The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

In my recent subprime and credit crisis lawsuit status update (here), I commented that the defendants seemed to be getting the upper hand at the dismissal stage in many of these cases. Two recent dismissal motion rulings tend to corroborate this view. In addition, the defendants in the auction rate securities cases continue to have their dismissal motions granted.

SunTrust Bank: The first of these two recent dismissal motion rulings is the September 24, 2009 opinion (here) by Northern District of Georgia Judge Thomas Thrash, Jr. in the SunTrust Banks auction rate securities lawsuit. As reflected in greater detail here, the plaintiffs alleged that SunTrust Bank’s broker-dealer subsidiary sold them auction rate securities. The plaintiffs allege that the defendants failed to disclose certain features about the securities and about the auction rate securities marketplace. The plaintiffs also allege that the defendants engaged in manipulative auction practices.

Judge Thrash granted the defendants’ motion to dismiss the disclosure related allegations because the allegations "about the Defendants state of mind do not meet the heightened pleading requirements applicable to securities fraud cases."

As an initial matter, Judge Thrash found that the plaintiffs’ allegations were "not stated with particularity." Though the plaintiffs contend that "high level corporate officials" issued certain management directives, the plaintiffs "do not identify any of these officials, by name, by title, or even by job description." With respect to the supposed directives, the Plaintiffs "do not describe what these documents may have said, who issued them, or when they were distributed."

Judge Thrash further found that the plaintiffs’ allegations "do not give rise to a strong inference that the Defendants’ acted with an intent to defraud or with severe recklessness." Thus, while the complaint refers to supposed management directives and uniform sales materials, the allegations are "not strongly supported" in the complaint. The confidential witnesses on whom plaintiffs rely do not reference the supposed directives or sales materials, and "none of the Plaintiffs’ allegations mention a single communication from any high level corporate officials, let alone any management directives or uniform sales materials."

Judge Thrash found that "the more plausible theory is that high level corporate officials carelessly or negligently provided training on how to sell auction rate securities, and because of the improper training, many SunTrust brokers exaggerated the benefits," noting further that the allegations overall were "more consistent with a negligent state of mind than a fraudulent or reckless one."

The court did noted that "the only allegation that might suggest otherwise" is the contention that the defendant entities were among the companies the SEC investigated in 2006 for auction rate securities practices, and therefore the defendants’ senior executives "must have been aware of manipulative auction practices." But Judge Thrash found that the inference that the plaintiffs seek to draw from this allegation is "simply too weak and convoluted," because it required the court to assume that the executives continued the manipulative practices after the SEC investigation and willfully trained brokers to sell the securities without changing the practices or disclosing the practices to the brokers. The court said "Plaintiffs do not provide sufficient allegations to make anything more than a weak and convoluted inference" about this contention.

Finally, Judge Thrash found that the plaintiffs’ market manipulation allegations "do not meet the heightened pleading requirements applicable to securities fraud cases." Because plaintiffs had previously amended their complaint, he denied plaintiffs further leave to amend.

The SunTrust Banks auction rate securities lawsuit is the latest of the auction rate cases to be dismissed. (Refer to my recent post here for an overview of prior dismissals.) The SunTrust Bank case also follows the recent dismissal in the Raymond James auction rate securities case, where the case was dismissed not on the basis of a prior regulatory settlement, but rather because of pleading deficiencies, without regard to whether or not the defendant company had entered a regulatory settlement.

While there are a number of other auction rate securities cases in which the dismissal motions are yet to be heard, at this point, the plaintiffs have not yet survived a dismissal motion in any of the auction rate securities cases in which dismissal motions have been heard.

There were almost two dozen separate auction rate securities lawsuits filed (some with multiple complaints) after the auction rate securities market froze up in February 2008. But though the plaintiffs’ lawyers rushed to file these cases, so far the suits are not faring well at all for the plaintiffs.

Huntington Bancshares: The second of the two recent dismissal motion rulings involves the shareholders’ derivative suit filed in the Southern District of Ohio against Huntington Bancshares, as nominal defendant, and certain of its directors and officers. The complaint relates to Huntington’s July 2007 acquisition of Sky Financial. At the time the deal was announced, Huntington officials stated that the acquisition would be "accretive to Huntington’s earnings.

The complaint alleges that in acquiring Sky, Huntington also acquired Sky’s long-standing relationship with Franklin, which included $1.8 billion debt in the form of high-risk residential mortgages. Just five months after the acquisition, Huntington took charges of $300 million for loan loss allowances on the Franklin debt, which was followed by a "restructuring" of the relationship with Franklin. In the weeks following the restructuring, Huntington’s share price declined.

In their February 2008 complaint, the plaintiff alleged that the defendants knowingly concealed material adverse facts about mortgage-related losses resulting from the Sky acquisition and that Huntington knowingly acquired and continued to hold high-risk financial instruments that could not properly be valued. The defendants moved to dismiss the complaint on the grounds that the plaintiff had failed to make a presuit demand on Huntington’s board.

In a September 23, 2009 order (here), Judge George C. Smith granted the defendants’ motion to dismiss, holding under Maryland law that the plaintiff had failed to sufficiently allege demand futility.

Judge Smith first held under the first prong of the demand futility analysis under Maryland law that "Plaintiff has failed to plead with particularity that a demand would have caused irreparable harm to Huntington."

Judge Smith found further that "because Plaintiff fails to establish that a single member of the Board is conflicted or committed for purposes of establishing demand futility," the plaintiff had failed to satisfy the second prong of the demand futility analysis under Maryland law.

While at this point, it is difficult to generalize with respect to the subprime and credit crisis related derivative suits, as there have been relatively few dismissal motion rulings either way, the plaintiffs do not seem to be faring particularly well in dismissal motion ruling so far (see for example my recent discussion of the dismissal in the Citigroup derivative suit, here).

I have in any event added these two dismissals to my list of subprime and credit crisis-related lawsuit resolutions, which can be accessed here.

Many thanks to a loyal reader for providing a copy of the SunTrust Bank opinion.

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In a ruling with potential significance for the other remaining auction rate securities lawsuits, on September 17, 2009, Southern District of New York Judge Lewis A. Kaplan granted the defendants’ motion to dismiss, with leave to amend, in the auction rate securities lawsuit pending against Raymond James Financial and certain of its subsidiaries. A copy of Judge Kaplan’s opinion can be found here.

There have been prior dismissals granted in the many pending auction rate securities lawsuits. For example, dismissal motions have been granted in the auction rate securities lawsuits filed against UBS (refer here) and against Northern Trust (refer here), as well as in the auction rate securities lawsuit involving Citigroup (refer here, scroll down).

The Citigroup case had been based on a market manipulation theory rather than on a misrepresentation theory, and is noteworthy in that respect, but the dismissal of the Citigroup case based on the plaintiffs’ failure to adequately plead market manipulation is less relevant to the many other auction rate securities cases – including the one filed against Raymond James—that are based on misrepresentation theories.

Judge Kaplan’s September 17, 2009 dismissal in the Raymond James auction rate securities case is noteworthy in its own right and by contrast to the prior dismissals in the UBS and Northern Trust cases, because in the Raymond James, by contrast to UBS and Northern Trust, had not entered into regulatory settlements involving its investors. Indeed, Raymond James has been the target of certain high profile media criticism (refer here) as a "holdout" for its resistance to entry into a regulatory settlement.

Because Raymond James has not entered a regulatory settlement, the defendants in the Raymond James auction rate securities case were unable to seek dismissal on the same "absence of recoverable damages" theory as did the defendants in the Northern Trust and UBS cases. Thus, by contrast to the dismissals in those other two cases that turned on the existence of the regulatory settlements, the dismissal in the Raymond James case actually related to the sufficiency of plaintiffs’ allegations on the merits, and therefore may be of greater potential significance for other auction rate securities cases, particularly those relating to other defendant companies that have not entered regulatory settlements.

In granting the dismissal motions, Judge Kaplan very carefully distinguished the allegations that had been made against the various corporate defendants, and he carefully assessed the adequacy of the allegations as to each.

Judge Kaplan determined that many of the alleged misrepresentations were made by or on behalf of Raymond James Financial Services (RJFS), the parent company’s retail sales subsidiary that actually sold to investors the auction rate securities that other corporate subsidiaries had underwritten or managed the related auction processes. Judge Kaplan found that there were insufficient allegations concerning the alleged misrepresentations supposedly made to the plaintiff or as part of the overall scheme to be able to attribute misrepresentations as to defendants other than RJFS. He stated that the complaint "fails to allege how the remaining two defendant entities are responsible for the omissions."

Although this failure to attribute the alleged misrepresentations to the defendants other than RJFS alone would have been sufficient to dismiss the defendants other than RJFS, Judge Kaplan further considered the plaintiffs’ scienter allegations and concluded that the insufficiency of the scienter allegations provided an independent basis on which to dismiss the defendants other than RJFS, as well as for dismissing the complaint as a whole.

For reasons similar to those he expressed with respect to his ruling on the misrepresentation issue, Judge Kaplan concluded that the lack of particularized allegations of scienter were "fatal" to the claims against the defendants other than RJFS.

Judge Kaplan further found that plaintiffs’ scienter allegations in general were insufficient. First, he concluded that the plaintiff had not adequately pled "motive and opportunity." He first found that plaintiff’s allegations based on motivations to profit were insufficient. He allowed that plaintiff "comes closer" with her allegation that "defendants’ motive was to unload their excess and soon to be illiquid ARS inventory on unsuspecting customers."

Even these allegations, about the defendants’ supposed motive to unload excess inventory, were found to be insufficient because, Judge Kaplan held, they presumed that "there was a shared knowledge of the entire scheme" among all the defendants – yet the complaint failed, for example, to show that RJFS has knowledge of the issues surrounding the auctions or the securities inventory at the other subsidiaries.

Judge Kaplan noted that in effect the plaintiff sought to "aggregate the knowledge of two or more separate corporate entities on the basis that they share the same corporate parent and nothing more" – which Judge Kaplan found insufficient.

Finally, Judge Kaplan concluded that the plaintiff had not sufficiently alleged "conscious misbehavior or recklessness." Among other things, he found that:

The Court cannot infer that RJFS was aware it was marketing ARS to potential investors fraudulently because there is no showing that RJFS or insiders had access to the underwriters’ "unique" knowledge of the ARS market. Indeed, the complaint itself states that RJFS’s agents, the financial advisors who allegedly made the misrepresentations to investors, "lacked a rudimentary understanding about the auction rate securities and how the auction rate securities market functioned."

