Nearly three years after being threatened with shareholder lawsuits over an accounting issue and insider-trading charges, Providian Financial Corp. has agreed to settle the consolidated class action.
The agreement, announced Monday, calls for a $65 million payment, which will be covered by the liability insurance policy of the San Francisco company’s directors and officers. It remains subject to finalization and court approval, though a court date has not been set, said Alan Elias, a Providian spokesman.
In a press release, he said the settlement “brings to a close the bulk of our remaining outstanding litigation pertaining to these events from the past.” That reference is to the subprime credit card issuer’s pre-turnaround period, when it was crippled by excessive losses caused in part by imprudent lending policies it followed under its founder and then-chairman, Shailesh J. Mehta.
Providian still faces a related suit in California state court, but the proceedings “have been stayed by agreement of the parties,” according to Providian.
Edwin Groshans, an analyst with Moors & Cabot Inc., said shareholder suits have not been the focus of recent investor attention. He called Providian’s settlement a “modest positive,” because it will not result in any earnings change.
The allegations uncover a few skeletons, though. Among the charges were that Providian officers made false and misleading statements in the second and third quarters of 2001 and committed insider-trading violations on Mr. Mehta’s watch. The suits sought damages, interest, costs, and attorneys’ fees.
In December 2002 the U.S. District Court for the Northern District of California denied Providian’s motion to dismiss. On Jan. 15 of this year it certified the complaint as a class action for investors who bought stock between June 6, 2001, and Oct. 18, 2001 — the day Mr. Mehta resigned.
Like other subprime card lenders, Providian faced scrutiny over rising losses in 2001. An accounting change it made in the second quarter of that year effectively tamped down its closely watched chargeoff rate and later angered some investors, who felt they had been misled.
The accounting change addressed how Providian records bankrupt accounts. Under the old policy, it charged off an account as soon as it learned a cardholder had filed for bankruptcy — even though issuers have up to 60 days to do so. On June 18, 2001, it started holding the accounts longer (within 60 days) and processing the losses in bulk. That change had the effect of pushing all bankruptcy-related chargeoffs from the last two weeks of June into the third quarter.
The change went unnoticed until an August 2001 filing with the Securities and Exchange Commission. In the 10 days after, its stock dropped 12%, triggering several lawsuits.
Some suits also alleged that Mr. Mehta, a group president, and the chief financial officer dumped $22 million of stock before the accounting change was disclosed. The two executives left Providian shortly after Mr. Mehta.
