Subprime Securities Litigation Claims Law Seminars International Conference on the Subprime Lending Crisis New York Mariott Marquis Times Square Hotel New York, NY March 18-19, 2008 Richard P. Swanson Arnold & Porter LLP 399 Park Avenue New York, NY

1 Subprime Securities Litigation Securities Class Action Lawsuits – 48 to-date  Financial institutions re: loss disclosures – Toxic debt they didn’t get off the books fast enough  Mortgage originators – Few assets to recover against

2 Subprime Securities Litigation “You didn’t tell us what was there, or how bad the stuff was.”  One response: “If we had known how bad it was, why would we have kept some of it on our books?”

3 Subprime Securities Litigation Securities Claims Involving Origination  Note investors in securitization pools, SIVs and CDOs – Against originators, underwriters/securitizers, etc.  Not really started yet – collateral needs to be liquidated, etc.

4 Subprime Securities Litigation Securities Claims Involving Investment Mangers  E.g., State Street/Prudential, HSB, IDB  “You put us into this stuff” – KYC, suitability, etc. – Can include ERISA and breach of contract and fiduciary duty claims

5 Subprime Securities Litigation Common Issues and Themes  Fraud in the loan origination and underwriting process – Actions by the originator which permeate downstream  Due Diligence by underwriter/securitizer  Valuation – FAS 157 and Levels 1, 2, 3 – Were modeling assumptions too aggressive? – Mark to market, mark to model, mark to meltdown

6 Subprime Securities Litigation Common Issues and Themes (con’t)  Inadequate servicing  Inadequacies in delinquency and default reporting  Breach of securitization documents – Reps and warranties, eligibility, etc.  Accuracy of financial statements and disclosure documents

7 Subprime Securities Litigation Secondary Players  Trustees, servicers  Securitizers, Underwriters  Bond Insurers  Rating Agencies  Attorneys  Accountants – Typically auditors of the securitizers/underwriters, bond insurers, originators, etc.

8 Subprime Securities Litigation Failed Deal Litigation  E.g., URI and others in Delaware Chancery Court  Contractual remedies, MAC etc.

9 Subprime Securities Litigation Defenses and Motions to Dismiss  Tellabs: pleading standard and scienter (127 S. Ct (2007)) – Compare Accredited Home Lenders (07. Civ. 488 H) (S.D. Cal.) and Indy Mac Bancorp (07 Civ. 1635) (C.D. Cal.)  Stoneridge: secondary liability (No , decided January 15, 2008)  Dura Pharmaceuticals: loss causation (544 U.S. 336 (2005))

10 Subprime Securities Litigation Class Certification  2 nd Circuit IPO cases: need more than “some showing” to certify a class (471 F.3d 24 (2d Cir. 2006)  5 th Circuit Enron decision: need to show the existence of a cause of action on which reliance can appropriately be presumed (482 F.3d 372 (5 th Cir. 2007))  5 th Circuit Allegiance Telecom decision: loss causation needs to be demonstrated (487 F.3d 261 (5 th Cir. 2007))

11 Subprime Securities Litigation Some Special Considerations  Credit Default Swaps (“CDSs”)  Fund litigation  Margin valuation litigation  Debt enforcement litigation  Valuation and internal controls

12 Subprime Securities Litigation Some Special Considerations (con’t)  Possible 33 Act Claims – Section 11: misstatements in a registration statement, subject to a due diligence defense – Section 12(e)(2): misstatements by a seller of securities

13 Subprime Securities Litigation Some Special Considerations (con’t)  Multiple write-downs of some assets  Quality of the disclosures  Forward-looking statements and the “bespeaks caution” doctrine

14 Some Special Considerations (con’t) Enforcement and Investigation  SEC: Subprime Task Force – Make sure the values and the risks are disclosed  Federal Banking Regulators  Criminal investigations  State AGs

15 Questions? Feedback and Discussion