Subprime Mortgage and Related Litigation 2007: Looking ...

Contents »

2 ExecutiveSummary

2 Introduction

3 PresentationofFindings

7 AnHistoricalReferencePoint:RTCLitigation

7 Conclusion

8 Appendix

Subprime Mortgage and Related Litigation

2007: Looking Back at What’s AheadBy Jeff Nielsen

With Scott Paczosa and William Schoeffler

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SubprimeMortgageandRelatedLitigation»

named in at least one borrower class action suit during 2007.

Securities cases accounted for 22 percent of total filings. Of those, 54 percent were se-curities fraud class actions alleging tempo-rary inflation in a company’s stock price due to inaccurate or incomplete disclosures to shareholders.2 Directors and officers of the target company were individually named as defendants in 97 percent of these class actions. The remaining securities cases tar-geted either underwriting firms for alleg-edly making material misrepresentations in connection with the issuance of mortgage-related securities or investment managers who are alleged to have taken imprudent risks and/or to have misled investors in managing client portfolios.

Commercial contract claims make up 22 percent of total cases with the majority of these (58 percent) involving litigation seek-ing to force mortgage originators to repur-chase loans that went into early default or otherwise violated certain representations and warranties made at the time of sale. Employment class actions comprise nine percent of total cases with bankruptcy-re-lated and other making up the remaining four percent.

California and New York courts combine to account for approximately 50 percent of all cases filed.

II. IntroductionStandard & Poor’s recently estimated that global bank losses tied to subprime mort-gages may top $265 billion.3 Other esti-mates have pegged total subprime-related losses at $400 billion or more, even positing that the spillover could result in a curtail-ment of lending totaling $2 trillion.4

I. Executive SummaryAs the deterioration in the credit mar-kets gained speed during the second half of 2007, so did the related litigation. This paper presents an in-depth analysis of the subprime mortgage and related civil litiga-tion filed in federal court during 2007.

We identified 278 such cases filed during 2007, of which 65 percent were filed during the year’s final six months. While our list may not be exhaustive, we believe it pres-ents an accurate picture of the nature and volume of this rapidly emerging area of liti-gation. Based on our study of 278 cases, we seek to answer the following questions:

Who are the parties involved?

What types of cases are being filed?

What is the status of the cases?

Who is being sued?

Who is filing the suits?

Where are the suits being filed?

What specific claims are being put forth?

We have grouped these cases into the fol-lowing six (6) major categories: 1) borrower class actions, 2) securities cases, 3) com-mercial contract disputes, 4) employment class actions, 5) bankruptcy-related, and 6) all other. As of year-end 2007, 90 percent of these cases continued to be active.

While we observed a meaningful number of filings in each category, borrower class actions dominated, making up 43 percent of the total. The most common sub-catego-ries among the borrower class actions are matters focused on inadequate disclosure involving a specific product type – option ARMs – and cases alleging discriminatory lending practices, particularly as it relates to mortgage pricing.1 Each of the top 10 subprime mortgage lenders for 2006 was

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1. Throughoutthispaper,weareofferingnoopiniononthemerits,orlackthereof,oftheallegationscontainedinthecomplaints.Wesimplyreporttheclaims,asalleged.

2. ShareholderderivativeclaimsandERISAactionsbroughtbycompanysponsoredplansaccountedforanother21percentofsecuritiescasefilings.3. Shenn,Jody,“Subprime,CDOBankLossesMayExceed$265Billion”(Update5),Bloomberg.com,January31,2008,

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aCtr4_6NdXdw;Shenn,Jody,“S&PLowersorMayCut$534BillionofSubprimeDebt”(Update2),Bloomberg.com,January30,2008,http://www.bloomberg.com/apps/news?pid=20601087&sid=a_4VyhJYfZfQ.

4. Chibber,Kabir,“GoldmanSeesSubprimeCutting$2TrillioninLending”(Update5),Bloomberg.com,November16,2007, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXHulkIznCr0;Yoon,Al,“TotalSubprimeLossesSeenAsHighAs$480Billion:UBS,”Reuters,November14,2007,http://www.reuters.com/article/gc06/idUSN1417151920071114.

QUICK FACTS

Thenumberofsubprime-relatedcasesfiledinfederalcourtisacceleratingdramatically.Indeed,thenumberoffilingsnearlydoubledduringthesecondhalfof2007,from97to181(totalof278).Majorcasecategoriesincludeborrowerclassactions(43percent),securitiescases(22percent)andcommercialcontractdisputes(22percent),alongwithemploymentclassactions,bankruptcy-related,andothercases.

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Lookingatlitigationactivityfromthesavings-and-loancrisisoftheearly1990sasabenchmark,subprime-relatedcasesfiledin2007(federalcourtonly)alreadyequalone-halfofthetotal559actionshandledbytheRTCoveramultiple-yearperiod.

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Almostnooneitseemsisimmunefromthelitigation.MortgageBankers&LoanCorrespondentsmakeupthelargestcategoryofdefendants(32percent),butnameddefendantsalsoincludemortgagebrokers,lenders,appraisers,titlecompanies,homebuilders,servicers,issuers,underwritingfirms,securitizationtrustees,bondinsurers,ratingagencies,moneymanagers,publicaccountingfirmsandcompanydirectorsandofficers,amongothers.Fortune1000companieswerenamedin56percentofcases.

