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.")