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

As the subprime crisis has unfolded, one of the recurring themes has been the conflicted role of the rating agencies. Last week’s announcement (here) of a negotiated resolution of the New York State regulatory investigation of the rating agencies reflects one aspect of the recurring questions surrounding the rating agencies’ role in the current crisis. These questions are likely to persist in light of the recent revelation (here) that Moody’s continued to assign mortgage-backed securities investment grade ratings despite a whistleblower’s alarm about potential problems with the ratings.

But while the questions about the rating agencies’ role have persisted, and while the agencies own shareholders have sued the rating agencies over the agencies’ own disclosures (about which refer here and here), to date subprime investors have not targeted the rating agencies for their rating activities, to the best of my knowledge.

As discussed in a prior post (here), case law suggests that the rating agencies enjoy First Amendment protection for their rating opinions and activities. And, as also discussed in my prior post, while thoughtful commentators have suggested bases on which these defenses might be overcome with respect to the rating agencies subprime-related investment rating activity, subprime investors have not targeted the rating agencies. Until now.

In a lawsuit filed on May 15, 2008 in New York Supreme Court (New York County), the New Jersey Carpenters’ Vacation Fund has filed a securities class action lawsuit under the ’33 Act on behalf of investors in the three HarborView Mortgage Loan Trusts. In a petition dated June 3, 2008, the defendants removed the case to the United States District Court for the Southern District of New York. A copy of the notice of removal, to which the original complaint is attached, can be found here.

The defendants in the lawsuit include the three HarborView mortgage pass-through certificate trusts; the Royal Bank of Scotland Group (“RBS Group”) and its subsidiary, Greenwich Capital Holdings and related entities, including Greenwich Capital Acceptance (“GCA”) and five individual directors of GCA; and the three rating agencies, Fitch’s Ratings, Moody’s Investor Services, and McGraw Hill, as corporate parent for Standard & Poor’s Rating Services.

The three trusts were issuers of bonds (the mortgage pass-through certificates) created by RBS Greenwich Capital. The offerings were collateralized with loans originated and underwritten by Countrywide Home Loans. The complain alleges that the Registration Statement issued in connection with the offerings failed to disclose “the true impaired and defective quality of the loans collateralizing the Bonds” and that the “loans were not originated pursuant to the underwriting guidelines stated in the Registration Statement.”

The complaint alleges that the rating agency defendants “failed to conduct due diligence and willingly assigned the highest ratings to such impaired instruments since they received substantial fees from the issuer.” The complaint alleges further that the rating agencies “issued the ratings based on an outdated methodology designed in about 2002.” The ratings were alleged to be misleading because the rating agencies “presumed that the loans were of high credit quality issues in compliance with the stated underwriting guidelines, when, in fact, Countrywide had systematically disregarded its stated Underwriting Guidelines.”

The rating agencies later downgraded the mortgage-backed securities. The complaint alleges that the rating agencies “admission that they had not used an appropriate rating methodology …resulted in a substantial decline in the value of the Bonds.” The plaintiff itself claims that its investment in the instruments has declined by 55 percent.

All of the claims asserted in the Complaint are based on the ’33 Act. In Count I of the Complaint, the plaintiff specifically alleges (in paragraph 98) that the rating agencies “served as appraisers” as defined in Section 11(a)(4) of the ’33 Act. The paragraph further alleges that the rating agencies “purportedly reviewed and analyzed each offering and provided the credit rating for each tranche of the HarborView Bonds.” The paragraph further alleges that the service of providing the ratings “was essential to pricing and marketing the Bonds,” and that the ratings were contained in the Prospectus.

As far as I am aware, the plaintiffs’ complaint in the HarborView Mortgage Loan Trust lawsuit represents the first occasion as part of the current subprime litigation wave where subprime investors have sought to hold the rating agencies liable for their ratings. The plaintiff’s allegations will face a number of hurdles, including the jurisdictional issue discussed below.

In addition, the rating agencies will undoubtedly assert a number of substantive defenses, including the First Amendment defense discussed in my prior blog post (here), as well as whether the rating agencies even owed the plaintiff any duties. The rating agencies will particularly dispute the plaintiffs’ attempt to rely on Section 11(a)(4) of the ’33 Act as a basis for the rating agencies’ liability.

The jurisdictional issue pertains to the plaintiff’s initiation of the lawsuit in state court pursuant to the concurrent state court jurisdiction in Section 22 of the ’33 Act. The HarborView case is just the latest of the state court ’33 Act lawsuits arising as part of the current subprime-related litigation wave, as discussed in my prior post (here). In each case, the defendants have sought to remove these cases to federal court, notwithstanding the express prohibition in Section 22 of removal of state court cases to federal court. In at least one of the prior cases, the federal court has remanded the case back to state court in reliance on Section 22’s express removal prohibition (refer here for a discussion of the prior remand case).

It remains to be seen whether or not these cases will go forward in state or federal court. Although it is not altogether clear why the plaintiffs have sought to pursue these cases in state court, the plaintiffs clearly perceive some advantage in doing so. In any event, the success of the plaintiffs’ attempts to hold the rating agencies liable for their investment in subprime-related securities will be interesting to watch. It will also be interesting to see if other investor plaintiffs similarly seek to hold the credit rating agencies liable.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing a copy of the HarborView removal petition.

Run the Numbers: I have added the HarborView case to my running tally of subprime-related securities class action lawsuits. (My tally can be accessed here). According to my count, the addition of this case, as well as the case filed late last week against Franklin Bank Corp. (about which refer here), the current tally of subprime and credit crisis-related securities class action lawsuits now stands at 88, of which 48 have been filed in 2008.

Speakers’ Corner: On June 19 and 20, 2008, I will be co-Chairing the Mealey’s Subprime Mortgage & Insurance Coverage Litigation Conference at the Ritz-Carlton in Pentagon City, Virginia, with my good friend Matt Jacobs of the Jenner & Block law firm.

The agenda (which can be found here), includes many distinguished speakers and panelists, such as Andrew Carron of NERA Economic Consulting, Adel Turki of Cornerstone Research, Samuel Rudman of the Lerach Coughlin firm, Dan Bailey of Bailey & Cavalieri, John McCarrick of Edwards Angell Palmer & Dodge, David Hensler of Hogan & Hartson, and Mitchell Dolin of Covington & Burling.

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In the past week, plaintiffs’ lawyers filed a raft of new subprime and credit crisis related securities lawsuits. The cases involve a wide variety of claimants and defendants, and a diverse array of legal theories. But while the lawsuits themselves are diverse, they do all evidence a common theme, which is that the subprime and credit-crisis related litigation wave continues to surge on.

American International Group: The most prominent lawsuit filed in the past week is the securities class action lawsuit filed in the United States District Court for the Southern District of New York against American International Group, its CEO Martin Sullivan, its CFO Steven Bensinger, and two other officials. A press release describing the lawsuit, which was filed by the Bernstein Litowitz Berger & Grossmann firm on behalf of the Jacksonville Police and Fire Pension Fund, can be found here. A copy of the complaint can be found here.

According to the press release, “Defendants repeatedly reassured investors that AIG had successfully insulated itself from the recent turmoil in the housing and credit markets due to its superior risk management. In particular, defendants touted the security of [American International Group Financial Products] ‘super senior’ credit default swap portfolio, making numerous statements that this portfolio was secure and that AIG’s method for accounting for this portfolio accurately reflected its value.” The press release goes on to state that:

Investors began to learn the truth regarding AIG’s financial condition and the Company’s exposure to the mortgage market when, on February 11, 2008, the Company disclosed that its outside auditor had determined that there was “material weakness in its internal control” over the financial reporting and oversight relating specifically to its accounting for the CDS portfolio, and that the Company was revising the loss valuations it previously reported. Under the new valuations, losses on the CDS portfolio more than quadrupled – from the $1.4 billion reported on the CDS portfolio just weeks before to over $4.5 billion. Two weeks later, on February 28, 2008, AIG disclosed that the market valuations on the CDS portfolio would increase to $11.5 billion and revealed for the first time that the Company had notional exposure of $6.5 billion in liquidity puts written on collateralized debt obligations (“CDOs”) linked to the sub-prime mortgage market.

Finally, on May 8, 2008, the Company disclosed that market valuation losses on the CDS portfolio for the quarter climbed an additional $9.1 billion, for a cumulative loss of $20.6 billion, and that the Company was expecting actual losses on the portfolio to be about $2.4 billion. As a result of these disclosures, the price of AIG stock plunged from a Class Period high of $75.24 per share on June 5, 2008, to $38.37 per share on May 12, 2008, wiping out tens of billions of dollars in shareholder value and causing damage to the class.

