As the subprime litigation wave has churned on, many of the more recently filed lawsuits have been similar to previously filed suits. But amidst the repetition, there has also been some innovation, or at least variation, as a result of which the subprime litigation wave has continued to evolve. Two recently filed subprime and credit crisis- related lawsuits demonstrate both of these elements.


Fannie Mae Secondary Offering Litigation: First, on August 7, 2008, plaintiffs filed a purported securities class action under Section 12(a)(2) of the ’33 Act, in the New York (New York County) Supreme Court, in connection with the May 9, 2008 secondary offering of Federal National Mortgage Association (Fannie Mae) A copy of the complaint can be found here.


The complaint purports to be filed on behalf of all purchasers who bought Fannie Mae shares in the May 9 offering, in which the company sold approximately 94 million shares at $27.50 a share. (The shares closed today at $7.69.) Interestingly, Fannie Mae itself is not named as a defendant. The plaintiffs have named defendants only the offering underwriters, Lehman Brothers, J.P. Morgan and Citigroup.


The complaint alleges that the offering documents failed to disclose a pending change to FAS 140, which change if adopted, the complaint alleges, "could require the Company to raise as much as $46 billion of capital in order to remain in compliance" with its regulatory capital requirements. The complaint alleges that FAS 140 had previously allowed Fannie Mae to account for its liabilities for mortgage-backed securities issued by the company as if the company had sold the securities, even though the company was still obligated to guarantee the securities against defaults in the underlying assets. The supposed pending changes would require Fannie Mae to account on its balance sheet for these now off-balance sheet liabilities.


The complaint alleges that the offering documents had stated that upon the successful completion of the offering, the company’s capital requirements would be reduced. The complaint alleges that in July 2008, well after the offering’s completion, an analyst for Lehman Brothers (which was also one of the offering underwriters) issued a report disclosing the pending changes and the supposed impact on the company’s need for as much as $46 billion additional capital. The complaint alleges that in the week following the report, Fannie Mae’s share price dropped from $18.76 per share to $7.07 a share.


There are a number of curious things about this complaint. The first is that the complaint names only the offering underwriters as defendants; it does not name Fannie Mae itself. I expect this is because in connection with this firm commitment offering, the offering underwriters were the actual "sellers." (The complaint alleges that the underwriters, who directly bought the shares from the company, were "directly responsible for the offering and sale" of the shares to the market.) This would perhaps explain why the plaintiffs sought to pursue their Section 12 claim only against the underwriters, but it does not clarify why the plaintiffs did not also include in their complaint a Section 11 claim against Fannie Mae or other defendants.


UPDATE: Please note the reader comment below explaining that the May offering was an unregistered equity offering, and as such there was no registration statement — hence no Section 11 claim. As an aside, I note that I am always grateful when a reader provides this kind of clarifying information. I hope that all readers will lelt me know when statements on this blog are in need of clarification or correction.  

The other interesting thing is that plaintiffs have chosen to proceed in state court rather than federal court. I have previously noted (here) the apparent interest of some plaintiffs’ lawyers as part of the current litigation wave to pursue ’33 Act claims in state court, and I have also noted that plaintiffs have had some success in having these cases remanded back to state court in opposition to defendants’ efforts to remove them to federal court. Even though this most recent lawsuit asserts claims only under Section 12, it apparently continues the developing trend of plaintiffs pursuing ’33 Act actions (primarily Section 11 actions) in state court.


Jurisdiction for ’33 Act actions is concurrent, meaning that plaintiffs have a choice and they are consciously choosing to proceed in state court. I have previously speculated (here) that the decision to proceed in state court represents some form of forum shopping, or perhaps a bid to avoid the requirements of the PSLRA. Whatever the reason, the court selection appears calculated and tactical, much like the decision in this case to assert claims only against the offering underwriters and only under Section 12.


Special thanks to Adam Savett of the Securities Litigation Watch for the complaint in this Fannie Mae Secondary Offering lawsuit.


Stifel Financial Auction Rate Securities Litigation: The second of these two recent lawsuits is a purported securities class action lawsuit filed in the Eastern District of Missouri on behalf of all persons who purchased auction rate securities from Stifel Financial (or its affiliate, Stifel Nicolaus & Company) between June 11, 2003 and February 13, 2008. A copy of the complaint can be found here.


As I have noted (here), there have been many of these auction rate securities class action lawsuits filed. By my count, about which refer below, Stifel and its affiliate are the eighteenth different set of defendants to be separately named in an auction rate securities class action lawsuits.


What makes this complaint noteworthy is not its allegations, which are virtually identical to those raised in the earlier auction rate securities lawsuits. Rather, what makes this complaint noteworthy is its timing. There were a flood of these auction rate securities lawsuits filed in March and April 2008, but the filings tapered off after that. The most recent of these auction rate securities class action lawsuits, as near as I can determine, was filed in May 2008.


The other interesting element of the lawsuit’s timing is that it comes now, shortly after the largest financial institutions have entered settlements in which the big banks have agreed to massive buy backs of these securities from retail investors (refer here). As I noted in a recent post (here), even though these settlements might have seemed to suggest that the auction rate securities mess was winding wrapping up, the lawsuits relating to the securities continue to accumulate. Notwithstanding the settlements involving the largest banks, problems with these securities continue, and the related lawsuits continue to be filed.


A copy of an August 13, 2008 St. Louis Business Journal article relating to the new Stifel Financial lawsuit can be found here.


 Run the Numbers: In any event, I have added these two new lawsuits to my running tally of the subprime and credit crisis-related securities lawsuits, which can be accessed here.


With the addition of these two new lawsuits, the current tally of the subprime and credit crisis-related securities lawsuits now stands at 105, of which 65 were filed in 2008. As noted above, there have been 18 separate sets of defendants sued in auction rate securities class action lawsuits.


Subprime Coverage: Accompanying this litigation wave is the related question of insurance coverage for these lawsuits. Matthew Jacobs, Lorelie Masters and David Weiner of Jenner & Block have written an article in the July/August 2008 issue of Coverage entitled "Insurance Coverage and the Subprime Crisis: A Broad Overview" (here), which provides a comprehensive overview of the subprime litigation and the related insurance issues, from a policyholder perspective. The article is comprehensive and well-written, and raises a number of useful and interesting observations about the subprime-related coverage issues.