On April 1, 2009, PricewaterhouseCoopers issued this year’s version of its annual study of securities class action litigation (here). The PwC report differs in certain particulars from previously released studies of the 2008 securities lawsuit filings, but the overall findings are directionally consistent with the prior reports. The PwC report also adds some interesting observations of its own.

 

My own analysis of the 2008 securities lawsuit filings can be found here. Cornerstone’s previously released study of 2008 filings can be found here and Cornerstone’s study of the 2008 securities lawsuit settlements can be found here. NERA’s 2008 study can be found here and Advisen’s can be found here.

 

The PwC study found, consistently with the prior reports, that as a result of the financial crisis, the number of securities class action lawsuits rose for the second year in a row in 2008. The PwC report tallied 210 securities lawsuits in 2008, a number that is notably below the numbers reported by other studies. The 2008 total represents a 29 percent increase over 2007. The report found that the filings were steady throughout the year, with a slight uptick in the fourth quarter.

 

The report found that the majority of the 2008 filings were related to the financial crisis. Indeed, the report noted that "for the first time since the PSLRA, in 2008 the plaintiffs’ bar filed more federal securities lawsuits against the financial services industry group (banking, brokerage, financial services and insurance) than any other industry." By the same token, for the first time since the PSLRA’s passage, high tech companies were not the most frequently targeted.

 

The number of filings against companies in the pharmaceutical industry remained consistent with 2007, with 21 lawsuits in the sector in both years. My own analysis of the 2008 securities filings in the life sciences sector can be found here.

 

Filings against companies in the Fortune 500 were up in 2008, with 37 filings during the year, or 18% of all cases filed. The average annual percentage of filings against Fortune 500 companies since the PSLRA’s enactment is 13%. The majority (65%) of the Fortune 500 companies sued in 2008 were in the financial sector.

 

The report notes that the profile of financial companies sued in 2008 changed from those named as defendants in 2008. The focus changed from loan originators in 2007 to entities involved in loan securitization in 2008. (I might add parenthetically that the loan securitizers remain a target in 2009.) In 2008, the auction rate securities lawsuits were a significant part (38%) of the suits filed against entities involved in loan securitization.

 

According to the PwC report, securities lawsuits in the United States against foreign issuers "reached an all-time high in 2008, with 36 cases representing 17 percent of the total federal securities class actions filed." These filings against foreign issuers represent the highest percentage of the total cases in any year since the enactment of the PSLRA. 15 (or 42%) of the 36 cases filed against foreign issuers involved companies in the financial services industry, and 32 out of the 36 of the suits against foreign issuers were filed in the Second Circuit. The countries whose companies were sued most frequently were Canada, China and Switzerland.

 

The report notes that the number and aggregate dollar value of securities lawsuit settlements declined in 2008. However, if the $3.2 billion Tyco settlement is excluded from the 2007 numbers, the remaining total value of the 2007 settlements ($3.3 billion) is 9 percent less than the total value of the 2008 settlements ($3.6 billion).

 

The average 2008 settlement of $41 million represented a substantial increase from 2007’s average of $28.3 million, but the 2008 average was still well below the 2005 average of $67.6 million. The median 2008 settlement of $8 million was unchanged from 2007.

 

The report has an interesting statistic showing that the 2008 average for settlements greater than $1 million but less than $50 million was $11.2 million, which not only represents an increase over the equivalent 2007 average of $9.6 million, but also represents the highest such average since the PSLRA’s enactment.

 

The report also has extensive additional interesting analysis regarding the prevalence and type of accounting allegations, and their impact on settlement; the nature of SEC enforcement activity; and the increase in foreign regulatory activity.

 

The report concludes by noting that there are three areas in which "companies will want to remain especially vigilant," which are "institutional plaintiff activity (particularly activity relating to public and union pension funds), internal controls accounting-related allegations, and FCPA enforcement." The report ends with the observation that "securities litigation activity in 2009 is likely to reflect [the] new era of accountability and oversight, particularly if the regulatory environment is overhauled, as most think inevitable."

 

An interesting interview discussing the PwC report can be found here.

 

Special thanks to a loyal reader for providing me with a link to the PwC report.

 

Georgia’s banks have issues. The state has led the nation in the number of bank failures since January 1, 2008, a fact that earlier this year (even before the most recent round of closures) led the Wall Street Journal (here) to describe the Atlanta area as "the bank failure capital of the world." Signs indicate there may be more Georgia bank failures yet to come.

 

After the FDIC moved in this past Friday night (refer here), Atlanta’s Omni National Bank became the ninth Georgia bank closure since the beginning of last year. (A tenth Georgia bank closed in September 2007.) Though banks in 19 different states have failed since the beginning of 2008, no state has had more bank failures than Georgia. Not even California, which has had eight banks fail during that period, or Florida, which has had four.

 

The Georgia bank failures represent a significant part of the total number of bank failures in recent months. Since the beginning of 2008, there have been a total of 46 bank failures. So the nine failures in Georgia during that period represent about one-fifth of the total. The pace of Georgia bank failures has continued in 2009, with four out of the 21 closures so far this year.

 

The nine Georgia bank failures since the beginning of 2008 had a total of $4.7 billion in assets. The failures’ estimated cost to the FDIC insurance fund is about $1.4 billion.

 

A January 2, 2009 Wall Street Journal article entitled "Bank Failure Central? Try Alphretta, Georgia" (here) noted that the Atlanta region has been "haunted by overabundant home building, years of risky lending, and one of the most relaxed regulatory environments in the U.S. for starting new banks."

 

Nor have these problems entirely played themselves out yet. The Journal article quotes industry sources as saying that "as many as 20 of the 122 banks still headquartered in or near Atlanta could go under before the credit crisis and recession are over."

 

A March 31, 2009 Street.com article entitled "Georgia Banks Face More Pain" (here) similarly projects that "there’s a lot more trouble ahead" for Georgia’s banks. The article’s accompanying analysis shows that over 30 of Georgia’s 331 banks and thrifts are "in a weakened condition."

