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

Earlier this week when I posted my list of subprime lawsuits dismissal motion grants and denials (here), I was hoping the publication would encourage readers to let me know about case dispositions of which I was previously unaware. My strategy worked, because a loyal reader who prefers anonymity responded to my post by alerting me to the May 19, 2008 opinion (here) in the subprime-related securities class action lawsuit involving Standard Pacific. Because the court’s opinion is particularly thorough, it merits a detailed review.

Standard Pacific is a California-based residential construction company that concentrated in recent years on the formerly go-go growth areas of California, Florida, Texas and Nevada. As s result of the residential real estate slump, the company’s sales activity declined in 2006 and 2007. Plaintiff shareholders initiated a securities class action lawsuit against two Standard Pacific executives in August 2007.

The plaintiffs alleged that the defendants misrepresented Standard Pacific’s ability to open new, successful communities; misled the public about the demand for Standard Pacific homes; and lied about the company’s ability to continue its historically strong earning growth. Further background regarding the lawsuit can be found here.

In a May 19, 2008 opinion, Judge Margaret M. Morrow of the United States District Court for the Central District of California granted the defendants’ motion to dismiss, but allowed the plaintiffs’ 45 days’ leave to amend.

The defendants first argued that the plaintiffs’ complaint failed to satisfy the PSLRA’s pleading requirements because it is a “classic example of prohibited puzzle-pleading,” in that it contains extensive block quotations from the company’s class period statements “without specifying the particular statements that are false and misleading.”

The plaintiffs sought to address this issue in their reply papers, but the court found that “the organization the plaintiffs offer in their opposition brief does not cure the deficiencies in the complaint. To the contrary, it highlights plaintiffs’ failures to plead defendants’ purportedly false and misleading statements with specificity as required by the PSLRA,” and accordingly the court granted the motion to dismiss, with leave to amend.

The defendants also moved to dismiss on the grounds that the plaintiffs had not adequately pled scienter. The plaintiffs alleged, based on the confidential witness information, that defendants misled investors because they continued to cite sales information in reliance on internal reports they supposedly knew to be inaccurate. Defendants contended that, to the contrary, they informed investors that the company was experiencing sales declines, and that “the crux of plaintiffs’ fraud claim is not that the defendants flatly misrepresented the company’s performance but that they were deliberately reckless because the failed to lower their projections enough.”

The court found that

the fact that defendants reduced earnings and home delivery guidance cuts against plaintiffs’ claim that defendants acted with fraudulent intent. As no facts are pled supporting an inference that defendants selected the level of reductions they announced fraudulently or with deliberate recklessness, the complaint suggests a plausible nonculpable explanation for defendants’ conduct…. Taken as a whole…plaintiffs’ allegations do not give rise to a “strong inference” that at the time they made the statements, defendants knew or should have known that the state of affairs was much worse than they had acknowledged publicly….In effect, by arguing that defendants’ predictions and forecasts were not low enough, plaintiffs improperly attempt to allege “fraud by hindsight.”

The court similarly rejected the plaintiffs’ attempt to rely on the defendants’ certifications of the company’s SEC filings.

The dismissal, even though it is without prejudice, is still significant. First, the opinion is very detailed and thorough, which could carry some weight in other subprime securities cases, particularly the numerous other cases pending in the Central District of California.

Second, many of the other subprime complaints arguable share the “puzzle pleading” defect of the complaint in this case – all too often, the complaints in these subprime cases consist of block quotations from the defendants company’s disclosure documents, without direct connections specifying what about the disclosure the plaintiffs allege is false and misleading, and in what way the statements are false and misleading.

Third, many of the companies named in subprime securities lawsuits, like Standard Pacific, are accused not of failing to acknowledge problems but of failing to recognize the problems enough. To the extent other courts view these pleadings with the same level of skepticism as Judge Morrow, the complaints could face some formidable challenges at the motion to dismiss stage.

