A federal judge on Thursday approved a $40 million mortgage-backed securities settlement in a class-action lawsuit against former employees of Lehman Brothers (LEHMQ).

Judge Lewis A. Kaplan of the U.S. District Court in Manhattan's approval of the settlement ends more than three years of litigation between the former Lehman employees and union and pension groups that were suing them.

"While this settlement by no means compensates investors for the full amount of their damages, we believe it is an excellent result given the bankruptcy and limited insurance funds available," said Cohen Milstein Sellers & Toll PLLC's Steven J. Toll, a lawyer for the plaintiffs, in a statement. A Lehman spokeswoman didn't immediately have a comment.

Lehman's bankruptcy estate will pay $8.3 million to the plaintiffs, which include an engineers union, a boilermakers and blacksmith pension and pensions for public workers in Iowa and Mississippi. The rest of the money will come from an insurance policy for Lehman's former officers and directors.

The original suit was filed before Lehman's September 2008 bankruptcy filing and charged Lehman's officers and directors with giving investors misleading documents about the bank's credit-worthiness when it issued mortgage pass-through certificates in 2006 and 2007.

The individuals named in the suit'James J. Sullivan, Samir Tabet and Mark L. Zusy'all worked at Structured Asset Securities Corp., which was an affiliate of Lehman.

Lehman's collapse predictably spawned a spate of class-action lawsuits charging the company and its former officers and directors, including former Chief Executive Richard Fuld, with negligence and wrongdoing. The officers and directors insurance policies have paid for settlements of several of those cases.

Judge Kaplan last month signed off on the use of $90 million in insurance to settle a lawsuit between Lehman executives, including Fuld and former finance chief Erin Callan, with pension funds, companies and individuals as far away as Scotland, Ireland and Guam. Those investors bought about $30 billion in Lehman debt and equity a few months before the bankruptcy filing, investments that went sour when the bank collapsed.

Lehman earlier this year exited its bankruptcy, the largest in history, and then made an initial distribution to creditors a few weeks later. The next wave of distribution in the company's roughly $65 billion creditor payback plan tentatively is set for September.

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