Fifth Third to Pay $16M to Settle Subprime Suit

Fifth Third Bancorp (FITB) will pay $16 million to settle long-standing charges that it misled investors about its financial condition on the eve of the mortgage meltdown.

The settlement, filed Tuesday in U.S. District Court in Cincinnati, would resolve a class action that claims Fifth Third told investors that the company performed solidly in the third quarter of 2007 despite a deterioration in its loan book.

The lawsuit, which was filed in June 2008 on behalf of investors who purchased trust-preferred securities from Fifth Third in the fall of 2007, charged Fifth Third with concealing information about its exposure to poorly performing real estate markets in Florida, Ohio and Michigan, the company's growing exposure to defaults on mortgage loans, the extent of decline in the quality of Fifth Third's capital base and the weakening quality of its assets.

Three quarters later, Fifth Third told investors that earnings would be reduced between $350 million and $375 million because of chargeoffs stemming from subprime losses, according to the investors, who said the disclosures caused the value of Fifth Third's trust-preferred securities to fall 34% below their offering price.

The suit charged the offering's underwriters, including Citigroup (NYSE:C), Merrill Lynch, Morgan Stanley (MS), UBS, Bank of America (BAC) and Credit Suisse (CS), with abetting the alleged deception.

Fifth Third sought to dismiss the case, charging that the lawsuit blamed the company for failing to predict the financial crisis. "Plaintiffs apparently believe that Fifth Third - which, like every other United States financial institution, saw its economic condition and stock price gutted by the credit crisis - somehow knew what was coming and failed to disclose it," the company wrote in court papers filed in July 2009.

In August 2010, U.S. District Judge Sandra Beckwith dismissed some of the charges against Fifth Third while allowing other parts of the case to proceed.

Fifth Third spokeswoman Debra DeCourcy declined to comment on the settlement. A lawyer for the plaintiffs did not respond immediately to a request for comment.

The settlement, which would cover all the defendants, will have to be approved by the court.