 

The Street.com article identifies four banks (beyond those that have already failed this year) as "undercapitalized" as of December 31, 2008. The article also identifies thirty-three more that had "nonperforming asset ratios above 10%." On the other hand, the article also identifies 83 of Georgia’s 331 banks and thrifts as "good" or above.

 

These institutional failures have their costs, and even the closure of a smaller bank can leave problems behind. A March 28, 2009 New York Times article entitled "A Small Town Loses Its Pillar: Its Only Bank" (here) describes the difficulties experienced in Gibson, Georgia – a town far from Atlanta too small even for a hospital, a jail or a Wal-Mart – when it lost its only bank, FirstCity. (Refer here for background regarding FirstCity’s closure.)

 

The Times article recounts how the bank’s decline began with the 2001 sale of the former Bank of Gibson. After the sale, the bank rushed to "cash in on the expanding real estate market." By the time it failed, the bank was so weak that the FDIC couldn’t find another institution to buy its deposits. The article quotes the bank’s founder’s grandson as saying about the owners who acquired the bank in 2001 that "maybe they weren’t as smart as they thought they were."

 

The FDIC’s complete list of all bank failures since 2001 can be found here. Hat tip to Adam Savett of the Securities Litigation Watch for link to the Times article.

 

A Tweet Deal: I find myself becoming ever more deeply immersed in the world of Twitter. Among other things, I am more frequently adding links and comments on the same general topics as this blog, but between blog posts. An increasingly large number of people are now following me on Twitter as well. I invite all readers to join me on Twitter by subscribing here or clicking on the Twitter button in the right hand margin above.

 

And while on the Web 2.0 theme, I also invite readers to connect with me on LinkedIn by clicking on the relevant button in the right hand margin. A number of readers have joined my network recently and have also joined the industry groups of which I am also a part on LinkedIn. I welcome the connection with readers.

 

Earlier this week, I suggested (here) that the UBS auction rate securities lawsuit dismissal did not spell the end of the auction rate securities litigation. Two of the categories of likely future litigation involving auction rate securities I mentioned were lawsuits involving institutional investors (who are not covered, at least immediately, by many of the regulatory settlements) and lawsuits involving auction rate securities buyers that are targeted by their own investors.

 

As if to prove my point about the likelihood for continuing auction rate securities litigation, two significant auction rate securities lawsuits have arrived just since I added my post earlier this week.

 

First, in a lawsuit against an auction rate securities buyer, on March 31, 2009, PIMCO mutual fund investors filed a securities class action lawsuit in the Central District of New York against the funds’ investment manager and the funds’ sub-advisor, certain of the managers’ directors and officers (including bond investing guru Bill Gross). A copy of the complaint can be found here.

 

The complaint alleges that the funds concealed from the investors that

 

(a) The Funds lacked effective controls and hedges to minimize the risk of loss and risk of liquidity from auction rate securities ("ARS") which affected a large part of their portfolios; (b) The Funds lacked effective internal controls to ensure that the Funds would remain in compliance with restrictions and limitations related to their investment portfolios and strategies; (c) The extent of the Funds’ liquidity risk due to the illiquid nature of a large portion of the Funds’ portfolios, including ARS, was omitted; and (d) The extent of the Funds’ risk exposure to ARS was misstated.

 

The PIMCO mutual fund lawsuit joins recent lawsuits filed against Perrigo Company (about which refer here) and NextWave Wireless (refer here), as examples of cases in which auction rate securities buyers are targeted by their own investors for their exposure to the instruments. These lawsuits differ from the more standard auction rate securities lawsuits, in which the auction rate securities buyers were the plaintiffs and the defendants were the broker-dealers or others that had sold the instruments.

 

PIMCO’s woes with its funds’ investments in auction rate securities have been well-documented in the press in recent days, as the funds’ managers have struggled to manage problems stemming from the investments. A recent Wall Street Journal article discussing the funds’ woes can be found here.

 

The second of the two new auction rate securities lawsuits involves an institutional investor buyer, brining an action against the broker-dealers that sold the company the instruments. On April 1, 2009, Texas Instruments filed an Original Petition in Texas (Dallas County) District Court against Citigroup Capital Markets, BNY Capital Markets and Morgan Stanley, in connection with the company’s purchase of $524 million of auction rate securities backed by student loans. A copy of the Petition can be found here.

 

The Petition alleges that despite the defendants’ "assurances of liquidity and low risk," the company is now stuck with auction rate securities that it "cannot liquidate." The Petition alleges that the defendants "downplayed any risk of failed auctions" and "misrepresented the market demand" for the securities by omitting to disclose "the extent to which the entire ARS market depended on continued bidding and purchasing by the Defendants and other broker-dealers."

 

Beyond these more general allegations, the complaint contains some very case specific allegations relating to the defendants’ alleged failure to disclose that as 2007 progressed securities issuers (including issuers of securities that Texas Instruments held) were waiving the maximum interest rate limitations in connection with auctions of their securities. The company alleges that had it been advised of these waivers, it would have been alerted to the weakening demand for the instruments. The company alleges these omissions and affirmative reassurances induced it to continue to buy and hold the securities.

 

The Petition alleges violations of the Texas securities laws and seeks rescission of the securities purchase transactions as well as prejudgment interest.

 

Interestingly, the Petition does not mention the various regulatory settlements that Citigroup and others have reached with respect to the auction rate securities, presumably because the settlements do not provide relief (at least not immediately) to an institutional investor like Texas Instruments.

 

In any event, it is evident that the auction rate securities litigation is far from over.

 

Hat tip to the Courthouse News Service for the link to the Petition. Special thanks to Adam Savett of the Securities Litigation Watch for a link to the PIMCO lawsuit.