The September 17 dismissal is without prejudice. The plaintiff has until October 16, 2009, to submit an amended complaint. Whether or not the plaintiff in this case is successful in curing the pleading defects Judge Kaplan noted remains to be seen. But even if the plaintiff is able to overcome the pleading hurdle, Judge Kaplan’s analysis suggests that other auction rate securities plaintiffs may face significant challenges, even with respect to the defendant companies that have not entered regulatory settlements.

Many if not most of the auction rate securities lawsuits, like the one against Raymond James, involve multiple corporate subsidiaries as defendants, each of which touched a separate part of the auction rate securities process. Unless the plaintiffs in those cases are able to allege that the different subsidiaries had knowledge of the activities and operations of the other subsidiaries, the plaintiffs may, like the plaintiff in the Raymond James case, have difficulty establishing pleading sufficiency for their complaint’s allegations of misrepresentations and scienter against some or all corporate defendants.

To be sure, there may well be cases where plaintiffs can show – or at least allege—that, for example, the sales subsidiary was aware of the difficulties in the auction rate process or with excess inventory. But to the extent the plaintiffs failed to make or establish these connections in their complaint, their complaint may well be dismissed on the same grounds as in the Raymond James case.

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As the number of failed and troubled banks has surged, one recurring question has been whether the banks woes would lead to a new round of banking-related litigation. While a few lawsuits had emerged in connection with earlier bank failures (refer here), there really has been nowhere near the number of suits as might be expected from the number of trouble banks – until now, perhaps. The arrival of a couple of bank loan loss reserve lawsuits this past week, as well as other banking-related developments, raises the question whether the conjectured round of bank related lawsuits may now have begun.

First, on September 8, 2009, plaintiffs filed a securities class action lawsuit in the Central District of California against Pacific Capital Bancorp and certain of its directors and officers, as well as a stock analyst that follows the bank’s stock. According to the plaintiff’s counsel’s September 8, 2009 press release (here), the complaint alleges that the defendants misled investors by representing that:

that the Company was maintaining a strong allowance for loan losses which would enable it to absorb losses in its portfolio. As alleged in the complaint, defendants’ misstatements and omissions relating to Pacific Capital’s loan loss provision caused the Company’s common stock to trade at artificially inflated levels between April 30, 2009, when the Company reported that it maintained its loan loss provision at a very high level, through July 30, 2009, when the Company admitted that it had not adequately reserved for loan losses, had not applied a conservative reserve methodology, and needed to record an additional loan loss provision of $117 million. The "buy" rating issued by the analyst defendants on the Company’s common stock also contributed, as alleged, at certain times during the Class Period to the artificial inflation in the price of Pacific Capital stock.

Second, on September 11, 2009, plaintiffs filed a securities class action lawsuit in the Northern District of California against UCBH Holding and certain of its directors and officers. (UCBH Holding is a bank holding company for United Commercial Bank, a California-state chartered bank with its headquarters in San Francisco, refer here.) According to the plaintiffs’ lawyers’ September 11, 2009 press release (here), the complaint alleges:

UCBH knowingly falsified its financial statements by concealing the rising level of loan losses and non-performing loans through a series of improper accounting tricks and outright deception of regulators and auditors. On September 8, 2009, UCBH announced that its Chairman and CEO, Thomas Wu, and its Chief Credit Officer, Ebrahim Shabudin, were resigning following the results of an investigation of the improper loan accounting. As a result of the accounting improprieties, UCBH must restate its financial statements for each quarter and the full fiscal year of 2008. News of the accounting fraud and the pending restatement caused UCBH's stock price to fall significantly, damaging investors.

The complaint can be found here.

The final related development this past week took place on Friday night after the close of business, when the FDIC closed Corus Bank, N.A. about which refer here. (The FDIC actually closed three banks on Friday, refer here, bringing the 2009 year to date total number of bank failures to 92.) Though Corus only just now failed, the bank’s holding company and certain of its directors and officers had already been sued earlier this year (refer here) in a securities class action lawsuits in the Northern District of Illinois alleging that:

(i) that Corus was failing to recognize losses on its condominium loans in accordance with generally accepted accounting principles ("GAAP"); (ii) that Corus and/or its affiliates was purchasing condominiums in developments Corus had financed in an attempt to: (a) inflate the appraised values of condominiums to delay having to recognize losses on financing for such condominiums; (b) inflate developers’ sales figures to increase the likelihood of successful future sales; and (c) create the illusion of successful sales histories in order to inflate appraisal values for the condominiums to ensure inflated future prices for the condominiums; and (iii) that Corus was involved in detailed and in-depth negotiations with the Federal Reserve Bank of Chicago and the Office of the Comptroller of Currency regarding its deteriorating pool of condominium loans.

The arrival of the new lawsuits and the development involving Corus all in this past week may well have been coincidental. It remains to be seen whether there will in fact be a significant number of additional lawsuits involving failed or troubled banks.

That said, there is definitely a familiar tone to these recent cases. The allegations regarding the various banks’ alleged loan loss reserve deficiencies and alleged failure to recognize failing loans will be quite familiar to anyone who was involving in any way in the wave of failed bank litigation that accompanied the last round of failed banks during the S&L crisis. Though the future is uncertain, it is difficult no to speculate that we will see many more of these kinds of loan loss reserve inadequacy cases in the months ahead.

Of course, even if the cases do arrive in significant numbers, that does not necessarily mean that they will succeed. Some cases previously filed in connection with banks that failed in 2008 have already been dismissed. For example, the Fremont General lawsuit (refer here) and the Downey Financial lawsuit (refer here) have both been dismissed, and in Downey Financial’s case, the dismissal is with prejudice.

Nevertheless, the most recent filings seem to suggest that plaintiffs’ lawyers are not deterred by the prior dismissals. Given the depth of the current difficulties in the banking sector (about which refer here), there may yet be more, perhaps much more, banking-related litigation to come.

Citigroup Auction Rate Securities Lawsuit Dismissed: On September 11, 2009, Southern District of New York Judge Laura Taylor Swain dismissed the auction rate securities lawsuit that had been filed Citigroup. A copy of the September 11 opinion can be found here.

This action follows the earlier dismissals of the auction rate securities lawsuits that had been filed against UBS (refer here) and Northern Trust (refer here). However, this dismissal represents its own separate development, because unlike many of the other auction rate securities lawsuits, which were based on alleged misrepresentations in connection with the sale of the securities, the Citigroup auction rate securities lawsuit was based on a market manipulation theory.

As reflected in greater detail here, the plaintiff in the Citigroup auction rate securities lawsuit had alleged "defendants manipulated the market for Citigroup ARS by fostering the illusion that a valid market existed where buyers and sellers came together, with supply and demand in balance, allowing for the successful completion of auctions of Citigroup ARS. In fact, no such balance existed." The defendants moved to dismiss.

In her September 11 order granting the defendants’ motion to dismiss, Judge Swain held with respect to the plaintiff’s market manipulation claim under Section 10(b) of the ’34 Act that the plaintiffs had insufficiently alleged fraud; scienter; reliance; and loss causation. She also dismissed the plaintiffs’ claims under the Investment Advisers Act for lack of subject matter jurisdiction and the plaintiffs’ state law claims because they were preempted by SLUSA.

With respect to the plaintiffs’ market manipulation claim, she found the plaintiff’s fraud allegations insufficient because the complaint "does not include specific allegations as to which Defendants performed what manipulative acts at what times and with what effect" but instead that the complaint "relies on general and conclusory allegations regarding Defendants’ practices" regarding the ARS auctions. She concluded that "absent particularized allegations regarding Defendants’ alleged manipulative conduct, Plaintiff cannot state a claim for market manipulation."

With regard the plaintiff’s scienter allegations, Judge Swain found that the plaintiff has not sufficiently alleged motive and opportunity, holding that "Plaintiff’s conclusory allegations regarding Defendants’ motive for the alleged manipulation focus principally on Defendants’ desire to sell Citigroup ARS to offset subprime losses and to obtain fees for services in connection with the auctions." She found these allegations "too generalized to meet the scienter pleading requirement."

She also found that plaintiff had failed to allege particularize facts giving rise to a strong inference of scienter based on circumstantial evidence of conscious misbehavior or recklessness. She found that "the very market conditions – specifically the ‘subprime crisis’ – that Plaintiffs cites in his Complaint…give rise to an opposing and compelling inference that Defendants engaged only in bad (in hindsight) business judgments in connection with the ARS, and did not engage in the alleged conduct with an intent to deceive."

Judge Swain found further that the plaintiff had not adequately alleged reliance. In reaching this conclusion, Judge Swain specifically reference an SEC report that preceded the class period in which many of the practices of which the plaintiff complains regarding the ARS market auction process. These materials "disclosed that the ARS market was not necessarily set by the ‘natural interplay of supply and demand’" and therefore Plaintiff has not identified any basis on which the class reasonably could have relied on "the market ‘integrity’ assumption."

Finally, Judge Swain found that the market manipulation claim also fails because the plaintiff’s loss causation allegations are insufficient. In reaching this conclusion, she observed that "Plaintiff does not specifically allege that he tried to sell his ARS, nor does he allege that the interest rates set through Defendants’ manipulative conduct were lower than they would have been absent such conduct."

The dismissal granted in Judge Swain’s September 11 ruling is without prejudice; the plaintiff has until October 1, 2009 to file an amended complaint.

I have in any event added the Citigroup auction rate securities dismissal to my table of subprime and credit crisis-related lawsuit dismissal motion ruling, which can be accessed here.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing me with a copy of Judge Swain’s ruling.

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In prior posts (most recently here), I have noted the continuing litigation efforts of institutional investors excluded from the various auction rate securities regulatory settlements to try to compel their broker-dealers to buy back the investors’ ARS. In a complaint filed on May 13, 2009 in the Southern District of New York by Monster Worldwide against RBC Capital Markets (here), Monster raises the novel theory that RBC’s settlement-related offer to repurchase ARS from "eligible investors"is a "tender offer" that RBC must extend to all investors -- including institutional investors like Monster.