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Geographically,aroundhalfofallcasesarefiledinCaliforniaandNewYork.

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Litigationactivityisonlylikelytoincreasein2008,asisalreadyevident.Theprospectoflarge-scaleinterventionbygovernmentand/orself-prescribedindustrysolutions,nottomentiontheeconomicenvironment,mayaffectthevolumeoffuturefilings;however,theexplosionoflitigationactivityin2007islikelyonlythefoundationforexpandedactivityin2008.

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In the span of less than a year, writedowns taken by large financial services firms have already surpassed $100 billion, members of Congress have introduced bills seek-ing to overhaul the mortgage industry, and the number of regulatory investigations has multiplied. In addition, government institutions have adopted increasingly activist approaches as approximately two million U.S. homeowners face the pros-pect of spiking mortgage rates and possible foreclosure.5 While the origins of the so-called credit crunch center on mortgages originated in the United States, the effects have been widespread and the implications global in nature.

The confluence of low interest rates, af-fordability products like hybrid and option ARMs6, relaxed underwriting standards, and an insatiable appetite shown by the secondary mortgage market fueled an era of easy credit and a dramatic run-up in real estate values. Benign market conditions masked, for a time, the significant credit risk – and in some cases even fraud – that has since revealed itself with such ferocity.

By the end of 2007, delinquencies, foreclo-sures, and bankruptcies were up. Home values, bank share prices, and investor con-fidence were down. And the lawsuits had been filed – by the hundreds.

While we appear to still be in the early stages of the civil litigation emanating from the credit crunch, the cases filed during 2007 provide an instructive road map with respect to the course the litigation is likely to take. We have conducted an extensive analysis of these cases, which we present herein. We also compare these data to one notable historical benchmark – the civil pri-vate liability litigation brought by the Reso-lution Trust Corporation (RTC) in connec-tion with the savings-and-loan crisis of the late 1980s and early 1990s.

5. Schloemer,Ellen,WeiLi,KeithErnstandKathleenKeest,“LosingGround:ForeclosuresintheSubprimeMarketandTheirCosttoHomeowners,”CenterforResponsibleLending,December2006.6. Ahybridadjustableratemortgage(ARM)paysafixedrateforaspecifiedperiodoftime,oftentimesalowintroductory“teaser”rate,afterwhichitconvertstoafully-indexedadjustablerate.OptionARMsprovidetheborrowerwithflexible

paymentoptions,includingtheopportunitytoinitiallypaylessinterestthanisactuallyowed(accruing)ontheloan.Theinterest“shortfall”isaddedtotheloan’sprincipalbalance,whichisreferredtoasnegativeamortization.7. Otherpartiesinvolvedintheloanoriginationandclosingmightinclude,butarenotnecessarilylimitedto,realtors,appraisers,closingattorneys,etc.

III. Presentation of FindingsThis section of the paper presents the results of our review of 278 federal cases filed during 2007 and seeks to answer the following seven (7) principal questions.

Who are the parties involved?

What types of cases are being filed?

What is the status of the cases?

Who is being sued?

Who is filing the suits?

Where are the suits being filed?

What specific claims are being put forth?

Each of these questions is addressed in turn below. In the Appendix, we revisit these same questions for each of the major case types and also describe our methodology for gathering the case data.

1. Who are the parties involved?

Set forth below is a simplified schematic depicting the general mortgage origination and securitization process and some of the various parties involved. See Figure 1.

The process begins when a prospective borrower seeks to finance the purchase or renovation of a home, refinance an existing loan, or monetize existing home equity. The borrower may go directly to a lender or may

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3.

4.

5.

6.

7.

instead use the services of a mortgage bro-ker, who will typically have access to a vari-ety of loan products from several lenders.

Once the loan is approved and funded7, the lender will oftentimes act as a conduit (or else deliver the loan to a separate entity acting as a conduit), which pools the loan with other like loans and transfers them into a bankruptcy-remote securitization trust, or special purpose entity (SPE). The lender may continue to service the loan on behalf of the SPE, or this responsibility may be contracted out to another party. The SPE will, through the services of an under-writer, issue and market various securities backed by the mortgages, which are com-monly referred to as residential mortgage-backed securities (RMBS). Typically, the marketability of the securities, or tranches, is enhanced by virtue of receiving a credit rating from one or more of the major rating agencies (i.e., Standard & Poor’s, Moody’s, Fitch Ratings). Higher credit ratings are as-signed to those tranches that are struc-tured to benefit from some form of “credit enhancement,” usually either priority claims on the cash flows generated by the under-lying mortgages and/or credit insurance purchased from a third-party bond insurer (e.g., Ambac, MBIA, etc.).

Figure 1

OverviewoftheSecuritizationProcess

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The securities may be purchased by insti-tutional or individual investors the world over, including, for example, hedge funds or managers of collateralized debt obligations (CDOs), which re-securitize the subject RMBS, along with other assets, into a CDO. It is through securitization that the monthly mortgage payment made by a couple in California might be owned, at least in part, by a municipality in Denmark.

