Subprime Securities Litigation ClaimsLaw Seminars InternationalConference on the Subprime Lending Crisis

New York Mariott Marquis Times Square HotelNew York, NYMarch 18-19, 2008

Richard P. SwansonArnold & Porter LLP

399 Park AvenueNew York, NY 10022

212-715-1179richard.swanson@aporter.com

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Subprime Securities Litigation

Securities Class Action Lawsuits – 48 to-date

Financial institutions re: loss disclosures– Toxic debt they didn’t get off the books fast enough

Mortgage originators– Few assets to recover against

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Subprime Securities Litigation

“You didn’t tell us what was there, or how bad the stuff was.”

One response: “If we had known how bad it was, why would we have kept some of it on our books?”

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Subprime Securities Litigation

Securities Claims Involving Origination

Note investors in securitization pools, SIVs and CDOs– Against originators, underwriters/securitizers, etc.

Not really started yet – collateral needs to be liquidated, etc.

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Subprime Securities Litigation

Securities Claims Involving Investment Mangers

E.g., State Street/Prudential, HSB, IDB

“You put us into this stuff”– KYC, suitability, etc.

– Can include ERISA and breach of contract and fiduciary duty claims

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Subprime Securities Litigation

Common Issues and Themes

Fraud in the loan origination and underwriting process– Actions by the originator which permeate downstream

Due Diligence by underwriter/securitizer

Valuation– FAS 157 and Levels 1, 2, 3

– Were modeling assumptions too aggressive?

– Mark to market, mark to model, mark to meltdown

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Subprime Securities Litigation

Common Issues and Themes (con’t)

Inadequate servicing

Inadequacies in delinquency and default reporting

Breach of securitization documents– Reps and warranties, eligibility, etc.

Accuracy of financial statements and disclosure documents

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Subprime Securities Litigation

Secondary Players

Trustees, servicers

Securitizers, Underwriters

Bond Insurers

Rating Agencies

Attorneys

Accountants– Typically auditors of the securitizers/underwriters, bond insurers,

originators, etc.

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Subprime Securities Litigation

Failed Deal Litigation

E.g., URI and others in Delaware Chancery Court

Contractual remedies, MAC etc.

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Subprime Securities Litigation

Defenses and Motions to Dismiss

Tellabs: pleading standard and scienter (127 S. Ct. 2411 (2007))– Compare Accredited Home Lenders (07. Civ. 488 H) (S.D. Cal.)

and Indy Mac Bancorp (07 Civ. 1635) (C.D. Cal.)

Stoneridge: secondary liability(No. 06-43, decided January 15, 2008)

Dura Pharmaceuticals: loss causation (544 U.S. 336 (2005))

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Subprime Securities Litigation

Class Certification

2nd Circuit IPO cases: need more than “some showing” to certify a class (471 F.3d 24 (2d Cir. 2006)

5th Circuit Enron decision: need to show the existence of a cause of action on which reliance can appropriately be presumed (482 F.3d 372 (5th Cir. 2007))

5th Circuit Allegiance Telecom decision: loss causation needs to be demonstrated (487 F.3d 261 (5th Cir. 2007))

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Subprime Securities Litigation

Some Special Considerations

Credit Default Swaps (“CDSs”)

Fund litigation

Margin valuation litigation

Debt enforcement litigation

Valuation and internal controls

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Subprime Securities Litigation

Some Special Considerations (con’t)

Possible 33 Act Claims– Section 11: misstatements in a registration statement, subject to

a due diligence defense

– Section 12(e)(2): misstatements by a seller of securities

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Subprime Securities Litigation

Some Special Considerations (con’t)

Multiple write-downs of some assets

Quality of the disclosures

Forward-looking statements and the “bespeaks caution” doctrine

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Some Special Considerations (con’t)

Enforcement and Investigation

SEC: Subprime Task Force– Make sure the values and the risks are disclosed

Federal Banking Regulators

Criminal investigations

State AGs

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Questions?Questions?

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