A May 22, 2008 New York Times article describing the AIG lawsuit can be found here. A May 23, 2008 Law.com article about the suit can be found here.

Falcon Strategies/Citigroup: Another prominent lawsuit filed during the last week involved a hedge fund affiliated with Citigroup, which is also a defendant in the lawsuit. The lawsuit is filed on behalf of all persons “who have tendered or been asked to tender their shares” in Falcon Strategies Two LLC. According to the plaintiffs’ lawyers’ press release (here), Falcon was established as a “multi-strategy fixed income alternative seeking to provide investors with absolute returns, current income and portfolio diversification.” However, the complaint (which can be found here) alleges that Falcon was “not conservative” but “employed bond arbitrage, carried commercial debt obligations, and held asset-backed mortgage investments” that declined in value when the markets failed.

The complaint is somewhat unusual in that, which it alleges affirmative violations of the federal securities laws, it does not expressly seek damages, but rather seeks a preliminary injunction to enjoin the tender offer until the defendants correct the “allegedly false and misleading” tender memorandum.

A separate lawsuit against a Falcon Strategies fund seeking damages and filed on behalf of Fifth Third Bank is detailed in a May 20, 2008 Wall Street Journal article (here). The Falcon Strategies fund had previously been the target of a separate securities class action lawsuit, but that lawsuit was voluntarily dismissed (refer here concerning this prior dismissed lawsuit).

The Falcon Strategies lawsuit is the second subprime or credit crisis-related securities class action lawsuit brought against a Citigroup-affiliated hedge fund. In early May 2008, investors brought a securities lawsuit against MAT Five LLC, Citigroup and other defendants alleging misrepresentations in MAT Five’s placement memorandum (Refer here for further background regarding the MAT Five lawsuit.)

Bank of America: In addition to these two lawsuits, investors also brought a securities class action lawsuit against Bank of America and related entities on behalf of all persons who purchased auction rate securities from the defendants during the period May 22, 2003 and February 23, 2008. A copy of the plaintiffs’ lawyers’ press release can be found here and a copy of the complaint can be found here.

I have written extensively about the auction rate securities lawsuits in prior posts, most recently here.

National City/Harbor Bank: Finally, in the fourth of last week’s flotilla of new subprime lawsuits, on May 20, 2008, the defendants removed to the United States District Court for the Northern District of Ohio a lawsuit that had been filed in the Court of Common Pleas of Cuyahoga County Ohio on behalf of all persons who acquired shares of National City Corporation in connection with National City’s December 1, 2006 acquisition of Harbor Bank. A copy of the complaint and removal petition can be found here.

The plaintiffs allege that the Registration Statement issued in connection with the merger contained material misrepresentations and omissions concerning National City’s lending practices, financial results and liquidity. In particular, the complaint alleges among other things that the Registration Statement failed to disclose that National City was “dangerously overexposed” to “risky and impaired CDOs” and that the company had “failed to properly account for its highly leveraged loans and mortgage securities.”

National City previously has been sued in a securities class action lawsuit (as I discussed in a prior post, here) filed on behalf of its shareholders. But this new lawsuit is filed on behalf of a distinct set of claimants and is based on a different set of alleged misrepresentations, and therefore in my view it represents a separate new lawsuit. As discussed below, I have accounted for it separately in my running tally of subprime-related securities lawsuits.

The lawsuits against National City on behalf of the former Harbor Bank shareholders alleges violations of Section 11 of the ’33 Act, but was filed initially in state court under the ’33 Act’s concurrent jurisdiction provisions. I have previously noted (refer here) the plaintiffs’ lawyers’ recent interest in attempting to pursue ’33 Act claims in state court. While defendants routinely remove these cases to federal court, the plaintiffs’ lawyers’ have has some success in having the cases remanded to state court (refer here). While one can only speculate on the plaintiffs’ interest in pursuing these cases in state court, it is nonetheless a very interesting development that possible represents a new trend in securities litigation prosecution.

One other interesting thing about the National City/Harbor Bank lawsuit is that in addition to National City itself and its current and former directors and officers, the complaint names as a defendant, National City’s auditors, Ernst & Young. There have been some lawsuits where the target company’s outside auditors have been named as defendants (for example, refer here regarding the amended complaint in the Countrywide subprime litigation where the companies’ auditors have been named). The bankruptcy examiner in the New Century case also suggested that there may be claims against the company’s auditors (refer here for a discussion of this report). However, so far, the auditors have been an infrequent target, likely because of the Stoneridge decision. The cases involving outside auditors have tended to be bases where an offering of securities is involved, and the auditors potentially have their own primary liability in connection with the offering.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for a copy of the National City/Harbor Bank complaint.

Run the Numbers: With the addition of last week’s four new subprime and credit-related securities lawsuits, the current tally (refer here) of the subprime related securities lawsuits now stands at 85, of which 45 have been filed in 2008. With the addition of the new Bank of America lawsuit, the total number of auction rate securities lawsuits now stands at 17.

While the numerical specifics are important, the more important point is that the subprime and credit crisis-related litigation wave continues to churn on, the passage of time apparently doing nothing to diminish its intensity.

Speakers’ Corner: On Thursday May 29, 2008, I will be in New York speaking on a panel at IQPC’s 4^th Securities Litigation Conference (brochure here). The panel on which I am participating is entitled “Discussing Recent Trends in Director & Officer Liability (D&O) Liability,” and includes as co-panelists Ray DeCarlo of AIG and Adam Savett of RiskMetrics.

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A lawsuit filed late last week against First Marblehead Corporation underscores that the current lawsuit onslaught so often referred to as the “subprime” litigation wave is, and really has been for awhile, about so much more than just subprime. Although we are probably stuck with the “subprime” label as a shorthand way to describe these developments, the label encompasses a credit crisis that goes far beyond subprime lending.

First Marblehead is a Massachusetts-based company in the business of underwriting, packaging and securitizing student loans. Operating out of First Marblehead’s offices is a nonprofit organization called The Education Resources Institute (“TERI”) that provides guarantees of student loans that First Marblehead originates. On April 10, 2008, plaintiffs’ lawyers filed a securities class action lawsuit in the United States District Court for the District of Massachusetts against First Marblehead and certain of its directors and officers. A copy of the plaintiffs’ counsel’s April 10 press release can be found here. A copy of the complaint can be found here.

The complaint alleges that during the class period of August 10, 2006 to April 7, 2008, the defendants made material misrepresentations “concerning the performance and quality of First Marblehead’s securitizations, its ability to perform additional securitizations, TERI’s ability to adequately guarantee [First Marblehead’s] student loans, and the Company’s financial results and its ongoing operations.” The complaint alleges that the company “misrepresented the level of default rates in its portfolio,” and “disregarded that TERI was underreserved and unable to adequately insure” the company’s loans. According to the complaint, TERI filed for bankruptcy protection on April 7, 2008, and the company’s stock plunged.

The First Marblehead lawsuit has nothing directly to do with subprime lending itself. Indeed, the occurrence of credit-related litigation essentially unrelated to subprime lending is really nothing new – First Marblehead is not even the student loan company to be sued in a securities class action lawsuit as part of the current litigation wave, given the lawsuit filed in January 2008 against SLM Corporation (“Sallie Mae”), about which refer here.

The student lending cases, like the auction rate securities litigation, are about the secondary and tertiary consequences in the credit marketplace following on the consequences first triggered by the subprime lending meltdown. But the spread of litigation to other types of credit and other kinds of companies underscores the dark possibilities for a crisis that began in the residential real estate lending sector to spread across the entire economy and activate a much broader array of litigation.

It is probably worth noting that the turmoil that has hit the student lending sector is not limited just to the student loan organizations themselves; companies that invested in student loan-backed securities are also experiencing financial and accounting difficulties as a result of their investment in these securities. For example, in a situation that encompasses both the student loan problems and the breakdown of the auction rate securities marketplace, Winnebago, in its March 20, 2008 fiscal second quarter earnings release (here), disclosed that it owned $54.2 million of auction rate securities collateralized by student loans. As a result of the auction rate securities market failure, the company deemed these securities as not currently liquid, and reclassified them on the company’s balance sheet as long-term investments. In its April 9, 2008 10-Q (here), the company recorded a temporary impairment charge to these securities of $3.4 million.

The fact that the student loan turmoil would affect a company as unrelated to the sector as Winnebago demonstrates how far afield the effects of the current crisis have and may yet spread. The essential point here is that as long as observers continue to describe and think about the current developments as merely subprime-related, they will not only fail to appreciate the extent of what has already happened, but also likely underestimate the possibilities of what may lie ahead.

