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Attorney and partner at OakBridge Insurance Services; creator of The D & O Diary blog.
On the arguments being made in subprime mortgage-related litigation:
Most of the subprime cases that have been filed are in the very, very early stages, and there have been various dismissal motions and rulings. But even though we only have a handful, I think they’ve already lined up in two pretty distinct categories. And they’re lining up on which of two sets of arguments the judge is persuaded by.
One [argument] is that the investment losses or downturn or downgrades–whatever the negative effect was–was the result of larger economic forces no one could have foreseen, or that they were so generalized that this company was just swept along with the larger economy. The other is the plaintiffs’ argument that this was a massive fraudulent scheme that was deceptive and based on greed or other despicable tendencies of the defendants.
I think the difference-maker will be allegations of insider trading or other allegations showing that the defendants were motivated by their own personal financial gain. If you look at the California Countrywide [Financial Corp.] derivative lawsuit, Judge [Mariana] Pfaelzer in that case denied the motion to dismiss, and it was in large part because the allegations of insider trading, which were compelling factual allegations as far as Judge Pfaelzer was concerned.
Co-managing partner and national co-chair of the securities litigation practice at Katten Muchin Rosenman.
On securities lawsuit dismissals:
The basic stuff that was charged against American Express [and later dismissed] is the same sort of stuff that’s at the heart of a lot of these lawsuits against banks and others–that they didn’t do a very good job of protecting the risk associated with a lot of these supposedly high-yield securities. You see similar allegations in a bunch of the complaints.
I think the magnitude of what’s going on here is far greater than anything we’ve ever seen before. But at the end of the late ’80s, early ’90s, the savings and loan industry had huge problems with massive writeoffs and the like, and there was a lot of securities litigation brought against companies in that industry.
Many of them were dismissed on the basis of, yeah, they should have done a better job of managing and anticipating risk and making better judgment calls on worthless stuff. But that’s not securities fraud, that’s just negligence. It’s breach of fiduciary duty if anything, but it’s not fraud.
I think in some of these cases, it depends on the judge, and some judges are prone to throwing these out at the beginning. Some aren’t. It also depends on the facts–the facts in some of these cases are more serious, [such as] where there’s a suggestion they really knew that these things were not worth the value they were carrying them at. Where they have those kinds of facts, I think it’s going to be very hard to dismiss the case.
Partner, Skadden, Arps, Slate, Meagher & Flom; co-defense counsel on In re American Express Securities Litigation.
On heightened pleading standards:
You sort of have a confluence of events: First, the Supreme Court’s decisions in Tellabs and Stoneridge. Those decisions, most would agree, heightened the pleading standards [for securities lawsuits].
Against that backdrop you have cases that touch on subprime-related issues. Courts have not consistently applied Tellabs in those cases. Take a look, for example, at cases that have been brought against various market participants. You might get a different answer depending on what jurisdiction you’re in.
If you’re talking about cases where someone is alleged to have on its books subprime exposure or exposure to companies that have subprime exposure, [American Express] sends the message that [such claims are] just not enough.
Chair of the financial crisis team at Buchanan Ingersoll & Rooney.
On companies anticipating litigation related to subprime exposure:
Make sure that you’re properly accounting for this heightened regulatory review and searchlight on your balance sheets. To the extent that you think you could be disclosing more than you have, you should make those disclosures at this point to mitigate any potential damage. That’s an important thing, having very good, well-documented records.
For companies that are fearful of an action being brought against them, it’s important to conduct an independent internal investigation with your independent audit committee to analyze what went wrong and develop that information–and then be prepared to discuss that with enforcement [agencies] and the government at some point in the future. You may be making a decision to proactively discuss this with the government and coordinate that with the regulators and enforcement.
And do it in a coordinated way. One of the sentencing guidelines for corporations is their cooperation and whether they proactively tried to fix the problem before the government found out about the problem. That kind of proactive approach is absolutely critical during this period of time.