As the worst days of the financial crisis (if not their
ill effects) receded into the past, the accompanying credit crisis-related
litigation wave appeared to lose its momentum. By late 2010, new credit
crisis-related lawsuit filings seemingly had dwindled away. But now at the
midpoint of 2011, two new credit crisis related lawsuit have arisen. These new
lawsuits raise a number of interesting issues, as discussed below.
The Latest Filings
According to their June 21, 2011 press release (here),
plaintiffs' lawyers have filed a securities class action lawsuit in the
Southern District of New York against Deutsche Bank and four of its directors
and officers. The complaint, which can be found here, purports to
be filed on behalf Deutsche Bank common shareholders who purchased their shares
between January 3, 2007 and January 16, 2009.
The complaint, which alleges that the defendants
"concealed the Company's failure to write down impaired securities containing
mortgage-related debt," asserts that the defendants concealed that:
(a) defendants failed to record adequate provisions for
losses on the deterioration in mortgage assets and collateralized debt
obligations on Deutsche Bank's books caused by the high amount of
non-collectible mortgages included in the Company's portfolio; (b) Deutsche
Bank's MortgageIT subsidiary was issuing and had issued billions of dollars of
mortgage loans which did not comply with stated lending practices, leading to
thousands of defaults; (c) Deutsche Bank's internal controls were inadequate to
ensure that losses on residential mortgage-related assets were accounted for
properly; and (d) Deutsche Bank had transferred billions of dollars in defaulting,
or soon-to-default, mortgages to unwitting investors and government programs
due to its disregard of adverse findings by outside consultants.
Carlyle Capital Corp.: On
June 21, 2011, a plaintiff filed a securities class action complaint in the U.S.
District for the District of Columbia against certain individual officers and
directors of the now defunct Carlyle Capital Corp. (CCC), its investment
manager and related entities. The complaint, which can be found here, purports
to be filed on behalf of all those who purchased CCC shares between June 19,
2007 and through March 17, 2008.
The complaint alleges that CCC was organized under the
laws of Guernsey to profit from the spread between the its portfolio of
residential mortgage-backed securities (RMBS)and the cost of financing those
assets through short term repurchase agreements and other forms of financing.
Its principal place of business was in Washington, D.C. The complaint alleges
that the entity was a "house of cards" because it was committed to acquiring
"volatile, risk-securities that could only be purchased using massive borrowing
with the securities purchased serving as collateral." The company's RMBS
portfolio deteriorated during 2007, even prior to the company's July 2007 IPO
on Euronext. The complaint alleges that the deterioration and the liquidly
issues associated with the companies repo agreement financing were not
disclosed to investors.
The complaint alleges that following the offering, the
defendants continued to misrepresent the company's financial condition,
particularly with respect to its RMBS portfolio. Despite the deteriorating
market for RMBS, CCG continued to acquire additional RMBS. The complaint
alleges that as the marketplace nearly reached a "meltdown" in August 2007, the
company did not recognize its portfolio losses. In early 2008, a cascade of
margin calls forced the company's managers to put the company into liquidation
under the authority of the Royal Court of Guernsey.
These two cases have more in common than just the fact
that they both related (each in their own way) to the global financial crisis.
First, they both involve entities organized under the laws of non-U.S.
jurisdictions. Second, the complaints were first filed well after the end of
the purported class period. In each of these two cases, these case attributes
may present some interesting challenges for the plaintiffs.
Deutsche Bank is of course a domiciled in Germany.
However, the company's Global Registered Shares are listed on the NYSE. Its
shares also trade on the Frankfurt Stock Exchange. The complaint purports to
represent all investors that purchased the company's common shares during the
class period. The complaint does not explicitly restrict its class to those
investors that purchased their shares on the NYSE, but the question undoubtedly
will arise under Morrison v. National Australia Bank whether the relief
available under the U.S. securities laws will extend to those who purchased
their shares outside the U.S.
Though CCC had its principle place of business in
Washington, D.C., CCC was organized under laws of Guernsey and its shared
traded on the Euronext Exchange.
Euronext is based in Amsterdam and has affiliates in Belgium, France,
Netherlands, Portugal and the U.K. The defendants undoubtedly will seek to
argue, in reliance on Morrison v. National Australia Bank, that because
the transactions in which the purported class of investors purchased their
shares took place outside the U.S., their alleged injuries are not cognizable
under the U.S. securities laws.
The plaintiff in the CCC case, no doubt anticipating this
argument, alleges in his complaint that since April 2007 Euronext has been
owned by the NYSE; that most of the alleged misconduct too place in the U.S.;
that a substantial majority of the CCC shares were owned by U.S. residents, and
that U.S. investors "with typical brokerage accounts" access Euronext shares
the same as they would NYSE or NASDAQ shares. These considerations
notwithstanding, the question under Morrison is where the "transaction " took
place, and in light of the post-Morrison case law, the CCC plaintiff may
face significant challenges overcoming the defendants' Morrison-based
motion to dismiss. The defendants undoubtedly will argue that Morrison
expressly rejected the very kind of "conduct and effects" arguments on which the
plaintiff apparently intends to rely.