Another Auction Rate Securities Lawsuit: And speaking of auction rate securities, on April 11, 2008, plaintiffs’ lawyers filed yet another lawsuit on behalf of auction rate securities investors against the companies that sold them the investments. As reflected in the plaintiffs’ lawyers’ press release (here), the latest lawsuit involves Oppenheimer Holdings. The Oppenheimer lawsuit is the twelfth of these auction rate securities lawsuits to be filed.

Run the Numbers: Like everyone else, I too am trapped by the now-established convention of referring to the current credit-related lawsuit onslaught as the “subprime” litigation wave, and as a reflection of that convention, I have added the First Marblehead and Oppenheimer lawsuits to my running tally of the “subprime”-related litigation, which can be accessed here. With the addition of these two new lawsuits, the current tally now stands at 70, of which 30 have been filed in 2008. As noted, 12 of these lawsuits involve class action auction rate securities litigation.

Subprime Litigation: The Grandaddy of Them All?: Although the crisis commonly referred to as the “subprime” meltdown is relatively recent, subprime loans have been around for a while. Indeed, problems with subprime loans are also nothing new. Even though the current wave of subprime-related litigation did not get started until February 2007, there were subprime-related lawsuits before that. These earlier lawsuits may provide some interesting perspective on the current round of litigation.

As described in an April 9, 2008 Wall Street Journal article entitled “Subprime Lender’s Failure Sparks Lawsuit against Wall Street Banks” (here), American Business Financial Services was in the subprime loan origination business. It funded its operations through the securitization of loans, but, in addition, it also raised operating cash by selling notes through direct sales to individual investors.

According to the allegations in subsequent litigation, ABFS underestimated the number of its loans that would be paid off early as a result of refinancing, reducing the company’s cash flow, and ultimately leading to the company’s bankruptcy. The noteholders, of which there may have been as many as 22,000, lost millions.

The Journal article describes the Pennsylvania state court lawsuit that the bankruptcy trustee has filed against the Wall Street banks that sponsored ABFS’s securitizations, as well as against the company’s former directors and officers. But this trustee lawsuit follows two earlier lawsuits, one brought by the company’s shareholders and one brought on behalf of the company’s noteholders.

The ABFS shareholder securities litigation, background about which can be found here, was initiated in January 2004, following the company’s disclosure that the Department of Justice was investigating the company’s loan transactions and securitization agreements. The plaintiff shareholders alleged that the company and certain of its directors and officers misrepresented the company’s financial condition by artificially altering the company’s loan default ratio, to understate the level of the company’s troubled loans. In a June 2, 2005 memorandum opinion and order (here), the court granted the defendants’ motion to dismiss, on the ground that the plaintiffs did not adequately allege that the statements at issue materially misleading, nor did the plaintiffs’ allegations create a “strong inference” that the defendants acted with scienter.

The noteholder litigation, by contrast is going forward, albeit in a narrowed state. The background regarding the ABFS noteholder litigation can be found here. The noteholders also claimed that the defendants misrepresented the company’s financial condition. In two orders (here and here), the court dismissed the plaintiffs’ allegations concerning the company’s loan delinquency rates, as well as the plaintiffs’ solicitation claims under Section 12. A much-narrowed case is going forward.

The course of these earlier lawsuits casts an interesting light on the current wave of lawsuits. The ABFS shareholder lawsuit dismissal is a reminder that even a lawsuit involving a bankrupt company that is the subject of a DoJ investigation, and in connection with which shareholders lost substantially all their investment, still has to survive the formidable pleading requirements to which securities lawsuits are subject. Even the noteholders, whose plight may be particularly sympathetic, have seen their petition for redress of grievances substantially narrowed.

The fate of these earlier lawsuits is a reminder that merely because lawsuits are filed, even lawsuits filed in the context of significant financial losses and regulatory investigations, does not mean that the lawsuits will succeed. It may be important to keep in mind as the current wave of lawsuits continues to accumulate that these lawsuits will face the same formidable pleading barriers as did the ABFS lawsuits, and some of these lawsuits, like the ABFS lawsuits, will not survive or will only survive on a greatly narrowed basis.

Tellabs in the Ninth Circuit: Readers interested in following the implementation of the Supreme Court’s Tellabs decision in the lower courts will want to review the April 10, 2008 decision (here) in the Skechers USA securities litigation, in which the Ninth Circuit affirmed the district court’s dismissal of the lawsuit, in reliance on Tellabs.

However, the complications that may yet attend the implementation of the Tellabs decision in the lower courts is also suggested by the dissenting opinion in the Skechers appeal (here), in which the dissenting judge, applying the same Tellabs standard to the same facts, reached the opposite conclusion, finding that the district court’s dismissal ought to be reversed.

In the end however, while the Ninth Circuit’s majority and dissenting opinions in the Skechers case are interesting, they ultimately are of little value to the larger question of how Tellabs may be implemented in the lower courts, because the majority opinion is designated as “Not for Publication,” as a result of which it may not be cited. I have previously (here) decried the truly regrettable practice of courts designating opinions as not for publication or citation. Our entire system of jurisprudence relies on the usefulness of prior decisions to help resolve future cases, and it is fundamentally inconsistent with this arrangement for courts to try to remove decisions from this time-honored tradition and process.

Special thanks to a special friend of The D&O Diary for copies of the Ninth Circuit opinions.

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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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In a sweeping 581-page report (here), the examiner appointed in connection with the New Century Financial Corporation bankruptcy found that New Century “engaged in a number of significant improper and imprudent practices related to its loan originations” that “created a ticking time bomb that detonated in 2007.”

Bankruptcy examiner Michael J. Missal issued his report as part of the investigation he undertook at the request of New Century’s bankruptcy trustee to examine “any and all accounting and financial statement irregularities, errors and misstatements.” The report is dated February 29, 2008, but it was unsealed on March 26, 2008 at the request of former New Century Employees.

The examiner’s report concludes that New Century “had a brazen obsession with increasing loan originations, without due regard to the risks associate with that business strategy.” The report also concludes that New Century “engaged in at least seven wide-ranging accounting practices in 2005 and 2006” that “resulted in material misstatements of the Company’s financial statements.” The examiner did not find sufficient evidence to conclude that New Century engaged in earnings management or manipulation “although its accounting irregularities almost always resulted in increased earnings.”

The report also states that New Century’s outside accounting firm, KPMG, “contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the Company’s departure from applicable accounting standards.”

The report states that as a result of New Century’s accounting failures New Century understated its repurchase reserve in the third quarter of 2006 by 100%, and reported a quarterly profit of $63.5 million when it should have reported a loss.” In addition, the accounting errors resulted in the payment of performance bonuses to key executives in 2005 “that were at least 300% more than they should have been.” New Century also made “a number of false and misleading statements in its public filings, press releases and other communications.”

Based on his investigation, the examiner believes that “several causes of action may be available to the estate.” First, the report concludes that the estate may be able to assert causes of action against KPMG for “professional negligence and negligent misrepresentations.” Second, the estate may be able to assert causes of action against former officers “to recover certain of the bonuses… that were tied, directly or indirectly, to the incorrect financial statements.” These causes of action, the report states, “could seek million of dollars of recoveries.”

The examiner also considered whether the company’s former officials breached their fiduciary duties, and whether the estate has possible claims against the officials. The report notes that any assertion of these claims would have “strong defenses to overcome, particularly the business judgment rule and statutory and other limitations.”

While the examiner’s conclusions may (and undoubtedly will) be the subject of substantial debate, the report’s analysis of the company’s loan origination practices and accounting shortcomings is remarkably detailed. The sheer sweep and magnitude of the report and the depth of its detail could make New Century the poster child for the excesses of the subprime lending boom, evoking inevitable comparisons with Enron as the byword for an entire era. Indeed, the report suggests a number of echoes from that earlier period, including in particular the accounting firm’s supposed complicity in the company’s alleged excesses.

The fallout from the subprime meltdown will continue to accumulate in the months and years to come, but the New Century bankruptcy examiner’s report may represent the first installment on the history of the era.

A March 26, 2008 Bloomberg.com article discussing the examiner’s report can be found here. A March 27, 2008 Wall Street Journal article discussing the report can be found here.

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Add Merrill Lynch and Morgan Stanley to the growing list of companies that have been sued in securities class action lawsuits by investors for allegedly deceptive representation in connection with the sale of auction rate securities. According to the plaintiffs’ attorneys’ March 25, 2008 press release (here), the plaintiffs’ have filed a securities class action lawsuit in the United States District Court for the Southern District of New York against Merrill Lynch and its asset management company on behalf of investors who purchased auction rate securities from Merrill Lynch between March 25, 2003 and February 13, 2008.  A copy of the complaint can be found here.

