Legal News

Subprime Legal: State Regulators Get the Party Started

By Jamie Heller

Up until this week, and not counting the Bear Stearns hedge-fund indictments, we’ve had more talk than action from the AGs offices around the country on the credit crisis. Now, the lawsuits are starting to fly.

Today, the Massachusetts Secretary of the Commonwealth charged units of financial services giant UBS with fraud and dishonest conduct in sales of auction-rate securities. The suit alleges that UBS representatives told investors that auction-rate securities “were safe, liquid ‘cash alternatives’ when UBS knew they were not.” Regulators are now seeking to order UBS to give investors their money back, and restitution to those who had to sell below par. See this article from the DJ wires.

“We are disappointed that the Massachusetts Securities Division has filed this complaint against us, as we, our peers and the industry work toward solutions,” says Karina Byrne, a UBS spokeswoman in a statement. She noted that UBS provided support to the market longer than other firms and held approximately $10 billion of the securities on its own books at the end of the first quarter.

Meanwhile, on the left coast, California’s AG Jerry Brown sued Countrywide, alleging that it used “misleading marketing practices” to steer home buyers into “risky and costly loans” without regard to borrowers’ ability to pay. Washington state also filed an administrative action alleging that Countrywide engaged in discriminatory lending practices, and Illinois, as expected, also sued the beleaguered lender, which is about to become part of Bank of America. A story in today’s WSJ by Ruth Simon also says CT AG Richard Blumenthal plans to file against the lender as part of a “second wave” of state actions against Countrywide.

What are the odds of success? Simon’s story quotes Prentiss Cox, an associate law prof at U. of Minn., talking about California and Illinois. These suits “have a much greater chance of succeeding now than they would have a few years ago because everyone will understand the consequences” of the practices alleged in the lawsuits, he said. “Before, there was a presumption that these are large financial companies and they surely know what they are doing. No one assumes that anymore.”

LB readers: Do you agree? Give us your views on the suits’ odds of success.

Full post as published by Law Blog - WSJ.com on June 26, 2008 (boomark / email).