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Mortgage Mess Unleashes Chain Of Lawsuits
Tuesday, September 11, 2007; 10:34 AM
When something goes badly on Wall Street, people wind up in court. And the subprime mortgage mess is no exception.
A consortium of investors is going after the collapsed Bear Stearns hedge funds. Home buyers, shareholders and investment banks have filed suits against more than a dozen mortgage lenders. A working group at the Securities and Exchange Commission is examining accounting and disclosure issues, as well as stock sales earlier this year by executives at companies that since have been ensnared by the subprime mess.
"We will look at those responsible for any potential fraud, by company management, auditors, lawyers, credit-rating agencies or others," said Walter Ricciardi, a deputy enforcement director at the SEC.
And this is just the beginning, say legal experts tracking the steady stream of lawsuits. It has only been a few months since the credit market turmoil began, when home buyers with risky credit histories -- subprime borrowers -- started defaulting on their loans in large numbers.
There is almost no end to the list of potential legal targets, analysts say, because so many players share a piece of the blame for the mortgage meltdown. There are the home buyers who overstated their income to obtain risky loans, the mortgage lenders that made the loans and the Wall Street securities firms that repackaged the loans into tradable securities. There are the credit agencies that assigned ratings to those hard-to-value securities, the hedge funds and institutional investors that bought those assets to get an extra boost in returns and the individuals who invested in those fund managers.
The high-profile busts at Enron and WorldCom resulted in "a handful of focused litigation against a handful of very particular parties," said David Reiss, an associate professor at Brooklyn Law School. "The difference now is you have an immense amount of litigation against an incredible range of parties. . . . Everybody can point fingers at so many other people that you just don't know when it'll stop."
Securities lawyers are standing at the ready, with some firms creating special groups to focus exclusively on the mortgage mess.
"We kind of looked at the subprime mortgage industry from top to bottom . . . and saw that there would be litigation as well as securities-fraud issues as well as regulatory issues," said Rick Antonoff, a partner at Pillsbury Winthrop Shaw Pittman, who heads the firm's subprime industry group, which was established in March.
Among the group's clients are Wall Street banks that are suing subprime lenders to get them to repurchase loans that went bad shortly after they were sold. Antonoff expects the group to keep busy, most likely into 2009.
Credit agencies, which graded billions of dollars worth of mortgage-backed securities as safe investments throughout the recent housing boom, are also feeling the heat.
Members of Congress are calling for hearings and oversight, saying the rating agencies are conflicted because they are paid by investment banks that issue the securities the agencies rate. Institutional investors accuse the rating firms of being slow to downgrade securities.
"Essentially, the originators and credit raters shoved enough pigs and laying hens in with the beef herd that investors expecting prime ribs on their silver platter and money in their pocket ended up with pork ribs on their paper plate and egg on their face," Rep. Gary L. Ackerman (D-N.Y.) said in an opening statement during a Financial Services Committee hearing last week.