According to the press release, Merrill Lynch “offered and sold auction rate securities to the public as highly liquid cash-management vehicles and as suitable alternatives to money market mutual funds.” The complaint alleges that Merrill Lynch failed to disclose that  

(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 Merrill Lynch and other broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) Merrill Lynch 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) Merrill Lynch 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.

According to news reports (here), plaintiffs also filed a separate but substantially similar lawsuit against Morgan Stanley, raising more or less the same allegations on behalf of a class of investors who purchased auction rate securities from Morgan Stanley during the same class period as proposed in the Merrill Lynch lawsuit. I have not located the Morgan Stanley complaint itself, but will add a link when I get a copy.

UPDATE: A copy of the plaintiffs' lawyers' March 25, 2008 press release announcing the Morgan Stanley auction rate securities lawsuit can be found here and a copy of the complaint can be found here.

These two new lawsuits join a group of similar lawsuits, all filed by the same law firm on behalf of auction rate securities investors, against Deutsche Bank, Wachovia, TD Ameritrade and UBS. The law firm’s webpage describing these various lawsuits can be found here.

With the addition of these two new subprime-related securities class action lawsuits, my running tally of subprime related securities lawsuits, which can be accessed here, now stands at 59, of which 21 have been filed in 2008. Two of these 59 represent lawsuits brought on behalf of investors against mortgage-backed asset securitizers, six are class action lawsuits on behalf of auction rate securities investors, two are brought on behalf of mutual fund investors, and the remaining 49 of which are brought on behalf of public company shareholders.

Subprime Litigation Wave Hits Regions: Birmingham, Alabama-based Regions Financial Corporation has been hit with a couple of different subprime-related lawsuits as the subprime wave continues to spread beyond New York, California, and Florida, the states where the subprime litigation originally was concentrated.

First, according to a March 25, 2008 Birmingham News article (here), the Catholic Medical Mission Board, a Regions shareholder, has filed a shareholders’ derivative lawsuit against Regions, as nominal defendant, and certain Regions directors and officers, alleging that the defendants failed to disclose the extent of Regions’ lending exposure to residential homebuilders, which permitted company insiders to sell their shares in company stock at inflated prices. According to the news report, the complaint alleges that "Regions Financial's stock was artificially inflated because the defendants directed the company to hide the true extent of its subprime exposure.’

The derivative complaint (which can be found here) asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and breach of Section 10(b) of the ’34 Act.

Second, Regions has also been hit with a lawsuit filed under ERISA on behalf of its participants in the Regions defined contribution plan. A copy of the complaint can be found here. The complaint alleges that the offered plan participants Regions stock and investment options in Regions Morgan Keegan funds “when it was imprudent to do so.” The complaint also alleges that the investment in Regions stock and the Regions Morgan Keegan funds was maintained “when it was no longer prudent to do so.”  The complaint alleges that the defendants knew or should have known that these investments were imprudent because of Regions and the funds heavy investment in or vulnerability to subprime mortgage investments, loans and securities. The complaint also alleges that the defendants failed to communicate the risks of investing in the plan and also failed to communicate conflicts of interest.

As noted on my running tally of subprime related litigation (which can be accessed here), with the addition of the Regions ERISA litigation, my running tally of subprime-related ERISA lawsuits now stands at 11.

I have not been keeping a running tally of subprime-related derivative litigation (basically because the primarily state court oriented litigation is hard to track), but there has been substantial subprime related derivative litigation, involving, among others, Bear Stearns, American International Group, and Countrywide.

Special thanks to alert reader Rob Lichenstein for the links to the two Regions lawsuits and the Birmingham News article.

About the Bear Stearns Deal: If as I do you find many of the articles discussing the updated Bear Stearns deal confusing, you will want to read a couple of interesting posts on the Conglomerate blog, that provide insight into a couple of points about the revised deal that have received significant press attention.

First, there has been a great deal of discussion in the press about the possibility that the improved buyout offer may have resulted in part from drafting errors in the initial deal documents. BYU law professor Gordon Smith deconstructs this issue in a detailed Conglomerate blog post here (here), with helpful citations and cross-references to other blogs. Smith’s analysis of the differences between the original and the revised deal documents raise some interesting questions about what J.P. Morgan seems to have sought by offering revised terms. Bottom line, in exchange for the improved merger price, J.P. Morgan has eliminated the provisions that would have kept the deal open for a full year, and also obtained a 39.5% ownership interest as a means to try to ensure that the deal is concluded.

Second, and with respect to that 39.5% ownership interest transfer, Smith has a separate post on Conglomerate (here), that explores the Delaware case law behind the 39.5% interest and the limitations on share transfers to lock in shareholder merger approvals. As Professor Smith’s post notes, there is no automatic cutoff under Delaware law whereby a company can sell up to 40% of itself without shareholder approval, and suggestions to that effect in the mainstream media are “what is known in the law biz as ‘wrong.’” Practitioners have evolved the 40% rule of thumb, but “none of this has been tested in court.”

More About the FCPA: Regular readers know that I have frequently commented (most recently here) on the growing importance of Foreign Corrupt Practices Act enforcement proceedings and follow on civil litigation. Two recent publications provide significant additional information on this topic.

First, a March 25, 2008 Law.com article entitled “Today, No Bribe is Too Small” (here), takes a look at the expanding reach of enforcement activities. As the title suggests, the article looks at some seemingly small corrupt transactions that have attracted regulatory attention. The article states that “it seems that no bribe is too small to earn the attention of the department.” The article also focuses on regulatory actions that have been taken by middlemen and third party contractors, and how those seemingly remote actors’ actions have come back to haunt the sponsoring company.

Second, in a much more detailed look at recent FCPA enforcement activity, Porter Wright attorney Tom Gorman has recently posted a running series on the issues involved in recent FCPA regulatory actions on his SEC Actions blog. The most recent post can be found here. Taken collectively, these posts present an excellent overview of the current state of FCPA regulatory actions.

Finally, readers who recall my recent post (here) about the civil litigation arising from potentially problematic activities involving Alcoa’s operations in Bahrain will be interested to note that the U.S. Department of Justice has initiated a criminal investigation of the activities, and in that connection has asked for the entry of stay in the civil proceedings,  as discussed in a March 21, 2008 Wall Street Journal article entitled “U.S. Opens Alcoa Bribery Probe” (here).

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We knew it was coming but it sure got here fast. On March 17, 2008, plaintiffs’ counsel initiated a securities class action lawsuit in the United States District Court for the Southern District of New York against Bear Stearns and certain of its directors and officers. A copy of the plaintiffs’ lawyers’ press release can be found here, and the complaint can be found here.

According to the press release, the complaint alleges that during the class period between December 14, 2006 and March 14, 2008, defendants issued false and misleading statements, as a result of which “Bear Stearns stock traded at artificially inflated prices … reaching a high of $159.36 per share in April 2007.” The press release further states that:

In late June 2007, news about Bear Stearns’ risky hedge funds began to enter the market and its stock price began to fall. On March 10, 2008, information leaked into the market about Bear Stearns’ liquidity problems, causing the stock to drop to as low as $60.26 per share before closing at $62.30 per share. On March 13, 2008, news that Bear Stearns was forced to seek emergency financing from the Federal Reserve and J.P. Morgan Chase hit the market and Bear Stearns stock fell to $30 per share. Then, on Sunday, March 16, 2008, it was announced that J.P. Morgan Chase was purchasing Bear Stearns for $2 per share. By midday on Monday, March 17, 2008, Bear Stearns stock had collapsed another 85% to $4.30 per share on volume of 75 million shares.

The press release states that the defendants’ statements during the class period “due to defendants’ failure to inform the market of the problems in the Company’s hedge funds due to the deteriorating subprime mortgage market, which would cause Bear Stearns to have to rescue the funds, cause the Company and its officers possible criminal liability and hurt the Company’s reputation.”

The principals at JP Morgan clearly anticipated this development. According to a March 17, 2008 Law.com article (here), JP Morgan is “setting aside $6 billion to cover potential litigation” as well as other transaction and severance costs arising out of JP Morgan’s acquisition of Bear Stearns JP Morgan’s own March 16 press release (here) announcing the transaction does not mention any reserve or set aside for transaction expenses, but the March 18, 2008 Wall Street Journal (here) also says that “J.P. Morgan plans to set aside about $6 billion in reserves to cover the potential exposure and other costs.”

