Providian will pay $38 million to settle shareholders suit

By Michael Liedtke, The Associated Press
Friday March 22, 2002

SAN FRANCISCO — Embattled credit card issuer Providian Financial Corp. has agreed to pay $38 million to settle a class-action lawsuit filed by shareholders alleging the company inflated its profits by gouging its customers in the late 1990s. 

The proposed settlement, which still needs approval of a federal judge in Philadelphia, covers thousands of investors who bought Providian’s once high-flying stock between Jan. 21, 1999 and June 4, 1999. 

Before deducting attorney fees, the settlement works out to about $1.40 per share. The fees are expected to range between $9 million and $12 million, said New York lawyer Robert Finkel, who represented shareholders. 

Estimates on the shareholders’ damages during the period ran as high as $400 million. Finkel still believes Providian management defrauded shareholders but said proving the allegations in a trial might have been difficult because the company never restated its results during the period covered in the case. 

The tentative agreement doesn’t cover other class-action shareholder lawsuits filed late last year after San Francisco-based Providian shocked Wall Street by revealing huge loan losses that threatened to ruin the company. Those civil complaints are still in their preliminary stages. 

Providian doesn’t expect the settlement reached this week to affect its turnaround effort because the entire $38 million is covered by insurance, said spokesman Alan Elias. Providian didn’t acknowledge wrongdoing in making the settlement. 

The case revolved around allegations of abusive business practices that offered the first hint of trouble at Providian, which evolved from a small subsidiary of a Kentucky insurance company into one of the nation’s five largest credit card lenders. 

As it grew during the 1990s, Providian’s increased its profit partly by charging customers fees for everything from late payments to balance transfers. The aggressive sales practices helped Providian earn $296 million in 1998, but the shareholder suit alleged the profit was illusory because the way the company made its money. 

Acting on numerous customer complaints, authorities in California and Connecticut accused Providian of illegal business practices. The company wound up paying more than $400 million to settle the government investigations and class-action lawsuits filed on behalf of Providian’s credit card customers. 

During the first two weeks in 1999 after the government disclosed its investigations, Providian’s shares plunged from $62.06 to as low as $39.22. 

After settling the government’s complaints, Providian’s shares rallied and peaked at a split-adjusted $66.72 in October 2000. In late 2001, the stock fell to a low of $2.01 amid concerns that federal banking regulators would seize the company. 

Providian’s shares gained 25 cents Thursday to close at $6.15 on the New York Stock Exchange. 


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