Between May 2007 and February 2008, Monster acquired $71.6 million of student loan backed ARS from RBC that Monster was left holding when the ARS market collapsed. In October 2008, RBC entered a regulatory settlement in which it agreed repurchase ARS from "its individual customers, charities, non-profits and government entities with less than $25 million on deposit." Pursuant to this arrangement, RBC will repurchase more than $850 million in ARS from "eligible investors." News reports regarding the regulatory settlement can be found here.

On December 1, 2008, RBC initiated an offer pursuant to the settlement to repurchase the ARS from eligible investors. Monster characterizes this repurchase offer in its complaint as a "tender offer," which offer was not extended to Monster and other institutional investors.

In its complaint, Monster describes its exclusion from RBC’s regulatory settlement as "arbitrary and unlawful," and alleges that RBC’s limitation of the "tender offer" only to "eligible investors" as a "clear violation" of Section 14(d) of the Exchange Act, giving rise to a claim for relief.

Monster also alleges that the repurchase offer violates SEC Rule 14d-10(a)1, the "All Holders" Rule, which provides that "No bidder shall make a tender offer unless … The tender offer is open to all security holders of the class of securities subject to the tender offer."

Finally, Monster alleges violations of the securities laws and common law in connection with RBC’s representations regarding the ARS.

Monster’s "tender offer" theory is unique and creative. By characterizing RBC’s repurchase offer, Monster seeks to secure for itself the benefit of a settlement from which it was excluded. The court will be challenged in addressing these allegations, because were the court to accept Monster’s theory, the floodgates could be opened for investors excluded from the other regulatory settlements to seek to bring themselves within the repurchase requirements. The critical question will be whether or note Monster is able to sustain its theory that RBC’s repurchase offer pursuant to the settlement is in fact a tender offer. This case will be very interesting to watch.

Special thanks to Thom Weidlich of Bloomberg for providing a copy of the Monster complaint.

Apologies: I would like to extend my deepest apologies to all readers who have experienced difficulties trying to access The D&O Diary over the last couple of days. A series of extended service outages at the blog’s hosting service has interrupted access to the site. I sincerely hope that these extremely annoying and frustrating service outages will not recur.

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The collapse of the market for auction rate securities (ARS)  has generated a flood of litigation, mostly brought by angry ARS investors against the broker dealers who sold them the securities or against the mutual funds that allegedly failed to disclose that their assets were invested in these kinds of securities. More recently (refer for example here), companies that invested in ARS and carried the securities on their balance sheet have been sued by their own shareholders in connection with the companies’ ARS disclosures.

A recently filed lawsuit presents yet another variant of ARS litigation – in this most recent case, the directors and officers of a student loan originator that issued ARS have been sued by the company’s own shareholders for failing to disclose the company’s dependence upon and susceptibility to the weaknesses of the ARS marketplace.

Until it filed for voluntary Chapter 7 bankruptcy on February 9, 2009, MRU Holdings was an originator and holder of federal and private student loans which it marketed through its consumer brand My Rich Uncle. MRU collected its loans into student loan pools that were packaged and sold by broker-dealers (including Merrill Lynch) to investors. The interests in the pool were issued as auction rate securities. This securitization process freed up capital to make new loans and also generated fee income and other revenues. During its fiscal year ended on June 30, 2007, 58% of the company’s income came from securitizations, more twice the income the Company earned on interest from student loans.

On April 15, 2009, plaintiffs’ counsel filed a complaint in the Southern District of New York against four of MRU’s former directors and officers on behalf of persons who purchased MRU’s shares between July 9, 2007 and September 19, 2008. A copy of the complaint can be found here. The company itself, which is in bankruptcy, was not named as a defendant.

The complaint alleges that the company failed to disclose that the ARS market was illiquid and depended on the illusion of liquidity created by the broker-dealers’ undisclosed interventions to prop up the marketplace and prevent failures of the auction process. The complaint alleges that this illusion "allowed the Company to pay a lower interest rate" in the notes issued in connection with the company’s 2007 securitization, and that the spread allowed the company to realize a $16.3 million gain.

The complaint also alleges that the Company failed to disclose that once the "true nature of the ARS market became known," the Company’s future securitizations would not be as favorable and that "without the favorable terms available in the ARS market as a result of the manipulation by broker-dealers, the Company would not have sufficient capital to originate loans, making the Company’s business model untenable."

The complaint alleges that the Company failed to disclose the impact that the February 2008 collapse of the market for ARS would have on its ability to depend on securitizations to sell loans and free up capital. The complaint further alleges that on July 3, 2008, the Company announced the pricing of a $140 million private student loan securitization; however, on July 7, 2008, the Company further announced that the bonds to be issued in the pending securitization would be sold at a discount, and that rather than generating income, "the securitization would result in a significant write-down of assets."

Thereafter, the company’s share price declined, and Moody’s subsequently downgraded the company’s ARSs. On September 5, 2008, the Company announced that it would "pause" its student loan program. On September 19, 2008, the Company announced that its September 15, 2008 audit report contained a going concern opinion. The company later filed for bankruptcy.

As noted above, this new complaint against the former MRU directors and offices differs from prior ARS lawsuits, both in terms of who the plaintiffs are and in terms of the allegations raised. In the vast bulk of the ARS lawsuits filed under the securities laws, the plaintiffs are ARS investors who are suing broker-dealers who sold them the securities and whom the investors allege made misrepresentation in connection with the ARS. Similarly, mutual fund investors have sued the funds for failing to disclosure the funds’ investments in ARS. More recently, shareholders of companies that were ARS investors and that suffered balance sheet write-downs (and ensuing share price declines) have sued the companies because of the companies’ investment in ARS.

By contrast to those other case, the plaintiffs are neither ARS investors nor shareholders of companies that invested in ARS instruments. Rather, the plaintiffs in the MRU case are shareholders of a company that put loans into pools out of which the securities were issued.

And again by contrast to the other cases, the misrepresentation alleged in the MRU case are not about the nature of the ARS investments (as in the broker dealer cases}, or even about a balance sheet exposure to ARS investments (as in the prior public company cases), but rather about the company’s alleged dependence on the availability of the artificially favorable ARS marketplace as a way to generate income and as a way to free up capital.

While the MRU case may represent a new variant on the ARS theme, more cases of the now familiar forms of ARS litigation have continued to accrue.

For example, on April 16, 2009, Ashland Inc. filed a lawsuit in the Eastern District of Kentucky against Oppenheimer & Co. (copy of complaint here), in which Ashland alleged that Oppenheimer convinced Ashland to hold and to continue to invest in ARS "at a time when Oppenheimer knew the market for those ARS was collapsing."

The Ashland complaint alleges that after August 2007 disturbances in the marketplace for ARS based on municipal government bonds, that Oppenheimer steered Ashland toward ARS based on student loan obligations ("SLARS"). The complaint alleges that after the market for SLARS collapsed in 2008, Ashland was left "with approximately $194 million of illiquid Oppenheimer-brokered SLARS."

In a separate complaint also filed on April 16, 2009, Braintree Laboratories and related entities sued Citigroup Global Markets in the District of Massachusetts (complaint here). Braintree alleges that between June 2008 and August 2008, Citigroup sold Braintree approximately $33.3 million of ARS, which Citigroup allegedly had referred to not as ARS but as "seven day rolls" and as "government backed ‘money market’ investments."

Braintree alleges that despite its admissions in its various regulatory settlements, Citigroup has refused Braintree’s demand for rescission of the transactions. Among other things, Braintree alleges that in connection with the sale of the ARS to Braintree, "Citigroup acted with criminal and flagrant indifference to the rights, interests and property of the Braintree Entities and the public" and that the sales "resulted from ongoing fraudulent practices."

The Braintree complaint also alleges that the ARS sales to Braintree "fell close in proximity to Citigroup erasing recordings of conversations involving employees at its auction rate desk." The complaint alleges that "when engaging in these acts of spoliation of evidence and obstruction of justice, Citigroup acted willfully and with scienter."

If nothing else, the one thing that is absolutely clear about the breakdown of the auction rate securities marketplace is that it has proven to be an absolute litigation generating machine.

The Ashland and Braintree cases also demonstrates, as I have argued elsewhere (refer here), that neither the dismissal of the UBS auction rate securities lawsuit nor the ARS regulatory settlements marked the end of ARS litigation. As I noted more recently (here), the ARS litigation has continued to come in – and as the Braintree lawsuit demonstrates, interesting new allegations (such as the spoliation charge) continue to emerge.

The MRU lawsuit also shows that the auction rate securities litigation wave has continued to evolve as it has continued to grow. Further lawsuit variants seem likely as the wave continues to progress.

I have in any event added the MRU lawsuit to my table of credit crisis related class action securities litigation, which can be accessed here.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing a copy of the MRU complaint.

A Tribute to Susan Boyle: If you have not yet seen the video of Susan Boyle, an unemployed 47 year-old, singing a song from Les Miserables on the April 11, 2009 episode of Britain’s Got Talent, then you must drop everything and watch the video right now. Due to YouTube restrictions, I can’t embed the actual video in this post, but the video can be seen here.Take the time to watch the entire video; it is worth the seven minutes it takes to watch it. (Hat tip to the Drug and Device Law Blog, here, for the link.)

The video is even more moving if you follow the lyrics of the song she is singing, which are as follows (thanks to the Conglomerate blog, here, for the lyrics):

I dreamed a dream in time gone by,
When hope was high and life, worth living.
I dreamed that love would never die,
I dreamed that God would be forgiving.

Then I was young and unafraid,
And dreams were made and used and wasted.
There was no ransom to be paid,
No song unsung, no wine, untasted.
 

But the tigers come at night,
With their voices soft as thunder,
As they tear your hope apart,
And they turn your dream to shame.
 

And still I dream he'll come to me,
That we will live [our lives] together,
But there are dreams that cannot be,
And there are storms we cannot weather!
 

I had a dream my life would be
So different from this hell I'm living,
So different now from what it seemed...
Now life has killed the dream I dreamed...
 

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Earlier this week, I suggested (here) that the UBS auction rate securities lawsuit dismissal did not spell the end of the auction rate securities litigation. Two of the categories of likely future litigation involving auction rate securities I mentioned were lawsuits involving institutional investors (who are not covered, at least immediately, by many of the regulatory settlements) and lawsuits involving auction rate securities buyers that are targeted by their own investors.

As if to prove my point about the likelihood for continuing auction rate securities litigation, two significant auction rate securities lawsuits have arrived just since I added my post earlier this week.