(Perhaps it is an idle thought but one does wonder why the $6 billion was not applied directly to the acquisition price. …)

Yet another possibility that may yet arise is that individual Bear Stearns investors might choose to pursue their own litigation separately. According to the March 17, 2008 Wall Street Journal (here), there are individual investors whose losses from the Bear Stearns collapse approach $1 billion. According to the March 18, 2008 Wall Street Journal (here), “billionaire investor Joseph Lewis, one of Bear Stearns's biggest shareholders, with a 9.4% stake, rejected [J.P. Morgan’s] offer, saying it doesn't represent the true value of Bear Stearns. Mr. Lewis, though a spokesman, said the offer ‘is derisory, and I do not believe that shareholders will approve it.’” Certainly individual losses of that magnitude, if nothing else, raise the possibility of their proceeding on their own rather than as part of a larger shareholder class.

Update: According to news reports (here), an action has also been filed against Bear Stearns and its executives on behalf of Bear Stearns employees alleging that they "breached their fiduciary duties to plan participants by allowing their retirement savings to be invested in the company's stock despite knowing such an investment was imprudent."  The complaint alleges that the investment bank failed to disclose material adverse facts regarding its financial well-being, the potential consequences of its "substantial entrenchment in the subprime mortgage market," that the firm's stock price was artificially inflated and heavy investment of retirement savings in company stock would inevitably result in significant losses to the plan and its participants.

Securities Suit Against Deutsche Bank for Auction Rate Securities: On March 17, 2008, a different plaintiffs’ firm launched a securities lawsuit in the United States District Court for the Southern District of New York against Deutsche Bank and its wholly owned broker–dealer subsidiary, on behalf of a class of persons who purchased auction rate securities from Deutsche Bank and the broker dealer between March 17, 2003 and February 13, 2008, inclusive (the “Class Period”), and who continued to hold such securities as of February 13, 2008. A copy of the plaintiffs’ counsels’ press release can be found here and a copy of the complaint can be found here. 

According to the press release, the plaintiffs allege that the defendants violated the securities laws “by deceiving investors about the investment characteristics of auction rate securities and the auction market in which these securities traded.” The press release states that the defendants failed to disclose that:

(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 Deutsche Bank and other broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) Deutsche Bank 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) Deutsche Bank 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.

The auction rate securities purchasers’ lawsuit against Deutsche Bank is not the usual class action securities lawsuits brought against a publicly trade company by its own shareholders. The Deutsche Bank auction rate securities lawsuit is, however, subprime-related and it is a class action that alleges violations of the federal securities laws. For those reasons, I have added it to my running tally of subprime-related securities lawsuits, which can be found here. On a going forward basis, I will try to keep the parallel tallies too, taking into account the different kinds of litigation within the larger running tally.

With the addition of the Bear Stearns and Deutsche Bank securities lawsuits, the current tally of subprime-related securities lawsuits now stands at 51, twelve of which have been filed so far in 2008. Of these 51, two are securities lawsuits filed by mortgage–backed securities investors against the asset securitizers, and one (as noted above) was filed by purchasers of auction rate securities. The remaining 48 are more traditional securities class action lawsuits by public company shareholders.

Bear Ironies and Morgan Echoes: Bear Stearns shareholders can be forgiven if they fail to appreciate it, but there is a certain irony that Bear Stearns was the bailout recipient last Friday. This weekend’s whirlwind meetings involving the Fed and the lions of Wall Street present an uncanny echo of the closed door meetings at the New York Fed on September 23 1998, when government officials and Wall Street bankers were struggling to avert the collapse of Long Term Capital Management that all feared might trigger global financial panic. As colorfully told in the prologue of Roger Lowenstein’s excellent book about LTCM, When Genius Failed (here), the government’s rescue efforts nearly aborted because one Wall Street bank refused to cooperate in the government’s rescue plan - none other than Bear Stearns, whose then CEO and current Chairman James Cayne refused to play along.

This past weekend’s events also harken back to an even earlier episode, one in which JP Morgan Chase’s founder and primary namesake played the central role. As described in Robert Bruner and Sean Carr’s readable recent book, The Panic of 1907 (here), a capital crisis that originated from a liquidity drain following the 1906 San Francisco earthquake culminated in October 1907 in runs on a series of New York banks. J.P. Morgan himself, in effect functioning as the central banker in the absence of any more formal institution, caused his firm to intervene to provide liquidity to the Trust Company of America, declaring, to his colleagues “This is the place to stop the trouble, then.”

A century later, his firm is once again playing a central role in an effort to avert a financial crisis, and while some may argue that an important difference is that in 1907 Morgan didn’t acquire any of the rescued banks, it is a fact that one of the steps Morgan took in 1907 was a U. S. Steel-led buyout of Tennessee Coal, Iron & Railroad Company, a move claimed at the time was designed to avoid a collapse that could have undermined the stock market. The TCI & R rescue efforts, for which he and his firm were later criticized and subjected to a congressional investigation, ultimately proved to be good both for the Morgan firm as well as for the financial markets.

UPDATE: CFO.com has an excellent March 18, 2008 article entitled "J.P. Morgan Returns to Its Rescue Roots" (here) going into much greater detail about J.P. Morgan's storied past.

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There are a variety of different ways that the subprime-related litigation might be categorized. For example, the lawsuits might be grouped by type of defendant (as in my prior discussion of lawsuits against the mortgage-backed asset securitzers, here). The lawsuits might also be grouped by type of mortgage-backed asset involved (as in my discussion of lawsuits involving auction rate securities, here). Still another approach might be to look at lawsuits involving certain kinds of mortgages (as in my discussion of Option ARM mortgages, here).

An entirely different way to look at subprime-related litigation might be to follow the developments involving just a single mortgage related financial structure and to trace the litigation in which allegations relating to the structure have been raised. As shown below, just one financial structure has produced significant investor losses and left a spate of litigation in its wake.

The Mantoloking CDO: When the Mantoloking CDO 2006-1 was created in November 2006, it appeared as just one of many collateralized debt obligations (CDOs) listed in the December 4, 2006 Nomura Securities research report (here) describing recent structured finance pricings. As described in the report, the Mantoloking CDO was a $765 million CDO holding asset backed securities (ABS), on which the lead underwriter as Merrill Lynch.

Metro PCS: According to its subsequent court filing, on May 25, 2007, Metro PCS acquired $20 million in auction rate securities “consisting of Class A-2 Senior Priority Floating Notes from the Mantoloking CDO 2006-1, Ltd.” Metro PCS acquired the securities when Merrill Lynch, acting on as the company’s investment advisor, made the investment, as part of what eventually became approximately $134 million of CDO-related auction rate securities in which Merrill invested on the company’s behalf.

In the company’s October 18, 2007 Petition against Merrill Lynch filed in the Dallas County (TX) District Court (here), Metro PCS alleged that Merrill Lynch failed to advise of the company of the intended purchases prior to the acquisition of the Mantoloking securities. The company also alleges that the securities themselves were not authorized under the company’s investment guidelines. The company also alleged that Merrill Lynch had undisclosed conflicts of interest, in that it not only underwrote the initial CDO issuance, but continued to act as the sole dealer for the CDO. The company further alleges that Merrill Lynch itself had significant investments in the CDO and therefore had a vested interest in trying to maintain a market for the CDO’s securities, as a way to protect its investment.

In its February 27, 2008 financial release (here), Metro PCS disclosed that as a result of the latest round of write-downs, it was as of December 31, 2007 carrying the auction rate CDO securities investments for which it paid $134 million at a balance sheet valuation of only $36 million.

The Bear Stearns Hedge Funds: Investors in the Mantoloking CDO apparently also included the two now-bankrupt Bear Stearns hedge funds that are the center of so much controversy (and litigation). The October 22, 2007 Business Week cover article about the hedge fund’s collapse (here) reports that as the hedge funds’ condition and results deteriorated, the hedge funds’ managers “sought out increasingly esoteric bonds and other lightly traded securities that offered higher yields.” As a result, the hedge funds “were big buyers of so-called CDOs-squared – CDOs that invest in other CDOs.” The article reports specifically that “the funds at one time held $135 million of securities issued by the Mantoloking CDO, a CDO-squared.”

On December 19, 2007, when the hedge funds’ largest equity investor, Barclays Bank, sued Bear Stearns Asset Management and the two hedge funds’ individual managers (complaint here), Barclays alleged, among other things, that the hedge funds’ managers had caused the hedge funds “to become a dumping ground for especially risky assets, including numerous CDO-squared securities and other toxic assets.”

