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Current litigation landscape in New York

Times continue to be tough for financial institutions in the U.S. Not only is the industry dealing with a welter of new regulation, but there appears to be no end in sight to the unprecedented volume of claims spawned by the financial crisis. The industry has, of course, lived through many crises and their aftermaths. A decade ago, when Enron and WorldCom imploded within months of one another, the investor claims were unprecedented in size, as were the eventual settlements, with several banks contributing more than a billion dollars each.

The RMBS and CDO claims that the banks now face are, however, of a whole different magnitude, and almost evoke nostalgia for the WorldCom/Enron era. Unlike the earlier cases, where the most significant claims were coordinated before a single judge, many of the RMBS and CDO cases are being litigated based on state tort law theories, and are dispersed among dozens of state and federal courts across the country, leading to unpredictable and inconsistent results and presenting severe manageability and expense challenges.

And still new cases continue to be filed. Claims arising out of the final pre-credit crisis offerings in late 2006 and early 2007, often considered to comprise the weakest portfolios, may still be timely under the lengthy limitation periods in some states, so some expect the rate of filing to increase in the coming months. Earlier this month, the Second Circuit Court of Appeals dealt the industry a significant blow, adopting a broad view of an RMBS investor’s standing to assert claims on behalf of other investors that may well result in the revival of claims that the lower courts have dismissed.

No doubt many of these claims would be highly defensible if actually litigated to a conclusion, particularly given the sophistication of most RMBS and CDO investors. As a practical matter, however, it is difficult to see how the banks, the investors or the courts could actually try all the pending cases. This appears to have resulted in an assumption that all these cases will have to be settled sooner or later, and that, in turn, has led to even more cases. From the investor’s perspective, why not sue just to reserve your seat at the settlement table, particularly if you can get a lawyer to take the case on contingency?

In the next Risk Note we will focus on regulatory risk, including an update on the status of the SEC’s settlement with Citigroup. The district court has declined to approve the settlement because the settlement didn’t force Citigroup to concede wrongdoing in a way that would benefit potential civil claimants. As if the industry wasn’t facing enough challenges already.

Legal and Regulatory Risk Note
United States