First, in a lawsuit against an auction rate securities buyer, on March 31, 2009, PIMCO mutual fund investors filed a securities class action lawsuit in the Central District of New York against the funds’ investment manager and the funds’ sub-advisor, certain of the managers’ directors and officers (including bond investing guru Bill Gross). A copy of the complaint can be found here.

The complaint alleges that the funds concealed from the investors that

(a) The Funds lacked effective controls and hedges to minimize the risk of loss and risk of liquidity from auction rate securities ("ARS") which affected a large part of their portfolios; (b) The Funds lacked effective internal controls to ensure that the Funds would remain in compliance with restrictions and limitations related to their investment portfolios and strategies; (c) The extent of the Funds' liquidity risk due to the illiquid nature of a large portion of the Funds' portfolios, including ARS, was omitted; and (d) The extent of the Funds' risk exposure to ARS was misstated.

The PIMCO mutual fund lawsuit joins recent lawsuits filed against Perrigo Company (about which refer here) and NextWave Wireless (refer here), as examples of cases in which auction rate securities buyers are targeted by their own investors for their exposure to the instruments. These lawsuits differ from the more standard auction rate securities lawsuits, in which the auction rate securities buyers were the plaintiffs and the defendants were the broker-dealers or others that had sold the instruments.

PIMCO’s woes with its funds’ investments in auction rate securities have been well-documented in the press in recent days, as the funds’ managers have struggled to manage problems stemming from the investments. A recent Wall Street Journal article discussing the funds’ woes can be found here.

The second of the two new auction rate securities lawsuits involves an institutional investor buyer, brining an action against the broker-dealers that sold the company the instruments. On April 1, 2009, Texas Instruments filed an Original Petition in Texas (Dallas County) District Court against Citigroup Capital Markets, BNY Capital Markets and Morgan Stanley, in connection with the company’s purchase of $524 million of auction rate securities backed by student loans. A copy of the Petition can be found here.

The Petition alleges that despite the defendants’ "assurances of liquidity and low risk," the company is now stuck with auction rate securities that it "cannot liquidate." The Petition alleges that the defendants "downplayed any risk of failed auctions" and "misrepresented the market demand" for the securities by omitting to disclose "the extent to which the entire ARS market depended on continued bidding and purchasing by the Defendants and other broker-dealers."

Beyond these more general allegations, the complaint contains some very case specific allegations relating to the defendants’ alleged failure to disclose that as 2007 progressed securities issuers (including issuers of securities that Texas Instruments held) were waiving the maximum interest rate limitations in connection with auctions of their securities. The company alleges that had it been advised of these waivers, it would have been alerted to the weakening demand for the instruments. The company alleges these omissions and affirmative reassurances induced it to continue to buy and hold the securities.

The Petition alleges violations of the Texas securities laws and seeks rescission of the securities purchase transactions as well as prejudgment interest.

Interestingly, the Petition does not mention the various regulatory settlements that Citigroup and others have reached with respect to the auction rate securities, presumably because the settlements do not provide relief (at least not immediately) to an institutional investor like Texas Instruments.

In any event, it is evident that the auction rate securities litigation is far from over.

Hat tip to the Courthouse News Service for the link to the Petition. Special thanks to Adam Savett of the Securities Litigation Watch for a link to the PIMCO lawsuit.

Dismissal Motion Ruling in Options Backdating-Related Securities Lawsuits: The options backdating cases continue to grind through the courts. On March 27, 2009, District of Arizona Judge Robert Broomfield issued a 138-page ruling (here) on the pending dismissal motion in the options backdating-related securities lawsuit against Apollo Group and several of its directors and officers. (Background regarding the case can be found here).

Judge Bloomfield’s ruling is very painstaking and detailed. He parsed the allegations against each of the defendants extremely finely. The outcome is rather complex, and it would require a spreadsheet to explain with respect to each of the plaintiffs' substantive claims which defendants have been dismissed with prejudice, which have been dismissed without prejudice, and which have had their dismissal motions denied. The most critical aspect of his ruling is that the Court denied the motion to dismiss the plaintiffs’ claims under Section 10(b) against the Company and its most senior officers.

Apollo Group was also involved in a separate, rather notorious securities class action lawsuit that resulted in a January 2008 plaintiffs’ jury verdict that was overturned by the trial judge in August 2008 on a post trial motion. Refer here for background on this separate case.

I have in any event added the Apollo Group decision to my table of settlements, dismissals, and dismissal motion denials, which can be accessed here.

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A federal judge has ruled that securities class action plaintiffs who availed themselves of UBS’s auction rate securities regulatory settlement cannot separately maintain claims for damages against UBS. But while this ruling would seem to represent at least the beginning of the end for many similarly placed plaintiffs, we may still be a long way from the end of the auction rate securities litigation, despite the regulatory settlements.

Background

UBS was one of the 21 different companies named as defendants in the wave of auction rate securities lawsuits filed during 2008. The names of all of the auction rate securities lawsuit targets can be accessed here. Background regarding the case against UBS can be found here.

Essentially the plaintiffs alleged that UBS had failed to disclosure the liquidity risks associated with the auction rate securities, and also failed to disclose that UBS and other broker dealers regularly intervened in the market for the securities to maintain trading --and allegedly to manipulate the market as well. When the broker-dealers simultaneously stopped supporting the market on February 13, 2008, the market for the securities collapsed and investors were left with securities for which there was no active market.

On August 8, 2008, UBS announced a nearly $20 billion settlement with regulators regarding the auction rate securities (about which refer here). In the settlement, UBS agreed to buy the securities back from retail investors at par value, or to make up the difference to retail investors who had already sold for less than par.

The plaintiffs in the UBS auction rate securities settlement took advantage of the regulatory settlement and redeemed their securities as par. The defendants moved to dismiss the lawsuit on that basis.

Judge McKenna’s Ruling

In a March 30, 2009 opinion (here), Southern District of New York Judge Lawrence McKenna granted the defendants’ dismissal motion, with leave to amend. Judge McKenna found that

Given that Plaintiffs have availed themselves of the relief provided in the Regulatory Agreement, Plaintiffs cannot now allege out-of-pocket damages. When Plaintiffs elected to have UBS buyback their ARS at par value, they received a full refund of the purchase price. Therefore, Plaintiffs have already been returned to the position they were in before they purchased the ARS and before any fraud ensued….Plaintiffs’ out-of-pocket damages are necessarily zero because after choosing to rescind the ARS purchases, Plaintiffs have effectively paid nothing for their ARS.

Plaintiffs argued that they were entitled damages despite the regulatory settlement because "UBS’s fraudulent acts prevented Plaintiffs from receiving a sufficiently high rate of interest or dividends to compensate them for the risk of illiquidity associated with their ARS investments." Essentially, they were arguing that if they had been appropriately informed about the securities’ liquidity risk, they would demanded and would have been paid higher interest rates or otherwise have enjoyed a higher investment return.

Judge McKenna rejected this argument because plaintiffs in securities actions must choose among prospective remedies, between rescission and out-of-pocket damages. Having elected rescission, the plaintiffs "may not now seek additional interest or dividends as benefits of ARS purchases they have already elected to disavow."

Finally, Judge McKenna found that the class plaintiffs lack constitutional standing to asset claims on behalf of "class members who purchased UBS-underwritten ARS from brokerage firms other than UBS and investors who transferred to another brokerage firm ARS they purchased from UBS before October 2007."

Discussion

Judge McKenna’s ruling might seem to suggest that the regulatory settlements represent the end of the auction rate securities lawsuits. However, conclusions along those lines could well prove to be premature.

First, Judge McKenna granted the motion with leave to amend. Although there is ample reason to doubt that these plaintiffs can circumvent Judge McKenna’s concerns in an amended pleading, the case itself is not over yet.

Second, other courts may decline to follow Judge McKenna’s conclusions. Indeed, in a March 31, 2009 AmericanLawyer.com article (here) Alison Frankel quotes the plaintiffs’ attorney from the UBS case as saying "we’re not convinced other courts will rule the same way."

Third, there are still the claims of those erstwhile class members who were frozen out of the UBS regulatory settlement, such as those who bought the auction rate securities from a non-UBS broker or who transferred their account away from UBS. As the plaintiffs’ lawyer from the UBS case also is quoted as saying in the American Lawyer article, "the key to the auction rate securities litigation is plaintiffs whose securities were not bought back by the banks."

This category of investors who were shut out of the regulatory settlements also includes the investors who bought their securities from banks or broker dealers who have not yet entered regulatory settlements.

Fourth, in all the regulatory settlements, institutional investors’ interests were treated differently. For example, in the UBS settlement, institutional investors cannot hope to have their investment redeemed until at least 2010. These investors’ liquidity issues continue to give rise to new litigation; for example, I described in recent post (here) the lawsuit that KV Pharmaceuticals filed in late February against Citigroup, in which the company alleged that the illiquidity of its auction rate securities investments was, among other things, forcing the company to lay off workers.

And finally, there is the separate category of litigation that has arisen against auction rate securities investors, rather than against the auction rate securities sellers. These cases involved companies whose balance sheet exposure to auction rate securities has harmed their financial condition, and who face litigation from their own shareholders who claim the companies failed to disclose their exposure. The most recent of these cases, involving Perrigo Company, is discussed here.

In short, while Judge McKenna’s opinion unquestionably represents a significant milestone, it by no means represents the finish line for auction rate securities litigation. Unfortunately, these cases likely will be around for some time to come.

All of that said, Judge McKenna’s opinion does hold out the hope that a large portion of these cases can eventually be cleared out, and the problem at least reduced over time, perhaps to more manageable levels.

I have in any event added the UBS dismissal to my roster of settlements, dismissals and dismissal motion denials in connection with the subprime and credit crisis related lawsuits. The roster can be accessed here.

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In a February 12, 2009 FINRA Dispute Resolution Award, a panel of three arbitrators ruled that Credit Suisse must pay ST Microelectronics more than $400 million based on the company’s claims that Credit Suisse misled the company into buying subprime-exposed auction rate securities. A copy of the award can be found here.

The FINRA Award

As I detailed in an earlier post (here), ST Microelectronics had filed the FINRA claim against Credit Suisse (USA) LLC, while also separately filing a civil lawsuit against Credit Suisse Group, the U.S. affiliate’s Switzerland-based parent. The separate lawsuit complaint can be found here.