MIND C.T.I. Ltd.: The effects of the Mantoloking CDO spread far and wide, its reach including Israel-based communication services provider MIND C.T.I. Ltd.. In its February 27, 2008 filing on Form 6-K (here), MIND reported among other things that the company has as much as $20.3 million invested in asset-backed auction rate securities, on which the company had been unable to obtain third-party valuations, and for which the company may be taking asset-impairment charges in its forthcoming audited financial statements. The company noted that “the complexity of the valuation is derived from the fact that this security is collateralized by 126 structured finance transactions.”

The company’s 6-K also reports that on February 20, 2008, the company had filed a Statement of Claim with the Financial Industry Regulatory Authority (FINRA) and commenced an arbitration “against the international bank and certain employees thereof that invested …funds on behalf of the company.” According to the 6-K, the claim alleges, among other things, that:

the bank was supposed to invest the funds in highly liquid, highly safe, 28-day auction-rate securities, but -- without the Company's authorization -- invested the funds in collateralized debt obligations (CDOs). In particular, the claim alleges that the bank invested the funds in a security called "Mantoloking CDO" without telling the Company that this was a CDO investment until after the purchase had already occurred. The claim also describes how, after the fact, the bank advised that the security, which has a stated maturity date in the year 2046, had been rolled "due to failed auction."

According to the 6-K, the FINRA claim includes causes of action for fraud, violation of NASD rules (in particular NASD rules relating to suitability), violation of Section 10 of the ’34 Act, misrepresentation, and breach of fiduciary duty. The 6-K reports that the claim seeks “damages and other relief from all the respondents, including return of all funds plus compensatory and punitive damages.” The 6-K does not identify the “international bank” named in the FINRA arbitration claim.

While the Mantoloking CDO seems to have generated considerable pain for its investors, the CDO was just one of many hundreds of CDOs launched into the marketplace in the last several years. Some of the investors in these other CDOs undoubtedly have experienced some of the same kind of pain the Mantoloking CDO investors have felt, and there likely will be more pain to come. If the sequence of events surrounding the Mantoloking CDO is any indication, the investors in other CDOs can also be expected to pursue litigation to redress their grievances. Just looking at how much litigation the Mantoloking CDO alone has spawned or contributed to, it certainly appears that a formidable amount of CDO-related litigation activity could be involved.

A prior post in which I discuss CDOs squared in much greater length, including the increased risk associated with CDOs squared, can be found here.

Very special thanks to Uri Ronnen of AccountingClues for the links above regarding the Mantoloking CDO.

More UBS Lawsuits: According to news reports (here), on March 5, 2008, Pursuit Partners, a Connecticut-based hedge fund, has initiated a Connecticut state court lawsuit against UBS alleging that the hedge fund made CDO investments last year based on “fraudulent concealment of material information.” The suit alleges that UBS had been in talks with Moody’s and as a result knew that changes in the rating agency’s rating methodology were imminent, yet UBS continued to market the CDOs as if the change would not occur.

The hedge fund contends that when the new rating methodology was announced on October 10, 2007, the $50 million in CDO securities in which the hedge fund has invested were “reduced to junk status,” which triggered a default clause in the underlying derivatives contract, and the hedge fund lost its entire investment. The hedge fund says that “UBS took both sides of a derivatives contract, allowing it to liquidate the CDOs without sustaining a loss of its own.”

The hedge fund’s allegations are similar to the allegations raised against UBS by HSH Nordbank (about which I previously wrote, here), in which HSH Nordbank claimed that UBS had structured a CDO-related transaction so that UBS could profit to the investor’s detriment. HSH Nordbank also claims that UBS’s Dillon Read unit had stuffed the CDO with troubled loans as a way to reduce its own losses.

In addition to the Pursuit Parnters and HSH Nordbank lawsuits, UBS has also been sued by a physician who claims that UBS sold him auction rate securities from a closed end mutual fund, Eaton Vance Limited Duration Funds. According to the March 9, 2008 New York Times article entitled "As Good as Cash Until It's Not" (here), UBS put all of the doctor's charitable foundation's $1.35 million cash in auction rate securities.  The doctor claims that the foundation now can no longer "help prevent AIDS in Africa or provide indigent people with laser vision correction ."

You certainly do start to get the impression that there are a lot of angry investors out there.

Subprime-Related Derivative Complaint: As I documented elsewhere (here), shareholders’ derivative lawsuits were a significant part of the options backdating-related litigation. By contrast, there have been relatively few shareholders’ derivative lawsuits filed in connection with the subprime meltdown. Perhaps the most notable subprime-related derivative lawsuit so far is the action filed last year against AIG, as nominal defendant, and certain of its directors and officers (about which refer here).

On March 4, 2008, an investment fund manager filed a shareholders’ derivative lawsuit in Delaware Chancery Court against Bank of America, as nominal defendant, and certain of its directors and officers. The complaint (here) relates to the company’s January 22, 2008 announcement (here) that it would take a fourth-quarter 2007 write-down of $5.44 billion due to the devaluation of the company’s mortgage-backed securities, primarily CDOs.

The complaint alleges that the company underwrote and invested in CDOs but failed to inform investors of the associated risks, and failed to set aside adequate reserves for possible losses. The complaint also alleges that the company issued misleading disclosures about its exposure to subprime-related losses. The complaint further alleges that the company soft-pedaled its exposure to subprime mortgages.

The complaint alleges that the defendants breached their fiduciary duties, engaged in reckless and gross mismanagement, and wasted corporate assets.

It is not entirely clear why this lawsuit was brought as a derivative lawsuit rather than as a direct claim for damages. As a derivative claim, the lawsuit will be subject to certain defenses, including in particular the demand requirement.

Hat tip to the Courthouse News Service (here) for the copy of the complaint.

Now This: In addition to being the name of a CDO, Mantoloking is also the name of an oceanfront community in New Jersey, population 423 (2000 Census).  According to Wikipedia (here), Mantoloking is "the wealthiest community in the state of New Jersey," and its past residents included Katherine Hepburn and Richard Nixon. The current surfing conditions at Mantoloking can be viewed here.

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In prior posts (here and here), I noted two subprime securities lawsuit rulings in which defendants’ motions to dismiss were granted with leave to amend. But in a January 4, 2008 order (here) in the Accredited Home subprime-related securities lawsuit pending in the United States District Court for the Central District of California, the defendants’ motions to dismiss were largely denied, except with respect to certain of the outside director defendants’ dismissal motions.

The lead plaintiff in the case is the Arkansas Teacher Retirement System. The corrected consolidated class action complaint can be found here. Background regarding the case can be found here. The complaint names as defendants the company, a subprime-mortgage lender; its mortgage REIT subsidiary; five individuals who served as executives at the company or the REIT; and five individuals who had served as outside directors on the company’s board.

The complaint contains three basic sets of alleged misrepresentations: first, that the company maintained certain loan underwriting standards, when, it is alleged, the standards were in fact lax and were even undermined by the individual defendants; second, that the company maintained adequate reserves and allowances, when, it is alleged, that its reserves in fact did not adequately take into account the deterioration of the company’s mortgage loan portfolio and were even reduced as the portfolio deteriorated, resulting in an overstatement of the company’s earnings; and three, that the company misleadingly accounted for goodwill in connection with its May 2006 acquisition of Ames Investment Corp.

The plaintiffs asserted claims under Section 10 of the ’34 Act (and Rule 10b-5 thereunder); Section 14 of the ’34 Act (and Rule 14a-9 thereunder); and Sections 11, 12 and 15 of the ’33 Act.

In ruling on the motions to dismiss, Judge Marilyn Huff separately assessed the allegations against the various defendants. Judge Huff found that the complaint’s allegations as to the company and the five officer defendants adequately pled that the alleged misrepresentations were false and misleading. In making this finding, the court relied on the “group pleading doctrine,” which the court found properly applied to the officers since the individuals had “direct involvement with the company’s day-to-day affairs and financial statements.”

But Judge Huff declined to extend this finding to the outside directors or to the REIT. Judge Huff said that the complaint “fails to establish any basis for attributing statements” to these defendants. Accordingly, Judge Huff granted the motion to dismiss the Section 10 claims against the outside directors and the REIT.

Judge Huff also found that the complaint adequately pled scienter as to the five officer defendants and the company. She cited the complaint’s allegations that these individuals had “access to periodic reports that included detailed information regarding widespread deviations from company policy” and the allegations from several confidential witnesses that the defendants “actually directed these deviations.” Judge Huff also cited the allegations that the defendants “caused or permitted large decreases in several significant reserve accounts” in violation of GAAP while at the same time aware of the mortgage portfolio’s deterioration.