The belated nature of both of these cases also presents
some rather interesting issues. The Deutsche Bank case was filed about two and
a half years after then end of the purported class period. The CCC complaint is
even more belated, having first been filed more than three years after the
class period cut off.
The timing of the Deutsche Bank complaint may have to do
with the timing of the U.S. Department of Justice's recently
announced suit against the bank related to the its alleged
misrepresentations about its mortgage loans. The recently filed class action
complaint, specifically references the DOJ action and the May
4, 2011 Wall Street Journal article about the DOJ complaint. The
securities class action complaint appears to have followed in the wake of and
in reaction to the filing of the DOJ complaint. But while the timing of the
filing of the class action complaint may be understood as related to the timing
of the DOJ complaint, the plaintiffs should anticipate that the defendants'
dismissal motion will include a motion to dismiss the case on statute of
The CCC plaintiff's complaint expressly anticipates the
likelihood of a statute of limitations dismissal motion. The complaint contains
numerous paragraphs raising the delays that the Liquidation authority faced in
trying to investigate the causes of CCC's collapse. The complaint alleges that
the defendants and other related Carlyle parties "undertook deliberate and
affirmative steps to conceal... facts sufficient to apprise Plaintiff and the
Class of the existence of potential claims against the Defendants." The
complaint cites purported statements of the Liquidator that the defendants
"repeatedly obstructed their efforts" to obtain CCG's books and records.
On July 7, 2010 the Liquidators commenced a
civil action against the defendants in multiple jurisdictions, asserting
that the defendants breached their fiduciary duties to CCC. The plaintiff
alleges that the defendants' "fraud was effectively and indefinitely concealed
from the public at least until July 7, 2010."
It remains to be seen whether the CCC plaintiff's
fraudulent concealment argument will prove sufficient to overcome statute of
limitations concerns. But the belated nature of these cases and the presence of
the statute of limitations concerns underscore why the credit crisis-related
litigation wave has largely petered out, and why we are unlikely to see very
many more credit crisis-related lawsuits. Even if these cases manage to
overcome the statute of limitations hurdle, any other potential case that has
not yet been filed will facing even more daunting timeliness problems.
It is interesting to note how both of these cases embody
filing trends that seemed to have completely played out some time ago, or at
least to have dwindled out. As I noted at the outset, both of these cases
are credit crisis-related, a litigation trend that seemed to have mostly played
out a year ago. But these cases are "flashes from the past" in other ways as
well. They are both "belated" cases, in that they were filed more than a year
after their purported class period cutoff. There were a host of "belated" cases
in late 2009 and early 2010 (about which refer here),
but the belated cases flings seemed to have gone away some time ago.
And both cases involved companies organized under the
laws of non-U.S. jurisdictions, and whose shares trade in whole or in part on
exchanges located outside the U.S. In the wake of the U.S. Supreme Court's June
2010 Morrison v. National Australia Bank case, there was widespread
speculation that filing of securities class action lawsuits in the U.S. against
non-U.S. companies would become a thing of the past. Of course, lawsuits
against foreign companies whose shares trade on the U.S. exchanges have
continued, and that may explain the Deutsche Bank suit. The CCC case seems to
be another matter.
It really is interesting that, notwithstanding Morrison,
how many of the 2011 securities class action lawsuit filings involve non-U.S.
companies. About 33 of the approximately 109 (roughly 30%) securities class
action lawsuits filed so far during 2011 involve non-U.S. companies, compared
to 15.9 percent during all of 2010. To be sure, a large part of the 2011
filings involve U.S.-listed Chinese companies. But regardless of the reason,
the fact is that contrary to expectations, one year after the Morrison
decision, the securities class action lawsuit filings against non-U.S.
companies as a percentage of all filings has actually increased.
In any event because of the issues that these two recent
cases present, they will interesting to follow. It will also be interesting to
see if there are any more credit crisis related lawsuit filings ahead. I have
in any event added these two cases to my running list of credit crisis-related
lawsuit filings, which can be accessed here.
Final Notes: Although
the credit crisis related litigation wave largely played out early in 2010, a
trickle of credit crisis-related cases has continued to come in. In fact the
two cases above actually bring the number of credit crisis-related cases so far
in 2011 to at least four (categorization issues of course always come into
these kinds of analyses, but by my categorization there have been at least
four, others may categorize and therefore count differently). The prior two
2011 credit crisis-related cases are the Bank of America foreclosure
documentation case (refer here) and the United
Western Bancorp case (refer here).
And finally, these two cases are not the only "belated"
cases filed so far in 2011. By my count, there have been at least five
"belated" cases far this year, counting these two. The other three belated
cases are Frontpoint Partners (here), Oilsands Quest
(here) and Elan
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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