An Updated Analysis of Subprime Securities Suit Dismissal Motions
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While many courts are showing a greater willingness to grant motions to dismiss in subprime-related securities class action lawsuits, some cases are surviving dismissal motions and others are settling for hundreds of millions of dollars, as a result of which the "watchword is uncertainty until a more consistent and predictable pattern emerges," according to a recent study.
In a June 2010 report entitled "Subprime Class Actions Revisited," Jonathan Eisenberg of the Skadden law firm examines 14 new subprime-related securities lawsuit rulings issued during the first five months of 2010. This report updates Eisenberg’s prior analysis of 16 dismissal motion rulings entered in 2009.
Eisenberg’s overall conclusions are that "courts are showing more evidence of subprime fatigue and a greater willingness to grant motions to dismiss even in cases that do not require proof of scienter," but while "recent trends have been more favorable for defendants, the results are by no means one-sided, and the final chapters of the subprime class action story have yet to be written."
Eisenberg notes that, by contrast to his earlier study, "more than half of the recent dismissals occurred in non-scienter Securities Act claims." Eisenberg also notes that courts continue to dismiss many of the Section 10(b) claims asserted in the subprime securities class action, "principally, but not exclusively, on the ground that the allegations of scienter are inadequate." Court has also found a number of the allegedly fraudulent statements immaterial as a matter of law.
With respect to the cases that have survived dismissal motions, the basis "overwhelmingly" are allegations related to "declining underwriting standards." In light of the numbers of cases that have survived the dismissal motions, as well as the significant dollar figures involved in some of the settlements, "while the story in the aggregate is positive for defendants, much risk remains in these cases." Overall, Eisenberg finds that he has "not found a single factor that explains the outcomes across all cases."
My running tally, listing (with links) dismissal motions rulings and settlements in all subprime and credit crisis-related lawsuits, can be accessed here. All of the decisions referenced in Eisenberg’s article are listed with links in my tally.
One interesting aspect of Eisenberg’s paper is with respect to his discussion of the difficulties plaintiffs face in trying to allege that defendants were "slow to recognize the enormity of the subprime crisis." He recites data from Bloomberg’s tally of subprime-related write downs showing that "less than three-tenths of one percent of the more than $1.75 trillion of global write-downs between 2007 and 2009 occurred prior to the third quarter of 2007." The rest occurred incrementally from the third quarter from the 2009.
Eisenberg suggests these data show that Judges "are and should be skeptical of the types of claims that could be made against virtually any financial institution that was late to recognize the damages ultimately inflicted by the subprim tsunami."
Special thanks to Jon Eisenberg for providing a copy of his article.
I digress. The courts are not doing their jobs, as Congress knifed the American public in the back.
Who am I? I am a finance professional who got stuck working with subprime derivatives for a hedgefund after the dot com collapse.
I KNOW that investors complained to the Commodities Futures Trading Commission as early as 2003 regarding the non-disclosure of the sale of naked or uncollateralized "collateralized" debt obligations.
I am frightened by our court system that the lawyers and especially the judges are not well informed about the products.
According to the SEC and the CBOE (Chicago Board of Option Exchange), if you "write" (sell) a "naked" or "exposed" (uncollateralized) call option, that is considered highly risky and the CBOE and the respective brokerages holding the traders' account will require a minimum net worth of $25,000 just incase the buyer goes after everything they hold. Writing uncollateralized or "naked" call options holds an UNLIMITED risk and the CBOE will not require the trader to write these options without an option approval level 5 to show that the fully understand what they are doing.
Options, Subprimes and Futures are all derivatives. Derivatives are just a term describing any financial instrument that is collateralized by another financial instrument. Options are collateralized or "secured" by 100 shares of underlying stock, Futures are collateralized by a specific number of commodities, subprimes are collaterlized by a bond in the same way.
When the subprime trader wrote or sold an uncollaterlaized CDO to the buyer, they assumed unlimited risk in the same manner that the "naked" call option writer does. The CFTC never enforced regulation that the risk or the type of collateralization be disclosed before the buyer and seller opened the position.
The CFTC did not require that any traders hold any licenses to prove they knew what they were buying or selling on behalf of their clients.
The SEC requires that all traders hold a Series 7 license to trade stocks, options and mutual funds on behalf of the client.
Because the CFTC did not enforce any regulation, we do not know that the traders knew what they were doing on behalf of their clients, except that they had to compete with the other firms for expected gains.
Investors KNEW in 2003 that these subprime dealers (aka. Countrywide, Bear Stearns, etc.) were not collateralizing the subprimes like they were supposed to.
Infact, although SFAS 140 legalized the Repo 105 transactions (ref: Lehman Brothers case); it is perfect evidence that the collateral (in this case, the bonds) were not with the subprime dealer when they sold the bonds to the investors.
The Repo 105 transaction is perfect evidence that the subprime dealers did not collateralized the bonds as they were supposed to.
Moody's and other rating agencies did not take the lack of collateral into account when they made their assessments to the media. This may have been an intentional move aligned with a conflict of interest. Why else would a business ruin their own credibility among their markets?
Also, Deregulation, not the Securities Act of 1933 made the CFTC the authority of subprime trading. Since the CFTC never took complaints, they have nothing on file for the investors to use in their defense against the dealers. There was no clearinghouse, no evidence.
The cases brought before the judges are LEGITIMATE cases of fraud. I do not care that they are too lazy to deal with it, we need better judges.
The subprime market is valued around "$300 trillion". That amount of money does not exist. Wall Street is only worth $40 trillion (appx). The US might be worth $70-100 trillion. There is simply not enough bonds to collateralize the amount of subprimes that were sold to investors. So there are quite a few toxic assets out there.
If anything, this should be producing ample LEGITIMATE cases on behalf of the ill-informed investor.
Subprimes were sold to investors to provide the dealers with financial inventory to sell ARM loans to "buyers" of real estate.
Also, realtors in groups have taken out ARM loans to purchase secondary properties to artificially prop the value of real estate way above the price equilibrium in their respective local markets.
Many are predators. There are realtors who convinced a non-legal immigrant to the US to buy a property worth $1 million on a salary of $35,000. And to take out equity loans to buy two vehicles worth $20,000 each. Again, the borrower speaks no English and makers only $35,000/year.
The realtors bribed our lawmakers to pass legislation to bail them out of their bad bets at taxpayer expense. This is unconstitutional, unethical on many, MANY levels and destructive macro-economic policy.
IF the judges sucked up the financial education, i promise these cases would provide lawyers with a lot of work. The legal empire will have it's own economy without pandering to political theatrics. Plantiffs may see the rewards. Where are the juries on this?
However, under the oath of duty and ethics; Congress is not interested in correcting the situation. They have no interest in regaining trust in AMerica's markets; which we very direly need for an economic recovery.
I highly hope that the courts will pull itself together so that plantiffs can take control and clean the mess up.