The Financial Crisis: Are there any good claims to assert?

Terry OxfordSusman Godfrey L.L.P.

901 Main Street214-754-1902

Susman Godfrey Forms Financial Fraud Task Force in New York to Assist Clients in Nation's Financial Market Crisis [ PR Newswire  ·  2008-09-22 ]

NEW YORK, Sept. 22 /PRNewswire/ -- The recent events on Wall Street have led to an unprecedented number of calls to Susman Godfrey's New York office seeking advice on potential claims. To assist in evaluating and pursuing such claims, Susman Godfrey has formed a financial fraud task force of some of our most experienced partners from across the country and relocated them temporarily to our New York office. Eric Mayer of Houston, Terry Oxford of Dallas, Marc Seltzer of Los Angeles, and Floyd Short of Seattle are joining New York partners Steve Susman, Bill Carmody, Robert Rivera, and Jacob Buchdahl to assist clients in New York and nationwide. The combined expertise and experience of this group of attorneys -- which includes veteran civil trial lawyers and former federal prosecutors experienced in investigating and trying financial fraud cases -- will enable us to respond dynamically to the unprecedented events now sweeping through the Nation's financial markets and beyond.

Step 1: Securitization

Loans generated E.g., mortgage-backed home loans Due diligence?

Contributed to a trust: Trust 1 Rating agencies

Theory: Diversity (e.g., value, geography) Whole > sum of parts = higher ratings

Step 1: Securitization (cont.) Securities sold

Entitle holders to rights in trust assets As mortgage principal and interest

gets paid

Lowest rated securities First not paid If default on principal or interest

Step 2: Re-securitizations

Various lower-rated securities are contributed to a trust: Trust R

Once again, the theory is Through diversity of assets The group is stronger than sum of

parts Higher ratings

Securities sold

Step 3: Credit Default Swaps

Company – e.g., AIG – buys securities in Trust 1 assets or Trust R assets

AIG obtains insurance from Co. X in case of security’s default

Co. X obtains insurance from Co. Y And so on and so on

Step 3: Credit Default Swaps (cont.) Companies like AIG eventually

bought insurance against security default Even if they didn’t own that security A naked bet

Gramm legislation late 1990s Prohibit regulation of CDSs Passed 95-0

Volume of CDSs exceeds GNP

Step 4: Collapse

Economic downturn causes Massive numbers of homeowner

defaults Nationwide – all kinds of mortgages

Default on securities in Trust 1 Default on securities in Trust R AIG calls insurance from Co X 9/15/08: Lehman default

Madoff, Stanford, etc. – Class Actions?

How to prove reliance on classwide basis?

Fraud-on-the-market theory N/A with privately traded securities (Merrill Lynch Litig., 471 F.3d 24 (2d Cir. 2006))

Affiliated Ute presumption? In omissions cases Only if complete absence of any

disclosure? (Abell and Finkel – 5th Cir.)

Class actions (cont.) State law cause of action?

E.g., Tex. Securities Act No requirement of reliance

Securities Litigation Uniform Standards Act (SLUSA) Preempts state law class claims alleging

misstatements “in connection with the sale of a covered

security”

Class actions – SLUSA preemption

Aha! … Stanford CDs are not “covered securities”

But let’s look at that language again:“in connection with the sale of a covered security”

Class actions – SLUSA preemption (cont.) SEC complaint alleges as misstatement

that “[Stanford] told investors that the bank’s assets were invested in a ‘well-balanced global portfolio [including] U.S. and global securities.”

S. Ct. (Merrill Lynch v. Dabit): “in connection with” = “coincide”

11th Cir. (Instituto v. Merrill Lynch 2008): misrepresentation that securities would be bought (?)

Class Actions – Breach of Fiduciary Duty

SLUSA expressly does not preempt No requirement of relianceBut … For Cayman Island hedge funds – British

derivative law tougher than DE law For NY cases: Martin Act may preempt

No private cause of action Even when fund NOT formed under NY law?

Class Actions – Foreign Investors

US law easily provides forum for foreign investors (SEC v. Berger, 322 F.3d 187 (2d Cir. 2008))

But … 2d Cir. also holds that class cannot

include foreign investors From countries that will not give res

judicata effect to judgments Research foreign laws of judgments?

Individual actions

Avoids SLUSA preemption So long as <50 plaintiffs Beware: jointly-held accounts may = 2

plaintiffs

Can take advantage of State Blue Sky laws … except …

Individual actions (cont.)

NY Blue Sky doesn’t have private cause of action

Some argue that Congress preempted all Blue Sky laws with respect to unregistered securities (Houston v. Sewerd (S.D.N.Y. 2008) rejected that argument w.r.t. Oregon law)

Who has money?

NOT Madoff

NOT Stanford

Maybe the feeder funds

Ratings agencies

Certainly a key part of the problem

But …

Many courts have afforded 1st Amendment protection to ratings agencies (See Enron, 511 F. Supp. 742)

Ratings Agencies (cont.)

But cf. Fitch v. UBS, 330 F.3d 104 (2d Cir. 2003): No 1st Amendment protection against subpoena where

As a general matter, the agency published ratings only for transactions in which it got a fee; and

agency took an active role in planning the transaction

Who has money? (cont.)

What about the guys who put the securitization together? “RSG Investment Bank of Wall Street” Paine Webber

Suit for a single securitization

Who has money? (cont.)

Sue each Investment Bank for ALL its securitizations?

Some plaintiffs lawyers have done just that

The Financial Crisis: Are there any good claims to assert?

Terry OxfordSusman Godfrey L.L.P.

901 Main Street214-754-1902