 

Dismissal Motion Ruling in Options Backdating-Related Securities Lawsuits: The options backdating cases continue to grind through the courts. On March 27, 2009, District of Arizona Judge Robert Broomfield issued a 138-page ruling (here) on the pending dismissal motion in the options backdating-related securities lawsuit against Apollo Group and several of its directors and officers. (Background regarding the case can be found here).

 

Judge Bloomfield’s ruling is very painstaking and detailed. He parsed the allegations against each of the defendants extremely finely. The outcome is rather complex, and it would require a spreadsheet to explain with respect to each of the plaintiffs’ substantive claims which defendants have been dismissed with prejudice, which have been dismissed without prejudice, and which have had their dismissal motions denied. The most critical aspect of his ruling is that the Court denied the motion to dismiss the plaintiffs’ claims under Section 10(b) against the Company and its most senior officers.

 

Apollo Group was also involved in a separate, rather notorious securities class action lawsuit that resulted in a January 2008 plaintiffs’ jury verdict that was overturned by the trial judge in August 2008 on a post trial motion. Refer here for background on this separate case.

 

I have in any event added the Apollo Group decision to my table of settlements, dismissals, and dismissal motion denials, which can be accessed here.

 

In a development that may foreshadow further "gatekeeper" claims as part of the current credit crisis litigation wave, on April 1, 2009, the trustee for the New Century Financial Corp. liquidation initiated lawsuits in California and New York against KPMG and its international parent, seeking to recover $1 billion in damages for negligence and for aiding and abetting breaches of fiduciary duty.

 

The California complaint, filed in the Los Angeles County Superior Court (copy here) against KPMG LLP, alleges that the firm "did not act like a watchdog" but rather "acted like a cheerleader for management."

 

The complaint alleges that KPMG "performed grossly negligent audits and reviews" and "failed to detect material errors" with respect to New Century’s residual interest on loans it securitized and on its loan repurchase liability. The complaint also faulted KPMG for its approval of faulty loan loss reserves, alleging that an audit partner silenced the concerns of a more junior audit team member who questioned the reserve calculation.

 

The complaint also alleges that KPMG "aided and abetted New Century’s directors’ and officers’ breaches of their fiduciary duties." The complaint alleges that KPMG knew that management was improperly reserving for risks the company faced and that management had failed to implement an effective system of internal controls.

 

The aiding and abetting allegations includes the charge that KPMG aided and abetted company officials "in maintaining material weaknesses and significant deficiencies in New Century’s system of internal controls over financial reporting." The complaint alleges that KPMG is "jointly responsible with the directors and officers for damages resulting from these breaches."

 

The complaint seeks compensatory damages of $1 billion, as well as punitive damages.

 

The complaint filed in the Southern District of New York (copy here) substantially repeats many of the same allegations as the California complaint, but addresses the alleged liability of KPMG’s international parent. The complaint alleges that the parent represented that it would "ensure that member firms’ work would meet professional standards and regulatory requirements."

 

The complaint alleges that KPMG International did not fulfill these responsibilities, and as a result New Century was harmed. The complaint seeks unspecified compensatory as well as punitive damages from KPMG International.

 

The trustee’s filings in these complaints certainly suggest the possibility that auditors and other "gatekeepers" could be targeted in the wake of the subprime meltdown. Leading accounting indusrty commentator Francine McKenna (also the author of the indispensible "re:The Auditors" blog) is quoted in the April 1, 2009 Wall Street Journal as saying that the case "may embolden others to look more closely at the possibiltiy of bringing [accounting] firms to some level of culpability for the things that happened" that led to the credit crisis.

 

But in assessing that possibility it may be important to note the particular key circumstances that preceded the trustee’s claims against KPMG.Specifically, the new lawsuits follow more than a year after the February 29, 2008 581-page report of Michael Missal, the KPMG bankruptcy examiner, in which the examiner concluded that KPMG had "contributed" to certain of New Century’s "accounting and reporting deficiencies by enabling them to persist in, and in some instances, precipitating the Company’s departure from, applicable accounting standards." A detailed review of the examiner’s report, including a link to the report itself, can be found here.

 

The examiner’s exhaustive review, which among other things specifically suggested the possibility of negligence claims against KPMG, was effectively a road map for the April 1 lawsuits. While the lawsuits might well have been filed even without the examiner’s report, few other prospective claimants considering "gatekeeper" litigation will have such a detailed script from which to compose their complaint.

 

On the other hand, many of the complaints already filed in numerous lawsuits as part of the current subprime and credit crisis-related litigation wave have already targeted a variety of gatekeepers, including offering underwriters, credit rating agencies, and, in some cases, even the outside auditors.

 

Indeed, the securities lawsuit filed against New Century’s former directors and officers also specifically named KPMG as a defendant. In his December 3, 2008 order denying the defendants’ motion to dismiss the securities lawsuit, Central District of California Judge Dean Pregerson specifically denied KPMG’s separate motion to dismiss, finding that the complaint in that case adequately alleged that KPMG was aware of accounting and internal control deficiencies but nevertheless issued its audit opinion in connection with the company’s 2005 financial statements. A detailed discussion of Judge Pregerson’s decision, including a link to the opinion, can be found here.

 

The outcome of KPMG’s dismissal motion in the New Century securities lawsuit, as well as the trustee’s filing of the April 1 lawsuit, among other things suggests that the U.S. Supreme Court’s decision in the Stoneridge case may not deter prospective litigants from pursuing claims against auditors and other gatekeepers.

 

One of the more interesting aspects of the trustee’s complaint against KPMG is his claim seeking to hold the accounting firm "jointly responsible" with New Century’s former directors and officers for the officials’ breaches of their fiduciary duties. While the trustee’s claims at this point represent nothing more than allegations and it remains to be seen whether his claims on this theory will result in any recovery, the possibility that auditors may be alleged to be "jointly liable" for directors’ and officers’ fiduciary breaches raises a host of concerns and questions, not the least of which relate to co-defendant (or third-party defendant) proceedings, such as cross-claims for contribution.

