Banking Law

Housing Wire's Paul Jackson ended a post last Friday about the expansion  of New York City's class action lawsuit Countrywide Financial Corporation and others with the words "It?s pretty clear that the biggest winners out of current market turmoil are the lawyers." It's hard to argue.

Paul referred specifically to the press release issued by New York City Comptroller William C. Thompson, Jr.on Friday in which the Comptroller crowed about adding "26 different financial services companies that underwrote Countrywide stock and bond offerings, two global accounting firms, and additional Countrywide officers and directors who signed SEC filings that contained false and misleading information about Countrywide's business and finances." I'm sure it's purely coincidental that the expansion of the lawsuit follows so closely on the heels of Bank of America's recent announcement that it plans to buy Countrywide. The fact that the City is adding a laundry list of rich defendants, most covered by E&O policies and perhaps better capitalized than Countrywide, and the further fact that there's now a pending acquisition that you can possibly use as leverage to force some kind of settlement, are just due to slap-happy serendipity.

Paul's correct about lawyers, of course. When stock prices tumble, class action attorneys come out of the woodwork. Settlements are extracted, the investors often receive a relatively small percentage of their actual losses, and the class action attorneys make millions. If stock prices fall, it must be because of fraud, it couldn't be because "stuff happens." There are no accidents in a universe where every negative occurrence must be rectified through the payment of money by a defendant or its insurer.

Yet, lawyers can't exist without clients. True, in some cases it's been alleged that some of the more shady class action attorneys may have purchased lead plaintiffs, and a few famous class action attorneys are being pursued by the authorities for the such alleged conduct. In this case, however, the City of New York is leading the charge and nobody had to pay it a dime. Not yet, at least.

The Big Apple is in good company. Last week, the Attorney General of Ohio filed a lawsuit against Freddie Mac on behalf of the Ohio Public Employees Retirement System, also alleging that fraudulent statements were made by a defendant involved in the mortgage business, in this case Freddie Mac, that misled investors like OPERS. According to Ohio Attorney General Marc Dann, Freddie Mac Freddie Mac had "secretly and intentionally participated in one of the largest housing investment deceptions in modern U.S. economic times." Nothing overblown about that allegation, is there?

Dann said Freddie Mac, a private company that holds a federal charter, was "deeply invested in the subprime mortgage industry and failed to disclose that it was not protecting itself from the billion-dollar risks it incurred."

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In addition to the Ohio case, Dann said he filed a request for the Ohio Public Employees Retirement System to become the lead plaintiff in a class-action suit of Freddie Mac shareholders making similar claims in a suit filed recently in a federal court in New York.

In addition to attorneys, there are plenty of plaintiffs, including, obviously, state and local governments, who are eager to hop on board the class action gravy train and ride the rails to the promised land of recovered losses. Regardless of the percentage of the alleged losses that are actually recovered by the time, years down the road, these lawsuits actually settle, the state and local governments can tell the voters that they "did something" to "get the bad guys who caused this mess." As Marc Dann bloviated so well in his press release:

"I would like to commend the trustees and staff at OPERS for supporting my effort to hold Freddie Mac accountable for the role the company and its top executives played in bilking investors and fueling the foreclosure crisis that is destroying neighborhoods across our state and the entire nation," Mr. Dann said. "By authorizing me to bring this suit on their behalf they are protecting the interests of the pension plan, the workers and retirees who depend upon it, and the taxpayers whose hard-earned dollars fund it. And they are also sending a loud and clear message to Wall Street that this type of fraud and manipulation will not be tolerated by the people who live on the Main Streets that are being devastated by what Freddie Mac has done."

As well as furthering Dann's pursuit of higher political office. As CNN notes, Dann has a track record against Freddie Mac, so the template makes cynical sense, regardless of the changed facts and circumstances.

The pension fund was the lead plaintiff in an earlier lawsuit against the government-sponsored Freddie Mac that ended in a $410 million settlement.

And so it goes.