Legal News

Case Dismissed: On a Bad Stretch for the Plaintiffs? Securities Bar

By Ashby Jones

April might be the cruelest month, but for the plaintiffs securities bar, March certainly wasn’t a walk in the park.

During the last few weeks of March, defendants (namely, banks and other financial institutions) won dismissal motions on a bunch of lawsuits in which plaintiffs had sued for fraud, alleging that losses suffered during the financial crisis were the result not of bad timing or luck, but of extreme recklessness or outright fraud.

Since mid-February, federal judges have dismissed securities-fraud lawsuits against Oppenheimer, CIBC, Fremont General, Morgan Stanley, Merrill Lynch, State Street and Bank United Corp.

So what’s going on here? I delve into the issue in this piece in Thursday’s Journal.

It seems the banks have won dismissals of lawsuits with variations of a “global financial catastrophe defense,” arguing that the blame should be placed on collapsing markets rather than any actions on their part.

“Judges realize that not every massive loss of investor capital is caused by fraud,” said Joseph Grundfest, a former SEC commissioner and co-head of the Rock Center for Corporate Governance at Stanford Law School. “They’re recognizing that while the financial system went astray, and that much should be done to fix it, there are differences between fraud and mistake.”

About 40 securities-fraud cases filed since the end of 2007 have been dismissed in early stages, compared with about 20 in which some claims were allowed to move to the evidence-gathering phase, according to statistics compiled by Kevin LaCroix’s D&O Diary. In some cases, judges have left the door open for lawyers to refile their suits with stronger allegations.

On the law-firm front, the firm with perhaps the most to celebrate is Skadden, which represented Fremont General, CIBC (along with Gibson Dunn), Morgan Stanley and Merrill Lynch. (Click here and here for stories from the AmLaw Litigation Daily’s Andrew Longstreth on the CIBC and Fremont rulings, respectively).

To be sure, plaintiffs have reached some significant settlements in credit-crisis-related cases. For instance, early last year, Merrill reached a $475 million settlement with a proposed class of plaintiffs who had alleged Merrill had understated its subprime-debt exposure. The settlement ranked among the largest securities class-action settlements ever.

And judges have allowed a handful of other plaintiffs’ claims to go forward, including claims against Lehman Brothers, Credit Suisse, and iStar Financial.

Adam Savett, the director of securities class-action services for RiskMetrics Group, a risk-management and research firm, says plenty of unknowns remain in a lot of cases, like whether defendants who lost motions to dismiss will try to settle or take their chances at trial. “On many of these cases,” he says, “the Magic 8-Ball is saying, ‘Ask again later.’ ”

Full post as published by Law Blog - WSJ.com on April 08, 2010 (boomark / email).