 

All of which leads to a point I have been asserting for some time, which is that we are still only in the earliest stages of the credit crisis related litigation wave. Not only are the cases against the defendant companies continuing to pour in, but the likelihood of further gatekeeper litigation like that filed against KPMG suggests that the litigation will continue for many, many years to come.

 

The "re: The Auditors" blog has an interesting and detailed analysis of the KPMG complaints, here.

 

Hat tip to the Wall Street Journal (here) for copies of the KPMG complaints.

 

Honoring Those Who Serve: A recent MSNBC segment reported on what my good friends, David Bell of AWAC and John McCarrick of the Edwards and Angell law firm, have been doing to honor those who have made the ultimate sacrifice in service to our country. As reflected in the video below, a group they helped to organize, Grateful Nation Montana, is taking steps to ensure that the children of U.S. soldiers killed in the battle will be able to pursue a college education.

 

Please watch this video. It is guaranteed to bring tears to your eyes, but it will also make you appreciate the efforts of a couple of industry leaders, who have done something substantial and worthy to help make a difference.

 

http://www.hulu.com/embed/dqNZB052Zl4t2S_GWHbX4A

In an April 1, 2009 administrative complaint (here), Massachusetts Secretary of the Commonwealth William Francis Galvin accused Madoff feeder fund Fairfield Greenwich Advisors and its Bermuda affiliate of "complete disregard of its fiduciary duties to its investors" and of "flagrant recurring misrepresentations" that "rise to the level of fraud."

 

If you have not yet seen the complaint, you should take a look, because it contains some rather striking allegations, the most provocative of which are based on the transcript of a telephone conversation in which Bernard Madoff coaches senior Fairfield officials on how to respond to inquiries from the SEC.

 

At one time Fairfield has a much as $14 billion of assets under management, of which nearly $7 billion was invested with Madoff through its flagship funds. The firm earned hundreds of millions of dollars in fees from investors in connection with the Madoff related investments. (Detailed background regarding the Fairfield group can be found here.) UPDATE: Fairfield’s principals were on track for payouts totalling over $117 million in 2008, before the scandal surfaced, as reflected in documents filed with complaint, according to the Dealbook blog (here).

 

The complaint alleges that Fairfield’s managers were "blinded by the fees they were earning" and "did not engage in meaningful due diligence" but instead "turned a blind eye to any fact that would have burst their lucrative bubble."

 

The complaint alleges that in contrast to the due diligence efforts Fairfield claimed in its marketing materials, the firm "neglected to do any meaningful check into whether Madoff was actually making trades he said he was making." The complaint further alleges that "the concept of due diligence was merely part of Fairfield’s marketing pitch, not an activity it meaningfully engaged in with respect to Madoff."

 

The centerpiece of the complaint is a transcript of a December 2005 telephone conversation between Madoff and several senior Fairfield officials. Fairfield apparently recorded the conversation then apparently unbeknownst to Madoff and produced the recording in connection with the Massachusetts investigation. The transcript of the call can be found here.

 

The SEC was about to interview the Fairfield officials in connection with the SEC’s investigation of allegations against Madoff by Harry Markopolos. The transcript shows that Madoff opened the call by stating "obviously, first of all, this conversation never took place, okay?"

 

Madoff then gave the Fairfield officials precise instructions on what to say in response to the SEC’s questions, noting at one point that "the secrecy as to information is the key issue for everybody," even going so far as to say to the Fairfield officials that "the less you know about how we execute… the better you are."

 

The complaint alleges with respect to this phone conversation that Madoff was "manipulating the flow of information to the SEC" and that as a result of its cooperation, Fairfield helped Madoff "evade SEC detection."

 

The complaint also alleges that Fairfield’s reliance on the outside audit firm’s audit of Madoff’s investment company was "absurd," and that Fairfield made "patently false representations" about the audit and the auditor even though Fairfield "did not know one thing about this one-person auditing firm."

 

The complaint also alleges that as 2008 progressed, client redemptions and larger problems in the financial marketplace began to trouble the Fairfield officials. They began to debate internally about "gaps" in their knowledge about Madoff. Their internal communications reflect liquidity concerns as well as concerns about Madoff’s counterparty exposures.

 

The complaint alleges that the officials did not follow up on these concerns. Instead, in response to Madoff’s anger about increasing fund redemption in the late fall 2008, they tried to support him by marketing against redemptions as well as by placing their own cash in new Madoff funds formed at the eleventh hour.

 

The complaint seeks a cease and desist order and restitution to all investors who invested in Madoff through Fairfield, as well as disgorgement of related fees and an administrative fine.

 

In response to the complaint, Fairfield issued an April 1, 2009 statement (here) in which it characterized the complaint as "false and misleading" and asserted that it "conducted vigorous and robust monitoring [of Madoff] on an ongoing basis." The complaint, according to the statement, is based on "nothing more than 20-20 hindsight that supposes that anyone familiar with Madoff’s operation should have determined that it was a Ponzi scheme." But, the statement notes, not one person detected the fraud.

 

Among the Fairfield officials mentioned by name in the complaint is Andres Piedrahita (a Fairfield partner and son-in-law of Fairfield founding partner Walter Noel), whom the complaint alleges in 2007 alone earned in excess of $45 million. The March 31, 2009 Wall Street Journal ran a fascinating front-page article about Piedrahita entitled "The Charming Mr. Piedrahita Finds Himself Caught in the Madoff Storm" (here), reporting among other things that Piedrahita had once told a friend that his "real job" was "to live better than any of my clients."

 

Piedrahita, trading on his "outstanding public relations skills," played a key role in "expanding the reach of the Madoff fraud by wooing wealthy Latin Americans and Europeans." Piedrahita is now under investigation with both Spanish and U.S. authorities, and is a defendant in numerous class action lawsuits, along with Fairfield and other Fairfield officials.

