According to news reports (here), Treasury Secretary Henry Paulson has added his voice to the growing chorus declaring that the worst of the credit crisis may be past. Paulson reportedly said that “we are seeing signs of progress as capital and credit markets stabilize.” We can all hope for the sake of the financial markets, and indeed, the entire U.S. economy, that Paulson is correct.

But while the top level indications may be encouraging, it would be premature at this point to conclude that the subprime and credit crunch related litigation wave is spent. If the lawsuit filings just in the last week are any indication, the litigation wave will continue to roll on for the foreseeable future.

For example, on May 16, 2008, plaintiffs’ lawyers filed a securities class action lawsuit in the United States District Court for the Central District of California against Downey Financial Group and certain of its directors and officers. The plaintiffs’ counsel’s May 16 press release can be found here and a copy of the complaint can be found here.

According to the press release, on March 17, 2008, Downey (a savings and loan holding company) reported (here) an “increase in non-performing assets to almost 11% of total assets, up from 1.2% in May 2007.” According to the complaint, the “true facts, which were known to the defendants but concealed from the investing public” were that:

(a) defendants’ portfolio of Option ARMs contained millions of dollars worth of impaired and risky securities, many of which were backed by subprime mortgage loans; (b) prior to the Class Period, Downey had seen Countrywide’s growth and had started to get more aggressive in acquiring loans from brokers such that the loans were extremely risky; (c) defendants failed to properly account for highly leveraged loans such as mortgage securities; (d) Downey had very little real underwriting, which led to large numbers of bad loans that would cause huge numbers of defaults; and (e) Downey had not adequately reserved for Option ARM loans, the terms of which provided that during the initial term of the loan borrowers could pay only as much as they desired with any underpayment being added to the loan balance.

I have written previously (here) about the litigation threat that Option ARMs could present. Downey is far from the only financial institution that is vulnerable to defaults and delinquencies as Option ARMs readjust. Moreover, all lending institutions remain vulnerable to increasing defaults as rising unemployment, and rising energy and food costs (among other things), continue to undermine borrowers’ ability to remain current on their mortgages and other debt. Other lenders undoubtedly will be reporting increases in non-performing assets in the weeks and months ahead – which is one reason why the subprime and credit crisis litigation wave may have long way to go before it loses momentum.

In addition, on May 12, 2008, plaintiffs initiated a shareholder class action lawsuit in the United States District Court for the Eastern District of Michigan against private mortgage insurer MGIC Investment Corp. and its CEO and its CFO. Refer here for a copy of the complaint. MGIC’s woes relate back to its failed 2007 attempt to merger with Radian Group, as well as the deterioration of the joint venture, Credit Based Asset Servicing and Securitization LLC (“C-Bass”), in which MGIC had entered with Radian. The July 2007 collapse of the C-Bass venture and the August 2007 termination of the pending merger of the two companies previously led to the filing of a securities class action lawsuit against Radian Group (about which refer here).

The MGIC complaint alleges that even after the demise of the C-Bass venture and after the termination of the Radian merger, MGIC continued to struggle, and on February 13, 2008, the company announced (here) a loss for the fourth quarter of 2007 of $1.47 billion, part of a full year 2007 loss of $1.67 billion.

MGIC’s financial challenges, which continued well after the company’s mid-2007 crises, underscores that fact that many companies are continuing to grind through tough financial circumstances. MGIC’s continuing challenges suggest that even if, as Secretary Paulson observes, the worse of the credit crisis may have passed, the fallout will continue to filter through the system for many months to come. And as companies continue to wrestle with these circumstances, additional litigation, like that filed against MGIC, will continue to emerge.

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

Run the Numbers: With the addition of these two new lawsuits, my running tally (here) of subprime and credit crisis related securities class action lawsuits now stands at 81, of which 41 have been filed during 2008.

An FCPA Follow-on Litigation Variant: In prior posts (most recently here), I have written about the growing liability threat arising from civil litigation following after Foreign Corrupt Practices Act enforcement activity. In a May 2008 article entitled “Suing Bribing Competitors: The Next Tool in the International Anti-Corruption Arsenal?” (here), James Maton and Joshua Gardner of the Edwards Angell Palmer & Dodge law firm describe yet another litigation threat arising out of corrupt practices enforcement proceedings.

The authors’ describe increasing litigation activity involving claims by companies that lose bids to bribing competitors. The disappointed bidders bring private lawsuits against the companies that are awarded the contracts. The losing bidders seek to recover lost profits, as well as costs wasted in bidding. Plaintiffs have asserted these kinds of claims under federal and state antitrust laws, RICO, and state common law theories such as intentional interference with contract and unjust enrichment.

The authors conclude that notwithstanding the litigation hurdles involved, “these types of private lawsuits are bound to increase in the United States, England and elsewhere.” All of which supports a view I have expressed numerous times on this blog – namely, the as anticorruption enforcement activity increases, the threat of related private civil litigation also increases, and that this litigation threat represents an important emerging liability risk for companies and their directors and officers.

Blog Bites Man: This past week, The D&O Diary passed its second anniversary, as two years have now passed since the blog’s May 10, 2006 launch. During its second year, the blog passed several important milestones, including most significantly its move from Blogger to LexBlog. And after almost 400 blog posts, The D&O Diary now has nearly 1,500 e-mail and RSS subscribers.

I would like to thank The D&O Diary’s readers for their continued support. I remain a highly motivated blogger because of the regular encouragement I receive from the blog’s readers.

I would also like to thank everyone who has sent me links, suggestions and comments over the last two years. I get most of my best material from readers’ suggestions, and I hope everyone out there will continue to send me the good stuff that I might not otherwise find. Please keep your suggestions coming. Thanks to all for their support for The D&O Diary.