Largely driven by litigation in the financial sector arising from the ongoing credit crisis, the heightened pace of securities filings continued during the first quarter of 2009.


There were a total of 57 separate, new securities class action lawsuits filed during the first quarter. The 57 new securities lawsuits represents an annualized pace of 228 filings, which would be basically unchanged from the 226 lawsuits filed in 2008. (My analysis of the 2008 filings can be found here.)


However, the 57 first quarter filings do represent a decline from the 67 new lawsuits that were filed in the fourth quarter of 2008, when the Madoff-related filings that came in at year end and increased the quarterly numbers.


The filings during the first quarter 2009 were driven by the filing of new subprime and credit crisis-related securities lawsuits. Of the 57 first quarter suits, 35 (61% of the total) were subprime and credit crisis-related. A spreadsheet of the 2009 subprime and credit-crisis related securities lawsuit filings can be found here. A table of all of the subprime and credit crisis securities cases filed during the period 2007 to 2009 can be found here.


The first quarter lawsuit filings targeted entities in 26 different Standard Industrial Classification (SIC) code categories. But consistent with the predominance of the subprime and credit crisis cases, most of cases were filed with SIC codes in the financial sector. A total of 30 of the 57 cases (52%) involved companies in the 6000 SIC Code (Finance, Insurance and Real Estate) series. Indeed, 21 of the 57 cases (37%) were filed against companies in just three SIC Codes: SIC Code 6021 (National Commercial Banks), 9 filings; SIC Code 6029 (Commercial Banks not elsewhere classified), 6 filings; and SIC Code 6189 (Asset Backed Securities), 6 filings.


Not only were the first quarter cases largely concentrated in the financial sector, but many of the cases involved very specific kinds of financial transactions. At least 12 of the 57 cases were based upon the offerings of subordinated, preferred or other specialized classes of the issuer-defendants’ securities. (Some entities, for example, Deutsche Bank, were hit with multiple distinct suits relating to different securities offerings, as discussed further below.)


In addition at least five of the new filings involved actions against the issuers of mortgage pass-through certificates.


The various Ponzi scheme frauds were also a material factor in the first quarter filings. For example, the Madoff and Stanford Financial frauds accounted for a least six distinct cases among the first quarter filings. (There obviously were multiple additional duplicate filings involving these frauds, a source of one of the many counting problems associated with the first quarter filings.)


A significant number of the first quarter filings did not involve publicly traded companies. For example, the first quarter securities lawsuit filings targeted mutual funds, private investment firms or investment partnerships, and other private entities. At least eight of the 57 first quarter filings involved entities that lacked an SIC code designation.


Thirteen of the 57 new filings (or about 23%) involved foreign-domiciled companies, representing six different countries. However, many of these cases involved separate suits filed against the same companies. For example, while there were five separate lawsuits filed against U.K.-based companies, only two different companies, RBS and Barclays, were actually involved in those five separate cases.


The 57 cases were filed in 25 different courts, but 29 of them (about 51%) were filed in the Southern District of New York. Only one other court, the Northern District of California (5 filings) had more than two.


Even though the 57 first quarter filings represent a heightened level of litigation activity, the impact of those cases on D&O insurers will be more muted than might otherwise be expected, due to the nature and distribution of the filings.


First, the litigation activity was predominantly concentrated in the financial sector, which means that carriers that have not been active in this sector have largely avoided significant claims activity so far in 2009. The carriers that were active in the sector are not as fortunate, but that represents only a subset of the overall D&O insurance marketplace.


Second, the incidence of multiple distinct lawsuits against the same company, which was a significant part of the first quarter lawsuit activity, means that the maximum potential aggregate insurance exposure from the new lawsuits is likely substantially less than if 57 separate lawsuits had been filed against 57 complete separate companies.


Third, a certain percentage of the cases, particularly the Ponzi scheme cases, are likelier to produce E&O losses rather than D&O losses, so the impact on the D&O insurers from these cases could be more limited than might otherwise be the case for the more typical securities class action lawsuits.


All of that said, the pace of litigation activity certainly shows no signs of abating. There are still reasons to believe that the current litigation wave will spread more generally beyond the financial sector. The likelihood of litigation from corporate insolvencies also threatens continued heightened litigation activity as the year progresses.


Counting: A final word about counting the filings. I suspect that other observers have or will likely reach differing counts than I have for the first quarter filings. Part of the difference is a result of the perennial counting problems – for example, whether or not to count merger objection lawsuits or lawsuits where the main allegation is that the defendant failed to register securities (neither of which categories I count).


But beyond these recurring issues, the kinds of cases that were filed in the first quarter made counting particularly uncertain. The cases themselves made it very challenging to determine whether or not a new complaint represent a duplicate lawsuit or a new lawsuit.


For example, how many different lawsuits can there be regarding Deutsche Bank preferred securities? Is a lawsuit involving a different class of preferred securities a duplicate or distinct?


The multiple Madoff-related lawsuits post a particularly difficult categorization challenge, as the protean mix of defendant feeder funds targeted in the lawsuits present a dizzying array of combinations.


Just to cite one specific counting challenge, I refer to the complaints that have been filed in connection with Wells Fargo’s Mortgage Pass-Through Certificate offerings. One lawsuit represent certificate investors was filed in January 2009 (refer here). A second complaint was filed in March 2009 also brought on behalf of Mortgage Pass-Through Certificate investors (refer here). The March complaint related largely (but not exclusively, as far as I can tell) to different specific offerings of Mortgage Pass-Through Certificates. Reasonable minds (particularly reasonable minds with an abundance of time to undertake an intense textual comparison between the two complaints) might reach a different conclusion, but upon consideration of the different offerings involved, I counted these as two distinct filings rather than as duplicate filings.


These are not easy issues and different people could and probably will reach far different conclusions. I have at least tried to be internally consistent with my own counting. In any event, don’t be surprised if other securities lawsuit counts published elsewhere vary from my own. Even if the precise numbers differ at the margins but the general findings should be generally consistent.