In any event, I have added the Standard Pacific opinion to the list of subprime lawsuit dismissal motion grants and denials. I hope other readers will let me know of any other subprime lawsuit dismissal motion rulings of which they are aware, so that the list can be as complete as possible.

Special thanks to the anonymous loyal reader for alerting me to the Standard Pacific opinion.

Another Option ARM Lawsuit: In a different post earlier this week (here), I noted the lawsuits that had been filed up to that point relating to Option ARM mortgages, and I suggested the likelihood that there would be further lawsuits relating to Option ARMs. In a quick confirmation of my prediction, on June 11, 2008, plaintiffs’ counsel initiated a securities class action lawsuit in the Central District of California against IndyMac Bancorp and certain of its directors and officers. A copy of the plaintiffs’ lawyers’ June 11 press release can be found here. A copy of the complaint can be found here.

According to the press release, the complaint alleges that

defendants issued materially false and misleading statements regarding the Company’s business and financial results. Specifically, defendants downplayed and concealed IndyMac’s growing exposure to non-performing assets, particularly loans in its pay-option adjustable-rate mortgage (“Option ARM”) and homebuilder construction portfolios, and made numerous positive representations regarding the Company’s capital position to alleviate investors’ fears concerning the Company’s capital erosion. As a result of defendants’ false statements, IndyMac stock traded at artificially inflated prices during the Class Period.

It is important to note that IndyMac had previously been sued in a subprime-related securities class action lawsuit, the background regarding which can be found here. In concluding that this latest lawsuit is sufficiently distinct from this prior lawsuit to represent a new lawsuit, I note the following: first, the class period of the prior lawsuit was May 4, 2006 to March 1, 2007, whereas the purported class period for the new lawsuit is from August 16, 2007 to May 12, 2008. In addition, the substantive allegations in the two lawsuits relate to different alleged misrepresentations. In particular, the prior lawsuit does not appear to relate to the companies representations regarding Options ARM mortgages or the company’s capital position.

Accordingly, I am recognizing this latest complaint as a new and separate filing. However, I encourage readers who may disagree to let me know of any circumstances that might militate in favor of a different conclusion.

I have added the new IndyMac lawsuit to my running tally of subprime and credit-crisis related securities lawsuits, which can be found here. With the addition of the new IndyMac lawsuit, the tally of subprime and credit crisis-related lawsuits now stands at 90, of which 50 have been filed in 2008.

Finally, it is worth noting that, as reflected in my list of subprime dismissal motions grants and denials referenced above that motion to dismiss have twice been granted with leave to amend in the prior IndyMac lawsuit.

More Subprime ERISA Lawsuits:  I have also added two subprime-related ERISA lawsuits to my running tally of subprime-related lawsuits.

First, in a June 11, 2008 press release (here), plaintiffs’ lawyers announced that they had initiated a lawsuit in the Southern District of New York under ERISA against Wachovia Corporation and various of its officers and administrators. According to the press release, the defendants allegedly violated their duties to participants in the Wachovia Savings Plan by “continuing to invest in and hold Wachovia stock despite the fact that they knew or should have known that Wachovia was not properly reporting its financial condition and was not disclosing significant problems which had the effect of inflating the value of Company stock.”

Second, on May 9. 2008, plaintiffs’’ counsel initiated a lawsuit in the Western District of Tennessee on behalf of past and present employees of First Horizon National Corporation who participated in the First Horizon Savings Plan. A copy of the complaint can be found here. The complaint alleges that the defendants breached their fiduciary duty by requiring plan participants to invest in First Horizon shares, which the plaintiffs contend was “imprudent… because First Horizon was not fairly and accurately disclosing the risks and likely consequences of a number of its banking practices such that the Plan was purchasing shares of First Horizon Stock at an inflated price.” Among the undisclosed risks alleged is the company’s exposure to subprime and Alt-A mortgages.

