Morgan Stanley and Van Kampen served as investment advisors to various closed-end municipal and taxable bond funds. In order to generate leverage, the funds issued auction rate preferred securities (ARPS). In February 2008, the downgrades of monoline bond insurers and other ripple effects of the financial crisis resulted in a virtual freeze in the ARPS market, thereby eliminating liquidity for investors in ARPS. The funds decided to redeem a percentage of their ARPS at par and replace the leverage with other types of financing (notably, tender option bonds). Classes of common stock shareholders in the funds sued Morgan Stanley Investment Advisors Inc., Van Kampen Asset Management, and others in shareholder derivative actions, and the boards of directors of the funds appointed special litigation committees (SLCs) in order to determine whether to support the derivative litigation.
Defendants engaged Compass Lexecon Affiliate, Professor Christopher Culp, along with a team in our Chicago office led by David Gross and Laura Yergesheva, to analyze the ARPS market and to determine whether shareholders were damaged by the boards’ decisions to redeem ARPS. In particular, Professor Culp and his team analyzed Plaintiffs claims that tender option bond financing was costlier and riskier than ARPS, and that the funds’ at-par redemptions of ARPS were inappropriate. Professor Culp concluded that the common shareholders of the Funds did not suffer any damages as a result of the refinancing of ARPS with tender option bonds; that both the cost and risk of tender option bond financing and ARPS financing for the funds are comparable; and the Funds made a reasonable decision to redeem ARPS at par. Both SLCs extensively cited Professor Culp’s expert reports and concluded that it was not in the funds’ best interest to support the derivative litigation. The Supreme Court of the State of New York, County of New York dismissed the derivative litigation, citing Professor Culp’s expert reports and the reports of the SLCs. Judge Marcy Friedman wrote that “Plaintiffs have failed to rebut the trusts’ showing and to demonstrate that the independent trustees’ determinations were not made in good faith after reasonable inquiry…The decision of disinterested trustees, based on a comprehensive report of a disinterested special litigation committee, is protected by the business judgment rule.” We were retained in this matter by Richard Rosen and others at Paul, Weiss, Rifkind, Wharton & Garrison LLP who successfully represented defendants.