The Subprime Lending Shakeout: A Litigation Perspective
Having finally wrapped up this mess, it's back to blogging on a more regular basis...
Yesterday, Fed Chairman Ben Bernanke commented at length for his fellow economists at the Federal Reserve Bank on how problems in the market for subprime mortgages may affect the housing markets and the economy generally. As one of my favorite economist bloggers summed up in this post at the Calculated Risk blog, according to Chairman Bernanke, "everything will be fine."
That may be reassuring to stock market investors, who must be feeling a bit dizzy from the recent 15% run up since the subprime collapse took its toll on the market a few months back. For those left holding the bag, however, there's little solace to be drawn from Chairman Bernanke's comments. But, based on the benefits Chairman Bernanke noted the subprime shakeout is having on helping rein in loose lending practices generally, I think it's fair to say here that one man's noose is another man's whip.
For those purchasers of securitized subprime mortgage-backed securities left holding the bag, however, there is one prayer that may provide much needed relief ... and that's the "prayer for relief" that accompanies a complaint filed in the US district court. As this 8-count complaint proves, there's no shortage of prayers for relief available to the disgruntled investor left holding the bag. Bankers Life Insurance Co. v. Credit Suisse First Boston Corp., et. al., No. 07-690 (M.D. Fla. 4/23/07) (hat tip: Calculated Risk).
Through its complaint, Bankers Life seeks to recover the 95% of its $1.4 million investment that it lost when it purchased in 2004 certain securitized mortgage-backed loans that were originally issued in 2001 in an offering underwritten by Credit Suisse First Boston and DLJ Mortgage Capital. The packaged loans were subsequently serviced by Select Portfolio Servicing (SPS) of Salt Lake City.
Cutting to the chase, Bankers Life alleges that CFSB, DLJ, and SPS misled the agencies whose ratings determined the market price of the securitiies by misrepresenting key indicators relating to the portfolio's performance. As a result, the complaint alleges, Bankers Life was left holding the bag since it paid about $1.3 million more than the securities were inherently worth.
As every litigator knows, alleging something is one thing, but proving and recovering on it is a "horse of a different color," as the old saying goes. Here are a few "off the cuff" thoughts as to why I think this complaint will have difficulty surviving a motion to dismiss....
- Count I alleges negligent misrepresentation, which (at least in Illinois) is not actionable unless a duty is owed.
- Count II alleges fraud, but that usually needs to be "pled with particularity" and there are not many particularities of fraud in this complaint.
- Count III alleges breach of fiduciary duty based on the mere fact that the defendants' offered securities in the state of Florida, which seems a stretch of a common law duty.
- Count IV alleges violations of Rule 10b-5 of the federal securities laws, but here again the pleadings lack particularity.
- Count V alleges violations of Section 12(a)(2) of the Securities Act of 1933, but Bankers' Life didn't purchase the securities in the initial offering in 2001, so it's hard to see why it should have standing to pursue an alleged '33 Act violation for purchases made in the secondary market in 2004.
- Count VI alleges violation of third party beneficiary rights, but its standing to sue for that violation will likely be an uphill battle.
- Count VII alleges violation of Florida's securities anti-fraud laws, but those too likely require pleading with particularity.
- Count VIII alleges civil conspiracy, but before a conspiracy can be found, there has to be an actionable wrongdoing, and Counts I-VII don't allege actionable wrongs.
4/29/08 Update: See my update on the case at today's post entitled Subprime Litigation Update: Plaintiff's Victory a Near Certainty in Bankers Life v. Credit Suisse.]
© Steve Jakubowski 2007