Sedgwick

In the February 2010 Edition:

The subprime lending crisis and ensuing credit crunch have resulted in significant losses and numerous lawsuits involving parties to the mortgage lending and securitization process. This digest collects and summarizes recent media reports regarding potential liability, government initiatives, litigation and regulatory actions arising from the subprime mortgage crisis and credit crunch, as well as the increasing number of reported cases of financial fraud.

This issue focuses on recent significant decisions in civil litigation regarding subprime and other high-risk mortgages, the growing number of reported Ponzi and financial fraud schemes around the world, the status of civil, criminal and regulatory actions relating to the Madoff, Stanford, Dreier and Rothstein Ponzi schemes, and continuing government efforts to ease the economic impact of the subprime crisis and credit crunch.

In the Spotlight:

Litigation & Regulatory Investigations

Court Grants Rating Agency Defendants' Motion to Dismiss in Lehman Subprime Lawsuit
On February 1, 2010, Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York granted a motion to dismiss filed by rating agency defendants Moody's and Standard & Poor's in the multidistrict litigation arising out of the MBS practices of Lehman Brothers Holdings, Inc. The plaintiffs, who purchased MBS issued in August 2005 and August 2006 by certain Lehman Brothers entities, alleged that because the rating agencies determined the composition of the loans that collateralized the securities, the rating agencies "engaged in steps necessary for the distribution" of the securities. Thus, according to the plaintiffs, the rating agencies were "underwriters" as defined by Section 11 of the Securities Act. Judge Kaplan rejected this argument and found that the rating agencies did not qualify as underwriters under Section 11 of the Securities Act because "there is nothing in the complaint to suggest that [the rating agencies] participated in the relevant 'undertaking' – that of purchasing the securities at issue ...'from the issuer with a view to their resale.'" Additionally, Judge Kaplan dismissed the plaintiffs' Sections 12(a)(2) and 15 claims against the rating agencies. ("Rating Agencies Are Not '33 Act 'Underwriters,'" The D&0 Diary, February 3, 2010; In re Lehman Brothers Securities and ERISA Litigation, No. 09-MD-2017 (S.D.N.Y. February 1, 2010))

Ponzi Schemes & Fraud Actions

Trial Begins Against Former Stanford Employees Accused of Shredding Records
On February 1, 2010, the criminal trial against Bruce Perraud and Thomas Raffanello, former employees of Stanford Financial Group's Fort Lauderdale office, commenced in the U.S. District Court for the Southern District of Florida. Perraud and Raffanello are accused of conspiring to shred business records sought by the SEC. According to the indictments against Perraud and Raffanello, a federal court in Dallas issued an order on February 16, 2009, after the SEC initiated its lawsuit against R. Allen Stanford mandating that "anyone who had notice of the order was barred from disposing of or destroying company records." Perraud and Raffanello allegedly arranged for documents at Stanford Financial's Fort Lauderdale office to be destroyed by February 23, 2009. Counsel for Raffanello and Perraud challenged the applicability of that order to Raffanello and Perraud by asserting that the order is "fatally flawed." ("Stanford Workers Accused of Shredding Go to Trial (Update 1), Bloomberg BusinessWeek, February 1, 2010)

Government and Regulatory Intervention

Financial Reform Bill Stalls in Senate
On February 5, 2010, Sen. Christopher Dodd, D- Conn., chair of the Senate Banking Committee, announced that talks with his Republican counterpart regarding the proposed financial reform bill had reached an "impasse." According to reports, Republican Sen. Richard Shelby of Alabama and Sen. Dodd appear to disagree about the creation of a consumer protection agency to regulate financial products such as mortgages and credit cards. In addition, new constraints on banks' risk-taking proposed by the Obama administration last month have also been controversial, complicating negotiations. ("Hopes Fade For Bipartisan Financial Reform Bill," Financial Times, February 5, 2010); ("Senate Financial Services Reform Efforts Stall," Business Insurance, February, 5, 2010)

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