National City Corporation case: UPDATE
Last Friday Delaware Chancery Court Judge William Chandler III approved a settlement in shareholder lawsuit against National City. Judge Chandler III awarded the shareholders' attorneys $400,000. In March, the court ruled that National City shareholders involved in the suit would receive no financial award. Attorneys have asked the judge to award $1.2million, but Judge Chandler II reduced it to one-third because $1.2million represents princely sum for a non-monetary, therapeutic and modest achievement . He reduced the original $1.2million to $400,000, the attorneys will receive an amount commensurate with the benefit obtained for the shareholder class and the amount of effort plaintiffs' counsel actually expended.

In return investors dropped their claims for the release of more than 400 pages of documents that detailed Cleveland-based National City's scramble to find a buyer last fall. National City tried to keep the records sealed, but the court released them after newspapers (The Plain Dealer joined the Columbus Dispatch ) and The Associated Press asked the judge that they should be made public.

In his 15-page opinion, Chandler said the new disclosures provided a benefit, albeit a meager benefit to shareholders.
Judge Chandler said the disclosures included:

•\tNational City's potential participation in the federal government's asset relief program (TARP).
•\tA potential conflict with National City's financial adviser, Goldman Sachs, which advised both PNC and National City at various times.
•\tInformation on how National City's board searched for buyers.
•\tNational City's plans for future growth had it remained independent.

We think the settlement is an overall disappointment.

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November 26, 2008 - The case was transferred to the U.S. District Court for the Northern District of Ohio.

April 21, 2008 - An investor in shares of National City Corporation (NYSE: NCC) filed a lawsuit in the Cuyahoga County Court of Common Pleas on behalf of all current and former National City Corporation employees who acquired National City Corporation common stock pursuant and/or traceable to a registration statement filed with the Securities and Exchange Commission (”SEC”) on December 1, 2006.

The complaint states that the December 1, 2006 Registration Statement was filed with the SEC so that National City Corporation could offer 2.4 million shares of stock to employees of Harbor Federal Savings Bank (”Harbor Bank”) under the Harbor Bank Employee Stock Ownership Plan and the Harbor Bank Stock Incentive Plan (collectively, the “Harbor Bank Plans”). National City Corporation acquired Harbor Bank on December 1, 2006. The December 1, 2006 Registration Statement contained misleading statements and omissions that violated the Securities Act of 1933.

Plaintiffs’ allegations include that the Registration Statement was materially false and misleading in that it included misleading and inaccurate statements and/or failed to disclose: (i) the fact that National City Corporation’s portfolio of collateralized debt obligations (”CDOs”), many of which were backed by subprime mortgage loans, was dangerously overexposed to risky and impaired CDOs; (ii) the fact that National City Corporation had failed to properly account for its highly leveraged loans and mortgage securities; (iii) the extent to which National City Corporation was exposed to securities backed by adjustable rate mortgages (”ARMS”), which would be toxic to National City Corporation once housing prices stopped increasing at a rapid pace; (iv) the fact that National City Corporation was using dangerously high levels of leverage to prop up its financial results, thereby exposing National City Corporation to a severe liquidity crisis; (v) the fact that National City Corporation’s liquidity position had deteriorated to dangerously low levels.

The complaint further alleges the Registration Statement was also materially misleading and inaccurate in that it included misleading and inaccurate statements and/or failed to disclose material information about National City Corporation’s loan origination and lending practices. In particular, the Registration Statement made materially misleading statements and/or failed to disclose: (i) that the Defendants had disregarded publicly stated underwriting and loan-origination practices to artificially inflate reported income, earnings and loan volume; (ii) that National City Corporation had made a substantial amount of loans without requiring documentation confirming the credit-worthiness of borrowers; (iii) that National City Corporation lacked the requisite internal controls to determine appropriate allowance for loan losses; (iv) that National City Corporation understated reserves and allowances for loan losses which did not properly reflect the risk facing National City Corporation for the purpose of artificially inflating National City Corporation’s reported income and earnings; (v) that National City Corporation improperly mischaracterized high-risk, low documentation loans as prime loans as opposed to sub-prime loans; (vi) that National City Corporation engaged in predatory lending practices; (vii) that National City Corporation’s purported financial success was the result of aggressively and improperly originating risky loans, without regard to its stated underwriting and origination policies, and without taking adequate reserves to reflect the risks associated with such loans; and (viii) that National City Corporation did not properly value and failed to disclose the ineffectiveness of its hedging with respect to loans held for sale, MSRs and retained interests.

National City Corporation is a financial holding company that provides commercial and retail banking, mortgage financing and servicing, consumer finance, and asset management services in the United States. National City Corporation is headquartered in Cleveland, Ohio.