The first subprime-related securities class action lawsuit was filed in February 2007, and so the subprime and credit crisis-related litigation wave will soon enter its fifth year. With the anniversary date just ahead, it seems like an appropriate time to step back for an updated interim status update. I have set out below a numerical overview of the case filings and case resolutions so far, followed by some observations about how the cases are developing.
New Case Filings
Though the depths of the financial crisis is now mercifully receding further into the past, credit crisis-related cases still continued to arrive during 2010, albeit in significantly diminished numbers.
As I noted in my overview of the 2010 securities class action lawsuit filings (here), the credit crisis cases were a significant part of all filings during the years 2008 (when there were 102 credit crisis-related lawsuit filings) and 2009 (62).
By contrast during 2010, there were only 23 new credit crisis-related securities lawsuits, representing about 13% percent of the total. Of these 23 new credit crisis cases, only nine of these cases were filed in the year’s second half, and only one was filed after August 2010. The subprime and credit crisis litigation wave, it seems, is winding down.
One factor complicating efforts to continue to track the filings is that over time it has become increasingly difficult to maintain definitional clarity about what exactly constitutes a subprime or credit crisis-related case. For that reason, published reports of the number of subprime and credit crisis securities suits vary. But the various reports generally agree that there are about 230 securities class action lawsuits have been filed since the beginning of the subprime litigation wave. For statistical simplicity, I have used the number 230 for analytical purposes in this post.
Dismissal Motion Rulings
Since the very first of these cases moved through the preliminary motions, I have tried to track the dismissal motions rulings. My running tally can be accessed here. As the number of rulings have accumulated it has become increasingly challenging to meaningfully sort out the rulings, but some generalizations are possible.
Not counting the handful of cases that have been voluntarily dismissed and not refiled, there have been dismissal motion rulings in a total of 106 of the cases, or about 46% of all of the subprime and credit crisis-related securities class action lawsuits lawsuits. (The counting gets a little complicated because some cases have had multiple rulings, and others have had only partial rulings).
For purposes of determining how the dismissal motions have been running, I have counted as dismissals all cases in which dismissal motions have been granted, regardless of whether the dismissal was with or without prejudice, but not counting as dismissals those cases where the dismissal motion was initially granted without prejudice and then subsequent dismissal motions were denied on rehearing. I count a case in which any part of the plaintiff’s claims survive as a dismissal motion denial, even though the motion may have been granted in substantial part.
Using these principles to categorize the various dismissal motion rulings, it appears that dismissal motion rulings have been granted in 53 cases, or half of all dismissal motion rulings so far. Of these 53 dismissals, 39 were granted with prejudice and 14 were granted without prejudice. In addition to these 53 dismissals, there were an additional seven cases in which dismissal motions were initially granted without prejudice but in which renewed motions to dismiss were subsequently denied.
Dismissal motions have been denied, in whole or in part, in 53 of the cases.
Based on the dismissal motions that have been heard so far, the dismissal rate on these cases is running at 50% compared to historical dismissal rates of securities class action lawsuits of about 40%.
Before jumping to any conclusions about the subprime lawsuit dismissal rate compared to more typical dismissal rates, it should be recalled that I have included in the subprime lawsuit dismissal rate even cases that were dismissed without prejudice. Some of these cases may yet survive renewed dismissal motions, as have several other subprime and credit crisis cases that were initially dismissed but that ultimately survived. Some prominent examples of these cases include the Washington Mutual case (refer here), the BankAtlantic case (here), the PMI Group case (here), and the Credit Suisse case (here).
It is also important to note that dismissal motions still have not yet been heard in over half of the subprime and credit crisis-related cases. It is entirely possible that the dismissal motions were ruled upon more quickly in many of the least meritorious cases, and that as other cases move toward ruling on the preliminary motions the dismissal rate move revert toward historical norms.
One final note about the dismissal motion rulings is that appellate courts have affirmed the dismissals of at least three cases: NovaStar Financial (here), Centerline (here) and Impac Mortgage (here).
Settlements (and a Trial)
So far, 17 of the subprime and credit crisis-related securities class action lawsuits have settled, representing aggregate settlement amounts of $1.930 billion. The average settlement amount is $113.54 million.
These settlement figures are substantially inflated by a few larger settlements. Indeed, just three settlements account for $1.335 billion of the aggregate settlement amount – Countrywide ($624 million), Merrill Lynch ($475 million) and Charles Schwab YieldPlus ($235 million). If these three jumbo settlements are removed from the calculation, the average settlement drops to $42.51 million – still a very large number but not quite as astonishingly large.
