CIT Group Inc. has received preliminary court approval of a $75 million settlement to resolve allegations the commercial lender fraudulently misled shareholders about its exposures to risky mortgages and student loans. The class includes investors who owned CIT shares between Dec. 12, 2006, and March 5, 2008, and who bought preferred stock under an October 2007 offering. Shareholders claimed the New York-based company falsely assured that it maintained conservative loan portfolios and had set aside adequate reserves for expected losses. They said CIT’s share price tumbled as the truth became known and losses grew.
CIT filed for bankruptcy protection in November 2009, resulting in the loss of $2.3 billion of taxpayer bailout money, and emerged from Chapter 11 the following month. Its bankruptcy remains one of the five largest by assets in U.S. history, according to BankruptcyData.com. The company is now led by former Merrill Lynch & Co. Chief Executive John Thain, but operates under an agreement subjecting it to close scrutiny by the Federal Reserve Bank of New York following its earlier losses, amassed under Thain’s predecessor.
The settlement calls for CIT to pay $75 million in cash to be distributed among class members. In refusing to dismiss the case two years ago, Judge Barbara Jones said the investors had sufficiently alleged they were misled by CIT officials. The Plaintiffs accused CIT of failing to disclose a lowering of credit standards, misrepresenting the performance of subprime mortgage and student loan portfolios. According to Judge Jones, the Plaintiffs had also adequately shown that CIT directors sometimes approved the lowered lending standards while touting a “conservative” and “disciplined” approach to subprime lending. The directors learned of the weakened loan portfolios while publicly saying CIT would suffer “minimal” losses, according to the judge.
U.S. District Judge Barbara Jones in Manhattan granted preliminary approval for the settlement. A hearing to consider final approval is scheduled for June 13. The lead Plaintiff is Pensioenfonds Horeca & Catering, a pension fund for the Dutch hospitality and catering industry. The case is In re: CIT Group Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 08-06613.
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