Can YOU be sued simply for owning stock in a company? Apparently so, if the company went bankrupt!

Imagine you have been working for a company for many years as a faithful employee. You have diligently put away money into the company's 401k program and invested in company stock. The company goes through a merger and you are issued new stock in the new company. Now that company goes bankrupt through no fault of yours and you find yourself being sued for the value of your stock at the time of the merger.  Does that make you feel secure in your investment portfolio?

This is exactly what is happening to many of the shareholders of the Chicago Tribune and LyondellBasell. In Bankruptcy Courts Part 8 - Vexatious Litigation and Abuse of Legal Process, I exposed how the bankruptcy courts in the Southern District of New York are allowing baseless lawsuits to be brought forth against shareholders who had no responsibility for the bankruptcy of the company. 

Imagine shareholders of LyondellBasell opening their mail to learn they are being sued!  One of the biggest problems behind this is New York Judge Robert Gerber, who is presiding over the case of Texas-based LyondellBasell, and who simply will not make a ruling on motions made in his bankruptcy court while shareholders get dragged through this process for nearly three years.  

Recently Thompson Reuters News and Insight's Nick Brown, wrote an article about a related lawsuit in the LyondellBasell case. This case was about a lawsuit between UBS and a hedge fund, Highland Capital Management. In this case, Judge Gerber actually made a ruling. What a shock!

It seems Gerber has a problem with rulings. We are still awaiting a ruling in Gerber's nearly $400 million blunder in the GM bankruptcy case. But I digress.

Judge Robert Gerber's Bankruptcy Blunder

Brown referenced the controversy we have pointed out in the LyondellBasell case because of Gerber's failure to act. "The Lyondell buyout continues to be a source of controversy, with litigation before Gerber alleging that the deal was fraudulent. Motions to dismiss that lawsuit remain pending despite having been filed more than 18 months ago," Brown stated.

In The Motley Fool blog site, information about these lawsuits is clearly laid out.

Following is an except from that article:

In 2010, the trustee for the bondholders filed a claim in bankruptcy court in New York. The trustee is using a new “fraudulent transfer” argument in the court case. They have named every person/entity that owned over $100k in shares on the date of the buyout as defendants. The trustee claims that the $48 per share buyout price represents a fraudulent transfer. Stated differently, everyone that received the $48 was not and IS NOT entitled to it. The lawsuit seeks to “clawback” the buyout funds. The trustee wants to use the clawed back funds to help make the bond holders whole.

This is without regard to how long the shares were held before the buyout was consummated. They could have been held one day or one decade, it does NOT matter. Let me emphasize the point. The trustee is not attempting to get any gains that were recognized by owning the stock. The trustee wants the bankruptcy court to order maybe 50% or $24 per share to be forfeited by the holders of the stock on the buyout date.

They have served court papers on all holders of the stock above the $100k threshold. It is on the order of 2,000 funds/advisers/trusts and INDIVIDUAL INVESTORS.

By the way, do you have any of your investments tied up in mutual funds, trusts or are you an individual investor in stocks? This precedent, if it holds up, could be aimed directly at you.

These cases are simple extortion by unsecured creditors and their lawyers against innocent shareholders. They know that many of these people cannot afford to fight and will be extorted to settle - especially when Gerber won't make a ruling on their motions to dismiss, thereby dragging out the process indefinitely as legal fees pile up for these innocent Texans, many of whom cannot afford to defend themselves.  Is this justice, New York style??

The Motley Fool article concludes stating, "BOTTOM LINE is you do not want to own any common stock that gets bought out through an LBO, then goes bankrupt. (Don’t ask me how you are supposed to always know this in advance.) If you own the shares as part of a mutual fund or ETF, they will fight the battle for you. If they lose, the losses will be amortized over the rest of the investments... If is not clear how this case will be resolved, but the financial outlays will be significant, win, lose or draw. Welcome to America. . ."

This is a sad state of affairs and shakes at the very foundation of our capitalist investment system. It directly effects you and your investments and retirement plans. We will bring you more information about this case in the near future.

In the mean time, let's hope Judge Gerber follows the instructions from Federal District Court Judge Denise Cote and actually makes some rulings. It is, after all, his job to do so...

 

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