Some companies might want to make sure to be very careful before making large acquisitions. Otherwise they might find themselves fighting a legal battle for something the company being acquired did years ago. Such is the case for HSBC Holdings Plc, a British bank, which has recently been hit with the largest judgment yet made in U.S. courts. The judgment, a record breaking $2.46 billion, was made against HSBC by U.S. Judge Ronald Guzman following a jury trial in a class action against Household International, which is now a division of HSBC.
According to the class action lawsuit, Household International’s chief executive, chief financial officers, and head of consumer lending all made false and misleading statements about the company in order to artificially inflate the company’s share price. The lawsuit further alleges that Household International engaged in predatory lending and intentionally concealed the quality of its loan portfolio.
Reports of Household International’s lending practices began to reach the public in 2001, which resulted in the company’s share prices sinking to the lowest it had been in seven years. The class action lawsuit was filed against Household International in 2002, the same year that HSBC bought out the U.S. lender. Now HSBC is stuck dealing with the lawsuit. A spokesman for the company sounded confident however, saying that HSBC plans to appeal and believes that it has a strong case. Despite its embroilment in the current legal battle, HSBC seems not to regret the purchase of the U.S. lending company. On the contrary, it appears to be eager to continue the battle against the class action lawsuit. The spokesman did add, however, that the matter has been noted in HSBC’s regulatory filings. It might affect future acquisitions made by the British bank after all.
The case is notable because securities fraud class actions almost always settle before reaching a jury. Defendants frequently prefer to settle outside of court to avoid the negative media attention as well as to avoid the extremely high judgments. When a class is certified by a judge, it frequently puts pressure on the defendant to settle the case outside of court, given that class action status gives the plaintiffs greater leverage.
Plaintiffs in securities fraud class action lawsuits generally rely on the “fraud on the market” theory as a key tool in their litigation. This is the theory that the price of a security trading in an efficient market reflects all publicly available information about that security. Working on that premise, the theory assumes that investors rely on material misrepresentations which are reflected in market prices at the time that the security is traded. Like most securities fraud class action lawsuits, the one against Household International also relied on evidence that investors and the market relied on unreliable statements provided by high-level executives at Household International. Because of the misrepresentations of the company and its lending practices, investors were led to buy shares which they would not have otherwise purchased, or were led to buy them at a higher price than that at which they would normally have bought them.
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