Just as the financial crisis itself has gone through various phases, the resulting litigation has also changed and evolved. A June 4, 2010 report entitled "Credit Crisis Litigation Revisited: Litigating the Alphabet Soup of Structured Products" by my friend Faten Sabry, and her colleagues Anmol Sinha, Jesse Mark and Sungi Lee, all of NERA Economic Consulting, takes a detailed look at the credit crisis-related litigation wave, with a particular emphasis on the way that it has developed over time.
The focus of the NERA report is credit crisis-related "securities cases," which includes not only state and federal securities class action lawsuits, but also "ERISA claims, shareholder derivative actions, individual state and federal cases, [and] international cases." Thus, the universe of cases that NERA is tracking is considerably broader than the ones I have included in my running tally of subprime and credit crisis-related litigation, which can be accessed here.
The Report’s overall conclusion is that "there are conflicting signals about the future of this litigation." On the one hand, new credit crisis-related lawsuit filings have declined and almost half of the preliminary motion decisions to date have been dismissals. On the other hand, "types of allegations, products and defendants have continued to shift, and recent regulatory activity," such as the recent enforcement action against Goldman Sachs, "add to the uncertainty surrounding the direction and focus of the litigation."
According to NERA’s tally, there have been a total of 424 of the broad category of credit crisis cases filed since the beginning of 2007, 225 of which are securities class action lawsuits. The most active quarter both for credit crisis cases generally and for securities class action lawsuits specifically was the second quarter of 2008, when there were 48 new cases overall and 38 new securities class action lawsuits. Both overall credit crisis lawsuit filings and securities class action lawsuit filings declined every quarter during 2009.
The NERA report observes that there has "been a noticeable shift in the type of defendants as the credit crisis has progressed." Among other things, the incidence of cases involving corporate directors and officers has changed over time. The percentage of credit crisis filings that name directors and officers as defendants decreased between 2007 and 2009. In 2007 70% of the cases included director and officer defendants. The percentage of cases with director and officer defendants declined to 61% in 2008 and 52% in 2009. Early 2010 filings show a slightly increased percentage, with 67% of cases including director and officer defendants.
The types of companies involved in the cases have also shifted over time. For example, in 2007, mortgage lenders, home builders and REITs were named as defendants in 47% of filings, but by 2008, the kinds of companies were involved in only 20% of filings. Only 5% of the 2009 filings involved these kinds of companies, and so far none of the 2010 has involved these companies. With this shift away from residential mortgage defendants, the plaintiffs have changed, too, as the claimants have "shifted toward non-primary mortgage market participants."
While the percentage of filings against mortgage lenders, home builders, and REITs has declined over time, the percentage of cases naming securities issuers and underwriters has increased, from only 24% and 23% of filings in 2007 and 2008, to 37% of filings in 2009, and 60% so far in 2010.
The types of financial products involved in the credit crisis lawsuits have also shifted over time. Because the 2007 lawsuits largely involved lenders, mortgage originators and homebuilders, many of the 2007 suits involve mortgage loans – about 40% of the 2007 cases involved allegations relating to mortgage loans. By contrast only about 7% of 2010 cases involve mortgage loans, but "products such as ABS/MBS, CDOs and CDSs now make up the majority of the recent securities credit crisis lawsuits."
Slightly more than a third of the cases overall have either had dismissal motion rulings or been settled. I was a little puzzled by NERA statistics on case dismissals, as their data show that 61% of cases have been dismissed, with or without prejudice, which is considerably higher than my own figures reflect. (Refer here to access my own tallies of subprime and credit lawsuit dismissal motion rulings.)
However, NERA’s dismissal figures also include a number of voluntary dismissals. Removing those from the equation reduces the percentage of dismissal grants to 46%. In addition, NERA puts settled cases in a separate category and are counted neither as a dismissal motion denials or grants. Many of the case settlements followed dismissal motion denials, and so NERA’s figures on dismissal motion denials do not reflect those cases. All of these considerations should be taken into account when referring to the NERA data for purposes of determining how parties are faring in disputed dismissal motions.
Aggregate settlements to date in these cases total over $2.1 billion, with roughly $1.7 billion in settlements associated with securities class action lawsuit settlements. (My detailed list of subprime and credit crisis-related lawsuit settlements can be accessed here.)
Though the settlement numbers so far are impressive, there are clearly many more settlements yet to come, and the aggregate settlement figures are likely to grow. As the NERA report comments in closing, "settlements and judgments will be the next chapter in this story."
The NERA report contains a great deal of interesting and useful information and it is worth reading at length and in full. Very special thanks to Dr. Sabry for providing me with a copy of the report.
NERA also recently released a separate report entitled "Subprime and Synthetic CDOs: Structure, Risk and Valuation" which intended to provide a "plain English" explanation of many of the complex financial instruments that were involved with the financial crisis. This June 3, 2010 report can be accessed here.
My own recent status update on the subprime and credit crisis related litigation can be found here.