Jaffe et al. v. HSBC

A rare jury trial in a securities class action has potentially left HSBC Holdings plc on the hook for more than $2 billion in damages. On May 7 a jury found it and three former officers of a mortgage lender it acquired in 2002 liable for securities fraud.

The long-running suit, filed in August 2002 in federal district court in Chicago, alleged that the lender, Household International Inc., and its chairman and CEO, CFO, and head of its consumer lending unit made false and misleading statements to investors that caused the share price to inflate. The plaintiffs, represented at trial by Michael Dowd of Coughlin Stoia Geller Rudman & Robbins, also claimed that the mortgage lender engaged in predatory lending and hid the quality of its loan portfolio to artificially bump up share prices.

When reports about Household’s lending practices began to leak out in 2001, the share price dropped to a seven-year low and, over the next year, lost 50 percent of its value. In August 2002 Household also restated its financial records because of improper accounting related to the company’s agreements with credit card companies. The restatement wiped out $386 million in earnings previously reported by the lender.

At trial, shareholders counsel asserted that the lender made 40 misleading statements over the class period. But HSBC, represented by Cahill Gordon & Reindel’s Thomas Kavaler, countered that all of Household’s practices were disclosed to investors and that the restatement was a good-faith mistake made on the advice of its auditors. (Arthur Andersen LLP, originally a defendant in the action, settled separately in 2006.)

The jury found for the shareholders on 16 of the 40 allegedly misleading statements and shortened the class period. At press time damages had not yet been calculated.

For Plaintiff Lawrence E. Jaffe Pension Plan et al.

Coughlin Stoia Geller Rudman & Robbins: Spencer Burkholz, Michael Dowd, Daniel Drosman, Azra Mehdi, counsel Cameron Baker, and associates Lawrence Abel, Luke Brooks, Jason Davis, and Maureen Mueller. (Mehdi, Baker, Brooks, and Davis are in San Francisco; the rest are in San Diego.) Coughlin was selected as lead plaintiffs counsel in 2002.

Miller Law: Marvin Miller. (He is in Chicago.) Miller was local counsel.

For Defendant HSBC Holdings plc et al. (London)

Cahill Gordon & Reindel: Susan Buckley, Patricia Farren, Thomas Kavaler, David Owen, Howard Sloane, and associates Jason Hall, Joshua Newville, Lauren Perlgut, Kim Smith, Scott Watnik, and Michael Wernke. (All are in New York.) Cahill was the third firm chosen to lead the case, after Milbank, Tweed, Hadley & McCloy and then Wachtell, Lipton, Rosen & Katz. It represented both the company and the individual defendants.

Eimer Stahl Klevorn & Solberg: Nathan Eimer. (He is in Chicago.) Eimer was local counsel.

—F.H

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