2. What types of cases are being filed?

We have classified the 278 cases8 we iden-tified into six (6) major categories of civil litigation: 1) borrower class actions, 2) secu-rities cases, 3) commercial contract disputes, 4) employment class actions, 5) bankrupt-cy-related9, and 6) all other.

While we observed a meaningful number of filings in each area, borrower class actions dominated, making up 43 percent of the total. Securities cases and commercial con-tract claims each accounted for 22 percent. See Figure 2.

The pace of the filings picked up dramati-cally as the year progressed, generally mir-roring the deterioration in market condi-tions. The number of cases filed during the second half of the year totaled 181, nearly

doubling the 97 cases filed during the first six months. See Figure 3 (quarterly) and Fig-ure 4 (monthly). The increase in total filings during the latter half of 2007 was driven by 49 new securities cases (308 percent in-

8. Eightofthesecases,orthreepercent,arecounterclaims.9. Notallcasesfiledinbankruptcycourtwereconsideredtobebankruptcy-related.Rather,thisdesignationwasappliedtolitigationthatappearedtobedirectlyrelatedtothebankruptcyfiling(e.g.,disputesovertheassetsofthecorporation,

allegedfraudulentconveyances,preferenceclaims,etc.)andwasnototherwisecategorized.

crease) and 79 borrower class actions (84 percent increase). September was the most active quarter with 92 filings; August was the most active month with 50 new cases.

Figure 2

Subprime-RelatedFederalFilingsbyCaseType,2007

Figure 4


Figure 3


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3. What is the status of the cases?

The 278 cases filed during 2007 are early in their life, as one would expect. Ninety percent continued to be active at year-end 2007. See Figure 5.

Of the terminated cases, most were dis-missed (five percent of all cases), a handful of default judgments were rendered (three percent of all cases), and the remainder were settled or stayed / administratively closed.

Note that for metrics other than number of cases filed (including by type), our analyses focus on the 251 cases that were active as of year-end 2007. Given that these matters are new and in some cases rapidly evolving, we wanted to provide a current snapshot of the characteristics of those cases that were not subject to an expedient disposition. Similar-ly, if an amended complaint was filed before year-end, our data reflect such amendments.

4. Who is being sued?

Perhaps the easier question to answer is ‘who has not been sued’? Virtually ev-ery party along the mortgage origination and securitization chain (see Figure 1) is represented: mortgage brokers, lenders, appraisers, title companies, homebuild-ers, servicers, issuers, underwriting firms, securitization trustees, bond insurers, rating agencies, money managers, public account-ing firms and company directors and offi-cers, among others.

We present the composition of the named defendants by SIC code in Figure 6. The group most commonly targeted is Mortgage Bankers & Loan Correspondents (6162) at 32 percent. National Commercial Banks (6021) are second at 10 percent, with Sav-ings Institution, Federally Chartered (6035) and Security Brokers, Dealers & Flotation Companies (6211) at nine and seven per-cent, respectively.

Fortune 1000 companies10, or their subsid-iaries, have been named in 56 percent of the 251 cases. See Figure 7. Fortune 500, 100 and 50 companies have been named in 50, 32 and 22 percent of the lawsuits, respectively. When focusing on financial services-related companies comprising the Fortune 1000, just under 50 percent of these companies have been named as a defendant in at least one case. See Figure 8.

In addition, Figure 9 identifies the top 10 subprime mortgage originators for the year 200611 and indicates whether they have been named as a defendant in each of the major case categories. All of the top 10 subprime lenders have been named in a borrower class action while lawsuits from the other categories are more uneven. New Century Financial Corporation, currently in bankruptcy, has been named as a defendant in five of the six major case categories.

10. Fortunemagazine,April30,2007issue.11. PerInsideMortgageFinance.

Figure 5

StatusofCasesFiledDuring2007

Figure 6

WhoIsBeingSued?

Figure 7

Fortune1000Defendants

Figure 8

Fortune1000DefendantsbyIndustry

Subprime-RelatedFederalFilingsAgainstOriginators,2007

Figure 9

Fortune % of Cases *50 22%100 32%500 50%

1000 56%*Reflectspercentageofcaseswithatleastonesuchdefendent

(as of December 31, 2007)

Note:Reflectsactivecases.

Industry No. in Fortune 1000

% Named as Defendants

CommercialBanks 30 57%DiversifiedFinancials 13 23%Homebuilders 14 50%SavingsInstitutions 4 50%Securities 17 41%


Note: Reflects active cases. Total Filings = 251

Top Subprime Originators (2006) [a] Borrower Class Actions Securities Contract

ClaimsEmployee

Class ActionsBankruptcy-

Related Other

1.HSBCFinancial l l l

2.NewCenturyFinancial l l l l l

3.CountrywideFinancial l l

4.CitiMortgage l l l

5.WMCMortgage(GE) l

6.FremontInvestment&Loan l l l l

7.AmeriquestMortgage(ACCCapital) l l

8.OptionOneMortgage(H&RBlock) l l

9.WellFargoHomeMortgage l l l

10.FirstFranklinFinancialCorp(MerrillLynch) l l

Note:[a] Per Inside Mortgage Finance

Total Filings = 251

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The next most common was the Second Cir-cuit, which includes New York14, with 62 cas-es (22 percent). Of these 62 filings, securities and commercial contract cases accounted for 35 and 53 percent of the total, respectively.