I have added the Wachovia and First Horizon ERISA lawsuits to my running tally of subprime-related ERISA lawsuits, which can be found here. With the addition of the new ERISA lawsuit, the tally of subprime-related ERISA lawsuits now stands at 17

Special thanks to a loyal reader for identifying the new ERISA lawsuits.

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Add corporate debt to the type of lending caught up in the current credit crisis, and add both commercial real estate financing companies and private equity firms (or at least one that recently completed a high profile public offering) to the kinds of companies now ensnared in the current wave of lawsuits. The latest round of lawsuits suggests just how far afield these cases may spread before all is said and done.  

The iStar Lawsuit: The lawsuit filed on April 14, 2008 in the United States District Court for the Southern District of New York against iStar Financial and certain of its directors and officers represents these latest variants in the evolving course credit crisis litigation wave. A copy of the plaintiffs’ lawyers’ press release about the iStar lawsuit can be found here, and the complaint can be found here.

The iStar lawsuit is brought on behalf of shareholders of the company who bought their shares in the company’s December 13, 2007 secondary offering, in which the company raised more that $227 million. According to the complaint, the offering documents failed to disclose that the company was at the time of the offering experiencing negative effects from the credit market turmoil and failed to recognize more that $200 million of losses on its “corporate loan and debt portfolio.”

On February 28, 2008, the company reported (here) a fourth quarter 2007 loss of 478.7 million, due in part to $134.9 million in charges associated with the “the impairment of two credits that are accounted for as held-to-maturity debt securities in its Corporate Loan and Debt portfolio.” and due to the fact that the company had increased its loan loss provisions by $113 million.

The Blackstone Lawsuit: In another example of the far flung effects from the current market turmoil, investors who bought shares of The Blackstone Group, L.P in the firm’s June 25, 2007 IPO have filed a lawsuit in the United States District Court for the Southern District of New York against the company and certain of its directors and officers.

According to the plaintiffs’ lawyers’ April 15, 2007 press release (here), the complaint alleges that the offering documents failed to disclose that Blackstone’s “portfolio companies were not performing well and were of declining value and, as a result, Blackstone’s equity investment was impaired and the Company would not generate anticipated performance fees on those investments or would have fees ‘clawed-back’ by limited partners in its funds.”

The complaint (which can be found here) alleges that in the company’s March 10, 2008 announcement (here)of fourth quarter and year end financial results, the company announced “announced that it was writing down its investment in Financial Guaranty Insurance Company by $122 million.”

Financial Guaranty Insurance Company is a bond insurer that has been struggling due to downgrades of its own credit rating. FGIC’s travails have already resulted in a prior securities class action lawsuit against the company’s other significant investor, The PMI Group. My prior discussion of The PMI Group securities litigation can be found here.

These events and ensuing lawsuits represent the latest extension of the circumstances that originated with the subprime lending meltdown but now are increasingly widespread. I recently highlighted (here) the turmoil (and ensuing litigation) that had affected the student lending sector. The extension of the effects and of the litigation, first to the commercial lending sector and to a commercial real estate financing company, and next to a private equity firm that went public only a short while ago amidst great hoopla and now has been sued for it, are merely the latest developments in what clearly promises to be an increasingly encompassing phenomenon.

As I have noted before, observers who persist in viewing the credit crisis and ensuing litigation as an exclusively “subprime”-related problem will not only fail to comprehend what has already occurred, but will likely underestimate what may lie ahead.

Another Auction Rate Securities Lawsuit: Another related recent development in this area is the lawsuit filed on April 14, 2008 on behalf of auction rate securities investors against Wells Fargo & Co. The plaintiffs’ attorneys’ press release can be found here and a copy of the complaint can be found here.

With the addition of the iStar, Blackstone and Wells Fargo lawsuits, my current tally of credit crisis-related securities lawsuits, which can be accessed here, now stands at 73, 33 of which have been filed in 2008. Thirteen of 73 lawsuits are brought on behalf of auction rate securities investors.

