Back in February 2007, when investors in New Century Financial Corporation filed a securities class action lawsuit against the company and certain of its directors and officers, there was little reason to suspect at the time that problems at the company represented the leading edge of a looming financial crisis or that the case itself was the first lawsuit in what ultimately grew to become a mountain of subprime and credit crisis-related litigation. But even now, five years later, the litigation wave continues to churn through the system, though we are now mercifully well past the depths of the financial crisis.
As reflected below, though many of the cases have now been resolved, many more remain pending, and the likelihood is that the litigation will continue for years to come.
In the five years since the first of the credit crisis lawsuits was first filed, there have been nearly 230 subprime and credit crisis related lawsuits filed, including four in 2011. A list of all of the filings can be accessed here. 2008 was the peak year of the financial crisis and also the peak year for credit crisis related lawsuit filings, when there were 102 subprime and credit crisis-related cases filed. After that, the filings began to diminish. There were 62 credit crisis related securities class action lawsuit filings in 2009, and only 23 in 2010. Maintaining a precise count over time has been challenging, as cases have been consolidated, removed, transferred, and so on. The count of 230 lawsuits should be viewed as indicative of the total number of filings, rather than an exact representation. For analytic purposes below, I have used the 230 figure, but it should be kept in mind that all calculations are approximate.
Dismissal Motion Rulings
By my reckoning, about 144 of the cases, or about 63%, have reached the motion to dismiss stage. A list of all dismissal motion rulings can be accessed here. As time has passed it has become increasingly complicated to track the dismissal motion rulings, as well. Several cases have had multiple rulings and there have even been a handful of cases that have made their way up to the appellate courts.
For purposes of counting the dismissal motion rulings, I have counted as dismissals all cases in which a dismissal motion was granted, whether or not the dismissal was with prejudice. However, I did not count cases in which the dismissal motion was initially granted but in which the motion was denied on subsequent rehearing. If any part of the plaintiffs’ case survived the dismissal motion, I counted the ruling as a dismissal motion denial, even if the ruling may have resulted in the dismissal of a substantial part of the plaintiffs’ case.
One particularly complicated variant that I have tried to factor in my analysis are the rulings in which a dismissal with prejudice was granted as to some but not all the parties. I have tried to factor those rulings out of my analysis here. In addition, I have counted cases in which dismissal motions were reversed on appeal as dismissal motion denials. Finally I have counted summary judgment grants in my tally of dismissals.
Using these principals to categorize the dismissal motion rulings, and disregarding the small handful of cases that were voluntarily dismissed and not refilled, it appears that dismissal motions have been granted in 76 cases, or slightly more than half of the cases in which dismissal motions have been heard (that is, about 52%).
Although this dismissal rate is slightly higher than the historical rate of all securities class actions, which runs about 40%, it is important to keep in mind that I have included dismissal without prejudice in the tally. Some of the dismissed cases may yet survive renewed dismissal motion, as was the case with a number of cases in which dismissal motions were initially granted – for example, the Washington Mutual case (here), the Credit Suisse case (here), the New Century Financial case (here), PMI Group (here), and IndyMac (here). The inclusion of summary judgment grants may also inflate the apparent dismissal rate somewhat as well.
In addition, appellate courts proceedings could also affect the dismissal rate calculation. In at least two cases, Nomura Asset Acceptance Corporation (about which refer here) and Blackstone Corporate (here), appellate courts reversed the dismissals granted in the lower courts. There may well be other reversals on appeal, which could affect the dismissal rate calculation, at least marginally. To be sure, the dismissals of a number of other cases has been affirmed on appeal, including the dismissal in the NovaStar Financial case (refer here), Centerline (here); Impac Mortgage (here); Home Banc Corporation (here); Regions Financial Corp./Trust Preferred Securities (here); Morgan Keegan Asset Management (here); General Electric (here); American Express (here); and Fremont General Corporation (here).
Finally, it should be noted that dismissal motions are still yet to be heard in over a third of the subprime and credit crisis-related lawsuits. With further proceedings yet to unfold in many cases and with so many other cases yet to be heard, it would be premature to make any definitive pronouncements about whether or not the subprime and credit crisis cases are being dismissed at a greater rate than securities class action lawsuits generally.
40 Settlements and a Trial
So far 40 of the subprime and credit crisis related securities class action lawsuits have settled, representing $4.419 billion in the aggregate. It is interesting to note that of these 40, 23 of the settlements were announced in 2011, representing $2.48 billion total. The pace of settlement quickened considerably in the year just ended, as more of the earlier cases reached the settlement stage. It seems likely that we will see even more settlements in 2012.