5. Who is filing the suits?

Seventy-three percent of the 251 lawsuits are class actions brought by borrowers, in-vestors, or employees.12 See Figure 10.

Of the commercial entity plaintiffs, the single largest category is Mortgage Bank-ers & Loan Correspondents (6162), which accounts for 28 percent of the commercial plaintiffs. See Figure 11. This is explained, at least in part, by the large number of cases in which purchasers of residential mort-gage loans are seeking to force originators to repurchase the loans, or otherwise make amends. These are loans that went into ear-ly payment default (EPD) or are otherwise alleged to have violated certain representa-tions and warranties in connection with the sale of those loans.

6. Where are the suits being filed?

California and New York courts combine to account for approximately 50 percent of all cases filed. See Figure 12.

The courts of the Ninth Circuit, which in-cludes California13, were the jurisdiction of choice for 82 of the 278 cases filed (29 percent). See Figure 13. Of these 82 cases, 63 percent were borrower class actions.

12. ThemostactiveplaintifflawfirmsfilingonbehalfofthepurportedclassesforeachofthemajorcasetypesaredetailedintheAppendix.13. TheUnitedStatesCourtsfortheNinthCircuitconsistoftheU.S.CourtofAppealsfortheNinthCircuit,andthedistrictandbankruptcycourtsandrelatedcourtunitsfortheDistrictsofAlaska,Arizona,NorthernCalifornia,CentralCalifornia,

EasternCalifornia,SouthernCalifornia,Hawaii,Idaho,Montana,Nevada,Oregon,EasternWashington,WesternWashington,theU.S.TerritoryofGuamandtheCommonwealthoftheNorthernMarianaIslands.See http://www.ce9.uscourts.gov/courts.html.

14. TheUnitedStatesCourtsfortheSecondCircuitconsistoftheU.S.CourtofAppealsfortheSecondCircuitandtherespectivedistrictandbankruptcycourtsfortheSouthern,Northern,EasternandWesternDistrictsofNewYork,theDistrictofConnecticutandtheDistrictofVermont.SeeSecondCircuitHandbook,p.2;http://www.ca2.uscourts.gov/Docs/COAManual/everything%20manual.pdf.

15. Reflectscountsallegedasofthemostrecentversionofthecomplaint.Computationsdepictingtheprevalenceofthevariouscountsallegedreflectonlythosecasesforwhichcomplaintswereavailable.Weidentifiedatleastonecomplaintformorethan90percentofthe251cases.

Figure 10

WhoIsFilingtheSuits?

Figure 12

Subprime-RelatedFederalFilingsbyState,2007

Other16%

Unknown14%

Mortgage Bankers &Loan Correspondents

28%

Loan Brokers4%

Real Estate Agents& Managers

4%

Total Commercial Plaintifs = 76Legend: NEC – Not Elsewhere ClassifiedNote: Reflects active cases.


Security Brokers, Dealers& Flotation Companies

4%Real Estate

Investment Trusts7%

National Commercial Banks

9%

CommercialBanks, NEC

14%

Figure 11

WhatCommercialEntitiesAreFilingtheSuits?

Figure 13

Subprime-RelatedFederalFilingsbyCircuit,2007

7. What specific claims are being put forth?

The specific counts alleged are detailed for each major case type in the Appendix.15

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IV. An Historical Reference Point: RTC LitigationThe U.S. savings-and-loan crisis of the late 1980s and early 1990s is one oft-cited yard-stick for the current credit crunch. While differences exist16, the extent of the damage wrought appears to be of a generally similar scale and magnitude. A comparison of the ensuing litigation can also be made.

As it relates to the savings-and-loan crisis, the RTC was tasked with overseeing much of the clean-up, which included pursuing recovery through civil litigation. From the time of its creation in 1989 to its dissolution in 1995, the RTC filed, inherited, or defend-ed 559 civil professional liability actions.17,18

While an imperfect comparison, the 278 subprime-related cases filed during 2007 already amount to approximately 50 per-cent of the RTC total, with the majority of those 2007 cases (65 percent) having been filed during the last half of the year. If the pace of filings observed during the second half of 2007 is assumed to continue into this year, the number of subprime-related cases would surpass the total RTC caseload dur-ing 2008.

16. Thethriftcrisiswasdrivenprimarilybylossesfromcommercialrealestateloansthatwereoriginatedbythriftsandgenerallyheldinthethrifts’ownportfolios.Consequently,theresultingcreditexposurewashighlyconcentratedinthatparticularindustry.Thatis,thecreditlossesbelongedtothethrifts,theiruninsuredcreditors,andtheirshareholders–andultimatelytoU.S.taxpayers.Inthecurrentsituation,residentialmortgageloanswereinmostcasessoldshortlyaftertheywereoriginatedandsecuritizedinterestsintheloanswerelatersoldtoinvestorsallovertheworld(withcreditriskoftensubsequentlytransferredyetagainthroughcreditderivativecontracts).Asaresult,thecreditriskassociatedwithsubprimemortgageswasbycomparisonwidelydispersedand,soitseems,hasbecomenearlyubiquitous.