More Suits Against Securitzers: In earlier posts (here and here), I noted the emergence of securities class action lawsuits brought on behalf of investors against the investment banks and related entities that securitized mortgages and other types of debt into financial instruments in which the investors invested and in which they lost money.

The latest of these lawsuits was brought on March 19, 2008 in New York Supreme Court by the City of Ann Arbor Employees’ Retirement System on behalf of investors who purchased Mortgage Pass-Through Certificates as part of a December 12, 2006 offering of the instruments. Named as defendants are Citigroup Mortgage Loan Trust, which organized the offering of certificates backed by pools of mortgages, and 18 mortgage loan trusts, in which the mortgages were held. The defendants have removed the lawsuit to the United States District Court for the Eastern District of New York. Background regarding the lawsuit can be found here. A copy of the removal petition, to which the complaint is attached, can be found here.

The complaint alleges that the offering documents misrepresented the underwriting standards used in connection with the mortgage origination, and also misrepresented the various criteria used to qualify loans and properties. As a result, the complaint alleges, the offering documents misrepresented the risk profile of both the secured assets and the certificates.

The Citigroup lawsuit is substantially similar to the lawsuits previously brought against affiliates of Nomura (about which refer here), Countrywide (refer here) and Wachovia (refer here). This latest complaint is also similar to those prior complaints in that the plaintiffs (who in each case are represented by the Coughlin Stoia firm) sought to initiate each lawsuit in state court. My detailed analysis of the jurisdictional issues involved can be found in the post linked above regarding the Nomura lawsuit.  

Though the defendants have uniformly sought to remove these cases to federal court, in the Countrywide case, the earliest of these cases to be filed, the federal court granted the plaintiffs’ motion to remand the cases to state court. As noted in my discussion of the Countywide remand decision here, the federal court’s remand of the case to state court was based on the grant of concurrent jurisdiction to state courts for ’33 Act liability cases, a jurisdictional grant the federal court found has not been eliminated by subsequent legislation.

I have previously speculated that the plaintiffs’ strategy for pursuing these cases in state court is to avoid the requirements of the PSLRA, an impression that is reinforced by the fact that the plaintiffs’ lawyers did not issue a press release at the time they filed these state court complaints. Whether other defendants’ attempts to remove these lawsuits to federal court will ultimately prove to be successful remains to be seen, but the prospect of significant nationwide securities litigation going forward in state court seems fraught with the potential for uncertainty, opacity and complexity.

You’re Such a Lovely Audience, We’d Like to Take You Home With Us: As your reward for reading this far, I am going to share a wonderful little secret with you. Stanford Law School, which has long maintained its excellent Securities Class Action Clearinghouse (here) has now started the Stanford Global Class Action Clearinghouse (here). The new site is devoted to tracking the development of class action litigation throughout the world. While the site is new and is only just getting started, it already has very interesting materials and shows great promise. We can only hope its sponsors and guardians develop and maintain this new site as well as the predecessor.

Hat Tip to my good friends at the Drug and Device Law Blog (here) for the link to the new site.

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Driven by the growing wave of subprime-related litigation (particularly a spate of auction rate securities lawsuits), the number of new securities class action lawsuit filings surged in March 2008. The total number of new securities class action lawsuit filings -- 25 – matches the number of new filings in November 2007, which in turn represented the highest monthly total of new filings since January 2005.

The 25 new securities lawsuits in March included 14 new subprime-related suits, taking account the new auction rate securities filed against J.P. Morgan Chase on March 31, 2008 (about which refer here). Of the 14 subprime-related suits, eight (including the new J.P. Morgan Chase lawsuit) were brought on behalf of auction rate securities investors against the companies that sold them the instruments. The remaining lawsuits (both those that are subprime-related and those that are not) were brought on behalf of public company shareholders against the companies and their directors and officers, other than one lawsuit brought on behalf of mutual fund investors.  

