The Subprime Mortgage Fallout Yields $75 Million Settlement in CIT

March 14, 2012

Following on the heels of other successful settlements achieved in actions filed in the wake of the subprime mortgage crisis, lead plaintiff Pensioenfonds Horeca & Catering (“PH&C”), a Dutch pension fund, achieved an outstanding result for CIT Group, Inc. shareholders. With Robbins Geller Rudman & Dowd LLP at the helm, PH&C was able to obtain a $75 million settlement despite CIT’s bankruptcy filing in 2009 during the pendency of the litigation.

During the class period, defendants understated the risks and impairments to CIT’s subprime home loan and private student loan portfolios and failed to adequately reserve for the impairments to those portfolios. Specifically, as Robbins Geller uncovered during discovery, while the subprime market was collapsing and the delinquency rate on CIT’s home loans was spiking, defendants refused to adopt adequate reserve methodologies recommended by the company’s own Risk Management department, underreserved for impairments to the subprime home loans, and continued originating billions of dollars in risky loans to mask the disastrous state of CIT’s aging portfolio. Nevertheless, defendants reassured investors that CIT was “much more conservative” than other lenders, had “tightened home lending underwriting,” and that the “subprime profile is strong” and adequately reserved for. Beginning on July 18, 2007, however, defendants were forced to disclose the truth about CIT’s subprime home loans, announcing that the company would have to take a $765 million write-down on the loan portfolio and completely exit the home lending business. CIT’s stock price plunged on the news, but the revelations were far from over.

Even as investors began to learn the truth about CIT’s subprime home loans, defendants were busy covering up the risks to the company’s student loan portfolio. While defendants again assured investors that “there’s almost no credit risk” to student loans, that “non-performing assets are insignificant” and that they “don’t really emphasize the private loan at all,” CIT had already built up a portfolio of more than $113 million in loans to students of the sham Silver State Helicopters LLC vocational school. The entire Silver State portfolio was comprised of private, non-guaranteed loans which, by mid-2007, represented more than 31% of CIT’s total private student loans and over 20% of the company’s “at-risk” student loans. Unbeknownst to investors, by May 2007, CIT ceased issuing new loans to Silver State and placed it on the internal Suspended Accounts list as the school’s graduation rate fell below 10% and the delinquency rate on the loans rose above 30% – nearly seven times the average delinquency rate for student loans. While defendants desperately tried to sell the Silver State loan portfolio, investors were told nothing about the portfolio, and defendants failed to reserve for impairments to the loans. Even after defendants realized that they could not sell the loan portfolio and CIT’s auditor specifically told former CEO Jeff Peek that the company was “woefully under reserved, ”investors were still kept in the dark. It was only at the end of February that defendants were finally forced to reveal CIT’s exposure to the Silver State loans and their failure to properly account for those loans. And again, CIT’s share price plunged on these disclosures, falling to under $16 per share.

In January 2012, after years of intense litigation, Robbins Geller obtained a $75 million cash settlement from CIT and certain officers and directors who were at the helm prior to bankruptcy. The $75 million settlement is a result of the excellent and tenacious work by Robbins Geller. The Honorable Barbara S. Jones, who presided over the litigation, commented during the final approval of the settlement that “class counsel’s representation, from the work that I saw, appeared to me to be of the highest quality.”

According to Robbins Geller partner Henry Rosen, “This settlement is a real testament to the talented team who worked tirelessly on behalf of CIT investors. Our firm has the brightest people in the field, and without the dedication of the firm’s lawyers, investigators, forensic accountants and support staff, we would not have been able to develop the strong evidence of defendants’ falsity and liability and prepare the case for trial. In addition, without the significant contributions of time and attention by our client and lead plaintiff, PH&C, this settlement would not have occurred. They sought lead plaintiff status, led the investigation and prosecution of this action, and did whatever was necessary to get a class certified on behalf of damaged CIT investors.”

According to Tor Gronborg, one of the lead partners on the case, “Although it has become common for defendants in subprime lending cases to blame their company’s demise on the economy, the evidence developed before filing this action and during discovery demonstrated the individual defendants’ liability for the harm done to investors.” Matthew Alpert, a senior associate on the case, added that “whenever corporate defendants rely on the economic crisis of 2007/2008 as an explanation for why their loan portfolios and stock price imploded, investors are at risk of recovering nothing for the damage done to them. Through the review of millions of pages of CIT-related documents, interviews and depositions of more than 70 fact witnesses, and the tireless efforts of our in-house forensic accountants, plaintiffs were prepared to take this case to trial and prove that shareholders were defrauded. Outstanding settlements like this put corporate wrongdoers on notice as to the force this firm brings with it when it is retained to prosecute a securities fraud action.”

The litigation team at Robbins Geller Rudman & Dowd LLP, consisting of Henry Rosen, Tor Gronborg, Brian O’Mara, Robert Henssler, Matthew Alpert, Francis DiGiacco, and forensic accountants Christopher Yurcek and Terry Koelbl, together with lead plaintiff PH&C, was responsible for obtaining this extraordinary settlement on behalf of the class.

In re CIT Group Inc. Securities Litigation, No. 1:08-CV-06613 (S.D.N.Y.).

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