Only 17 cases have settled even though dismissal motions have been denied in 53 cases. Not only are there but a very few settlements overall, but the settlements are emerging at a very slow rate. Thus for example., during 2010, there were only eight settlements of subprime and credit crisis-related securities class action lawsuits, only two of which were announced after August 1, 2010.
It is worth keeping in mind that every now and then there is an occasional case that isn’t dismissed that doesn’t settle either. Not many securities class action lawsuits go to trial, but at least one subprime and credit crisis-related securities lawsuit so far has gone all the way through to a jury verdict.
In November 2010, a jury in federal court entered a plaintiffs’ verdict in the subprime-related securities class action lawsuit against BankAtlantic Bancorp and certain of its directors and officers. The jury awarded damages of $2.41/share, which published sources have suggested could be worth as much as $42 million. Interestingly enough, this case was one of those that was initially dismissed but that survived the renewed motion to dismiss.
Observations
Even if it is valid to observe that the subprime and credit crisis-related cases are being dismissed more frequently than is generally the case for securities class action lawsuits, it is also clear that the highest profile cases generally are surviving. Among other cases that have survived are those involving Citigroup (refer here), AIG (here), Countrywide (here), Fannie Mae (here), Washington Mutual (here), New Century Financial (here), Sallie Mae (here) and Bank of America (here).
In general, it seems that courts have proven to be wary of many allegations of fraud, in light of the global financial crisis. Courts have required specifics in order to allow cases to proceed. Where plaintiffs have been able to show, using internal documents or confidential witness testimony, that there was a mismatch between what a company was telling investors and what its people were saying internally, the cases have been allowed to proceed. Courts have been most receptive to this suggestion in the highest profile cases.
Some examples of cases where courts’ skepticism, arising from the extent of the global financial crisis, has been most pronounced have included the Security Capital Assurance case, in which (as discussed here), Southern District of New York Judge Deborah Batts wrote in her March 31, 2010 dismissal motion ruling that "defendants, like so many other institutions floored by the housing market crisis, could not have been expected to anticipate the crisis with the accuracy plaintiffs enjoy in hindsight."
Similarly, and as discussed here, in his March 17, 2010 opinion in the CIBC subprime-related securities suit, Southern District of New York Judge William H. Pauley III observed that:
The Complaint describes an unprecedented paralysis of the credit market and a global recession. Major financial institutions like Bear Stearns, Merrill Lynch, and Lehman Brothers imploded as a consequence of the financial dislocation. Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental measured response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud. …CIBC, like so may other institutions, could not have been expected to anticipate the crisis with the accuracy Plaintiff enjoys in hindsight
An example of a case in which courts have been persuaded to allow cases to proceed, notwithstanding these kinds of concerns, due to alleged gaps between what was been communicated externally and what allegedly was being said or done internally, is the Citigroup subprime-related securities lawsuit, where Southern District of New York Judge Sidney Stein noted in his November 9, 2010 opinion that the company allegedly was "taking significant steps internally to address increasing risk to its CDO exposure but at the same time it was continuing to mislead investors about the significant risks those assets posed. This incongruity between word and deed establishes a strong inference of scienter."
Another case where a court found a similar "incongruity" is the Fannie Mae subprime related securities lawsuit, in which (as discussed here) Judge Paul Crotty said in his September 30, 2010 order denying the defendants’ motion to dismiss as to one part of the plaintiffs’ allegations that certain emails on which the plaintiffs rely showed that "Fannie may have been saying one thing while believing another."
One particular type of allegation that has had success in a number of cases involving mortgage originators and against the organizers of mortgage loan pools or trusts is that, contrary to public statements about the underwriting discipline utilized in creating the mortgages, the mortgage originators had "systematically disregarded" their mortgage underwriting guidelines. An example of a case in which this allegation was sufficient to allow a case to survive a dismissal motion is the DLJ Mortgage Capital/ Credit Suisse subprime-related securities lawsuit (about which refer here) in which Southern District of New York Judge Paul Crotty denied the motion to dismiss solely as to plaintiffs’ allegations that the mortgage originator’s alleged ""systematic disregard of the mortgage underwriting guidelines."
There have been a number of dismissal motion developments that seem likely to be relevant in other dismissal motion rulings.
The first is that the U.S. Supreme Court’s opinion Morrison v. National Australia Bank clearly will be relevant to Section 10(b) cases filed against foreign domiciled companies. In the Morrison case, the Court found that Congress had not intended the ’34 Act to apply extraterritorially and that Section 10(b) applies only to transactions on U.S. exchanges and to domestic transactions in other securities.
