By now it is not news that the current credit crisis and related litigation wave have both spread far beyond the residential real estate sector in which they both first began. But the details surrounding the extension remain interesting and may even contain hints about what may lie ahead, as suggested by a recent lawsuit.
As reflected in their February 20, 2009 press release (here), plaintiffs’ attorneys have filed a securities class action lawsuit in the Southern District of New York against American Express and its CEO and CFO. The complaint (which can be found here) is filed on behalf of those persons who purchased the company’s securities between March 1, 2007 and November 12, 2008.
According to the complaint, American Express is the world’s largest issuer of charge cards. The complaint alleges that during the class period, the company "deviated from its historical strategy" of targeting the "premium market sector" and instead "engaged in riskier lending," while it "reassured investors and analysts that it did not engage in such riskier transactions."
The complaint alleges that the defendants "mislead investors by falsely representing American Express’s exposure to the riskiest credit card holders." The complaint alleges that the defendants repeated these reassurances to "artificially support" the company’s share price "as the building credit crisis in the market punished most companies that dealt with risky customers."
The complaint further alleges that as a result of the company’s "shift to risky card business," its brand has been "cheapened" and its stock has dropped over 65%. The complaint also alleges that the company won approval to convert to a bank holding company in order to qualify for TARP money – "a capital infusion required to save the Company from its risky endeavors."
On the one hand, it is hardly surprising in this environment that any credit lending facility should be experiencing difficulties or that those difficulties might result in litigation. But on the other hand, this new lawsuit does demonstrate both how far afield from the original subprime-related problems that triggered the current crisis, and how diverse the credit problems are that are now driving the related credit crisis litigation wave.
For some time now, the spreading subprime and credit crisis-related litigation wave has spread to encompass sectors of the credit marketplace beyond just subprime lending. Some time ago, for example, student lenders were drawn in (refer here), as were commercial construction companies (refer here). The involvement of a credit card company represents just another category of the credit marketplace to be drawn into the litigation wave.
But even though this new lawsuit may be just an extension of previously existing trends, it still has some ominous overtones. For one thing, American Express may be one of the largest providers of consumer credit, but it is far from the only one. Many businesses, other than just credit card companies, depend at some level upon the extension of consumer credit as part of their business model. The financial troubles these companies are now facing could also mean vulnerability to possible future litigation.
Another troubling note suggested by American Express’s woes is that a great deal of consumer debt, like the residential real estate debt, was packed into securities backed by the debt. The challenges facing the mortgage-backed securities market are at this point well known. Deteriorating conditions in the consumer credit arena could have significant implications for securities backed by the consumer debt.
In the meantime, American Express seems to be taking matters into its own hands to try to avoid further defaults as the recession deepens. According to February 23, 2008 news reports (here), American Express has offered to pay some cardholders $300 to pay off their outstanding balances and close their accounts by April 30, 2009. According to the news reports, analysts are concerned that credit card defaults could reach 11 percent by year end. One commentator is quoted as saying that what the company is trying to do is to "move to the front of the line in terms of getting paid back."
In any event, I have added the American Express complaint to my running tally of the subprime and credit crisis related securities litigation, which can be accessed here. With the addition of the American Express complaint, the current litigation tally now stands at 162, of which 19 have been filed so far in 2009. A spreadsheet reflecting the 2009 cases can be found here.
Special thanks to Adam Savett at the Securities Litigation Watch for the link to the American Express Complaint.