17. FederalDepositInsuranceCorporation,“ManagingtheCrisis:TheFDICandRTCExperience1980-1994,”(Washington,DC:FederalDepositInsuranceCorporation,1998),p.270.

18. Included274suitsrelatedtodirectorandofficer(D&O)liability,126attorneymalpracticesuits,46fidelitybondmatters,and43accountingmalpracticemat-ters(someofthe274D&OcasesbroughtbytheRTCinvolvedinsurancecoverageactionsoutofthesameinstitutionforwhichaseparatesuitwasfiled).

V. ConclusionWe expect – and have already observed – continued heavy filing activity into 2008. The ultimate volume of filings during 2008 and beyond will be influenced by a variety of factors including, but not limited to, the course of regulatory investigations, the di-rection and velocity of changes in residen-tial real estate values, the extent to which borrowers facing contractual resets in sub-prime ARMs (which will peak in 2008) will be shielded by the government and/or in-dustry from foreclosure, the extent to which the bond insurers and other counter-parties will make good on the credit insurance they sold, and additional revelations of subprime exposure / writedowns by financial institu-tions and other entities. In addition, actions (or inactions) by central banks and macro-economic indicators generally, including consumer sentiment, will play a critical role in determining the extent of the market upheaval and related litigation. In any case, the explosion of litigation activity in 2007 is likely only the foundation for expanded activity in 2008.

Contents »

9 BorrowerClassActions

12 SecuritiesCases

15 SecuritiesFraudClassActions

17 CommercialContractDisputes

20 EmploymentClassActions

22 Bankruptcy-RelatedandOther

23 MethodologyforIdentifyingCases

Appendix

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Borrower Class ActionsAs noted above, borrower class actions make up 43 percent of the 278 cases filed, the larg-est category of the major case types. Figures A1 to A8 below detail the types of borrower class actions filed19, the most active plaintiff law firms, the composition of the named de-fendants (by SIC code), the states in which the cases have most often been filed, and the specific counts alleged.

Of the 36 borrower class actions whose principal claim involved inadequate disclosure in connection with the mortgage origination process, 27 (75 percent) involved option ARMs. The cases involving option ARMs were filed predominantly in August and October and more than 80 percent included Jeffrey K. Berns Law Offices among plaintiffs’ counsel. Simi-larly, of the 26 class actions alleging some form of discriminatory lending or, in one case, servicing, 19 of those cases (73 percent) explicitly identified the target institution’s discre-tionary pricing policies20 to be among the root causes. California was the most common venue (42 percent), and mortgage brokers, mortgage companies, commercial banks, and thrifts accounted for approximately 65 percent of the named defendants.

19. Caseswerecategorizedbasedonwhatwasviewedtobetheprincipalclaim.Fourcasesaretechnicallynotclassactionspersebutcontainanalogousclaims.20. Discretionarypricingpoliciesallowtheloanofficer,mortgagebroker,orcorrespondentsomeleewayinsettingtheborrower’smortgagerate.

Figure A1

Subprime-RelatedBorrowerClassActionFilingsbyCaseType,2007

Subprime-RelatedBorrowerClassActionFilingsbyCaseType,2007

Figure A2

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Figure A3

Subprime-RelatedBorrowerClassActionFilings:WhoIsRepresentingtheClass?

Figure A4

Subprime-RelatedBorrowerClassActionFilings:WhoIsBeingSued?

Figure A5

Subprime-RelatedBorrowerClassActionFilingsbyState,2007

Law Firm Cases % of Total1.JeffreyK.BernsLawOffices 22 19%2.Kiesel,Boucher&Larson,LLP 17 15%3.BonnettFairbournFriedman&BalintPC 10 9%4.Chavez&GertlerLLP 8 7%5.SeveralFirms 7 6%


Note: Reflects active cases.

Total Filings = 115

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Figure A6

Subprime-RelatedBorrowerClassActions:InadequateDisclosures–SpecificCountsAlleged

Figure A7

Subprime-RelatedBorrowerClassActions:ImproperCharges/Payments–SpecificCountsAlleged

Figure A8

Subprime-RelatedBorrowerClassActions:DiscriminatoryLending/Servicing–SpecificCountsAlleged

Count % of Cases1.CB&PC–UnfairCompetitionLaws,§17200 75%2.TILA,15U.S.C.§1601 72%3.BreachoftheCovenantofGoodFaith&FairDealing 69%4.BreachofContract 59%5.CB&PC–FalseAdvertising,§17500 53%6.CCC–ConsumerLegalRemediesAct,§1770 16%


Legend:CB&PC–CaliforniaBusiness&ProfessionsCodeTILA–TruthinLendingActCCC–CaliforniaCivilCodeNote: Reflects active cases, to the extent complaints were available.

Total Filings = 36

Count % of Cases1.RESPA–ProhibitionAgainstKickbacks&UnearnedFees,12U.S.C.§2607 69%2.UnjustEnrichment 38%3.BreachofContract 24%4.NegligentMisrepresentation 21%5.Fraud 17%6.CivilConspiracy 17%7.BreachofFiduciaryDuty 14%


Legend:RESPA–RealEstateSettlementProceduresActNote: Reflects active cases, to the extent complaints were available.

