The former shareholders of Bear Stearns Co., which was acquired by JPMorgan Chase & Co. ( JPM - Analyst Report ) , now have a reason to cheer as the senior executives of Bear Stearns have agreed to pay $275 million to settle a nation-wide litigation. The lawsuit accused these executives of misleading the investors regarding the deteriorating financial health of Bear Stearns in the run up to the financial crisis.

The cash deal will be covering all those investors who had Bear Stearns’ common share and call options, as well as the sellers of Bear put options from December 14, 2006 till March 14, 2008. However, the settlement deal does not specify how the money would be divided among the investors. Additionally, the deal would still require the approval of the court.

Further, Deloitte & Touche LLP, the independent auditor of Bear Stearns and a defendant in the case, is not a part of the settlement deal.

The investors led by Michigan Retirement Systems have alleged that Bear Stearns’ top management used deceiving models to increase the value of the assets and liquidity positions. The plaintiffs had also accused Bear Stearns’ management of failing to manage risks stemming from the subprime and other mortgage-related securities. This led to the fall of two in-house hedge funds in 2007.

Further, in early 2008, Bear Stearns announced that the collapsed hedge funds would be investigated by the regulators. This led to a sharp decline in the company’s share price. Thus, in March 2008, in order to prevent it from collapsing, JPMorgan acquired Bear Stearns with the help of the Federal Reserve for $10 per share.

Similar Settlements

Earlier, there have been several similar litigation settlements reached by the investors. In July 2011, Washington Mutual Inc., bought by JPMorgan, decided to pay $208.5 million to settle a class-action lawsuit by Ontario Teachers' Pension Plan Board and other investors. Washington Mutual was accused of securities fraud, dubious business practices and misleading financial reports.

Similarly in August 2010, Countrywide Financial Corp., acquired by Bank of America Corporation ( BAC - Analyst Report ) , agreed to pay $600 million to end several class actions brought on behalf of the investors in Countrywide stock. The lawsuits had alleged that Countrywide masked its mounting risks during the housing boom.

Likewise in January 2009, Merrill Lynch & Co., also bought by Bank of America, settled a class-action suit by paying $475 million. The lawsuit was filed by Ohio state teachers' retirement system and other investors who sustained huge losses after Merrill Lynch wrote down a hefty amount of assets backed by subprime mortgages.

Conclusion

Such settlements provide a sort of relief to the companies and their shareholders as it reduces the litigation overhang. Further, this also reinstates investors’ confidence in the judicial system.