There have already been rulings in at least two subprime cases in which courts have, in reliance on Morrison, granted motions to dismiss cases pending against non-U.S. companies. As discussed here and here, respectively, the subprime-related securities cases against both Swiss Re and Société Générale were dismissed in reliance on Morrison.
Many of the subprime and credit crisis-related securities class action lawsuits involve companies domiciled overseas. It may be anticipated that foreign-domiciled defendants in pending ’34 Act cases will seek to have the cases dismissed, or at least narrowed, in reliance on Morrison, which could affect a number of pending cases.
Another dismissal motion ruling that could affect a number of pending cases is Southern District of New York Judge Miriam Goldman Cedarbaum’s October 14, 2010 ruling in the case pertaining to Goldman Sachs-related entities mortgage-backed securities. The court held that the plaintiffs had not alleged "cognizable injury" where they had not alleged that they failed to receive payments due under the securities, but rather they have alleged that their investments have declined in value or are now riskier than when purchased.
As far as I am aware, Judge Cederbaum’s ruling is the first in which mortgage-backed investors’ Section 11 claims have been dismissed for lack of cognizable injury based on a failure to allege that payments due under the securities had been terminated or interrupted. There were quite a few of these mortgage-backed securities lawsuits filed during 2008 and 2009, and Judge Cedarbaum’s decision potentially could be quite significant in these other cases, at least where the investors have not alleged that payments due under the instruments have failed.
Another recent ruling that may suggest problems that many plaintiffs asserting Section 11 claim may fact is the dismissal on statute of limitations grounds of many of the claims asserted in the Barclays subprime related class action lawsuit (about which refer here). The ruling suggests that the statue of limitations could be a significant issue in many ’33 Act cases, particularly where the referenced offerings may have taken place well before the filing date of the lawsuit.
Many of the subprime and credit crisis-related securities lawsuits are yet to reach to the dismissal motion ruling stage. From the comments of many of the judges who have issued rulings, it is clear that the courts are struggling with the complexity and magnitude of these cases..
For example, Judge William Pauley noted in denying the motion to dismiss in the Sallie Mae subprime related case that the complaint was a "behemoth" containing "labyrinthine allegations." Similarly, in his dismissal motion ruling in the Citigroup subprime-related securities suit, Judge Stein emphasized length and even the weight of the complaint, noting that it "536 pages long, contains 1,265 paragraphs, and weights six pounds." In his dismissal motion ruling in the Raymond James Financial subprime case, Judge Robert Patterson Jr. bemoaned the amended complaint’s "extreme length," which, he said, represents "an independent ground for dismissal."
The courts may feel oppressed by the sheer mass of the plaintiff’s pleadings, but plaintiffs do face formidable obstacles in trying to build complaints sufficient to overcome the initial procedural hurdles. And the fact is that many of these cases are highly complex, implicating as they do the most exotic creations of Wall Street’s fevered imaginations.
In addition to daunting the courts, the sheer size and complexity of many of these cases may be delaying case resolutions, including settlement. The relatively small number of settlements of these cases so far may well be a reflection of the complexity of the cases. Despite these challenges, the cases will continue to grind their way through the system. Certainly the remaining cases will move toward the dismissal motion stage. And it seems likely that many more case will move toward settlement. 2011 promises to be a year when many more of these cases are resolved – though this process is also likely to continue for many years to come.
U.S. Supreme Court Grants Cert in Halliburton Case: It used to be relatively rare for securities cases to come before the United States Supreme Court. Now it seems that there are two or three important securities cases every term. The Court has already agreed to hear several securities cases during this term. And now the Supreme Court has agreed to hear yet another securities case.
As reflected on The 10b-5 Daily blog (here), on January 7, 2011, the Supreme Court granted the petition for writ of certiorari in the Halliburton case out of the Fifth Circuit. The case will address the question whether or not loss causation is a relevant issue at the class certification stage. I hope to have an opportunity to review this development at greater length in a future blog post. In the meantime, The 10b-5 Daily has done a good job linking to all of the relevant materials.
The First Bank Closures of 2011: We can all hope that the worst of the current wave of bank failures is behind us, but banks are nevertheless continuing to fail. After taking control of 322 banks between January 1, 2008 and December 31, 2010, this past Friday night the FDIC completed the first two bank closures in 2011 when it took control of banks in Arizona and Florida, as reflected here. We can certainly hope that there will be fewer bank closures overall in 2011, after the 157 bank failures last year (the highest number of bank failures since 1992).