Category — Litigation

If you have questions regarding the information in this post, please contact-

• Jim Benjamin, 212.872.8091, New York

The lawsuit volume related to the current market crisis has already surpassed the savings-and-loan cases of the early 1990s. An estimated 98 subprime and credit crisis related securities lawsuits were filed in 2008. We believe that securities litigation will continue to increase, as the successes of civil suits or government investigations and suits, coupled with subsequent public disclosure of financial services practices, spur further claims. With a stagnant economic climate, we believe that market participants will more actively seek to recoup their losses and regain profitability through litigation.

Similarly, the U.S. government could aggressively pursue securities litigation to recoup the taxpayer dollars put towards the Wall Street “bailout,” targeting companies whose investment practices or public statements may be seen as having contributed to the market crisis.

While shareholder suits against directors and officers made up the bulk of subprime litigation in the immediate wake of the collapse of Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch and AIG, a newer “wave” of credit crisis litigation may target companies outside the financial services sector. Investors have begun and may continue to sue companies that placed wrong-way bets on commodities futures or companies that have been undermined by their exposure to these failed financial institutions and to auction rate securities.

Several major lawsuits have already emerged against a diverse array of companies, including a chicken producer, a solar cell manufacturer, a wireless network and an energy holding group, all of which suffered significant losses after Lehman’s collapse; allegations include failure to disclose their heavy exposure to failed financial institutions, lack of diversification or high risk-taking practices, and issuance of materially false or misleading financial statements about their economic outlooks.

Plaintiffs, other than shareholders, may include securities issuers and underwriters, mortgage insurers, monoline insurers, credit default counter parties and collateralized debt obligations (CDO) service providers. Defendants to these cases may be CDO sponsors, mortgage lenders and brokers, asset managers, institutional trustees, credit default swap counterparties, insurers and rating agencies.

Rating agencies, such as Moody’s and Standard and Poor’s, could face a barrage of claims from both private financial entities and government regulators. Several securities class action cases by public retirement fund investors brought under the Securities Act of 1933 have included ratings agencies in their complaints, holding them liable for underwriting or appraising toxic mortgage-backed securities (MBS). Additionally, in a first-of-its-kind case, several community organizations in Los Angeles have brought a civil rights complaint against rating agencies for inflating ratings of mortgage bonds “designed to fail,” which, they claim, caused a disproportionate number of foreclosures in minority and low-income communities.

Investors in CDOs or MBS may bring claims against investment advisors for recommending unsuitable investments. Likewise, Employee Retirement Income Security Act (ERISA) claims against retirement fund managers who made allegedly risky investments with subprime exposure could create substantial litigation over fiduciary duties.

Tuesday, October 28:

Akin Gump Strauss Hauer & Feld LLP partners John M. Dowd and Andrew J. Rossman will be presenting a free webinar titled “Who’s Going to Court, Who’s Going to Jail?: Civil and Criminal Law Enforcement in the Wake of Financial Crisis.”  The program will address issues such as—

• assessing what laws, regulations and legal theories are available to federal and state law enforcement
• examining potential private litigation causes of action and the likely targets of such civil lawsuits
• evaluating the impact recent federal court rulings, such as Stoneridge, will have on civil litigation
• analyzing possible plaintiffs’ and defendants’ legal strategies in civil and criminal actions.

The live webinar takes place on Tuesday, from 10 a.m. to 11 a.m. EST.  To view the program, please go to the Washington Legal Foundation Web site at www.wlf.org.  The program will be recorded and available for later viewing on the Foundation’s Web site, as well.

Wednesday, October 29:

With credit tight, corporate managers are looking for other ways to grow their businesses.  Strategic partnerships fit the bill.  But corporate finance experts say such hook-ups—while often appealing—come with their own set of problems.

On Wednesday, October 29, Financial Week M&A reporter Tim Catts, along with Akin Gump Strauss Hauer & Feld LLP’s C.N. Franklin Reddick III and KPMG Corporate Finance LLC’s Cherie Smith Homa, will participate in a live Financial Week Webcast—”To Buy or Not to Buy? Why a Strategic Partnership May Be the Way to Go”-in which they will discuss the promise and perils of strategic partnering.

To register for this free webcast, visit the Financial Week Web site.

What follows is a client alert from Akin Gump’s litigation practice. A PDF of the full alert can be downloaded here.

If you have questions regarding this alert, please contact—

• Anthony T. Pierce, 202.887.4411, Washington, D.C.
• Mary A. House, 202.887.4143, Washington, D.C.

Government takeovers, bankruptcies, mortgage defaults and the broadening credit crunch have contributed to major losses across the financial services industry.  In particular, the approximately $55 trillion[1] market in credit default swaps (CDS)—many based on mortgage-backed securities—has contributed to the downfall of venerated financial institutions.  The market for CDSs is drying up, as protection sellers have had to write down huge losses on CDS portfolios.  Moreover, continuing Credit Events on CDSs means that literally trillions of dollars in CDS settlements are coming due.  Market participants, including both CDS buyers and sellers, are concerned about what rights, obligations and litigation considerations arise under CDS agreements when a Credit Event[2] on the underlying reference entity or obligation is noticed, or when a counterparty asserts an Event of Default and attempts early termination of the agreement.