According to the February 12 Award, the FINRA complaint against the U.S. affiliate asserted claims under Section 10 of the ’34 Act and Rule 10b-5, alleging that the claimant "requested investments in student loan securities backed by U.S. government guarantees" but that instead their funds were invested in what the civil lawsuit complaint described as "illiquid, risky and unsustainable auction rate securities consisting of collateralized debt obligations and credit linked notes, some of which were backed by subprime real estate loans." (The separate complaint alleged that Credit Suisse had an "intentional strategy" of "dumping into the accounts of unsuspecting clients some of the worst ARS on the market.")

The Award makes no specific findings of fact but instead simply species the amounts to be awarded to ST Microelectronics. Credit Suisse is ordered to pay the claimant "compensatory damages" of $400 million, which is to be "paid immediately in exchange for Claimant’s entire portfolio." The award also orders the payment of certain of fees and costs, interest, and $3 million attorney’s fees.

Discussion

The FINRA award has a number of significant implications, the most immediate of which may be those relating to Credit Suisse itself. The separate lawsuit complaint filed against the Credit Suisse parent company alleges that "at least a dozen other multinational corporations are victims of the same scheme," carried out by two Credit Suisse brokers who, in fact, are the subject of a current criminal prosecution (about which refer here). The complaint alleges that the supposed scheme involves "more than $2 billion of these clients’ money."

A July 31, 2009 Wall Street Journal article (here) listed ten overseas companies (including ST Microelectronics) that have initiated arbitration proceedings against Credit Suisse-affiliated companies based on auction rate securities. The February 12 FINRA Award may bode ill for Credit Suisse in these other proceedings.

In addition, the outcome, magnitude and prominence of the February 12 Award could also spur similar claims by other aggrieved parties against other broker-dealers, particularly other aggrieved institutional investors. By and large, institutional investors were excluded from the massive auction rate securities regulatory settlements that have been announced to great fanfare. These excluded investors may be encouraged by ST Microelectronics’ success, and seek to pursue their own claims. A February 13, 2009 Bloomberg article (here) discussing the Award quotes one observer as saying "this decision will likely lead to either more arbitrations or settlements between investors and broker-dealers."

To be sure, the circumstances relating to Credit Suisse’s involvement with auction rate securities may be distinct. As noted above, criminal proceedings have arisen from its brokers’ activities. Other prospective claimants’ claims may not be as sympathetic.

It is important to emphasize that while the Award itself describes the relief granted as "compensatory damages," what it actually accomplished is a rescission of the underlying securities transaction. Credit Suisse basically has to buy back the company’s securities at face value. (In that regard, the Award itself noted that what the claimant had requested was "relief equivalent to rescission" – which appears to what the claimant got.) Though the Award provides for the payment of other fees and costs, it does not award any other type of damages. The Award expressly denied the claimant’s request for punitive damages.

The absence of the award of other damages potentially could affect other prospective claimants. That is, while these cases may provide an avenue of relief, there is nothing about this Award to suggest that that a claim of this type is going to produce some kind of a bonanza. On the other hand, for many prospective institutional investor claimants, the opportunity to return their auction rate securities for face value at this point would be more than enough incentive for them to pursue a claim.

The Award does provide one very particular kind of encouragement for these kinds of claims. The panel’s award of $3 million in attorneys’ fees undoubtedly will capture the imagination of many would-be claimants’ attorneys. The prospect of this kind of fee recovery undoubtedly will encourage many attorneys to seek out and pursue these claims.

It is unclear from the Award what preclusive or superseding effect the Award might have on the separate federal court lawsuit ST Microelectronics filed against the Credit Suisse corporate parent. It seems that the company secured the relief it sought. What reason or even opportunity there might be to continue to prosecute the civil case is not immediately apparent.

Hat tip to the WSJ.com Law Blog (here) for the link to the FINRA Award.

Don’t Tell Me How to Fix It, Just Tell Me Who to Blame: If you missed it, you may want to take a look at the list of the "25 People to Blame" (here) in the February 23, 2009 issue of Time Magazine. The magazine’s attempt to identify the individuals responsible for the current financial mess is actually kind of interesting, even thought provoking.

The list includes the usual suspects: Dick Fuld, Jimmy Cayne Angelo Mozillo and Stan O’Neill.( I agree that Angelo Mozillo of Countrywide also belongs on the list, although I don’t think I would have put him first, as Time Magazine did.) Time also included, correctly in my view, Fred Goodwin of Royal Bank of Scotland, whose ill-fated and ill-time take over assault on ABN AMRO is record setting in a number of extremely negative ways.

The list also recognizes others who rightfully should shoulder some of the blame, but who sometimes elude the harsh spotlight. In this category I would put Marion and Herb Sandler, whose Golden West Savings bank initiated the Option ARM mortgage. Sandy Weill also (correctly, in my view) appears on the list for the mess he made of Citigroup.

A couple of U.S. Presidents make the list -- Bill Clinton and George W. Bush. Alan Greenspan, Hank Paulson and Chris Cox are also there. There is also one former Prime Minister, Davíð Oddsson of Iceland, and one Premier, Wen Jiabao of China.

There are a several interesting names on the list. For example, John Devaney appears as a sort of a stand in for the whole hedge fund industry, and Lew Ranieri gets belated recognition for having fathered mortgage securitization. Kathleen Corbett, the former head of rating agency Standard & Poor’s also gets a nod for the plethora of triple-A rating on mortgage backed securities that encouraged so much misdirected investment. Joe Casano gets due recognition for basically taking down AIG.

There are others whom I think are misplaced on this list. For one thing, what is Bernie Madoff doing there? He may have been a big crook, but in the end he is just a crook.

There are also at least two very significant omissions from the list.

First and foremost, the U.S. Congress deserves to be recognized for its encouragement of housing policy that was misguided and disproportionate to the requirements and limitations of sound principles. Congress is great at holding hearings and making speeches when things go wrong. Their own abysmal record of implementing policies that prevent problems warrants its own set of hearings. I’d like to put some of them in the dock and subject them to the same kind of sneering cross-examination that they have been imposing on others in recent days. (To be fair to the list-makers, they did slot former Texas congressman Phil Gramm at No.2 on the list, which arguably is a Congressional designation by proxy.)

And finally, why isn’t the American Homebuyer on the list? Yes, the American Consumer is recognized, but I think we need to be specific here. Within the larger group of well-intentioned home buyers are those who were driven by some weird form of housing lust to buy gigantic houses they couldn’t afford. There also appear to have been some who were all too willing to hide or even misrepresent their true financial condition to secure credit. Sure, the lenders were complicit, but as long as we are assigning blame, let’s put some everywhere that it belongs.Of course, many homeowners who are now struggling had nothing to do with any of this kind of conduct, but there are also those who were involved.

When you come right down to it, there is no shortage of culprits. Sadly, there are many, many victims. Some of them are even the same people.

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Though multi-billion dollar auction rate securities settlements were announced to great fanfare some months ago, litigation involving auction rate securities continues to mount (as I previously noted, here). Two recently filed proceedings highlight the fact that notwithstanding the settlements, many investors’ grievances are yet to be addressed.

As a result, while regulatory authorities continue to press for additional settlements, other investors may feel that the settlements do not remedy their particular claimed harm, and may seek to pursue individual litigation, in effect opting out of the regulatory settlements already reached.

I note that I raised the possibitliies for these further disputes when the settlements first emerged, here.

The Hutchinson Auction Rate Securities Lawsuit

First, on November 14, 20008, Hutchinson Technology filed a securities lawsuit in Minnesota federal court against UBS and related entities, accusing the defendants of fraud in connection with their purchase on Hutchinson’s behalf of approximately $70 million in illiquid auction rate securities under a discretionary cash management agreement.

Hutchinson’s complaint, which can be found here, alleges that UBS sought to protect its own balance sheet by seeking “secretly to shift the risk from its swelling inventory of ARS onto clients like Hutchinson by pitching ARS as safe, liquid, ‘cash equivalent’ investments while knowing that, in fact, the purported liquidity of the ARS had become an illusion.”

The complaint quotes extensively from UBS e-mails and other internal documents allegedly showing that the defendants had conflicts of interest with their own clients to whom they sold the securities, as well as a growing awareness of the dangers associated with a failing ARS marketplace. The complaint alleges that the defendants violated federal and state securities laws as well as other state statutory and common law duties.

What makes the Hutchinson complaint of particular interest is that it expressly acknowledges UBS’s August 2008 auction rate securities settlement, which the complaint also implicitly acknowledges applies by its terms to Hutchinson. However, the complaint alleges that the settlement “does not resolve the dispute between Hutchinson and UBS” in that the settlement’s terms “do not return Hutchinson to the position it would otherwise be in but for UBS’s fraud.”

Though the settlement contains UBS’s commitment to redeem the securities as par, “the purchases will take place over several years, and corporations with positions of more than $10 million (like Hutchinson) will not be able to start selling their position to UBS until June 30, 2010.” And thought the settlement required UBS to provide “liquidity loans,” any borrowing client would “remain obligated to repay the loan on demand even if the value of the ARS declines.”

Hutchinson’s complaint cites several alleged deficiencies with these arrangements. First, “it is uncertain whether UBS will have the means to satisfy its obligations or indeed survive as a firm.” (Ouch.) Second, Hutchinson “has needs for liquidity well in advance of that date,” including, for example, the need to redeem $150 million in convertible notes due in March 2010. Third, the value of Hutchinson’s ARS has “dropped considerably,” causing the company to mark down the securities on its balance sheet, with further writedowns potentially ahead, which in turn could have the effect of “potentially negatively impacting the price of its stock.”

Hutchinson is basically attempting to opt out of UBS’s regulatory settlement regarding the auction rate securities. Though the settlement promises eventually to make Hutchison whole, it is the word “eventually” that is giving Hutchinson concern. Hutchinson’s litigation objective may be discerned from its offer in its complaint to tender its auction rate securities investments “at par value plus all interest accrued.” Hutchinson wants its own deal, without having to wait, in effect contending that the delay itself constitutes an additional form of harm.

Hutchison may or may not succeed. Many of the harms it claims have not yet occurred, but merely threaten. But to the extent other investors perceive, like Hutchinson, that their interests are better served or will be advanced by separately litigating their claims rather than participating in the settlements, the utility of the regulatory settlements could be substantially undermined.