Judge Huff also found that the plaintiffs had adequately pled materiality, reliance and loss causation. Judge Huff denied the motions to dismiss the Section 14 claim, largely on the same grounds as with respect to the Section 10 claim, although once again she separated out the outside director defendants and granted their Section 14 dismissal motions. She denied the motion to dismiss the ’33 Act claims as well, although she again separated out the outside directors and granted their motion to dismiss the section 12 claims against them .

Special thanks to an alert reader, who felt that if I were going to write about the dismissals granted, I also had to write about the Accredited Home dismissal denial, to which he referred me.

Motion to Dismiss Denied in Comverse Options Backdating Securities Lawsuit: On February 19, 2008, Judge Nicholas Garaufis entered an order (here) denying the defendants’ motions to dismiss the Consolidated Amended Complaint (here) in the Comverse Technology options backdating securities lawsuit. Refer here for background regarding the case.

The motions actually came in the form of an appeal from the prior report and recommendation of Magistrate Judge Ramon Reyes, to whom the court had referred the case.

Significantly, Judge Garaufis reversed the Magistrate Judge’s recommendations in one significant respect. The Magistrate Judge had recommended dismissal of the Section 10(b) claims against the three outside director defendants who had served on the board’s audit and compensation committees. The court found that the three individuals’ “knowledge and experience” coupled with “red flags” evident in the board consent forms, made it “at least as plausible” that the three “were aware of, but ignored a strong likelihood of wrongdoing when the signed the unanimous consent forms.”

The court affirmed the Magistrate Judge’s recommendations in all other material respects.

The plaintiffs’ lawyers’ press release describing the dismissal order can be found here.

I have added the Comverse Technology order to my list of options backdating lawsuit dismissals, denials and settlements, which can be accessed here.

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Doomsday estimates of subprime related write-downs of as much as $400 billion, at a time when current Wall Street losses are “only” around $120 billion, beg the question of where the rest of these losses are. Undoubtedly, some part of these as yet unannounced losses will be revealed in many financial institutions’ upcoming earnings releases, as discussed in the February 19, 2008 New York Times article entitled “Wall St. Banks Confront a String of Write-Downs” (here).

But Wall Street woes alone do not encompass the universe of potential losses. As discussed in the February 11, 2008 Financial Times article entitled “The $280bn Question: Where are the Rest of the Subprime Bodies?,” (here), the question that “everyone is trying to work out is where the rest of the bodies are.” The Financial Times article notes that:

Outside Wall Street, suspicions are rife that other institutions are still concealing losses…In particular, there is now rising concern about so-called “buyside” institutions, or entities that have been purchasing mortgage-linked securities in recent years, rather than selling them on. “The problems are moving from the sellside to the buyside – that is where the losses are still to be recognized,” one structured finance expert told a conference in London last week.

There have been some buyside disclosures, the most prominent of which at this point is Bristol-Myers Squibb’s recent $275 write-down of auction rate securities (about which I previously commented here). Whether and to what extent these kinds of write-downs will spread to other nonfinancial companies remains to be seen.

The observers monitoring these developments apparently include plaintiffs’ securities attorneys. A February 19, 2008 Reuters article entitled “Subprime Lawsuits Seen Hitting More Industries” (here) reports that plaintiffs’ attorneys expect that investors lawsuits “likely will spread beyond the financial and housing sectors, as more companies reveal write-downs linked to bad mortgage investments.” The article quotes Salvatore Graziano of the Bernstein Litowitz law firm as saying that “we expect non-real estate companies to start being impacted by this.” He added that his firm has “already gotten a number of inquiries from clients” who are suffering losses from investments they thought were very safe.”

Graziano specifically mentioned the Bristol Myers write-down, commenting that shareholders could potentially bring legal claims against companies that take these kinds of write-downs if the assets were not previously properly valued. He added that “what Bristol-Myers did puts a lot of pressure on the auditors for other companies. That’s why I expect a lot more in coming quarters.”

Graziano also mentions AIG’s recent announcement of potential losses of up to $5 billion in its derivatives portfolio. “I think AIG, without reaching an ultimate conclusion, is a case we’re interested in looking at further.”

More About Auction Rate Securities: In a recent post (here), I discussed the possibility of claims arising from problems connected with auction rate securities. A separate February 19, 2008 Reuters article entitled “Marketing of Auction Rate Securities May Bring Lawsuits” (here) notes that “banks and brokers could face a wave of lawsuits from clients who claim they were not properly told about risks in the now nearly frozen auction rate securities market.” The article quotes Graziano as saying that he has heard “concerns from institutional investors that funds invested in auction rate securities carried an inappropriate level of risk for the kinds of investments they authorized brokers to make.”

Along those same lines, on February 15, 2008, the Miami law firm of Diamond, Kaplan & Rothstein announced (here) that it is “investigating claims involving investment losses in auction rate securities.” The press release specifically mentions broker-dealers that sold auction rate securities, including Lehman Brothers, Goldman Sachs, Merrill Lynch, Citigroup and UBS.

And Then There are the Rating Agencies: One of the recurring themes arising in discussions about subprime issues is the question of the potential liability of the rating agencies (which I discussed most recently here). Jim Peterson at the Re:Balance blog has an interesting discussion (here) of the issues surrounding the rating agencies involvement in the subprime meltdown. Peterson takes the position that the credit rating agencies may not be able to “dodge the bullet” this time. (Peterson is a financial and accounting columnist for the International Herald Tribune.)

Speaker’s Corner: Readers interested in subprime related issues will want to know about two upcoming conferences on the subject. First, IQPC is holding a conference entitled “Subprime and the Credit Crisis” on February 26-27, 2008, in New York City. (agenda here). I will be moderating a panel entitled “Exploring Potential D & O Insurers’ Liability.”

And on March 6, 2008, Mealey’s is sponsoring an event in New York entitled “Subprime-Backed Securities Litigation Conference,” the agenda for which can be found here. I will be speaking on the topic of “CDOs, Asset Valuation and Subprime Litigation So Far.”

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On February 12, 2008, a plaintiff initiated a securities class action lawsuit in the United States District Court for the Central District of California relating to Morgan Stanley’s subprime-related woes. The complaint (here) purports to be filed on behalf of a class of persons who purchased Morgan Stanley’s shares between July 10, 2007 and November 7, 2007. The gist of the complaint is that Morgan Stanley "failed to disclose its significant exposure to losses related to the declining value of the subprime-related derivatives that the Company traded for its own proprietary account."

The purported class period ends on November 7, 2007, when Morgan Stanley announced (here) that as a result of the decline in "fair value" of "subprime related balance sheet exposures," the company’s revenues for the two months ended October 31, 2007 "were reduced by $3.7 billion." The complaint contends that "analysts and the market" had been "led to believe that Morgan Stanley’s smaller presence in the underwriting of CDOs would not lead to a major write-down."

While the complaint aspires to assert a  number of very serious allegations, the complaint also has a number of features suggesting something other than a highly engineered litigation assault.

First, the complaint does not name the company, its most senior managers, or its directors as defendants. Instead, the sole defendant named in the complaint is one individual, Gary Lynch, identified in the complaint as the company’s Executive Vice President and Chief Legal Officer. (The complaint also alleges that the company’s Internal Audit Department reports to Lynch, but the complaint does not explain the significance of that fact with relation to the complaint’s allegations.)

The complaint refers to no statements that Lynch himself allegedly made, but instead refers only to statements of Morgan Stanley itself. The allegations against Lynch are based solely on his position and responsibilities within the company. However, the complaint does not explain why Lynch should be held liable while none of the other senior company officials, who also obviously held positions of responsibility, are even named as defendants. There are no allegations that Lynch sold his shares of company stock. The scienter allegations are based solely on allegations of Lynch’s supposed actual knowledge of falsity, but there are no specific allegations of which facts he supposedly knew to be false or the basis of plaintiff’s allegations of Lynch's knowledge. It is not particularly clear why Lynch has been named. Actually, it is not clear at all.

Concerning the company’s own statements, the complaint refers only to the company’s July 10, 2007 and October 10, 2007 filings on Form 10-Q, with respect to each of which the complaint says only that "nowhere within the filing did the company adequately disclose its exposure to losses incurred from trading in its subprime mortgage-backed derivatives, CDOs or the subprime-backed security organizations for which it was responsible."

Second, although the purported class representative’s certification establishes that the plaintiff did indeed pay $17,211 for 340 Morgan Stanley shares, the plaintiff bought his shares on March 14, 2006, well over a year before the commencement of the purported class period. In other words, the purported representative of the class of persons who purchased shares between July 10, 2007 and November 7, 2007 himself bought no shares during that period. The plaintiff will obviously face certain obstacles satisfying the "commonality" requirement, as he is not even a member of the class he purports to represent.

