Banking Law

Litigators, Line Up Your Experts!

Well-known legal social media guru Robert Ambrogi authored an article in the latest Bullseye Newsletter entitled "Legal Tsunami Is Coming, Batten Down The Experts."

As James J. Angel, associate professor of finance at the McDonough School of Business at Georgetown University puts it: "When there's a trillion-dollar hole in the economy, there will be a lot of litigation."

No argument here, professor. As even Stevie Wonder could see, that litigation wave has already washed ashore. There's no question that it will travel far inland, causing much wailing and gnashing of teeth.

As is the case in every financial or economic crisis, Bob rightly points out that in this one, trial lawyers who want to surf from the top of the litigation tsunami wave will need experts to answer the basic question, a variation of which was once made famous by Senator Sam Ervin during the Watergate Hearings: "What did they know and when did they know it."

Through it all, expert witnesses will play two key roles, says Angel, a financial expert whose work focuses on the operation of markets in the United States and abroad. One will be to explain the transactions in terms juries can understand. The other will be to study and dissect the transactions and the documents underlying them.

That latter role, he adds, could well involve equal parts professional analysis and detective work.

While documents alone may provide the smoking gun in some cases, they may be insufficient to prove allegations of bad faith or misrepresentation. In these instances, the role of the economic expert might be to provide models that help explain the behavior of one party or another.

In other words, dueling experts will vie to convince a judge or jury about what was reasonably foreseeable risk as of a prior date, what Ambrogi calls "crystal-ball gazing in reverse." That's always fun, and expensive.

Another role for economic experts in subprime mortgage litigation is to chart patterns of behavior by individual lenders that might show a tendency for or against risky business. "One of the things you might want to look at is whether some lenders systematically were off in a way that suggested that someone there was improperly manipulating these loans," [University of Michigan School of Business professor Robert] Van Order suggests.

Bob also discusses litigation in California in which a subprime lender was sued for not giving its workers a California WARN Act notice of layoffs at least 60 days in advance. An exception to the notice requirement is in the event that the layoff could not have been reasonably foreseen. One expert, a University of California professor, was engaged as an expert to render an opinion on the foreseeability of the collapse. I suppose if they can stick a subprime lender with the duty to foresee the subprime lending collapse, maybe we can make the same allegation stick against the regulators who also failed to foresee that collapse. Oh, I forgot: at the regulatory level, there's never an adequate remedy for negligence. Never mind.

Bob also discusses the case of a credit default swap transaction that unraveled due to a "credit event." While in that case the expert opinion required had to do with the law of the Philippines, I wonder how many experts will accurately unravel the complexity of the foreseeability of risk in credit default swaps. From what I can determine, the parties that put them together never adequately understood how they might ultimately unravel. Then again, that's the beauty of hired guns who operate with perfect 20/20 hindsight, and can take all the time your client can afford to run their models based upon the way events actually transpired.

At any rate, the article closes on a cautionary note of common sense from George Washington University economics professor Anthony Yezer, but one that will likely not be heeded by anyone.

"We all make mistakes," he says. "Not everyone who is wrong is a crook or has committed fraud. If we take that position, no one will ever take risks."

I don't know if the professor's tried to get a loan lately, but there isn't a heck of a lot of risk-taking going on these days. By the time the "tsunami of litigation" recedes, and all the experts have not only been battened down, but stowed away, it may be a long time before anyone takes one again.

Full post as published by Bank Lawyers Blog on December 10, 2008 (boomark / email).