result.

On Thursday the firm filed the first of what Drubel expects will be "a number" of fraudulent inducement suits against Bear Stearns. (The 60-page complaint, filed in Manhattan federal district court, also names former Bear CEO James Cayne, copresident Warren Spector, and auditor Deloitte & Touche.) Drubel's client in this first suit is Bruce Sherman, the former CEO of the money management firm Private Capital Management, which owned the largest block of Bear shares (almost 6 percent). Sherman's suit involves only his personal losses, which Drubel said amount to "tens of millions of dollars."

The complaint alleges that Bear execs Cayne and Spector repeatedly (and personally) assured Sherman that everything was fine at the investment bank, even when they knew that its mortgage-backed securities were drastically overvalued. "Defendants sought to induce Sherman to retain his Bear stock and to purchase additional shares of Bear stock," the complaint says. "Defendants knew that the market and the financial press would view Sherman's sale of his Bear stock as a loss of confidence in Bear by a well-known and longstanding investor. This, in turn, would have undermined confidence in Bear's management at a critical time."

The complaint also claims that Deloitte is liable for negligence under Section 18 of the Securities Act. The section is infrequently cited in class actions, Drubel said, because it requires a showing that an individual investor relied on the auditor's work. But because Sherman and the other major Bear Stearns shareholders Boies Schiller is talking to are not part of a class action, Drubel said, they can allege that they relied on Deloitte's audits. (“Deloitte believes the complaint to be totally without merit and will defend against it vigorously,” the accounting firm said in an e-mail statement.)

"This option is for substantial investors with substantial losses," Drubel said. "They're unusual cases."

A spokesperson for JP Morgan Chase, which acquired Bear Stearns in 2008, declined to comment on Sherman's suit, but the Litigation Daily has confirmed that the defense will be led by Eric Goldstein of Paul, Weiss, Rifkind, Wharton & Garrison, who's already defending Bear Stearns and JP Morgan in the Manhattan federal district court securities class action. Bear's summary judgment motion in that case has been fully briefed, with Paul Weiss arguing that the plaintiffs have failed to demonstrate any fraud by the investment bank.

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