The average of the settlements so far is about $110 million. However, the largest settlements are pulling this average upward. If the four largest settlements (the $627 Wachovia Preferred Securities settlement, the $624 Countrywide Settlement; the $475 Merrill Lynch settlement and the $415 Lehman Brothers Offering Underwriter settlement) are removed from the calculation, the average drops to about $63 million.
Not every case that survives dismissal settles; though it is very rare in the securities class action lawsuit context, some cases still do go to trial. In November 2010, a jury in the Southern District of Florida entered a plaintiffs’ verdict in the securities class action lawsuit filed against BankAtlantic Bancorp and certain of its directors and officers. (It is interesting to note that this case is one of the cases mentioned above in which the dismissal motion was initially granted but was denied on reconsideration.) However, as noted here, in April 2011, Southern District of Florida Judge Ursula Ungaro granted the defendants’ motion to have the jury verdict set aside. The plaintiffs have appealed Judge Ungaro’s ruling to the Eleventh Circuit.
Even if subprime and credit crisis-related dismissal rate may be running ahead of historical norms so far, it seems that the highest profile cases are surviving the dismissal motions. Thus, for example, the dismissal motions were denied in the Lehman Brothers case (about which refer here), in the Bear Stearns case (here), in the BofA/Merrill Lynch merger case (here), as well as in the Citigroup case (here), the AIG case (here) and the Washington Mutual case (here).
One particular subset of the cases that presents some particularly interesting issues, and where the plaintiffs lawyers have seen large parts of their cases dismissed, are the cases that have been brought on behalf of mortgage-backed securities investors. From fairly early on these cases, courts have granted the dismissal motions as to specific mortgage-backed securities offerings in which the named plaintiffs had not purchased the securities. A more troublesome standing challenge has arisen in cases in which the courts have held that the named plaintiffs can only represent investors that purchased securities in the same investment tranches, but not investors who purchased securities in other tranches in the same securities offering. Rulings along these lines have been granted in the Washington Mutual mortgage- backed securities case (about which refer here), in the Countrywide Mortgage-Backed securities case (here), and in the J.P. Morgan mortgage-backed securities case (here). These rulings have dramatically narrowed the potential scope of these cases. If the line of analysis were to be followed in other mortgage backed securities cases, it could substantially diminish the potential value of these cases for the plaintiffs.
At the same time, during 2011, there were a couple of attention- grabbing settlements of mortgage-backed securities cases. The first of these was the $125 million settlement of the Wells Fargo mortgage backed securities case, which represented the first settlement of any of the mortgage backed securities cases. This settlement was followed in December with the $315 million settlement of the Merrill Lynch mortgage-backed securities case. These settlements demonstrate that the mortgage backed securities cases potentially have substantial value. However, it will be interesting to see how the rulings involve tranche standing described in the preceding paragraph affect these cases going forward.
There were a number of other interesting aspects of the subprime and credit crisis securities class action lawsuits that settled in 2011. Among other things, the year’s settlements included the largest settlement yet as part of the wave of litigation, the $627 million settlement in Wachovia Preferred Securities Litigation. The settlements also included the rather unusual resolution in the Wachovia Equity Holders’ action, which settled for $75 million while the case was on appeal from its dismissal in the lower court. This latter settlement underscores the fact that looking at the current dismissal rate of these cases may not reveal everything there is to know about these cases.
It is not a mere coincidence that the two cases I noted in the preceding paragraph involve Wachovia, which was acquired in December 2008 by Wells Fargo. In fact, a very large part of the aggregate amount for which the cases have settled so far has come from just two companies, Wells Fargo and Bank of America, due to the two firms’ acquisitions of companies that were at the center of many of the key events in the subprime meltdown and credit crisis.
Take Bank of America, for instance. So far, the settlements on BofA’s tab include the $624 Countrywide settlement; the $475 million Merrill Lynch settlement; the $150 million Merrill Lynch bond action settlement; and the$315 million Merrill Lynch mortgage-backed securities settlement. For those of you keeping score at home, that adds up to a cool $1.56 billion, or nearly 30 percent of the aggregate settlement dollars so far.
