The filing of new subprime meltdown and credit crisis-related securities suits dwindled as 2010 progressed, which some commentators interpreted to suggest that the litigation filing phenomenon might finally have run its course. But though we have now begun the fifth year since the first subprime-related securities suit arrived in February 2007, it appears the process may not yet have played itself out, as the first subprime mortgage and credit crisis related lawsuit of 2011 was filed last week.
Moreover, as discussed further below, the early 2011 securities suit filings have reflected the continuation of other prior year’s filings trends as well.
The latest credit crisis lawsuit filing grows out of the foreclosure documentation debacle that came to light late last year.
According to their February 2, 2011 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the Southern District of New York against Bank of America Corporation and certain of its directors and officers alleging that "concealed defects in the recording of mortgages and improprieties with respect to the preparation of foreclosure paperwork that harmed BofA’s investors when BofA had to temporarily discontinue foreclosures and admit to the problems it was experiencing."
According to the press release, the complaint (which can be found here) alleges that
(a) BofA did not have adequate personnel to process the huge numbers of foreclosed loans in its portfolio; (b) BofA had not properly recorded many of its mortgages when originated or acquired, which would severely complicate the foreclosure process if it became necessary; (c) defendants failed to maintain proper internal controls related to processing of foreclosures; (d) BofA’s failure to properly process both mortgages and foreclosures would impair the ability of BofA to dispose of bad loans; and (e) BofA had engaged in a practice known internally as "dollar rolling" to remove billions of dollars of debt from its balance sheet over the prior years.
The BofA lawsuit is the second securities class action lawsuit to arise in the wake of the foreclosure documentation brouhaha. The first, filed in November 2010, involved Lender Processing Services, which related to alleged disclosure violations relating, among other things, to the company’s alleged use of "robo-signers." Background on the Lender Processing Services case can be found here.
I have added the new BofA lawsuit to my list of subprime and credit crisis related securities class action lawsuits, which can be accessed here. David Bario’s February 3, 2011 Am Law Litigation Daily article about the BofA suit can be found here.
Chinese Take-Out: The credit crisis litigation wave is not the only litigation trend from prior years that appears to have carried over into early 2011. As I first noted here, one of the trends that developed in the second half of 2010 was a rash of filings involving Chinese domiciled companies. Some commentators speculated in their year end litigation overviews that this development would prove to be a short-lived phenomenon, but at least so far, the filing trend appears to have continued into the first few weeks of the New Year.
Just last Friday, February 4, 2011, there were two new securities class action lawsuits filing involving Chinese-domiciled companies.
First, according to their February 4, 2011 press release (here), plaintiffs’ lawyers have filed a securities suit in the Southern District of New York against China MediaExpress. The relatively short complaint, which can be found here, alleges that the company’s share price declined after a pair of analyst reports in late January and early February raised questions about the accuracy of many of the Company’s statements and the quality of the company’s earnings.
Second, according to their February 4, 2011 press release (here), plaintiffs’ lawyers have initiated a securities class action lawsuit in the Southern District of New York against China Valves Technology and certain of its directors and officers. The complaint, which can be found here, alleges that the company misrepresented the nature of its February 2010 acquisition of China-based Able Delight Valve Company, and also misrepresented Able Delight’s financial condition and circumstances. According to the complaint, the company later disclosed that the Able Delight acquisition was a related party-transaction, the Able Delight was a money losing operation, and that Able Delight is the target of a corruption investigation.
The China Valves complaint, like the China MediaExpress complaint, makes extensive references to the reports of securities analysis, who apparently are closely scrutinizing Chinese companies with U.S. listings.
The January 11, 2011 Citron Research report quoted in the China Valves case stated, among other things with respect to the Able Delight transaction, "it is almost as if China Valves was trying to break a record with how many securities laws can be broken with a single transaction," characterizing the company’s transaction-related omissions as a "4-in-1 disclosure failure." (The China MediaExpress complaint also cited a research report issued by an analyst from Citron Research.)
Nor are these two cases the first of the year involving a Chinese company. As reflected here, on January 12, 2011, plaintiffs’ lawyers filed a securities class action lawsuit in the Central District of California against Tongxin International Ltd. and certain of its directors and officers. Although technically Tongxin is organized in the British Virgin Islands, it operates as a trucking manufacturing company based in China. Like the China Valves case, the Tonxin complaint (which can be found here) also alleges supposed misrepresentation and omissions with respect to a related-party transaction.
Some might argue that it is making too much to generalize from the three filings, but the fact is that these cases bear a strong resemblance to ten cases filed in 2010 against Chinese companies. Moreover, there have been relatively few new securities cases filed this year, so these three cases represent roughly one-fifth of all the securities class action lawsuits filed so far this year.
In other words, it sure looks like the wave of cases against Chinese companies has continued undiminished into the New Year. With securities analysts apparently highly motivated to ferret out Chinese companies reporting deficiencies, plaintiffs’ lawyers apparently will not lack for further grist for the litigation mill.
Even if the 2011 securities class action lawuits filings overall are off to a slow start, the filings so far suggest that prior years’ trends remain at work and are driving many of the new securities suits so far this year.
