Investors are filing fewer lawsuits against corporations and their officers, though regulators have shown no signs of backing off, according to a new analysis. But financial firms remain plaintiffs’ biggest targets. Defendants in two recent securities lawsuits are accused of using mortgage investors’ funds for personal expenses and even church donations.
There were 178 securities lawsuits filed during the first quarter, according to a report announced today by Advisen — a New York-based firm that says it provides data, analytics and news offerings to 100,000 insurance industry professionals. New filings were down more than a third from the fourth quarter and 39 percent lower than the record 294 lawsuits filed in the first-quarter 2009.
During all of 2009, legal actions totaled 1,003 — though still the lowest annual activity since 2005.
“The securities litigation landscape now looks more like it did prior to 2007, before the meltdown of the subprime mortgage market and the credit crisis sparked hundreds of lawsuits, largely against financial institutions,” John Molka III, author of the report, said in a news release.
Still, securities cases accounted for one-third of all cases filed.
Securities fraud cases represented a third of first-quarter securities lawsuits, more than any other category. But such cases were still 42 percent lower than in the prior quarter. Around nine-in-10 securities fraud cases were filed by regulators and law enforcement agencies.
Among such regulators were the Securities and Exchange Commission, which announced that it filed a complaint in U.S. District Court for the District of New Hampshire on April 9 against Financial Resources Mortgage Inc., Scott D. Farah and Donald E. Dodge. The defendants allegedly violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934; and Rule 10b-5 thereunder by bilking 150 investors out of at least $20 million.
Meredith, N.H.-based Financial Resources was a mortgage brokerage owned by Farah. Investors were allegedly promised returns of between 12 and 20 percent and told that their capital would be used to fund specific construction projects. Dodge, through his unlicensed servicing company C L and M Inc., serviced the loans.
“The defendants did not segregate investor money and used it for a variety of purposes not authorized by the offering documents, including paying returns to earlier investors, paying personal expenses, paying operating expenses of Financial Resources Mortgage Inc. and C L and M Inc., and donating money to the Center Harbor Christian Church, a church founded and owned by Scott Farah’s father, and of which Scott Farah was treasurer,” the SEC said. “The complaint names the church as a relief defendant.”
In another securities fraud case, a motion to dismiss by Corus Bankshares Inc. in a class action filed in U.S. District Court for the Northern District of Illinois on behalf of lead plaintiff Tracy Jones was denied, according to a copy of the April 6 ruling published by Leagle. One exception, however, was the dismissal of defendant Tim H. Taylor.
A theft charge was reinstated against David Fili over allegations he took $25,000 for a 25 percent investment in his company, 1-800-MY-MORTGAGE LLC, from a Colorado couple then used the funds for his own personal benefit, the Eagle Tribune reported. The charge was reinstated after Fili missed a March 3 deadline to repay the investors.
In Advisen’s report, 31 percent of first-quarter securities lawsuits were “breach of fiduciary duty suits” mostly filed in state courts.
The share of cases that were securities class actions — which has steadily fallen since 2004 — was 21 percent. The report indicated that the average class action against a large company costs a minimum of $10 million to defend and could cost as much as $100 million.
Almost no credit crisis securities cases were filed during the first quarter. But out of 348 credit crisis-related cases previously filed, 32 were settled and 62 were dismissed as of March 31.
Among those dismissed, according to a recent report from the Miami Herald, was one against BankUnited Financial founder and former chairman and chief executive officer Alfred R. Camner and other former senior executives. Subsidiary BankUnited, FSB, failed in May 2009. The news report indicated 11 other legal matters remain in BankUnited Financial’s bankruptcy.
Advisen’s report noted that new lawsuits tied to the credit crisis have nearly disappeared during the first quarter. In addition, a number of closely watched credit-crisis cases were dismissed — including complaints against American International Group, Merrill Lynch and bond insurer MBIA. Judges are reportedly reluctant to blame company management for the impact from the economic crisis.
Financial firms were named as defendants in 31 percent of first-quarter securities case filings and remain the most targeted sector. In 2001, just 8 percent of defendants were financial companies.
“Given heightened regulatory enforcement activities and the fact that regulators have increased the coordination of their efforts since the credit crisis, forcing parallel proceedings,” the report warned, “corporations and their directors and officers would be unwise to let their guards down during this relative calm in the litigation storm.”
The report said 46 cases were filed in state courts, 24 were filed in U.S. District Court for the Southern District of New York and the rest were filed in other federal courts. A recent trend towards filing cases in state courts eased during the latest period.
Plaintiffs and defendants settled in 99 cases for an average of $18 million during the first quarter. Of all first-quarter settlements, 10 events accounted for 70 percent of the settlement or award amounts.
TRACY JONES, on behalf of himself and all others similarly situated, Plaintiff, v. CORUS BANKSHARES, INC., ROBERT J. GLICKMAN, and TIM H. TAYLOR, Defendants.
Case No. 09 C 1538 (U.S. District Court for the Northern District of Illinois)