Category — Securities Litigation

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• 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.

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.

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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.

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