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Published byAugustine Tyler Modified over 9 years ago
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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 10022 212-715-1179 richard.swanson@aporter.com
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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 351612
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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?”
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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.
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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
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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
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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
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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.
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8 Subprime Securities Litigation Failed Deal Litigation E.g., URI and others in Delaware Chancery Court Contractual remedies, MAC etc.
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9 Subprime Securities Litigation Defenses and Motions to Dismiss Tellabs: pleading standard and scienter (127 S. Ct. 2411 (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. 06-43, decided January 15, 2008) Dura Pharmaceuticals: loss causation (544 U.S. 336 (2005))
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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))
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11 Subprime Securities Litigation Some Special Considerations Credit Default Swaps (“CDSs”) Fund litigation Margin valuation litigation Debt enforcement litigation Valuation and internal controls
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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
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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
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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
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15 Questions? Feedback and Discussion
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