05/07/2008 03:23:59 PM EST
The Subprime Class Action Litigation -- Predictable or Revolutionary Law?
Overall, the first wave of the subprime class action litigation, which centers on allegations of misstatements/delayed statements by public companies to their shareholders concerning the extent of collateralized debt obligation (CDO)-related losses, can be said to predictably follow Supreme Court directives on the scope of defendants. These cases may also seize upon lingering court inconsistencies concerning proof of the potential fraud they committed. J. Scott Colesanti, Special Professor at the Hofstra University School of Law analyzes this first wave of class action litigation and highlights issues that will shape subprime class action in the future.
Professor Colesanti writes: With the subprime class action lawsuits now in full swing, one could reasonably wonder, will the litigation craze follow or unsettle the changes to securities class actions expressly prescribed by the Supreme Court in recent years?
Since the news broke of the disappearance of the CDO auction market in the summer of 2007, dozens of lawsuits against public companies and their upper management have been filed. Indeed, less than six months into the subprime debacle, commentators were noting that the crisis was on track to surpass the total number of class actions filed in the S&L Crisis nearly twenty years ago. Yet the more ready comparison may be to the [collateralized mortgage obligation (CMO)] crisis of 1994, which inspired scattershot complaints n4 and a whole new meaning to the term indemnity agreement. The targets of the present litigation wave have to date included home builders, mortgagors, banks, broker-dealers, funds, loan originators, insurers, government-sponsored enterprises and credit ratings agencies. In the long run, more than just the financial giants will have suffered.
The bad news for potential deep pockets is not likely to subside in the near future. There may be as many as 2 million homeowners with subprime mortgages whose teaser interest rates will rise this year (in amounts as high as 30 percent). Significantly, regulators have yet to identify the primary culprit for the unexpected market shuffle and the dramatic decline of related securities. The stock exchanges are investigating brokerage house sales practices, the SEC and FBI are said to be concentrating on inventory valuation, the Treasury department is pondering new securities and commodities laws, Congress is weighing licensing for mortgage brokers, and various State officials are criticizing credit rating agencies. Amidst the flurry of impassioned finger-pointing, the class actions race forward. [footnotes omitted]