By the same token, Wells Fargo had some large bills to pay, too. The settlements on its tab include the $627 Wachovia Preferred Securities settlement and the $75 million Wachovia equity investors’ settlement mentioned above, as well as the $125 Wells Fargo mortgage backed securities settlement. Those three settlements add up to $827 million.
The total of the settlements funded or to be funded by BofA and Wells Fargo collectively add up to $2.38 billion — or more than half of the aggregate $4.419 billion of subprime and credit crisis-related settlements so far.
It is interesting to contrast these mammoth settlements, involving as they do a solvent surviving entity, with the smaller settlements in cases in which the target company did not involve a surviving entity. Even though the Washington Mutual collapse was the largest bank failure in U.S. history, the securities case settled for $208.5 million, of which $103.5 million was contributed on behalf of the underwriter defendants and the company’s auditor. And even though the failure of Lehman Brothers was the central event of the credit crisis, the securities case against the former Lehman executives contributed settled for $90 million. (Separately, the Lehman Brothers offering underwriters agreed to a $417 million settlement.) Obviously both of these settlements are very substantial, but still stand in contrast to the much larger settlements I n which a solvent surviving entity was involved.
The WaMu settlement and the Lehman executive settlements do illustrate one critical aspect of the resolution of the subprime and credit crisis-related securities class action lawsuits and that is the importance of D&O insurance to the settlement of many of these cases. Insurance likely was not much of a factor in the larger cases involving BofA and Wells Fargo. D&O insurance was also likely not much of a factor in the $417 million Lehman Brothers offering underwriter settlement. But D&O insurance has been a significant factor in many of the other settlements.
For example, the $105 million settlement on behalf of the individual defendants as part of the $208.5 million WaMu settlement was funded entirely by D&O insurance. Similarly the $90 million settlement on behalf of the Lehman executives was funded by D&O insurance (a settlement that largely exhausted the company’s $250 million D&O insurance tower). D&O insurers will contribute $68.25 million of the recent $79 million settlement of the E*Trade case. $30 million of the $37.5 Popular Inc. securities class action settlement is to be funded by D&O insurance, as discussed here. Other important settlements also obviously involve substantial D&O insurer contributions, even if the exact amount is not entirely clear – see here for example with respect to the $68 million MBIA settlement.
In other words, D&O insurance has been a critical part of many of these settlements. Taken together these cases have been enormously costly to the D&O insurance industry, particularly when the fact that D&O insurance is also funding a substantial portion of the costs of defending these cases as well. Taking into account that many more cases are yet to be resolved, it is clear that by the time all is said and done, the subprime and credit crisis-related litigation wave taken collectively will prove to have been a major event for the D&O insurance industry. With only a small portion of the cases resolved to date, the ultimate magnitude of the industry’s losses from this event is still yet to be told.
SEC Modifies Its Policy – A Little Bit: Many readers may have been surprised as I was to learn on Friday that the SEC no longer would be accepting the “neither admit nor deny” settlements. This aspect of the disputed Citigroup enforcement action has been the subject of heater controversy before Southern District of New York Judge Jed Rakoff (as discussed here).
However, the policy modification turns out to amount to substantially less than first appeared. As Alison Frankel explains in a January 6, 2011 post on Thomson Reuters News & Insight (here), the new policy only applies where the enforcement action target has admitted guilt or been convicted in a related criminal action. As Frankel puts it, “in other words, defendants whose guilt has already been established under the higher standard of criminal law can no longer deny civil charges. Which leads, of course, to the question of why it took the SEC 40 years to change such a ridiculous policy.”
No matter how you look at it, this change “does not represent a major change in policy,” as one commentator noted on the WSJ.com Law Blog (here). It should have no effect on the pending Citigroup controversy.
The Chevron Ecuador Environmental Lawsuit: I confess that I have not been closely following the long-running lawsuit that was filed against Texaco (now part of Chevron) on behalf of Ecuadorians in connection with Texaco’s oil production operations in that country. Over time, the case seemed to represent the absolute embodiment of litigation run amok and I long ago lost interest.
Nevertheless, I have to say that I found Patrick Radden Keefe’s January 9, 2012 The New Yorker (here) article about the case entitled “Reversal of Fortune” in to be absolutely fascinating. The story about the case is full of outsized characters, including in particular the crusading lead plaintiffs’ counsel Steve Donzinger. The tale is worthy of a John Grisham novel. The case, which is no closer to resolution than it has ever been, has taken on a very peculiar life of its own. Though the case does very much represent litigation run amok, the story of the case makes for some very interesting reading.