Health Disclosures, Leadership and Legacies: Following Apple’s January 18, 2011 announcement that its CEO, Steve Jobs, would be taking his third health-related leave of absence from the company’s helm, an energetic debate arose on the question of how much a public company must disclose about the medical condition of a key official.
I had occasion to reflect on the circumstances and questions surrounding Steve Jobs’ health-related disclosures while reading University of Wisconsin history professor John Milton Cooper, Jr’s excellent one-volume biography of Woodrow Wilson.
In October 1919, while traveling the country to try to drum up public support for The League of Nations, Wilson suffered a debilitating stroke. Just a few days later, while recuperating at the White House, he suffered a dangerous prostate infection that according to Cooper left Wilson "near death." Though he emerged from these twin ordeals, Wilson was left weakened, and arguably incapacitated.
Notwithstanding the seriousness of Wilson’s condition, the information disclosed publicly about his condition was carefully measured and consistently "vague" and "upbeat." Over the ensuing weeks and months, Wilson would struggle to recover, but he never considered resigning. His Vice President, Thomas R. Marshall, fearful of appearing as if he were plotting some kind of a coup, resolutely stayed in the background.
Cooper’s biography overall presents a balanced but unquestionably favorable impression of Wilson. However, with respect to Wilson’s condition in the wake of the medical crises, Cooper’s assessment is harsh. He noted that "the psychological effects of the stroke were … striking" as Wilson’s "emotions were unbalanced and his judgment was warped." Though in the past Wilson had been able to "offset his driving determination, combativeness and overweening self-confidence with detachment, reflection and self-criticism," those compensating behaviors were now "largely gone." Worse, Cooper noted, "his denial of his illness and limitations was starting to border on delusion."
The most disturbing thing about Wilson’s condition, however, is that the American people were largely kept in the dark, as was most of official Washington. With the benefit of hindsight and the passage of nearly a century’s time, it seems unbelievable how little of Wilson’s incapacity was disclosed.
Though both their conditions and the particulars of their circumstances arguably are entirely different, I still think there may be lessons for Jobs and for Apple from the circumstances surrounding Wilson’s incapacity.
The first is how harsh the judgment of history is on the decision to withhold information from the American people about Wilson’s condition. Cooper, an unquestionably favorable biographer, can barely restrain his outrage over the insufficiency of the disclosure about Wilson’s condition. Admittedly, part of Cooper’s outrage is due to the fact that the mistaken picture given of Wilson’s health allowed his wife Edith to exercise a complete gatekeeper role over the President, and practically speaking to determine Presidential policy and action. But even allowing for this historically astonishing aspect of Wilson’s situation, the fact remains that the history’s judgment surrounding the disclosure questions are unforgiving.
The second is that the decisions and disclosures surrounding Wilson’s health unquestionably undermined Wilson’s legacy. Cooper’s biography makes a persuasive case that, until his illness, Wilson was an effective President. Cooper also seems to suggest that without the troublesome months after Wilson’s illness, Wilson could well be remembered as a great President. Instead, the turmoil and conflict that followed his illness cast a cloud over Wilson’s entire Presidency. Had he accepted his incapacity and stepped aside when he was no longer able to govern, Wilson’s legacy might have been preserved. But that would have required him to acknowledge – to himself, and more importantly, to the American people – that he was no longer fit for office.
There are obvious and important differences between these two circumstances. Jobs, by contrast to Wilson, has been willing to take several leaves of absence from his position. Yet even in the latest announcement, there was an apparently deliberate suggestion that despite everything Jobs is somehow still in control – thus, the company’s January 18 release expressly stated that Jobs will "remain involved in major strategic decisions during [his] leave of absence." Maybe his condition allows him to remain involved, but there is a sense of Jobs struggling to remain in charge.
But the questions that surround Apple’s announcement relate less to Jobs’ determination to remain involved than they do the limited information about Jobs’ medical condition and capacity. Since Jobs medical challenges first emerged in 2003, Apple has maintained the same consistently restrained approach toward medical disclosures. The company’s approach may meet applicable legal standards, and, from the perspective of Jobs’s privacy, may be completely understandable. But I wonder if the company might take a different approach if it were to consider the disclosure questions in light of the way it might all look in retrospect, with the benefit of hindsight and after the passage of time.
I know that many readers may find my attempt to draw parallels between Wilson’s circumstances and what has recently happened to Steve Jobs to be more than a stretch. There is no doubt that the differences between the circumstances arguably are more important than the similarities. Nevertheless, I still think there are lessons that can be drawn from the way that history has judged the nondisclosures surrounding Wilson’s health.
Admittedly, my effort to frame the analysis in terms of the earlier time period may reflect a personal predilection more than anything else. I confess that I have long been fascinated with the sequence of events that followed after the end of World War I. There are a number of first-rate books on the subject. One I have read several times is Margaret Macmillan’s Paris 1919: Six Months That Changed the World, which not only details the deep problems associated with Wilson’s personal involvement in the negotiations of the Treaty of Versailles, but also documents how the peace negotiations left indelible marks throughout the world and to this very day, in places as far flung as Iraq, Palestine, the Balkans and the Far East.
The story of the troublesome events surrounding Edith’s Wilson’s caretaker role during Wilson’s illnesses is well told in Phyllis Lee Levin’s book, Edith and Woodrow: The White House Years.