Total Filings = 31

Count % of Cases1.ECOA,15U.S.C.§1691 85%2.FHA–RacialDiscrimination,42U.S.C.§3605 70%3.CivilRights–EqualRightsUndertheLaw,42U.S.C.§1981 35%4.CivilRights–PropertyRightsofCitizens,42U.S.C.§1982 35%5.FHA,42U.S.C.§3601 30%6.BreachofFiduciaryDuty 15%7.FHA,42U.S.C.§3604 15%


Legend:ECOA–EqualCreditOpportunityActFHA–FairHousingActNote: Reflects active cases, to the extent complaints were available.

Total Filings = 26

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Figure A9

Subprime-RelatedSecuritiesFilingsbyCaseType,2007

Securities CasesSecurities cases account for 22 percent of the total cases filed. Figures A9 to A15 below de-tail the types of securities cases filed, the most active plaintiff law firms, the composition of the named defendants, the states in which the cases have most often been filed, and the specific counts alleged. Securities fraud class actions account for 54 percent of securities cases (securities fraud class actions are detailed separately). ERISA claims related to com-pany sponsored plans and shareholder derivative claims account for another 22 percent.

The remaining cases involve claims against investment managers or broker-dealers (16 percent) and underwriters related to the issuance of RMBS (eight percent). With respect to the former category, all of these cases were filed during the second half of 2007. Security Brokers, Dealers and Flotation Companies (6211) was the group most often singled out as a defendant (based on SIC code). Directors and officers were named as defendants in 80 percent of cases. The state with the greatest concentration of these cases is New York with 36 percent with California and Florida combining to account for another 28 percent.

Subprime-RelatedSecuritiesFilingsbyCaseType,2007

Figure A10

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Figure A11

Subprime-RelatedSecuritiesFilings:WhoIsRepresentingtheClass?

Figure A12

Subprime-RelatedSecuritiesFilings:WhoIsBeingSued?

Figure A13

Subprime-RelatedSecuritiesFilings:WhoIsBeingSued?

Law Firm Cases % of Total1.CoughlinStoiaGellerRudman&RobbinsLLP 14 23%2.KellerRohrbackLLP 6 10%3.Schiffrin,Barroway,Topaz&Kessler,LLP 6 10%

4.GlancyBinkow&GoldbergLLP 6 10%

5.BernsteinLitowitzBerger&GrossmannLLP 5 8%



Total Filings = 60

Defendants % of CasesDirectors/Officers 80%

Underwriters 20%

AccountingFirms 2%


Note: Reflects active cases, to the extent complaints were available.

Total Filings = 60

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Figure A14

Subprime-RelatedSecuritiesFilingsbyState,2007

Figure A15

Subprime-RelatedSecuritiesFilings:SpecificCountsAlleged

Count % of Cases1.‘34Act–ManipulativeandDeceptiveDevicesandContrivances,§10(b)&Rule10(b)(5) 58%2.‘34Act–Joint&SeveralLiability,§20(a) 49%3.BreachofFiduciaryDuty 28%4.‘33Act–CivilLiabilitiesonAccountofFalseRegistrationStatement,§11 16%5.‘33Act–CivilLiabilitiesArisinginConnectionwithProspectuses&Communications,§12(a)(2) 16%6.‘33Act–LiabilityofControllingPersons,§15 16%7.NegligentMisrepresentation 14%8.BreachofContract 12%9.ERISA–LiabilityforBreachofFiduciaryDuty,29U.S.C.§1109(a) 12%10.ERISA-LiabilityforBreachofCo-FiduciaryLiability,29U.S.C.§1105(a) 9%


Legend:‘34Act–SecuritiesandExchangeActof1934‘33Act–SecuritiesActof1933ERISA–EmployeeRetirementIncomeSecurityActNote: Reflects active cases, to the extent complaints were available.

Total Filings = 60

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Figure A16

Subprime-RelatedSecuritiesFraudClassActionCases:WhoIsRepresentingtheClass?

Securities Fraud Class ActionsSecurities fraud class actions account for 54 percent of securities cases and 12 percent of the total cases filed. Figures A16 to A20 below detail the most active plaintiff law firms, the composition of the named defendants, the states in which the cases have most often been filed, and the specific counts alleged.

Nearly 80 percent of the securities fraud class actions were filed during the second half of 2007, split roughly evenly between the September and December quarters. Similar to securities cases overall, Security Brokers, Dealers and Flotation Companies (6211) were the most common defendant (based on SIC code). Directors and officers were named as defendants in 97 percent of cases. New York, California, and Florida were the jurisdiction for approximately two-thirds of the securities fraud class actions while an underwriter was named in 21 percent of cases. Violations of Rule 10b-5 and Section 20(a) of the Securities and Exchange Act were alleged in 87 percent of securities fraud class actions.

Subprime-RelatedSecuritiesFraudClassActionCases:WhoIsBeingSued?

Figure A17

Law Firm Cases % of Total1.CoughlinStoiaGellerRudman&RobbinsLLP 14 42%2.GlancyBinkow&GoldbergLLP 6 18%3.Schiffrin,Barroway,Topaz&Kessler,LLP 4 12%4.BernsteinLitowitzBerger&GrossmannLLP 3 9%5.AbrahamFruchter&TwerskyLLP 3 9%



Total Filings = 33

1�


Figure A18

Subprime-RelatedSecuritiesFraudClassActionCases:WhoIsBeingSued?