 

Meanwhile, the April 2009 issue of Vanity Fair has a lengthy article (here) about Fairfield founder Walter Noel and his family. The article features a particularly striking photgraph of Noel’s five daughters, one of whom is the wife of Piedrahita. An October 2002 Vanity Fair article focused just on the five daughters can be found here. After awhile, trolling through the backstory on these sidelights to the Madoff scandal begins to create the same sensation as reading an overwritten novel.

 

A comprehensive list of the Madoff-related lawsuits, including the numerous lawsuit filed against Fairfield and related entities and individuals, can be accessed here. I have added the new Massachusetts complaint to the list.

 

Hat tip to the Wall Street Journal for the Fairfield Statement.

 

Other Stories We’re Following: According to news reports (here), a man in Newark, Ohio has been charged with drunk driving on a bar stool. The man apparently had built a motorized bar stool using a dismantled lawn mower. He managed to crash the stool, apparently as a result of the 15 beers he reportedly consumed prior to the accident. Readers interested in seeing this amazing (albeit unexpectedly dangerous) vehicle will want to refer here.

Meanwhile, on March 27, 2009, the Macomb (Ga.) Daily reported (here) that "a woman who sued a city of Warren police dog that she says bit her on the buttocks was ordered by a judge to pay $500 for frivolously naming the dog as a defendant." Frivolous? Has the judge ever been bitten on the butt by a police dog? Incidentally, the dog’s name is "Liberty" which is clearly what the dog took with the plaintiff’s behind

And in world news, Barrack Obama has apparently given Queen Elizabeth II an iPod as a gift in connection with his visit to Buckingham Palace today, as reported here. Alas, it is too late now, but had I been consulted in advance, I would have suggested loading the device with the music of this year’s inductees into the Rock and Roll Hall of Fame, in particular the songs of Run-D.M.C.

The Rock Hall induction, by the way, is this Saturday, April 4, 2009, in Cleveland, Ohio. (Cleveland Rocks, baby.)

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.

 

A federal judge has ruled that securities class action plaintiffs who availed themselves of UBS’s auction rate securities regulatory settlement cannot separately maintain claims for damages against UBS. But while this ruling would seem to represent at least the beginning of the end for many similarly placed plaintiffs, we may still be a long way from the end of the auction rate securities litigation, despite the regulatory settlements.

 

Background

UBS was one of the 21 different companies named as defendants in the wave of auction rate securities lawsuits filed during 2008. The names of all of the auction rate securities lawsuit targets can be accessed here. Background regarding the case against UBS can be found here.

 

Essentially the plaintiffs alleged that UBS had failed to disclosure the liquidity risks associated with the auction rate securities, and also failed to disclose that UBS and other broker dealers regularly intervened in the market for the securities to maintain trading –and allegedly to manipulate the market as well. When the broker-dealers simultaneously stopped supporting the market on February 13, 2008, the market for the securities collapsed and investors were left with securities for which there was no active market.

 

On August 8, 2008, UBS announced a nearly $20 billion settlement with regulators regarding the auction rate securities (about which refer here). In the settlement, UBS agreed to buy the securities back from retail investors at par value, or to make up the difference to retail investors who had already sold for less than par.

 

The plaintiffs in the UBS auction rate securities settlement took advantage of the regulatory settlement and redeemed their securities as par. The defendants moved to dismiss the lawsuit on that basis.

 

Judge McKenna’s Ruling

In a March 30, 2009 opinion (here), Southern District of New York Judge Lawrence McKenna granted the defendants’ dismissal motion, with leave to amend. Judge McKenna found that

 

Given that Plaintiffs have availed themselves of the relief provided in the Regulatory Agreement, Plaintiffs cannot now allege out-of-pocket damages. When Plaintiffs elected to have UBS buyback their ARS at par value, they received a full refund of the purchase price. Therefore, Plaintiffs have already been returned to the position they were in before they purchased the ARS and before any fraud ensued….Plaintiffs’ out-of-pocket damages are necessarily zero because after choosing to rescind the ARS purchases, Plaintiffs have effectively paid nothing for their ARS.

 

Plaintiffs argued that they were entitled damages despite the regulatory settlement because "UBS’s fraudulent acts prevented Plaintiffs from receiving a sufficiently high rate of interest or dividends to compensate them for the risk of illiquidity associated with their ARS investments." Essentially, they were arguing that if they had been appropriately informed about the securities’ liquidity risk, they would demanded and would have been paid higher interest rates or otherwise have enjoyed a higher investment return.

 

Judge McKenna rejected this argument because plaintiffs in securities actions must choose among prospective remedies, between rescission and out-of-pocket damages. Having elected rescission, the plaintiffs "may not now seek additional interest or dividends as benefits of ARS purchases they have already elected to disavow."

 

Finally, Judge McKenna found that the class plaintiffs lack constitutional standing to asset claims on behalf of "class members who purchased UBS-underwritten ARS from brokerage firms other than UBS and investors who transferred to another brokerage firm ARS they purchased from UBS before October 2007."

 

Discussion

Judge McKenna’s ruling might seem to suggest that the regulatory settlements represent the end of the auction rate securities lawsuits. However, conclusions along those lines could well prove to be premature.

 

First, Judge McKenna granted the motion with leave to amend. Although there is ample reason to doubt that these plaintiffs can circumvent Judge McKenna’s concerns in an amended pleading, the case itself is not over yet.

 

Second, other courts may decline to follow Judge McKenna’s conclusions. Indeed, in a March 31, 2009 AmericanLawyer.com article (here) Alison Frankel quotes the plaintiffs’ attorney from the UBS case as saying "we’re not convinced other courts will rule the same way."

 

Third, there are still the claims of those erstwhile class members who were frozen out of the UBS regulatory settlement, such as those who bought the auction rate securities from a non-UBS broker or who transferred their account away from UBS. As the plaintiffs’ lawyer from the UBS case also is quoted as saying in the American Lawyer article, "the key to the auction rate securities litigation is plaintiffs whose securities were not bought back by the banks."