Because of this risk, UBS may have to vigorously contest Hutchison’s claim (and other claims like it) or face the prospect of a multitude in individual disputes and pressure to enter a multitude of individual deals that could bleed the company on a timetable accelerated from the more leisurely scheme contemplated in the regulatory settlements.

This potentially could become a process for the administration of a thousand cuts – and it potentially affects not just UBS, but Citicorp, Wachovia, Merrill Lynch and the other large institutions (or their successors in interest) that tried to effect a comprehensive solution to the auction rate securities debacle.

The Massachusetts Regulatory Action Against Oppenheimer

While the financial firms that have reached regulatory settlements could face continued litigation notwithstanding the settlements, other firms that have not yet reached settlements could face continued regulatory pressure to do so.

For example, on November 18, 2008, the Massachusetts Securities Division filed a complaint (here) to initiate an adjudicatory proceeding against Oppenheimer for alleged violations of state securities laws in connection with the company’s sales of auction rate securities to the firm’s clients in the state.

The complaint alleges that Oppenheimer “significantly misrepresented not only the nature of the ARS, but also the overall stability and health of the market when marketing the product to clients.” The complaint further alleges that “Oppenheimer executives and ARS Department personnel sold their own ARS as they learned that the market was in danger of imploding.”

The complaint, which was filed with the Office of the Secretary of the Commonwealth, seeks an order among other things, “requiring Oppenheimer to offer rescission of sales of ARS at par” and “requiring Oppenheimer to make full restitution to investors who already sold these instruments at less than par.” Basically, the complaint seeks to compel Oppenheimer to provide substantially the same relief as other firms previously have agreed as part of their regulatory settlements.

The one thing that is clear from these two new proceedings is that, despite the high profile settlements earlier this year, litigation surrounding the auction rate securities continues to mount. First, there are firms like Oppenheimer that have not yet reached regulatory settlements that will face pressure to do so. But second, there are continuing disputes, like those raised by Hutchinson, that continue even with respect to the firms that have already reached regulatory settlements.

If nothing else, it seems likely that the auction rate securities litigation will churn on for some time to come, with no end yet in sight.

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Since the earliest days of the subprime litigation wave, one of the recurring questions has been whether the wave would spread beyond the financial sector. The question remains, but allegations in a new securities lawsuit suggest that circumstances arising from the subprime crisis are affecting a diverse variety of companies, and by extension the claims asserted against them.

According to their press release (here), on September 16, 2008, plaintiffs’ counsel filed a securities class action lawsuit in the United States District Court for the Southern District of California against NextWave Wireless and certain of its directors and officers. NextWave is a mobile broadband and multimedia technology company that develops, produces and markets mobile multimedia and wireless broadband products. A copy of the complaint can be found here.

According to the press release, the complaint alleges that:

Defendants issued materially false and misleading statements regarding the Company’s business and financial results. As a result of defendants’ false statements, NextWave stock traded at artificially inflated prices during the Class Period, reaching as high as $10.10 per share in June 2007.

On August 7, 2008, after the market closed, Nextwave issued its second quarter 2008 financial results, announcing it only had $71.1 million in cash and similar instruments available as of June 30, 2008 and, unless it raised money, its cash would run out at the beginning of October 2008. As a result, the Company was seeking financing that would give the Company enough money to operate through June 2009. On this news, NextWave’s stock fell $1.90 per share to close at $0.95 per share, a one-day decline of 67%.

According to the complaint, the true facts, which were known by the defendants but concealed from the investing public during the Class Period, were as follows: (a) NextWave did not have adequate sources of liquidity to continue operations as it executed its growth strategy and continued making aggressive worldwide acquisitions; (b) defendants had no reasonable basis to make favorable statements that the Company’s WiMAX semiconductor products would be available for commercial sale in the first half of 2008; (c) NextWave’s growth and acquisition strategy was not financially successful and did not provide the basis for continued growth or financial success because it was straining NextWave’s fragile liquidity position and NextWave did not have the financial resources to continue to operate its world-wide operations through the end of 2008; (d) NextWave failed to timely disclose that it had invested all of its marketable securities in extremely high-risk and illiquid auction rate securities; and (e) NextWave’s ability to continue as a going concern was seriously in question by reason of the facts alleged in subparagraphs (a)-(d) above.

The most interesting part about these allegations to me is the reference to the company’s investment in auction rate securities. The complaint itself further alleges with respect to these "extremely high-risk and illiquid auction rate securities" that NextWave "had misrepresented these investments as marketable securities on its balance sheet included in its financial statements disseminated in its Form 10-K and 10-Q and press release."

There have of course been many prior lawsuits against investment banks and broker-dealers in which it is alleged that the financial institutions misrepresented the risks of auction rate securities. But this new lawsuit against NextWave represents the first instance of which I am aware in which an auction rate investor has been sued for failing to disclose its exposure to auction rate securities investments. Obviously, there are a lot of other allegations in the lawsuit, but the auction rate investments allegations are an important part of the complaint and, if nothing else, are noteworthy.

The allegations about the company’s alleged balance sheet misclassification of its auction rate investments is of particular concern. Many companies (and other entities) hold auction rate securities investments, and all of these entities have been struggling both with valuation issues and with balance sheet classification issues. These classification and disclosure issues affect not just auction rate related investments but subprime and other mortgage-backed investments as well. At least theoretically, plaintiffs’ lawyers could allege similar investment disclosure and asset classification issues in connection with these companies.

Perhaps I am getting ahead of myself, but I also wonder whether similar "failure to disclose investment exposure" allegations might be alleged against companies that will be reporting significant write-downs in their holdings of securities of, for example, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG. Admittedly, this may be a far-fetched possibility at this point. But some companies’ write-downs of their investments in those assets could be material, which in turn could affect the reporting companies’ own stock market valuations. If the impact is significant, angry investors might consider their litigation alternatives.

Another Credit Crisis Lawsuit: There was also a more conventional credit crisis lawsuit filed today. According to the plaintiffs’ counsel’s September 16, 2008 press release (here), plaintiffs have filed a securities class action lawsuit against BankUnited Financial Corp. and certain of its directors and officers. A copy of the complaint can be found here.

According to the press release, the complaint alleges that

Defendants made false and misleading statements about BankUnited. Specifically, defendants misrepresented: (a) the losses the Company was likely to suffer due to BankUnited’s poor underwriting standards, which losses would occur once interest rates reset on the billions of dollars of pay-option arms (adjustable rate mortgages where borrowers had the ability to choose their payment amount during the initial period of the loan); (b) BankUnited’s sketchy appraisal process, which permitted borrowers to obtain mortgages in excess of their ability to pay and in excess of the value of the underlying property; and (c) BankUnited’s policies with regard to "piggy-back" loans, which are essentially second mortgages made at the time a home is purchased to fund a down payment.

The BankUnited lawsuit is the latest to raise allegations involving Option ARM mortgages, which I have discussed in prior posts, most recently here.

Run the Numbers: Many readers know that I have been tracking subprime and credit crisis-related securities lawsuits. My running tally can be accessed here. As time has gone by, definitional issues have become increasingly challenging. The NextWave lawsuit may present the most significant definitional challenge to date, because the auction rate investment allegations arguably are a peripheral part of the complaint.

I could go either way on this one, but after some thought, I have decided to include the NextWave lawsuit in my count, simply due to the fact that the company’s financial problems apparently were due in part to its investments in auction rate securities. Reasonable minds could differ on whether or not to include the lawsuit.

But with the addition of the NextWave and BankUnited lawsuits, the current tally of subprime and credit crisis-related lawsuits now stands at 114, of which 74 have been filed in 2008.

Dear Bob, you might not remember me, but I used to work at AIG: If you have not yet seen it, you must read the September 16, 2008 letter (here) that Maurice "Hank" Greenberg, AIG’s former Chairman and CEO and current Chairman and CEO of C.V. Starr, to now-former AIG Chairman and CEO Robert Willumstad.

I can’t imagine why Greenberg thinks Willumstad might have been concerned that Greenberg would "overshadow" him. Willumstad undoubtedly was reassured that, although Greenberg did feel compelled to note "you and the Board have presided over the virtual destruction of shareholder value built up over 35 years," it was not Greenberg’s "intention to point fingers or be critical."

Hat tip to the Wall Street Journal for the link.

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The headlines on the business pages have been dominated in recent days by the news of the blockbuster Citigroup and UBS auction rate securities settlements (about which refer here). But as noted in an August 8, 2008 CFO.com article (here), at the same time, a number of other leading banks have been hit with regulatory subpoenas as problems surrounding auction rate securities become “the crisis of the day for the large global financial services companies.”

In addition, investor litigation against the banks related to auction rate securities continues to accumulate. For example, on August 6, 2008, STMicroelectronics sued Credit Suisse Group in the Eastern District of New York, alleging that Credit Suisse placed $450 million of the chipmaker’s securities in unauthorized auction rate securities. A copy of the complaint can be found here. An August 7, 2008 Bloomberg article describing the lawsuit can be found here.

The complaint’s tone is blistering. The complaint alleges that in August 2007, when the company sought to liquidate what it thought was a portfolio of “liquid, safe and authorized student loan securities,” it discovered that Credit Suisse had actually invested in “illiquid, risky and unsustainable auction rate securities consisting of collateralized debt obligations and credit linked notes, some of which are backed by subprime real estate loans.”

Not stopping there, the complaint further alleges that “at least a dozen other multinational corporations are victims of the same scheme,” allegedly carried out by the same Credit Suisse brokers. The complaint alleges that this supposed scheme “involves more than $2 billion of these clients’ money.” The complaint further alleges that Credit Suisse “furthered the fraud by keeping it hidden from victims, governmental authorities and the investing public” and by “refusing to follow instructions to liquidate the assets.”

The complaint also alleges that Credit Suisse had an “intentional strategy” reducing its own exposure to auction rate securities and that it accomplished that goal by “dumping into the accounts of unsuspecting clients some of the worst ARS on the market.”

According to the complaint, ST has separately filed a FINRA arbitration against Credit Suisse Securities (USA), but because Credit Suisse Group itself is not a member of FINRA, it is not subject to its arbitration requirements, and therefore is not a party to the FINRA action, which remains pending. As a result, the newly filed civil lawsuit presents the spectacle of one Swiss domiciled company suing another Swiss domiciled company in U.S. federal court.