Third, the complaint was filed in the Central District of California. Morgan Stanley’s world famous headquarters are of course located on Broadway, in the heart of New York City. The only apparent connection to California is the plaintiff’s counsel’s office, which is on South Figueroa Avenue in Los Angeles. (According to a search on Google Maps , the distance from the plaintiff’s lawyer’s office to Morgan Stanley’s headquarters is 2,782 miles, a distance that seems metaphorically apt given the attributes of the plaintiff’s complaint.)

But whatever its merits, the complaint does in fact purport to represent a subprime-related class action lawsuit. Accordingly, I have added the case to my running tally of subprime-related lawsuits, which can be found here. As reflected in my tally, the addition of the Morgan Stanley complaint brings the number of subprime-related securities class action lawsuits to 44, and also brings the total number of 2008 subprime-related securities lawsuits to seven. 

It remains to be seen whether another plaintiffs’ firm will follow up on the Los Angles attorney’s salvo and file a more, well, calibrated securities lawsuit, or if this complaint will be the only attempt. It should be noted that Morgan Stanley has already been named in a subprime-related action purportedly brought on behalf of company employees’ under ERISA in connection with their company shares in their defined contribution plans, as described in the plaintiffs’ counsel’s December 18, 2007 press release (here). As noted in my running tally, the Morgan Stanley ERISA suit is one of nine subprime-related ERISA actions.

Subprime: BIgger Than the S & L Crisis?: On February 14, 2008, Navigant Consulting released a report on the 2007 subprime-related litigation (executive summary here). Among other things, the report notes that (including all categories of lawsuits, including borrower suits, bankruptcy actions, employment claims, as well as securities cases) there were 278 subprime-related lawsuits filed in 2007.

Navigant also issued a February 14, 2008 press release (reported here) stating that, by way of  comparison of the subprime litigation wave to the litgation filed in connection with the S & L Crisis, that the 278 subprime lawsuits, all filed in a single calendar year, "already equal one-half of the total 559 actions handled by the RTC over a multiple-year period." The report's author said that “The S&L crisis has been a high water mark in terms of the litigation fallout of a major financial crisis. The subprime-related cases appear on their way to eclipsing that benchmark.”

The report also notes that, in addition to mortgage bankers and loan correspondents, subprime litigation defendants include "mortgage brokers, appraisers, title companies, homebuilders, mortgage servicers, issuers, underwriting firms, securitization trustees, bond insurers, rating agencies, money managers, public accounting firms and company directors and officers."

The report also notes that "Fortune 100 companies were named in 56 percent of cases" and around "half of all cases were filed in California and New York." Litigation, the report concludes, "is only likely to increase in 2008."

Hat tip to the WSJ.com law blog (here) for the link to the Navigant report.

Subprime Primer: One of the more daunting aspects of the subprime crisis has been the veritable outburst of obscure and confusing terminology. In a recent post, The Sox First blog published a very helpful "Crunch Time Glossary" (here) explaining a long list of the subprime-related terms. My favorite is the Ninja Loan, defined as "a loan given to a person with No Income, No Job, and No Assets." (100% of Ninja loans are now less euphemistically and less colorfully known as "nonperforming.")

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As I have previously noted (here), securities backed by subprime and other residential mortgages are not just held by financial companies. A wide variety of companies invested in these securities in order to try to improve their return on cash and short-term investments. As the credit markets have deteriorated, many of these investments have declined in value, and the companies holding these investments have been forced to take write-downs or charges. The most dramatic write-downs have come from companies in the financial sector. But now companies outside the financial sector are announcing downward accounting adjustments, and some of these accounting adjustments are occurring in some unexpected places.

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Since I first began chronicling the subprime litigation wave in April 2007 (here), the wave has gained amplitude and speed. But a spate of recent subprime-related litigation developments, seemingly unrelated, suggest that the litigation wave's magnitude has crossed a significant threshold. Things seemingly have changed, decidedly for the worse.

The first development that makes me think things have worsened is the lawsuit that has been filed against Levitt Corp., which is described in the plaintiffs' counsel's January 25, 2008 press release (here). Although there are several noteworthy things about this lawsuit (as discussed further below), the significance to me of this lawsuit for the larger issue of the subprime litigation generally is the lawsuit's purported class period, which extends from January 31, 2007 to August 14, 2007. That is, the allegations in the complaint related to events that took place several months ago.

Most of the prior subprime-related lawsuits up until now have been filed in the immediate flash of dramatic subprime-related disclosures, on some occasions even on the same day. The arrival of a lawsuit based on more remote events suggests that plaintiffs' lawyers have now begun a grim process of backing and filling, completing a more comprehensive sweep of the subprime landscape.

The impression that we have entered a backing and filling phase that will entail an expansion in the scope of subprime litigation is reinforced by recent developments in the subprime-related securities lawsuit pending against Countrywide Financial Corporation. According to a January 25, 2008 press release (here), issued by New York Comptroller Thomas DiNapoli, who is one of the co-lead plaintiffs in the Countrywide securities lawsuit, the plaintiffs in that case have filed an amended complaint that, among other things, adds as defendants "26 different financial services companies that underwrote Countrywide stock and bond offerings, [and] two global accounting firms."

The 26 financial services companies are listed in the press release. The two accounting firms named are Grant Thornton LLP and KPMG LLP. According to the press release, by expanding the suit, the plaintiffs "seek to ensure that the underwriters and accounting firms who participated in the marketing of Countrywide securities to the public are held accountable for their actions." A copy of the Countrwide complaint can be found here. Special thanks to Adam Savett of the Securities Litigation Watch blog for supplying a copy of the complaint.

A third development suggesting that the stretch and sweep of the subprime litigation wave has amplified is the subprime-related securities lawsuit I previously noted (here) and that was filed last week against National City Corporation, a regional bank holding company based in Cleveland. Unlike many other subprime-related lawsuits, which have largely (although not, of course, exclusively) involved financial firms in New York, Florida and California that have experienced gargantuan writedowns or losses, the National City lawsuit involves a company in the hinterlands that experienced substantial but not nearly as massive writedowns and losses.

These disparate events are at one level unrelated. But the pattern I detect is the suggestion that plaintiffs are expanding the field of the companies and defendants they are targeting. Companies like Levitt, that seemingly were bypassed in the earliest stages. Defendants like the financial services companies and accountants in the Countrywide case, whom the plaintiffs' lawyers just didn't get to in the initial pleadings. And secondary targets like National City.

All of this suggests to me that the subprime litigation wave has entered a more encompassing and potentially more devastating phase. Up until now, plaintiffs have concentrated on what one plaintiffs' attorney recently called the "low hanging fruit." But these most recent lawsuits suggest that the threat now extends more broadly. The impression is that the subprime wave will hit not just the biggest obstacles but could inundate a much broader area of the landscape. The destructive force of the wave could prove to be even more catastrophic than seemed likely, even a short time ago.

One final observation about the changing menace of the subprime wave actually relates to a consequence from subprime litigation. That is, this past week saw the first subprime-related downgrade of a mainstream property and casualty insurer (about which refer here), in part because of the carrier's exposure to mortgage default risk though a former bond insurer affiliate, and in part because, as one rating agency noted, of the insurer's "subprime exposure through its D&O and E&O liability portfolio on both a primary and reinsurance basis."

The rating agency went on to note that this D & O and E & O exposure "gives rise to concerns that there may be a potential resurgence in claims for these lines as they relate to subprime issues in the future." More ominously, the rating agency noted that "adverse developments" in these insurance lines beyond the rating agency's expectations "will result in further rating actions." Clearly I am not the only one concerned that things have gotten bad, and could get worse.

As I noted above, there are other interesting things about the Levitt Corp. lawsuit. The first is that the lawsuit combines not just one, but two of the recent securities litigation trends. That is, it is not only a subprime-related securities lawsuit, but it is also a securities lawsuit arising out of a failed merger. I have previously noted, most recently here, there has been a recent surge of lawsuits arising from failed deals.

According to the plaintiffs' lawyers' press release (here), the Levitt Corp. lawsuit relates to the failed 2007 merger of the company with BFC Financial Corp. Levitt had announced the planned merger to great fanfare on January 31, 2007 (here), but on August 15, 2007, the company announced (here) that the merger agreement had been terminated (according to the plaintiff's lawyers' lawsuit press release, "without giving any explanation.").

The plaintiff's lawyers' press release goes on to state that the complaint alleges that

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