1 Fulbright & Jaworski L.L.P. Securities Litigation and the Financial Crisis

2 Financial Crisis Securities Litigation: Tale of the Tape After spawning hundreds of shareholder class and derivative actions, the financial crisis litigation engine is winding down At least 206 subprime-related and credit crisis-related federal Rule 10b-5 lawsuits have been filed since 2008, with 102 in 2008, 62 in 2009, 22 in 2010, and at least 2 thus far in 2011 –Source: The D&O Diary While new credit crisis-related cases have declined, the total number of securities fraud class action filings increased from 168 in 2009 to 176 in 2010 as more non-crisis cases were filed –Source: Cornerstone Research Credit crisis filings declined from 32.7% of total class action filings for 2009 to 7.4% of total filings for 2010 –Source: Cornerstone Research There have also been at least 25 ERISA class actions related to the financial crisis, as well as many shareholder derivative suits –Source: The D&O Diary

Typical Allegations In Financial Crisis Lawsuits Inadequate and misleading risk disclosures Misrepresentation of loan portfolio quality and extent of reliance on subprime or other high-risk loans False financial statements, improper accounting, and exaggerated valuations of loan portfolios Inadequate/understated reserves Market manipulation by large financial institutions Lack of internal controls Improper foreclosure practices –E.g., Pipefitters Local No. 636 v. Bank of America Corporation, No. 11 CIV 0733 (S.D.N.Y. filed Feb. 2, 2011): Securities fraud class action against BofA based on defective foreclosure paperwork Excessive executive compensation Insider stock sales 3

4 How Have Credit Crisis Class Actions Fared? At least 70 motions to dismiss have been granted for failure to satisfy federal pleading requirements, although some defendants were permitted to amend –Source: D&O Diary At least 50 motions to dismiss have been denied –Source: D&O Diary This ratio is similar to the overall dismissal ratio in the years after the Supreme Court’s Tellabs opinion, which reaffirmed stringent pleading requirements Recent Matrixx Initiatives Supreme Court decision could, however, lead to more denials of motions to dismiss First crisis-related securities class action jury trial resulted in $40+ million verdict against BankAtlantic Bancorp for allegedly misrepresenting quality of loan portfolio

5 Class Action Settlement Values Only 19 of the 200+ credit crisis federal class actions have settled –Source: D&O Diary Median and average settlements for credit crisis cases through 2010 have been $31.3 million and $103.1 million, respectively, which is three times greater than for non-credit-crisis settlements, although small sample size may skew results –Source: Cornerstone Research Significant settlements: –Countrywide Financial ($624 million) –Merrill Lynch ($475 million) –New Century Financial ($124.8 million) –MoneyGram International ($80 million) –Credit Suisse ($70 million) –American Home Mortgage ($37.3 million) –Ambac Financial ($33 million)

6 SEC Enforcement Actions SEC brought more than two dozen crisis-related enforcement actions and has recovered more than $1 billion in settlements. Highlights include: –SEC v. Citigroup, Inc., No. 10-CV (D.D.C. filed 2010) ($75 million penalty for allegedly misrepresenting subprime risk) –SEC v. Bank of America, No. 09 cv 6829 (S.D.N.Y. filed 2009) ($150 million penalty for failing to disclose Merrill Lynch bonuses; penalty increased from $33 million after court rejected initial settlement) –SEC v. Goldman Sachs, No. 10-CV-3229 (S.D.N.Y. filed 2010) ($535 million penalty/$15 million disgorgement for not disclosing Paulson role in constructing CDO investment) –SEC v. Mozilo, No. CV (C.D. Cal. filed 2009) ($67.5 million disgorgement/penalties against ex-Countrywide CEO for allegedly concealing subprime risk exposure and insider trading) –SEC v. Morrice, No. CV (C.D. Cal. filed 2009) (injunction and $700,000+ disgorgement/penalties against ex- New Century Fin. CEO for misrepresenting financial condition)

7 Auction Rate Securities Litigation Scores of lawsuits and numerous arbitrations and state and federal regulatory enforcement actions have been filed against brokers and underwriters of auction rate securities Regulators have secured more than $60 billion in ARS settlements Claimants and regulators typically allege that firms misrepresented liquidity of ARS markets, manipulated markets by creating illusion of liquidity, and/or failed to disclose degree of dependence on “support bids” to prevent auction failures ARS cases in federal court have routinely been dismissed for failure to allege falsity, scienter, and reasonable reliance –E.g., In re Citigroup, Inc., No. 08 Civ. 3095, 2011 WL (S.D.N.Y. Mar. 1, 2011) (dismissing claims that defendants manipulated market by creating illusion of liquidity); In re Merrill Lynch ARS Litig., No. 09 MD 2030, 2011 WL (S.D.N.Y. Feb. 9, 2011) (dismissing case and noting “robust” risk disclosures) Some courts, however, have denied motions to dismiss –E.g., Akamai Technologies, Inc. v. Deutsche Bank AG, _ F. Supp. 2d _, 2011 WL (D. Mass. Feb. 15, 2011) (denying dismissal in misrepresentation case and holding that defendant did not adequately disclose liquidity risks) Arbitration results have been mixed, with a number of significant awards against financial institutions

8 FDIC Litigation The FDIC has sent hundreds of demand letters and has authorized more than 150 lawsuits against officers and directors of failed banks At least six suits against 40 individuals have been filed to date: –IndyMac Bank Homebuilder Division (filed July 2, 2010) (fiduciary duty and negligence claims against 4 former officers) –Heritage Bank (filed Nov. 1, 2010): Alleges that 11 officers and directors breached fiduciaries and were grossly negligent in failing to manage and superrvise commercial real estate lending –Integrity Bank (filed Jan. 14, 2011): $70 million receivership suit against 8 former officials for losses incurred in high-risk loans –1 st Centential Bancorp (filed Jan ): Alleges that 12 former officers and directors caused at least $26.8 million in losses through 16 high-risk residential construction loans –Corn Belt Bank (filed March 1, 2011): Seeks at least $10.4 million from 4 former officers/directors for imprudent lending practices –Washington Mutual (filed March 16, 2011): Alleges that former CEO, COO, and home lending chief committed “gross mismanagement” by pursuing high-risk lending strategies with inadequate risk management; spouses of CEO and COO also sued for fraudulent conveyances )