Legal News

Subprime Legal: Cwide Shareholder Suit Dodges Dismissal

By Amir Efrati

A few days ago NYT ran this story discussing the difficulties of winning shareholder suits stemming from the subprime crisis, which made sense to us given the spate of court rulings that have raised the bar for plaintiffs and what we’ve heard from lawyers who’ve thought these suits didn’t have juice.

But perhaps we legal eagles forgot something along the way: Judges read the papers, too. And anyone following the subprime legal story lately knows how much of a drumming Countrywide Financial has gotten in this mortgage mess. The company has been repeatedly slammed by federal bankruptcy judges and the DOJ’s U.S. Trustee program for misconduct against borrowers (click here, here and here) and sources have told WSJ that the FBI believes there was widespread fraud in the origination of loans by the nation’s No. 1 lender (WSJ stories here and here.)

Case Not Dismissed: With this context, it’s not shocking to hear that earlier this week a federal judge overseeing a shareholder derivative and class-action suit against Countrywide and its directors and officers declined to dismiss the case. (Stories: NYT and WSJ. LB background on derivative suits, in which shareholders sue on behalf of the company, here. )

Los Angeles federal district-court judge Mariana Pfaelzer said the shareholders’ “allegations create a cogent and compelling inference that the individual defendants misled the public with regard to the rigor of Countrywide’s loan origination process, the quality of its loans and the company’s financial situation.” (The judge’s decision is here and the plaintiffs’ 208-page consolidated complaint, which includes frequent references to WSJ and NYT stories, is here.)

The Allegations: The allegations seem largely to reflect issues now out in the public and press. The suit, filed by the Arkansas Teacher Retirement System and several other investors against 14 of the company’s top officials, including CEO Angelo Mozilo, claims that — take a deep breath — the company shifted its strategy to originate non-traditional loans to risky buyers without getting assurance of their credit-worthiness, thereby increasing the company’s credit risk and hurting liquidity, and that the defendants breached their fiduciary duty to monitor the company’s origination of such risky loans; ignored loan underwriting standards in order “pump up loan volume, capture more market share and report artificially inflated income levels”; manipulated earnings by not taking “appropriate allowance for loan losses,” losses which caused the company’s share price to plummet; and that while the company was diving deeper into risky waters, the officials never told shareholders and allegedly lied about the company’s loan origination practices; and that they enriched themselves by selling stock when the company’s share price was artificially high.

The Lawyers: Representing the plaintiffs: Bernstein Litowitz and Grant & Eisenhofer. For Countrywide and its officials: Blake Edward Williams and Brian Pastuszenski of Goodwin Procter, and Eric Roth and Graham Meli of Wachtell Lipton, among others.

Full post as published by Law Blog - WSJ.com on May 15, 2008 (boomark / email).