It looks like Gibson Dunn & Crutcher is going to have to revise its report on early trends in subprime fraud litigation. Two crucial rulings that came at the end of last week -- denying motions to dismiss class actions against onetime mortgage giants Countrywide and New Century -- show that the plaintiffs bar isn't giving up and going away. In fact, if we're going to keep our subprime-litigation-as-a-baseball-game metaphor going, you could say that the plaintiffs in Countrywide and New Century right now have the bases loaded with no outs.
The Countrywide ruling by Los Angeles federal district court judge Mariana Pfaelzer was not considered a big surprise, according to D&O Diary, because Judge Pfaelzer previously denied a motion to dismiss a separate Countrywide subprime derivative suit. In the class action, Judge Pfaelzer dismissed claims only against accounting firm Grant Thornton, which was represented by Winston & Strawn. Lead plaintiffs counsel in Countrywide is Joel Bernstein of Labaton Sucharow, who will now have a chance to get to know a long list of defense counsel a lot better. They include: Goodwin Procter for Countrywide and its former execs; O'Melveny & Myers for Bank of America; Gibson Dunn for the underwriters; and Morrison & Foerster for the outside directors.
We were more intrigued by Los Angeles federal district court judge Dean Pregerson's 65-page New Century decision. Back in January 2008, Judge Pregerson was the first federal judge to dismiss a subprime class action. And what case enjoyed the distinction of being the first to be dismissed? New Century! Judge Pregerson essentially told the lead plaintiffs firm -- Bernstein Litowitz Berger & Grossmann -- that he didn't like the way the firm had drafted its complaint against New Century and its officers, directors, accountants, and underwriters.
But the judge dismissed the case without prejudice, giving Bernstein Litowitz partner Salvatore Graziano and his team a second chance. And before the plaintiffs lawyers filed their amended complaint, the examiner in New Century's bankruptcy issued a report full of allegations of financial chicanery.
So in the second complaint, underwriters' counsel William Sullivan of Paul Hastings Janofsky & Walker told us, Bernstein Litowitz offered better-pled support for scienter and loss causation. "Plaintiffs had the benefit of the [bankruptcy] trustee's report," Sullivan said. "It allowed them to go into more detail." (Other defense counsel in the New Century class action include Munger, Tolles & Olson for the former officers; Gibson Dunn for the outside directors; and Sidley Austin for KPMG.)
We asked Sullivan about previous reports (including ours) of plaintiffs struggling to show scienter and loss causation in subprime class actions. "You may want to rethink that," he said. "There were some early cases where the plaintiffs didn't know a lot, and some of those were dismissed. But the plaintiffs have gotten much more sophisticated about this."
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.