New York31%

Total Filings = 33Note: Reflects all cases filed during 2007.

Pennsylvania9%

Florida12%

California24%

Georgia6%

Other18%

Figure A19

Subprime-RelatedSecuritiesFraudClassActionFilingsbyState,2007

Figure A20

Subprime-RelatedSecuritiesFraudClassActionFilings:SpecificCountsAlleged

Defendants % of CasesDirectors/Officers 97%

Underwriters 21%

AccountingFirms 0%


Note: Reflects active cases, to the extent complaints were available.

Total Filings = 33

Count % of Cases1.‘34Act–ManipulativeandDeceptiveDevicesandContrivances,§10(b)&Rule10(b)(5) 87%2.‘34Act–Joint&SeveralLiability,§20(a) 87%3.‘33Act–CivilLiabilitiesonAccountofFalseRegistrationStatement,§11 26%4.‘33Act–LiabilityofControllingPersons,§15 26%5.‘33Act–CivilLiabilitiesArisinginConnectionwithProspectuses&Communications,§12(a)(2) 19%


Legend:‘34Act–SecuritiesandExchangeActof1934‘33Act–SecuritiesActof1933Note: Reflects active cases, to the extent complaints were available.

Total Filings = 33

1�

«February2008

Commercial Contract DisputesCommercial contract disputes account for 22 percent of the total cases filed. Figures A21 to A26 below detail the types of contract cases filed, the composition of the plaintiffs and defendants (by SIC code), the states in which the cases have most often been filed, and the specific counts alleged. The majority of the contract cases (58 percent) are actions by pur-chasers of whole loans against mortgage originators relating to loans that went into EPD or otherwise allegedly violated certain representations and warranties. Most of these cases were brought in the second calendar quarter of 2007.

The remaining cases generally involve disputes over the sometimes esoteric provisions of repurchase agreements and credit default swaps, or allegations of firms taking advantage of the credit crunch and allegedly extorting value from counterparties facing severe liquidity pressures (e.g., warehouse lenders making allegedly excessive collateral demands).21 Mort-gage Bankers & Loan Correspondents (6162) is the group most often sued and most often bringing the suits (based on SIC code).22 Commercial Banks (6021) is the second most common plaintiff group while Loan Brokers (6163) is the next most common defendant group in this category. The state with the greatest concentration of these cases is New York with 54 percent followed by Delaware at 22 percent.

Subprime-RelatedContractFilingsbyCaseType,2007

Figure A21

21. WehaveobservedanincreasingnumberofcontractdisputesoverthecorrectinterpretationofCDOprovisionswithinindentures;however,todate,thesecaseshavebeenfiledpredominatelyinstatecourt.

22. ThisessentiallyreflectsthecasethatloanoriginatorsandloanpurchasersengagedinlitigationoverrepurchaseobligationssharethesameSICcode.

18


Figure A22

Subprime-RelatedContractFilingsbyCaseType,2007

Figure A23

Subprime-RelatedContractCases:WhoIsFilingtheSuits?

Figure A24

Subprime-RelatedContractCases:WhoIsBeingSued?

1�

«February2008

Figure A25

Subprime-RelatedContractFilingsbyState,2007

Figure A26

Subprime-RelatedContractFilings:SpecificCountsAlleged

Count % of Cases1.BreachofContract 92%2.UnjustEnrichment 53%3.BreachoftheCovenantofGoodFaithandFairDealing 44%4.BreachofFiduciaryDuty 25%5.Fraud 19%



Total Filings = 43

�0


Employment Class ActionsEmployment class actions account for nine percent of the total cases filed. These matters essentially fall into two categories: 1) cases alleging hourly workers were wrongfully denied overtime pay, off-the-clock breaks, and minimum hourly wages, among other claims, and 2) cases alleging terminated employees did not receive the requisite 60-days advance writ-ten notice pursuant to the Worker Adjustment and Retraining Notification Act (WARN). Sixty-two percent of the cases filed fell in the first category and, conversely, 38 percent of the cases fell in the second category. See Figure A27. We debated whether to include these cases, specifically the wage-and-hour cases, and ultimately opted in favor, as they represent a major source of litigation emanating from both the boom and bust cycles of the subprime mortgage business (specifically the number of potential plaintiffs).

The pace at which the cases were filed is depicted in Figure A28 (75 percent of filings oc-curred in the second half of the year; August was the single busiest month with eight fil-ings). Figures A29 to A31 below detail the most active plaintiff law firms, the composition of the named defendants (by SIC code), and the states in which the cases have most often been filed. Because these cases typically focus on claims on behalf of workers involved in the loan origination function, Mortgage Bankers & Loan Correspondents (6162) is the group most often targeted (based on SIC code), appearing as a defendant in 47 percent of cases. California was the jurisdiction for 37 percent of cases; Delaware was second at 25 percent (primarily related to bankruptcy proceedings).

Subprime-RelatedEmployeeClassActionFilingsbyCaseType,2007

Figure A28

Subprime-RelatedEmployeeClassActionFilingsbyCaseType,2007

Figure A27

�1

«February2008

Figure A29

Subprime-RelatedEmployeeClassActionCases:WhoIsRepresentingtheClass?