With relation to the matters alleged in the ST complaint, it is interesting to note that on July 9, 2008, the Wall Street Journal reported (here) that federal prosecutors in the Eastern District of New York are “investigating whether two former Credit Suisse Group brokers lied to investors about how they placed their money into short-term securities.” Prosecutors are investigating whether investors were “misled about the nature of the auction rate securities they bought.”

The July 9 article quotes a statement from Credit Suisse as saying that the two employees, who resigned in September 2007, had “violated their obligations to Credit Suisse and to our clients.” The Credit Suisse statement added that “we promptly notified regulators when this matter arose last year and we have continued to work closely with them”

In addition, the Wall Street Journal reported in a front page article on July 31, 2008 (here) that one of the two brokers under investigation, a 35-year old broker named Julian Tzolov, “has left the U.S. and could have fled to his native Bulgaria.” The July 31 article also lists ten overseas companies (including ST Microelectronics) that have initiated arbitration proceedings against Credit Suisse affiliate companies based on auction rate securities companies.

On U.S. Market Competitiveness: Consider Departing Foreign Companies: Would-be reformers cite concerns that U.S financial markets are losing out to other countries’ markets due to concerns about U.S regulatory burdens and litigiousness (about which refer here). But if these concerns were as significant as the reformers suggest, you would expect that foreign companies cross-listed on U.S. exchanges would see a positive boost in their share price when they eliminate their U.S. listing. Recent academic suggest the opposite may be true.

In an August 2008 paper entitled “Why do Foreign Firms Leave U.S. Equity Markets”  (here), Andrew Korolyi and Rene Stulz of Ohio State and Craig Doidge of the University of Toronto took at look at the 59 foreign companies that chose to deregister their U.S. listings after the SEC enacted Rule 12h-6 in March 2007, making it easier for such companies to do so.

Their study produced two essential findings. First, they found that the 59 companies as a group “experienced significantly lower growth and lower stock returns than other U.S-exchange listed foreign firms in the years preceding the decision.” Second, they found that there is only “weak evidence that firms experience negative stock returns when they announce deregistration and stronger evidence that the stock price return is worse for firms with higher growth.”

The authors said their finding “support the hypothesis that foreign firms list shares at the lowest cost to finance growth opportunities and that, when those opportunities disappear, a listing become less valuable to corporate insiders so that firms are more likely to deregister and go home.”

As discussed here, the authors’ prior research substantiates that overseas firms benefit, through lower cost of capital, when they choose to list their shares on U.S. exchanges, and their shares trade for higher prices than do those of similar companies that do not choose to list here. One theory for this “listing premium” is the “bonding hypothesis,” which speculates that investors put more confidence in companies complying with American disclosure requirements and accounting standards. The authors’ more recent research suggest that the only companies punished for delisting from the U.S. exchanges are those that continued to have growth opportunities and a need to attract American capital. Other companies, who lack those opportunities, delist with impunity.

Perhaps ironically, current efforts to make the U.S. markets more competitive arguably may be undercutting the “listing premium,” which might be the U.S. markets’ greatest competitive advantage. As discussed in Floyd Norris’s August 8, 2008 New York Times article entitled “Reasons Some Firms Left the U.S.” (here):

By letting companies walk away easily, the advantage of an American registration is reduced, Mr. Stulz has argued. The S.E.C. is moving to allow foreign companies to use international accounting rules, so any advantage from confidence in U.S. accounting rules will vanish. And the commission is making it much easier for brokers to sell unregistered foreign shares to Americans.

“I think there is a grave risk that the advantage may be lost because of the continued chipping away at the rock,” Mr. Karolyi said. “It just doesn’t seem like the right time or the right place to be engaged in a serious deregulation of financial markets.”

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Regular readers know that I have been tracking subprime-related class-action lawsuits (here). In a recent post, I noted my interest in trying to develop a similar list of subprime-related derivative lawsuits. In response to my request, a number of readers supplied helpful information, and as a result I have been able to develop a list of subprime-related derivative lawsuits, which can be accessed here.

The list is accurate but it may not be complete. Readers aware of any other subprime-related derivative lawsuits are encouraged to let me know, so that I can address any omissions. I will update the list as new lawsuits come in or as new information becomes available.

The table of cases I have compiled lists the companies that have been named as nominal defendants in shareholders’ derivative lawsuits. Some of the companies listed actually have been sued in multiple derivative suits, and some companies have been sued in multiple jurisdictions. However, where the allegations relate to substantially similar allegations, each company has only been listed once, regardless of the number of actual derivative lawsuits pending. Where I have been able to supply relevant links (in most cases to the actual complaint), the link pertains to the first filed suit.

As the list reflects, a total of 20 companies have been sued as nominal defendants in subprime-related derivative lawsuits. The derivative suits against seven of these companies were first filed in 2008, the rest in 2007. Most (but not all) of the companies named in the derivative suits have also been named in subprime-related securities class action lawsuits. Most of the companies sued in the derivative lawsuits are in the lending and banking industries, but the list also includes insurance companies, home builders, and REITs, among other.

Special thanks to Adam Savett of the Securities Litigation Watch (here) for providing information and links to several of the lawsuits, and thanks to all readers who provided information and suggestions in response to my inquiry.

Another Auction Rate Securities Lawsuit: On April 8. 2008, plaintiffs’ lawyers filed another purported securities class action lawsuit on behalf of auction rate securities investors against the companies that allegedly sold them the securities, in this case Raymond James Financial. A copy of the plaintiffs’ lawyers’ April 8 press release can be found here, and a copy of the complaint can be found here.

This brings the total number of auction rate securities lawsuits to eleven. My prior post discussing the auction rate securities lawsuits can be found here. I have been tracking the auction rate securities lawsuits as part of my running tally of subprime-related class action lawsuits, about which more below.

Adjusting the Subprime-Related Class Action Litigation Tally: Also as a result of my efforts to build the list of subprime-related derivative lawsuits, I received additional information regarding three previously filed securities class action lawsuits. In the past, I had determined that these three lawsuits were not appropriately categorized as subprime-related. However, upon further inquiry and based on conversations with some readers, I have now added these three additional lawsuits to my running tally of subprime-related securities class action lawsuits. The three added lawsuits related to Municipal Mortgage & Equity (about which refer here), WSB Financial Corp. (refer here), and CBRE Realty Finance (refer here).

With the addition of these three lawsuits, and with the addition of the Raymond James auction rate securities lawsuit referenced above, my running tally of subprime-related lawsuits now stands at 68. One unfortunate consequence of my decision to add these three cases is that now my running tally may no longer agree with others’ tallies, such as the Stanford Law School Securities Class Action website (here). There is an inherent categorization problem in trying to track the subprime lawsuits. Reasonable minds will disagree about whether a case is or is not appropriately categorized as subprime related. There are almost always going to be some disagreements at the margins.

Many thanks to the readers who supplied the information and commentary about the three class action lawsuits.

Subprime ERISA Lawsuit Update: As most readers know, I have also been tracking subprime-related ERISA lawsuits (here). As a result of my research and inquiries regarding subprime derivative lawsuits, I identified three additional subprime-related ERISA lawsuits of which I previously had been unaware. These three additional ERISA lawsuits pertain to Huntington Bankshares (refer here), National City Corp. (refer here), and Impac Mortgage (refer here).

With the addition of these three suits to my list, the number of subprime-related ERISA lawsuits now stands at 14, five of which have been filed in 2008, and the remainder of which were filed in 2007.

Two Options Backdating Case Developments: Two courts recently issued rulings on motions to dismiss in options backdating-related lawsuits.

First, on March 31, 2008, in the Juniper Networks option backdating-related securities litigation (about which refer here), Judge James Ware of the United States District Court for the Northern District of California largely denied the defendants’ motion to dismiss, except that he granted the motion (with leave to amend) as to one individual defendants, and he granted the motion to dismiss all alleged misrepresentations that took place prior to July 14, 2001, as time barrred. A copy of the March 31 order in the Juniper Networks case can be found here.

Second, and also on March 31, 2008, in the Microtune options-backdating related derivative litigation, Judge Richard Schiff of the United States District Court for the Eastern District of Texas granted the defendants’ motion to dismiss, albeit with leave to amend as to certain individuals on certain claims. A copy of the Microtune opinion can be found here. Judge Schell first concluded the Congress had not created a private right of action under Section 304 of the Sarbanes-Oxley Act, and dismissed that claim. Judge Schell also granted the dismissal with prejudice of claims of allegedly misleading proxy statements as to the individual defendants who were not on the board at the time of the proxy. The proxy allegations were dismissed without prejudice as to the remaining individual defendants. Similarly, the plaintiffs’ claims based on Section 10(b) were also all dismissed, but with prejudice as to some defendants and without prejudice as to others. The court declined to exercise jurisdiction over the plaintiffs’ state law claims.

I have added these two decisions to my table of options backdating related case dispositions, which can be accessed here. Readers are encouraged to let me know about case dispositions of which they become aware so that I can add them to the list.

Special thanks to Nick Even of the Haynes and Boone firm for the link to the Microtune decision.

New Century Updated: In an earlier post (here), I noted that the court had granted (with leave to amend) the defendants’ motion to dismiss in the first-filed subprime related securities class action lawsuit, involving New Century Financial Corporation. On March 24, 2008, the plaintiffs filed their amended complaint (here), which names as defendants not only certain former directors and officers of the company, but also the company’s former auditor, KPMG, and the company’s offering underwriters.

Readers will recall that in connection with the New Century bankruptcy proceeding, the bankruptcy examiner recently released a detailed report (about which refer here) in which, among other things, the examiner reviewed the question of the auditors’ and the company's directors and officers' potential responsibility for certain accounting practices and statements at the company. In light of the bank examiner’s report, the plaintiffs sought (and the defendants’ agreed not to oppose) leave to file a second amended complaint, which the court granted. The plaintiffs’ must file their second amended complaint by April 30, 2008. The court also set a briefing schedule for the anticipated motion to dismiss, to be argued September 8, 2008. A copy of the court’s order granting leave and setting the scheduling can be found here.

A German Securities Trial?: The Securities Litigation Watch has an interesting post (here) about the apparent mass securities lawsuits trial that has commenced in Germany involving Deutsche Telecom. An April 7, 2008 Business Week article discussing the trial can be found here.

