Meanwhile, the Credit Crisis Litigation Wave Churns On

It seems as if the plaintiffs’ lawyers have kicked it into high gear as the year end approaches. There has been a flood of new securities lawsuit filings so far in December.  Posse List members across the country have been reporting in that many litigations started earlier this year are now entering the document review stage.

And as we reported last week in our “Trends in the Contract Attorney Market” (which you can access here) all the law firms we met with indicated a significant uptick in work projected to start in January: FCPA cases, Federal government investigations, bankruptcy and restructuring, and subprime/credit crunch work.  

Kevin LaCroix site is the best one we have found for charting the progress of litigations.  This past week he highlighted the NERA Economic consulting report which states securities lawsuit filings reached a six-year high in 2008.  LaCroix provides a full analysis here.

The report attributes the “surge” in filings to the credit crisis. Of the 255 YTD filings, 110 were credit crisis related, and almost 50% of cases involved defendants in the financial sector, as compared to only 16% of cases in the 2005-06 period.

Among the points made in the NERA report plus observations by LaCroix:

First, is has been an extraordinarily difficult year in which to just try and count the cases. For example, many litigation targets have been sued multiple times by different claimants, whether they are shareholders who acquired their shares over different time periods, or they are security holders with different classes of equity interests. Whether a new filing should or should not be “counted” has been difficult. Further complicating this has been the large number of state court filings, which are difficult just to find.

Second, while the 2008 filings were significantly increased by filings against companies in the financial sector, as the year has progressed and the impact of the credit crisis has become more widespread, the credit crisis-related filings have spread outside the financial sector.  The basic concept is that it involves, first, companies that were not themselves undermined by the credit crunch but rather as result of their exposure to companies that were. The most prominent examples are companies that suffered losses due to their exposure to Lehman Brothers.  These fall into the “exposed to others’ misfortunes” category of lawsuits.

Third, a huge wave of Madoff victim lawsuits could be coming. Madoff investors were quick to sue Madoff and his firm.   But with Madoff’s firm in liquidation and the money likely long gone, investors who lost money as a result of Madoff’s scheme are casting around for other targets from whom to try to recover their losses. Early returns suggest that investment firms and Madoff “feeder funds” could find themselves facing substantial Madoff victim litigation.

Fourth, the 2008 filings have been concentrated in the second and ninth circuits. The second circuit filings were increased by the large number of filings in the Southern District of New York, particularly financial companies domiciled there.

Fifth, looking forward, the NERA report notes that there could be “two opposing factors” that could determine whether or not average or median settlements will increase in the future. On the one hand, investor losses associated with the credit crisis lawsuits in 2008 are very large, which could be “an indicator of big settlements to come.” On the other hand, the credit crisis has “dramatically shrunk the size of many defendants’ pockets.” Lower financial wherewithal might operate as a downward force on settlement values and force quicker settlements (shorter document reviews?).