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Investor Litigation Falling

Investor Litigation FallingNERA Economic Consulting releases white paper

June 25, 2009

By staff

While investor lawsuits tied to the credit crisis more than doubled from 2007 to last year, quarterly filings have been trending down. Cases against mortgage lenders have tumbled.

The report, An Update on the Credit Crisis Litigation: A Turn Towards Structured Products and Asset Management Firms, was published earlier this month by NERA Economic Consulting.

Financial institutions have faced more than $1 trillion in credit losses and write-downs since the beginning of the credit crisis, according to authors Dr. Faten Sabry, Anmol Sinha and Sungi Lee. During that same period, the Federal Deposit Insurance Corporation has taken control of 48 U.S. banks.

In 2008, there were 188 securities cases filed that were tied to the credit crisis, rising from just 69 in 2007.

During just the first-quarter, filings totaled 46, lower than the fourth-quarter 2008’s 48 cases but barely changed from 45 in the first-quarter 2008. Case volume peaked in the second-quarter 2008 at 52 filings.

graph from NERA reported on 21 investor class action cases against lenders, financial institutions and mortgage-backed securities during the first quarter. The second-quarter report is due out in the next month or so.

Lenders were the target of 15 percent of the lawsuits filed in 2008, falling from 25 percent in 2007, according to NERA’s study. The share of lender lawsuits in the first-quarter 2009 was just 2 percent. At the same time, the share of cases against securities and underwriter firms has risen from 22 percent in 2007 to 50 percent in the first-quarter of this year.

By number of cases, lenders were defendants in 17 lawsuits in 2007, 29 in 2008 and just one during the first-quarter 2009. During the period from late 2006 through most of 2007, defendants in credit-related lawsuits have expanded from mostly lenders, originators and home builders to asset management firms.

graph from NERA

Allegations in the cases have shifted from undisclosed subprime investment risk to cases involving complex financial instruments like collateralized-debt obligations and credit-default swaps.

“Unsurprisingly, as CDOs began experiencing losses or potential losses, the lawsuits have followed,” the report said.

In cases against mortgage lenders, nine dismissals have been granted, five were denied and two involved voluntary dismissals. A settlement was reached in two of the cases.

The cases with the highest profiles were those against Countrywide Financial Corp. and New Century.

The report found that the share of cases that also target directors and officers has see-sawed — falling from 100 percent in the first-quarter 2007 to just 49 percent in the fourth quarter of that same year. But the share has steadily increased each quarter to 72 percent in the first quarter of this year.

Some of cases Analyzed in Report:

Waymon Tripp v. IndyMac Financial Inc, et al.
Motions to dismiss granted on Nov. 29, 2007.

Michael Atlas and Gail Atlas v. Accredited Home Lenders Holding Co. et al.
Motions to dismiss denied on Jan. 4, 2008.

Robert W. Boyd, III, et al. v. NovaStar Financial, Inc., Scott F. Hartman, W. Lance Anderson, and Gregory S. Metz.
Motions to dismiss granted on June 4, 2008.

George Pappas, et al. v. Countrywide Financial Corporation, Angelo Mozilo, and Eric P. Sieracki.
Motions to dismiss largely denied on Dec. 1, 2008.

New York State Teachers Retirement System v. New Century Financial.
Motions to dismiss denied on Dec. 3, 2008.

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