Figure A30

Subprime-RelatedEmployeeClassActionCases:WhoIsBeingSued?

Figure A31

Subprime-RelatedEmployeeClassActionFilingsbyState,2007

Law Firm Cases % of Total1.NicholsKaster&AndersonLLP 5 23%2.Outten&GoldenLLP 4 18%3.MargolisEdelstein 3 14%4.RobertS.NorellPA 2 9%5.SeveralFirms 1 5%



Total Filings = 22

��


Bankruptcy-Related and OtherAs noted above, not all cases filed in bankruptcy court were considered to be bankruptcy-related. Rather, this designation was applied to litigation that appears to be directly related to the bankruptcy and not otherwise categorized (e.g., disputes over the assets of the cor-poration, alleged fraudulent conveyances, preference claims, etc.). These cases account for less than three percent of the cases filed.

The final category includes all other case types, which in the aggregate make up less than two percent of total filings.

��

«February2008

Methodology for Identifying CasesWe attempted to identify all cases filed in federal court for each of the six major case types. While our list may not be exhaustive, we believe it presents an accurate picture of the na-ture and volume of subprime mortgage and related litigation filed during 2007.23

We employed two principal methods to identify the 278 cases comprising our population. First, we reviewed daily news articles from sources including, but not limited to, The Wall Street Journal, Bloomberg, LexisNexis, Dow Jones Factiva, and various litigation newsletters. Second, we utilized PACER24 and LexisNexis Courtlink25 to identify federal filings using key search terms and/or nature of suit (NOS) codes we felt were likely to capture our target case types. To the extent multiple actions seeking class status were filed against a particular defendant making generally similar allegations, we included only the first matter filed (this was particularly relevant for securities class actions).

We have likewise collected extensive data on state-court filings for subprime mortgage and related litigation; however, we chose to exclude cases filed in state courts from this study. The state courts present formidable challenges regarding inconsistent accessibility and lack of standardization across various courts. Other venues not captured include arbitrations, administrative proceedings and criminal matters, among others.

23. Subjecttothequalifications/clarificationscontainedherein.Therewereothercasetypesweintentionallydidnotcapture.Avoluminousexamplewouldbeindividualforeclosureactions.

24. PublicAccesstoCourtElectronicRecords(PACER)isanelectronicpublicaccessservicethatallowsuserstoobtaincaseanddocketinformationfromFederalAppellate,DistrictandBankruptcycourts,andtheU.S.Party/CaseIndexviatheInternet.

25. LexisNexis®CourtLink®providesaccesstothecalendarproceedings(docket)ofalawsuitandthedocumentsthatarefiledduringthecourseofthatsuit.

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About Navigant Consulting, Inc.

NavigantConsulting,Inc.(NYSE:NCI)isaspecializedindependentconsultingfirmprovidingdispute,financial,investigative,regulatoryandoperationsadvisoryservicestogovernmentagencies,legalcounselandlargecompaniesfacingthechallengesofuncertainty,risk,distressandsignificantchange.TheCompanyfocusesonindus-triesundergoingsubstantialregulatoryorstructuralchangeandontheissuesdrivingthesetransformations.

Contact »

For questions related to the data presented herein:

Jeff Nielsen 202.973.4506 [email protected]

For copies of this paper:

Shannon Prown 215.832.4436 [email protected]

Jeff Nielsen is a Managing Director in the Washington, DC office of Navigant Consulting, Inc. where he leads the firm’s Financial Services Disputes & Investigations service line. For more than 15 years, Mr. Nielsen has advised clients on the financial, economic, accounting and information management aspects of commercial disputes and regulatory investiga-tions, specifically matters involving the financial services industry and real estate. He has been retained on more than 50 banking matters and has extensive knowledge of mort-gage markets and products, including residential and commercial loans, as well as mort-gage banking, securitizations, and servicing operations. Mr. Nielsen is currently leading a number of the firm’s major subprime-related engagements. Mr. Nielsen is also a frequent speaker on mortgage-related issues and has been quoted, or has had his work cited to, in The Wall Street Journal, The New York Times, The Economist, as well as other publications.

Scott Paczosa is a Managing Director in the Chicago office of Navigant Consulting, Inc. with a national leadership role in identifying emerging issues and strategic responses to market developments. Mr. Paczosa, who has more than 15 years experience in the profes-sional services sector, has been intimately involved in developing the firm’s approach to as-sisting clients impacted by the turmoil in the subprime mortgage market.

William Schoeffler is a Senior Manager in the Washington, DC office of Navigant Con-sulting, Inc. where he leads the firm’s dedicated research group.

The authors would like to thank Scott Worthington, Shawn Cornell, Elizabeth Eubank, and Angela Krulc, among others, for their excellent research assistance.

©2008NavigantConsulting,Inc.Allrightsreserved.“NAVIGANT”isaservicemarkofNavigantInternational,Inc.NavigantConsulting,Inc.(NCI)isnotaffiliated,associated,orinanywayconnectedwithNavigantInternational,Inc.,andNCI’suseof“NAVIGANT”ismadeunderlicensefromNavigantInternational,Inc.

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