 

This category of investors who were shut out of the regulatory settlements also includes the investors who bought their securities from banks or broker dealers who have not yet entered regulatory settlements.

 

Fourth, in all the regulatory settlements, institutional investors’ interests were treated differently. For example, in the UBS settlement, institutional investors cannot hope to have their investment redeemed until at least 2010. These investors’ liquidity issues continue to give rise to new litigation; for example, I described in recent post (here) the lawsuit that KV Pharmaceuticals filed in late February against Citigroup, in which the company alleged that the illiquidity of its auction rate securities investments was, among other things, forcing the company to lay off workers.

 

And finally, there is the separate category of litigation that has arisen against auction rate securities investors, rather than against the auction rate securities sellers. These cases involved companies whose balance sheet exposure to auction rate securities has harmed their financial condition, and who face litigation from their own shareholders who claim the companies failed to disclose their exposure. The most recent of these cases, involving Perrigo Company, is discussed here.

 

In short, while Judge McKenna’s opinion unquestionably represents a significant milestone, it by no means represents the finish line for auction rate securities litigation. Unfortunately, these cases likely will be around for some time to come.

 

All of that said, Judge McKenna’s opinion does hold out the hope that a large portion of these cases can eventually be cleared out, and the problem at least reduced over time, perhaps to more manageable levels.

 

I have in any event added the UBS dismissal to my roster of settlements, dismissals and dismissal motion denials in connection with the subprime and credit crisis related lawsuits. The roster can be accessed here.

 

Among the recurring sources of D&O insurance coverage disputes are issues relating to timely notice of claim. A 6-3 decision by the Texas Supreme Court on March 27, 2009 (here), written over a vigorous dissent (here), recapitulates many of the perennial notice issues and reaches a result that while unquestionably policyholder friendly also poses certain concerns.

 

Background

At the time of FlashNet Communications May 2000 merger with Prodigy Communications, FlashNet purchased a 3-year discovery period under its existing D&O insurance program, which extended coverage for claims first made during the period May 31, 2000 to May 31, 2003.

 

The notice provision in the policy had been amended. The original provision required as a "condition precedent to coverage" that the insured provide notice of claim "as soon as practicable…but in no event later than ninety (90) days after such claim is made." The amended provision required "as a condition precedent" to coverage that the insured provide "notice, in writing, as soon as practicable of any claim first made against [the insureds] during the Policy Period, or Discovery Period (if applicable) but in no event later than ninety (90) days after the expiration of the Policy Period, or Discovery Period."

 

On November 28, 2001, FlashNet was named as a defendant in a securities class action lawsuit that was one of the many IPO laddering cases. Prodigy was served with a copy of the complaint on June 20, 2002.

 

Prodigy first communicated with the insurer by letter dated June 6, 2003, in which Prodigy sought the insurer’s consent under the policy to settlement of the securities case. The insurer responded that the June 6 letter failed to comply with the policy’s notice requirements. In reply, Prodigy sent a formal notice of claim on June26, 2003, which Prodigy claimed was timely because it was sent within ninety days of the May 31, 2003 expiration of the 3-year discovery period. The carrier denied coverage and Prodigy initiated an action seeking a judicial declaration of coverage.

 

Proceedings Below

The trial court ruled that Prodigy had failed to comply with the condition precedent to coverage and that this failure "avoids coverage, with or without prejudice to [the insurer]." The court of appeals affirmed, holding among other things that notice given almost one year after the lawsuit was filed was not "as soon as practicable," and that the insurer was not required to proved that it was prejudiced.

 

The Majority’s Opinion

Chief Justice Wallace B. Jefferson’s opinion for the majority framed the question before the court as "whether, under a claims made policy, an insurer can deny coverage based on its insured’s alleged failure to comply with a policy provision requiring that notice of claim be given ‘as soon as practicable’ when (1) notice of claim was provided before the reporting deadline specified in the policy; and (2) the insurer was not prejudiced by the delay."

 

The majority did not consider it determinative that notice as "as soon as practicable" was identified in the policy as a "condition precedent" to coverage. Rather, the Chief Justice wrote, in order to determine whether or not a showing of prejudice is or is not also required in order for the insurer to assert late notice as a defense to coverage, the question is whether the "notice as soon as practicable" language was "an essential part of the bargained-for exchange in the claims made policy at issue."

 

After reviewing the role of the notice provisions within claims made policies generally, the Chief Justice concluded that the insured’s obligation to provide notice "as soon as practicable" was "not a material part of the bargained-for exchange," and further concluded that "in a claims-made policy, when an insured gives notice of a claim within the policy period or other specified reporting period, the insurer must show that the insured’s noncompliance with the policy’s ‘as soon as practicable’ notice provision prejudiced the insurer before it may deny coverage."

 

Therefore, because the insurer had admitted that it was not prejudiced by the delay in receiving notice, the majority held that the insurer could not deny coverage based on Prodigy’s failure to provide notice as soon as practicable.

 

The Dissenting Opinion

The dissenting opinion, written by Justice Phil Johnson and joined in by two other justices, asserted that "today the Court rewrites an unambiguous insurance contract and changes the agreement of the parties." Justice Johnson wrote that "the record does not show as a matter of law that the notice language was not essential to the parties’ agreement," adding that "the Court’s conclusion otherwise is in derogation of the parties’ intent as expressed by the policy language."

 

Justice Johnson added that "there is no basis in the record for concluding that Prodigy’s one-year delay in reporting the claim was any more or less important to [the insurer’s] insurance business than if Prodigy had delayed for a year reporting a claim made on the last day of the Discovery Period."