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The subprime litigation wave is growing in amplitude and volume, as four companies have found themselves the targets of a total of five new subprime-related securities class action lawsuits, joining the now quite lengthy list of companies that have been swept up in the wave. With the addition of these five new securities lawsuits, as well as the numeous other suits filed in just the last few days, it appears that the subprime litigation wave is building dangerous momentum

Wachovia:  The first of these new lawsuits was actually filed back on January 31, 2008, against Wachovia Corporation , certain of its officers and directors, a related Wachovia unit that issued certain securities involved in the lawsuit, and the offering underwriters that underwrote Wachovia’s May 2007 preferred securities offering. (As noted further below, Wachovia was also named in a separate securities lawsuit relating to auction rate securities).

The Wachovia lawsuit flew under the radar screen at the time that it was filed because the plaintiffs’ lawyers chose to file the lawsuit in New York Supreme Court (Nassau County), though the defendants have removed the action under the Securities Litigation Uniform Standards Act (SLUSA) and the Class Action Fairness Act (CAFA). A copy of the removal petition, to which the initial complaint is attached, can be found here.

The complaint assert claims based on allegedly false and misleading statements in the registration and prospectus issued in connection with Wachovia’s $750 million May 2007 offering of preferred securities. The complaint alleges that the registration statement failed to disclose that Wachovia’s "portfolio of collateralized debt obligations ("CDOs") contained billions of dollars worth of impaired and risky securities, many of which were backed by subprime mortgage loans." The complaint also alleges that the defendants failed to "properly account for highly leveraged loans such as mortgage securities." Finally, the complaint alleges that the complaint failed to disclose that Wachovia was "heavily involved in option adjustable rate mortgages (ARMs)…that would become toxic (for both Wachovia and the borrowers) once house prices stopped increasing at a rapid rate."

The complaint alleges claims only under the ’33 Act, and expressly asserts that the state court has concurrent jurisdiction under Section 22 of the ’33 Act in connection with plaintiff’s claims. The plaintiff in the Wachovia law suit seems to be pursuing the same state court strategy that I discussed at length in my prior post (here) analyzing the class action securities lawsuits that investors have filed against the securitizers who created mortgage backed assets. Significantly, the Coughlin Stoia firm is involved in both those cases and the Wachovia case. Given the sophistication of the firm involved, one must assume that these state court filings are part of a conscious strategy on the firm’s part.

Though defendants have removed the Wachovia case to the United States District Court for the Eastern District of New York, it remains to be seen whether or not the plaintiffs will be able to have the case remanded to state court. As I noted here, the plaintiffs in the Luther v. Countrywide case, a ’33 Act class action lawsuit filed against mortgage backed asset securitizers, succeeded in having their case remanded back to state court. The court in Luther case concluded that concurrent jurisdiction provisions in the ’33 Act prohibit the state court’s case’s removal to federal court.

My theory on these state court lawsuits has been that the plaintiffs intend to argue that the provisions of the PSLRA to not apply to their state court ’33 Act lawsuits. The fact that the plaintiffs’ lawyers issued no press release at the time they filed the complaint tends to reinforce this impression. But regardless of their theory they seem to be making a comprehensive effort to bring these cases in state court. The involvement of state courts in these lawsuits will be very interesting to watch.

Lehman Brothers: On February 22, 2008, a Lehman Brothers shareholder filed a purported securities class action lawsuit in the United States District Court for the Northern District of Illinois, alleging that Lehman Brothers made certain misrepresentations or omissions about its exposure to subprime mortgages during the class period from September 13, 2006 through July 30, 2007. A copy of the complaint can be found here.

There are a variety of very odd things about this lawsuit, and almost all of these odd features repeat the same odd attributes of the subprime-related securities class action lawsuit was previously filed against Morgan Stanley, as I discussed in my prior post here.

The first odd feature about this lawsuit is that it does not name the company, its directors or its senior managers as defendants in the lawsuit. The sole named defendant is the company’s Chief Financial Officer, yet no misrepresentations or omissions are attributed directly to him. The allegations against the CFO are attributed solely to his position within the company. There are no allegations that the CFO sold shares of stock. It is not particularly clear why the CFO should be named as defendant while other officials are not.

The allegations regarding the alleged misrepresentations are sparse, and are essentially limited to a few occasions when the company supposedly downplayed its exposure to subprime mortgages. The class period ends at an odd time, too; the class period end is not in January 2008, when the company said that it has lost $5.9 billion on its mortgage related positions, but on July 30, 2007, when an equity analyst downgraded the company.

The named plaintiff is also an odd representative for the purported class. Though the class period purports to run from September 13, 2006 to July 30, 2007, the named plaintiff did not even buy his shares until July 15, 2007, making him an unlikely representative for a class of that duration. Moreover, the complaint itself refers to events and statements at or about the same time that the plaintiff bought his stock which surely raised questions about subprime-related exposures in general and subprime exposures at Lehman brothers in particular.

The plaintiff also chose to file his complaint in the Northern District of Illinois, though Lehman’s headquarters are in Manhattan.

But regardless of the complaint’s numerous anomalies, the complaint does represent a subprime-related securities class action lawsuit, and so, as noted further below, I have added it to my running tally of subprime-related securities lawsuits.

Schwab: On March 18, 2008, plaintiffs filed a securities class action lawsuit in the United States District Court for the Northern District of California against the Schwab Corporation, certain of its directors and officers, and as well as the underwriter and investement adviser associated with two Schwab YieldPlus Funds. The lawsuit is filed on behalf of investors who purchased Schwab YieldPlus Investor Funds Investor Shares and Schwab YieldPlus Funds Select Shares during the period March 17, 2005 through March 18, 2008. A copy of the plaintiffs’ counsel’s press release can be found here.

The complaint alleges that the defendants issued untrue statements regarding the lack of diversification of the funds and the extent of the funds’ exposure to subprime-backed securities. The complaint alleges that while the funds advertised themselves as a safe alternative to money market funds, they were in fact critically exposed because more than 50 percent of the funds assets were invested in the mortgage industry. The plaintiffs allege that the funds have lost over 18 percent of their value since mid-2007 and 11 percent since January 2, 2008. The plaintiffs allege that the defendants violated Section 11 of the ’33 Act based in misrepresentations in the funds’ offering documents.

The Schwab funds are actually the second mutual funds to be sued in connection with the subprime crisis; as discussed here, the earlier lawsuit involved Morgan Keegan.

Special thanks to a loyal reader for copies of the Wachovia and Lehman Brothers complaints.

More Auction Rate Securities Litigation: As readers may recall, in an earlier post (here), I speculated that lawsuits related to  auction rate securities may represent the next wave in subprime securities litigation. Last week, I noted (here) the securities class action lawsuit that had been brought against Deutsche Bank on behalf of auction rate securities investors. Auction rate securities investors have now filed two additional securities class action lawsuits, one involving Wachovia, and the other involving TD Ameritrade.

With respect to TD Ameritrade, the plaintiffs filed a securities class action lawsuit in the United States District Court for the Southern District of New York on behalf of persons who purchased auction rate securities from TD Ameritrade and an affiliate between March 19 2003 and February 13, 2008 and who continued to hold the securities. A copy of the plaintiffs’ attorneys’ March 19, 2008 press release can be found here, and a copy of the complaint can be found here

The complaint alleges that the defendants failed to disclose:

(1) the auction rate securities were not cash alternatives, like money market funds, but were instead, complex, long-term financial instruments with 30 year maturity dates, or longer; (2) the auction rate securities were only liquid at the time of sale because TD Ameritrade and other broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) TD Ameritrade and other broker-dealers routinely intervened in auctions for their own benefit, to set rates and prevent all-hold auctions and failed auctions; and (4) TD Ameritrade continued to market auction rate securities as liquid investments after it had determined that it and other broker dealers were likely to withdraw their support for the periodic auctions and that a "freeze" of the market for auction rate securities would result.

With respect to Wachovia, the plaintiffs filed a securities class action lawsuit in the United States District Court for the Southern District of New York on behalf of all investors who purchased auction rate securities from Wachovia and an affiliate between March 19, 2003 and February 13, 2008 and who continue to hold the securities. A copy of the plaintiffs’ counsel’s March 19, 2008 press release can be found here and a copy of the complaint can be found here. The allegations against Wachovia are substantially similar to the allegations against TD Ameritrade.

An additional lawsuit has been brought on behalf of an investor in auction rate securities, although in this case it is an individual action rather than a class action. On March 18, 2008, plaintiffs filed a lawsuit in the United States District Court for the Western Disrict of Texas against Wells Fargo and Wells Fargo Investments, alleging that the defendants violated the securities laws and breached their fiduciary duties in connection with the plaintiffs’ purchase of $2 million of auction rate market preferred shares. A copy of the complaint can be found here. (Hat tip to Courthouse News Service for a copy of the complaint.)

The plaintiffs contend that the Wells Fargo investment adviser referred to the securities as "bonds" that were "represented to be without risk." The plaintiffs claim that the defendants said that the securities could be redeemed on 7 days notice, but that when the plaintiffs sought to redeem the securities on March 11, 2008, they were told that no market exists for the securities. The complaint seeks recovery of $2 million plus punitive damages.

Some Observations and Tallies: Even for those that have been paying only intermittent attention, it is pretty clear that the pace of subprime-related litigation activity has picked up significantly over the last few days. Even without regard to these five new securities class action suits listed above, we had already seen a notable number of new subprime securities suits just in the last week, including for example, new lawsuits against SocGen, PMI Group, Deutsche Bank, and, most significantly, Bear Stearns. Adding these five new subprime-related securities class action lawsuits listed above to the list reinforces the impression that the litigation wave is gathering dangerous momentum, with the likelihood that even greater activity is yet to come.

With the addition of these new lawsuits to my running tally of subprime- related securities class action litigation, which can be accessed here, the current total of subprime securities lawsuits now stands at 56, of which 18 have been filed in 2008. Two of these 56 represent lawsuits by investors against mortgage backed asset securitizers, three are class action on behalf of investors in auction rate securities, and two relate to mutual funds, as noted above. The remaining 50 lawsuits were brought by shareholders of publicly traded companies.

More About Credit Default Swaps: In yet another prior post (here), I noted that problems arising from credit default swaps could be another source of litigation arising from the credit crisis. The March 20, 2008 Wall Street Journal is reporting (here) that Merrill Lynch has sued a unit of Security Capital Assurance, seeking to prevent SCA from avoiding its financial obligations to insure as much as $3.1 billion on seven credit default swaps.

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