The exact contours of this "new wave" is admittedly amorphous, but the basic concept is that it involves, first, companies that were not themselves undermined by the credit crunch but rather as result of their exposure to companies that were. The most prominent examples are companies that suffered losses due to their exposure to Lehman Brothers. One specific example is Constellation Energy, which, as noted here, is the target of a securities lawsuit alleging among other things that the company insufficiently disclosed its exposure to Lehman Brothers securities.
That there will be other lawsuits in the "exposed to others’ misfortunes" category is demonstrated by the lawsuit initiated on December 3, 2008 in the Southern District of New York against Chinese solar cell manufacturer JA Solar Holdings and certain of its directors and officers. According to the plaintiffs’ counsel’s December 3 press release (here), the Complaint alleges that the defendants failed to disclose that:
JA Solar purchased from a subsidiary of Lehman Brothers Inc. ("Lehman Brothers") a three month, $100 million note (the "Lehman note") on or about July 9, 2008. At the time of this purchase, Lehman Brothers, which guaranteed the Lehman note, was under severe financial distress. According to the complaint, defendants failed to disclose: (i) that JA Solar had made a material, highly speculative investment in a subsidiary of Lehman Brothers, an entity that was then undergoing a credit crisis and under significant financial distress; (ii) that the value of JA Solar’s investment in the Lehman note had diminished considerably; and (iii) that, as a result of the foregoing, defendants’ positive statements concerning JA Solar’s financial performance, outlook and earnings guidance were materially false and misleading and without reasonable basis.
Ultimately, at the end of the Class Period, JA Solar wrote off its $100 million investment in the Lehman note. After JA Solar fully disclosed and recorded an impairment in the value of its investment in the Lehman note, on November 12, 2008, JA Solar’s stock closed at $2.38 per share, a price that represented a decline of more than 87% from the high during the three month Class Period.
A copy of the JA Solar complaint can be found here.
Constellation Energy and JA Solar are far from the only companies experiencing losses as a result of the onslaught of bankruptcies and bailouts. Many companies have experienced huge losses as a result of the collapse of Lehman Brothers, Fannie Mae and Freddie Mac, AIG, Washington Mutual, and the other recent massive failures. There undoubtedly will be further lawsuits like the ones filed Constellation Energy and JA Solar.
Another category of "new wave" credit crisis litigation relates to companies that made wrong way bets on commodities and currencies, as I noted in a prior post (here). These companies have experienced significant losses as commodities prices and currency exchange rates suddenly and unexpectedly reversed direction this fall. Some of these companies have also been hit with securities lawsuits, as I noted in my prior post, and as also illustrated in the lawsuit recently filed against Aracruz Cellulose (about which refer here).
As discussed in a December 3, 2008 Wall Street Journal article entitled "Rapid Price Decline in Commodities Turns Some Offsets into Big Losses" (here), a number of companies "have taken hedging-related losses in the third quarter as a result of the rapid decline in commodities costs." But, the article emphasizes, "it isn’t over, either." Companies hedge their costs a few quarters in advance, so hedges taken more recently "are going to hurt profits for many in the fourth quarter and beyond." The article specifically mentions Campbell Soup, Kraft Foods, Pilgrim’s Pride, and Southwest Airlines.
The reference to Pilgrim’s Pride is particularly noteworthy as part of this discussion, because as I previously noted (here), the company has already been hit with a securities lawsuit based among other things on the company’s wrong way bet on corn prices. As the Journal notes, there will be other companies reporting losses after the end of the fourth quarter and even beyond on wrong way commodities and currency bets. Some of these companies likely will also face securities lawsuits.
The final category (or at least final until a new category emerges) involves auction rate securities. I refer here not to the mass of litigation filed earlier this year by auction rate investors against the broker-dealers that sold them the auction rate securities. Rather, I am referring to the cases where investors have sued companies because of losses the companies suffered as a result of the companies’ investment in auction rate securities.
An example of this auction rate case is the one involving NextWave Wireless (about which refer here) in which it is alleged, among other things, that the company "failed to timely disclose that it had invested all of its marketable securities in extremely illiquid auction rate securities."
There are a host of other companies facing distress due to their exposure to illiquid auction rate securities. For example, a December 3, 2008 Wall Street Journal article entitled "LandAmerica’s Collapse Leaves Investors Looking for Cash" (here) describes the failure of title insurance company LandAmerica Financial Group, which came about because one of the company’s subsidiaries had put funds held for real-estate investors in auction rate securities. Land America filed for bankruptcy last week.
There undoubtedly will be other companies facing liquidity crises as a result of their exposure to auction rate securities, and some of these companies, like NextWave Wireless, will face securities litigation as a result.
One final point about the evolution of the credit crisis litigation wave is that many of the companies involved in these various "new wave" categories identified above are outside the financial services sector. To the extent these new wave lawsuits continue to accumulate, this evolutionary process could be the means by which the credit crisis litigation wave spreads outside the financial sector to the larger economy.
Premonition of War Foretold: As we wonder how we got into the mess, one of the things that is becoming obvious is that the sober voices were silenced and mocked, and the dialog was dominated by the voices of those who had spent far too much time at the punch bowl.
The following video compiles of series of clips from the period 2006 through 2007, showing both how many foolish things were said, and also showing the prescience of Peter Schiff of Euro Pacific Capital. I don’t know what is more amazing about this video, that Schiff’s predictions were so uncanny or that the others, who mocked and even laughed at him, so badly misperceived what was happening, especially with respect to housing prices. I guarantee you will shake your head in disbelief at some of the things that are said in this video. Schiff in the meantime sounds like a man who had access to a crystal ball.
Hat tip to Joe Nocera of the New York Times in his Executive Suite blog (here) for the link to the video.