 

Discussion

If nothing else, the majority opinion in this case confirms the frequent observation that courts disfavor insurance coverage denials based on late notice defenses. The general reluctance of courts to recognize notice defenses is based on an apparent perception that a policy notice requirement can operate like a "gotcha" to cut insureds off from the policy coverage for which they paid and to which they would have been entitled if notice were timely – and if the carrier is not prejudiced by the late notice, well then, no harm, no foul, right?

 

But even allowing for these assumed biases, the majority’s opinion’s disregard of the policy’s explicit "condition precedent" language and its own determination that the "as soon as practicable" language was "not a material part of the bargained for exchange" are both discomfiting.

 

Some perspective seems in order here. Not only was Prodigy’s notice to the insurer delayed by nearly a year, but Prodigy’s first contact with the insurer was a request for settlement consent. At some level, these facts exemplify the very kinds of circumstances to which insurers will sometimes refer in attempting to explain why notice provisions are necessary.

 

It may well be objected that if the insurer was not prejudiced by the delay here, what difference did the one-year delay really make? The typical insurer answer to this question is that they don’t want to get caught up in sometimes complicated and potentially fraught debates about whether or not a delay prejudiced their interests. After all, what really constitutes prejudice? What has to shown to establish prejudice? Rather than having to debate these kinds of fact intensive and divisive issues, the insurers prefer certain bright line tests that specify the minimal requirements under certain circumstances.

 

On the other hand, the policy language itself may have preordained a policyholder friendly outcome here. The notice provision the court was interpreting had in fact been amended to make it more policyholder friendly, by substituting the more flexible "as soon as practicable language" for the policy’s base form requirement of notice within a specified number of days.

 

The question is whether the majority opinion’s ruling represents more of a policyholder friendly outcome than the insurers may have thought they were offering with the more flexible language – an outcome that may in the future constrain the insurers’ willingness to offer the flexible language and encourage them to insist on more rigid alternatives as reaction to this kind of outcome. A more rigid approach could in turn lead to more questions about the timeliness of notice and potentially to more coverage disputes.

 

All of that said, and knowing full well how devastating any coverage denial can be to policyholders, and how some clerical or administrative error potentially could produce notice problems that otherwise might leave policyholders in the lurch, there arguably is some fundamental fairness to the judicial system’s chronic suspicion of notice defenses. Viewed in that light, the outcome in the Prodigy case is at least understandable, even if the majority opinion itself could be unsettling in certain respects.

 

Special thanks to the several readers who provided me with copies of the Prodigy opinion.

 

A rare jury trial has commenced in a long-running securities lawsuit that resonates with overtones of the current subprime mortgage meltdown. On March 30, 2009, Northern District of Illinois Ronald Guzman began empanelling a jury in the securities class action lawsuit styled as Lawrence E. Jaffee Pension Plan v. Household International, Inc., a case that has been pending since August 2002. Background regarding the case can be found here.

 

According to the plaintiffs’ consolidated amended complaint (here), the case was brought on behalf of all persons who acquired Household International securities between October 23, 1997 and October 11, 2002. The plaintiffs contend that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme."

 

According to the complaint, Household "engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques." Household also reported "false statistics" that were intended to "give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was." The plaintiffs allege that the "defendants’ scheme" allowed them "to artificially inflate the Company’s financial and operational results."

 

In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings. (In recent months, HSBC’s results have been significantly affected by losses in the subprime mortgage portfolio it acquired in the Household deal and its chairman has publicly admitted that "with the benefit of hindsight, this is an acquisition that we wish we had not undertaken.")

 

The defendants in the lawsuit include Household International and its mortgage finance subsidiary, Household FInancial Corporation, and Household’s former CEO and CFO, as well as one other former individual officer of the company, as well as the former company’s former directors. The company’s offering underwriters were also initially named as defendants, but they were later dismissed from the case (refer here). The plaintiffs also reached a prior settlement with the company’s former auditor, Arthur Anderson.

 

According to news reports (here), Judge Guzman has bifurcated the case into two parts, with a damages phase to follow the initial liability phase, which is expected to last four weeks, if the initial phase results in a finding of liability.

 

As most readers undoubtedly are aware, jury trials in securities class action lawsuits are extremely rare. According to data compiled by Adam Savett at the Securities Litigation Watch (here), only 20 cases have gone to trial since the PSLRA was enacted in 1995. Six of those 20 cases involved conduct that occurred after the PSLRA’s enactment.

 

Two recent high profile trials involved JDS Uniphase and Apollo Group. As noted here, on November 27, 2007, the jury in the JDS Uniphase trial returned a defense verdict. The Apollo Group trial initially resulted in a January 2008 plaintiffs’ verdict and an award of $277.5 million in damages, but as detailed here, on August 4, 2008, the judge granted the defendants’ motion for judgment as a matter of law, which set aside the jury verdict. A detailed discussion of the two cases can be found here.

 

With the adjustment for the post-trial motion in the Apollo Group case, the jury verdict scoreboard for the six post-PSLRA cases now stands at three each for the plaintiffs and defendants, as explained in my post regarding the Apollo Group post trial motion.

 

As for the question why this case is going to trial when so many others settle, there undoubtedly are many factors but one may be the "billion-dollar price tag" that news reports suggest that plaintiffs have put on the case.

 

A March 30, 2009 AmLaw Daily article discussing the case can be found here.

 

Along with the flood of securities lawsuits, the current credit crisis has also generated a wave of litigation under ERISA, as I have detailed here. And just as many of the credit crisis-related securities cases have failed to survive preliminary judicial scrutiny (as noted recently here), at least some of the ERISA cases also may encounter judicial skepticism, if the recent decision in the Huntington Bancshares ERISA litigation is any indication.

 

On February 9, 2009, in an opinion that bespeaks a reluctance to sustain litigation based on the effects of the global financial crisis, Southern District of Ohio Judge Gregory Frost granted the defendants’ motion to dismiss in the Huntington ERISA case. A copy of the opinion can be found here.