Following is a discussion—generally applicable to CDS agreements—of what actions a market participant should consider in evaluating defaults, determining contract rights and managing losses.  Market participants should seek legal counsel for advice on specific agreements, as every agreement is different, and interpretation may depend on which version of the Master Agreement was chosen, as well as the Schedule, Annex, Definitions and Confirmations negotiated by the parties.[3] This article is not intended to provide legal advice and should not be relied upon as such.

Evaluating Defaults and Determining Contractual Rights and Obligations

One of the more serious questions of the unregulated CDS market is whether or not a protection seller currently assigned to pay out upon default of the reference entity or obligation has—or can raise—sufficient capital to do so.  Market participants should seek to minimize losses and consider litigation risks and opportunities by immediately organizing and evaluating information on outstanding CDSs.  As set forth in more detail below, market participants should: gather and index documentation on all CDSs; evaluate the risk of default of all parties and the reference entity and obligation; determine whether or not a Credit Event has already occurred; and determine whether or not an Event of Default has occurred.  If a Credit Event or Event of Default has occurred, this article provides a brief overview of relevant rights and obligations.

[Read more →]

The Securities and Exchange Commission (SEC) recently issued a manual from its Division of Enforcement and a request for public comment on fair value accounting, both of which may clarify the Commission’s actions and decisions.

If you have questions regarding the information in post, please contact-

Enforcement

• Jim Benjamin, 212.872.8091, New York

Fair Value Accounting

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

The SEC Division of Enforcement published its first manual to codify its practices and procedures for investigations. While intended as an internal staff reference, the document will offer insight on how the Commission operates in enforcement matters and what it expects in its requests for information.

The full manual can be found here.

The SEC is also requesting public comment until November 13 on fair value (or “mark-to-market”) accounting, for its study mandated by the Emergency Economic Stabilization Act of 2008. The Commission also welcomes public comments on the issues, point-of-view, research and opinions it should consider in conducting the study.

More information on submitting public comments can be found here.

[Read more →]

This is a client alert from Akin Gump’s litigation practice. A PDF of the full alert can be downloaded here.

If you have questions regarding this alert, please contact-

• Mary A. House, 202.887.4143, Washington, D.C.
• Anthony T. Pierce, 202.887.4411,Washington, D.C.

You can find the full alert here.

Tensions are rising in the financial industry over increasing terminations and defaults on over-the-counter (OTC) derivatives, or credit default swaps (CDSs).  With large investment banks seeking Chapter 11 protection, government bailouts, the takeover of Fannie Mae and Freddie Mac, and the tightening credit market, the approximately $55 trillion market in credit default swaps, many based on mortgage-backed securities, is facing difficult circumstances[1]. The sheer size of the market - and the number of speculators in the market - means that trouble in the CDS market has implications for market failure beyond the subprime mortgage market.  As trillions of dollars in CDS settlements are likely to become due, both protection buyers and sellers are wondering where the cash will come from and how to manage losses.

CDS Basics

Before the current credit crisis, many people were unaware of these financial instruments[2]. Beginning in the 1990s, large investors in such securities as corporate debt, municipal bonds or, more recently, asset-backed securities such as collateralized debt obligations (CDOs), started to use CDSs to hedge against losses on these investments.  A CDS is akin to insurance against an investment loss, whereby the entity seeking to hedge its loss, the protection buyer, pays a premium over time to a protection seller to reimburse it for the value of covered loss in its investment should a specified Credit Event [3] occur, such as a default or bankruptcy of the reference entity or obligation[4]. Buyers take a risk, however, regarding whether the protection seller will be able to payout upon a Credit Event.  Trades on CDSs are unregulated.  Only regulated entities, such as banks (as opposed to investment banks and hedge funds), are required to set aside reserves to cover potential CDS payouts.

[Read more →]

The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) yesterday issued interpretative guidance (the “Clarifications”) on fair value accounting that affords greater flexibility to banks and other holders of illiquid securities in estimating asset values under FASB’s fair value measurement rule, Statement of Financial Accounting Standards No. 157 (SFAS 157). These Clarifications have been issued in advance of additional interpretative guidance that the SEC and FASB intend to release by the end of this week.

This alert was produced by Akin Gump’s litigation section. Download the full text here.

Criminal cases come in all shapes and sizes in regulatory and business garb. They are not neatly labeled and packaged.  The consequences of all of these inquiries—private and public—can be fatal if not carefully and thoughtfully managed by experienced criminal lawyers.

Currently, there are 1,400 full-blown investigations underway in the country.  This current hysteria will make Enron look like child’s play.  Congress is considering spending $700 billion and the taxpayers want someone hung from the next tree. The citizen calls on the Hill are running 400-1 against the bailout legislation. The DOJ has sent document freeze letters to all agencies and institutions involved and the SDNY has issued Grand Jury subpoenas. The investigative committees on the Hill are sure to follow.

Why? This entire crisis is under a massive criminal/congressional investigation and the atmosphere is poisonous. That means every executive of every company or agency under inquiry can expect to be interviewed by someone who is working with or for the FBI. For example, suppose today, an internal auditor in a banking entity wanted to interview the former CEO about a deal with an investment banking house. These are complicated matters in a toxic environment that require counsel because how you behave during an inquiry is more important than the subject under inquiry.

For more information, please contact—

• John Dowd, 202.887.4386, Washington DC