Largely because of the subprime-related litigation, many of the March lawsuits were filed in the United States District Court for the Southern District of New York – a total of 11 of March’s 25 new securities lawsuits were filed in the S.D.N.Y. Six of the new securities lawsuits filed in March involved companies domiciled overseas.

With the addition of the 25 new lawsuits in March, the total number of new securities lawsuits filed in the first quarter of 2008 totaled 52, of which 24 are subprime-related. All of the auction rate securities lawsuits were filed in March. (A complete list of the subprime-related lawsuits can be found on my running tally of subprime lawsuits, which may be accessed here.)

The 52 new securities class action filings in the first quarter of 2008, if extrapolated across four quarters, imply an annual filing rate of 208 new securities class action lawsuits, which is consistent with historical norms. (According to Cornerstone’s year-end 2007 securities analysis, here, the average number of securities class action filings during the period 1997 to 2006 is 1994). However, while this filing rate is consistent with historical levels, it is well above the annual levels seen in the most recent years, particularly 2006 (116) and 2007 (166).

Again, largely due to the number of subprime-related filings, the S.D.N.Y had the largest number of first quarter filings, with 21. The federal district with the next highest numbers of filings, D.Mass., had only five.

The companies sued in new securities lawsuits in the first quarter represented 31 different Standard Industrial Classification (SIC) Code categories, which might suggest that a broad diversity of companies were sued, but in most of those 31 categories only a single company was sued. The SIC Code categories with the largest numbers of companies sued were SIC Code category 6211 (Security Brokers and Dealers), with 7 companies sued, and 6021 (National Commercial Banks), with 6 companies sued. In all 29 companies in the 6000 SIC Code series (Finance, Insurance and Real Estate) were sued in the first quarter.

Nine of the companies sued for the first time in the first quarter of 2008 were domiciled overseas, representing eight different countries (including Switzerland, in which two of the companies are domiciled; the other seven countries had only one each.)

Six on the companies sued for the first time in the first quarter of 2008 had completed an initial public offering less than 12 months before the date of the first-filed lawsuit.

A final word about my lawsuit count: I am largely dependent on publicly available sources for my information about securities class action filings, although I have been able to supplement my information with data and links supplied by readers. (I am always grateful when readers bring information to my attention). I have compared my count to the information available on the Stanford Law School Securities Class Action Clearinghouse website (here) and have elected to omit certain cases that the Stanford site has included, largely because at least three of the cases listed on the Stanford site do not involved publicly traded companies. I will say that the diversity and variation of cases that have arisen in the last few months have created some very difficult categorization issues, and reasonable minds clearly could differ as to whether any particular case should or should not be “counted.”

While the securities class action lawsuit filing rate has fluctuated since mid-2007, the evidence remains consistent that the "lull" in filings that occured between mid-2005 and mid-2007 is over. It does remain to be seen if the filings will continue at their current rate, especially whethter factors such as the auction rate securities crisis will continue to drive litigation. On the other hand, the litigation activity is being driven by so many different aspects of the current crisis, it seems probable that subprime and other credit-related litigation will continue to accumulate. The more interesting question may be the extent to whcih the credit crisis litigation will spread beyond the financial sector.

A Further Thought about Securities Class Action Settlements: Earlier today I posted about the new Cornerstone report on 2007 class action settlements. The report is interesting and includes useful analysis and information. But upon reflection, it occurred to me that it is increasingly the case that class action settlement data alone may not provide all of the information necessary to understand the costs involved in resolving securities lawsuits. As I have noted in numerous prior posts (refer here), class opt outs are an increasingly important part of securities lawsuit resolution, a development that gained considerable momentum during 2007. Indeed, as I note here, the aggregate amount required to settle the Qwest opt-out actions actually exceeded the amount of the class settlement, and the amount paid in settlement of other opt actions is also very substantial.

For that reason, any assessment of the total costs involved in securities case resolution cannot be limited to class action settlements alone. The costs involved with separate opt-out actions must also be considered.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The complaint alleges that the defendants failed to disclose:

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

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

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

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

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

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

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

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