 

Background

The lawsuit had been brought on behalf of participants in Huntington’s 401(k) plan. The plaintiffs alleged that the plan fiduciaries breached their fiduciary duties in connection with Huntington’s July 1, 2007 acquisition of Sky Financial. The plaintiffs alleged that Huntington’s risk of loss greatly increased by subjecting Huntington to $1.5 billion of subprime exposure through Sky’s relationship with Franklin Credit Management Corp.

 

The plaintiffs alleged that because of the merger with Sky Financial and its subprime exposure, Huntington stock became too risky to be considered a prudent plan investment. The plaintiffs alleged that the defendants failed to take any action to protect the plan assets from the "enormous and entirely foreseeable" risk that he increased subprime exposure would injure the plan and its participants’ retirement savings. The plaintiffs claim that defendants’ alleged breaches caused over $100 million in losses to the plan.

 

 

The February 9 Opinion

Judge Frost first agreed with the defendant’s contention that the plaintiffs’ allegation that Huntington violated ERISA when is acquired Sky "is simply an attempt to second guess Huntington’s business decisions and is not governed by ERISA."

 

Judge Frost also rejected plaintiffs’ claim that the defendants breached their fiduciary duty when they continued to invest in Huntington shares after the merger. Among other things, Judge Frost noted that large public pension funds had continued to invest in Huntington, and indeed had even increased their investment, after the merger.

 

He also noted that "although Huntington has experienced a significant drop in its stock price," its share price essentially "moved in tandem with the other regional banks in Huntington’s geographic footprint." Judge Frost also noted that the plaintiffs "do not point to any ‘red flags’ that should have placed Defendants on notice of a need to cease offering the Huntington stock."

 

Judge Frost also rejected plaintiffs’ allegation that defendants had failed to warn investors (including plan participants) of the risk, finding that in its SEC filings, Huntington "specifically disclosed its exposure to subprime, housing and construction markets and frequently disclosed the effect of increasing market turmoil."

 

Discussion

Judge Frost’s rejection of the plaintiffs’ ERISA claims was based on the specifics of plaintiffs’ allegations. However, his rejection was also clearly based in part on his perception of what the case represents. Among other things, he observed that:

 

it is clear that federal courts are currently experiencing a significant rise in "stock drop cases" due to the current status of the Stock Market and the economic climate in general, which of course includes the subprime lending crisis. However, ERISA was not intended to be a shield from the sometimes volatile stock market.

 

Judge Frost’s reference to "stock drop cases" shows not only how he perceived the Huntington case itself but also reflects a more general perception of the overall subprime litigation wave – that is, that the current influx of cases is the due to stock market volatility caused by the global economic downturn.

 

His general view the subprime cases represent an effort by investors to avoid the consequences of market volatility could, if widely shared, represent a substantial hurdle to the plaintiffs in many of these cases – both cases filed under ERISA as well as cases filed under the federal securities laws. Indeed, I have already noted (most recently here) numerous other credit crisis-related securities cases where courts clearly have shown skepticism that the plaintiffs’ losses were the result of anything other than the financial crisis itself.

 

To be sure, there have been subprime-related ERISA cases that have survived dismissal motions, just as there have also been subprime and credit crisis-related securities lawsuits that have survived motions to dismiss. For example, as I discussed here, the judge in the NovaStar ERISA case recently denied the defendants’ motion to dismiss, a decision that is particularly noteworthy because the motion to dismiss was granted in the NovaStar subprime-related securities lawsuit. (My discussion of the NovaStar securities lawsuit dismissal with prejudice can be found here.)

 

But while some of the ERISA cases may yet survive preliminary motions, many of the cases could also face the same kind of judicial skepticism reflected in Judge Frost’s opinion in the Huntington case. If so, a substantial number of the lawsuits being filed in the current wave of subprime and credit crisis-related litigation could fail to make it past the preliminary stages.

 

I have in any event added the Huntington decision to my running tally of subprime and credit crisis-related lawsuit settlements, dismissals and dismissal motion denials, which can be accessed here.

 

Special thanks to a loyal reader for providing me with a copy of the Huntington opinion.

 

An Unusual Madoff Victim Has Unusual Problems: As reflected in my register of Madoff-related litigation (which can be accessed here), the Madoff scandal has resulted in a wide range of suits and other legal proceedings. But the most unusual of the Madoff-related proceedings may be the motion for temporary restraining order and preliminary injunction filed on March 11, 2009 against Bernard Madoff in the Middle District of Florida by Gino Romano.

 

In his hand-written motion (a copy of which can be found here), Romano, an inmate in the federal prison system, alleges that Madoff enlisted him to recruit other inmates to invest with Madoff, by guaranteeing Romano "an annual return of 18.5%." Romano alleges that Madoff initiated this contact with Romano by sending him an "investment package" in January 2005.

 

Romano alleges that he "collected $1 million dollars from gang leaders" including members of "the Mexican Mafia, Chicago’s Gangster Disciples, the Black Panthers, the Aryan Brotherhood, and D.C. Blacks." Romano asserts that "now I’m in danger from these gangs because Madoff Ponzi scammed us."

 

The dangers Romano claims he now faces include not only irate gang members, but Madoff himself, whom Romano asserts has sent Romano threatening letters. Among other things, Madoff allegedly has communicated to Romano that "he is going to kill me and he has stolen Ponzi money to hire the best hitman money can buy."

 

As readers might well imagine, Romano finds all of this very distressing. He alleges that because of Madoff’s threats he has "suffered a mental breakdown, bed wetting, [and] panic attacks."

 

Call my cynical, but I have my doubts about many of Romano’s allegations. However, I am willing to allow the possibility that the part about "bed wetting" might well be true – although it seems unlikely that Madoff is responsible for that.

 

Special thanks to loyal reader Jon Jacobson for providing me with copies of numerous new Madoff-related pleadings, including Romano’s. I have added all of these new pleadings to my register of Madoff-related suits (here).