Subprime Market Collapse Triggers Wave of Class Action Filings
- United States
- 10/23/2008
The subprime market collapse has spurred numerous class actions. Some shareholder plaintiffs allege that underwriters are liable for making false and misleading statements in connection with Fannie Mae and Freddie Mac’s stock offerings.
In Mark v. Goldman Sachs & Co. et al., No. 08-Civ-8181, filed on September 23, 2008 in the Southern District of New York, the plaintiff alleged the defendants violated Section 12(a)(2) of the Securities Act, 15 U.S.C. § 771(a)(2) when they served as underwriters for Freddie Mac’s offering of Z Preferred Stock in the fall of 2007. According to the Complaint, plaintiff alleges that the defendants issued an Offering Circular which allegedly failed to disclose and warn plaintiff that (1) Freddie Mac was exposed to mortgage-related losses; (2) had debilitating deficiencies in its underwriting and risk-management procedures; (3) was and would remain after the offering undercapitalized; and (4) faced imminent insolvency, among other allegations.
Similarly, in Crisafai v. Merrill Lynch, Pierce, Fenner & Smith Inc., et al., No. 08-Civ-8008, filed on September 16, 2008 in the Southern District of New York, the plaintiff alleged defendants violated Sections 20(a) and 10(b) of the Securities Exchange Act and Rule 10b-5 when they served as underwriters for Fannie Mae’s offering of 8.25% Non-Cumulative Preferred Stock, Series T on May 13, 2008. Plaintiff alleges in the Complaint that Merrill Lynch and five other underwriters participated in the review and drafting of the Offering Circular for the offering. Plaintiff contends that the statements made in connection with the offering were “materially false and misleading” because (1) they grossly overstated Fannie Mae’s capitalization; (2) they failed to disclose the serious risk that current account changes under consideration by the Financial Accounting Standards Board (FASB) could force Fannie Mae to bring over $2 trillion of off-balance sheet obligations onto its financial statements and deplete the company’s capital surplus even further; and (3) defendants falsely asserted that the management believed that the offerings would adequately sustain the company through the end of the year. Plaintiff seeks to hold defendants liable for the allegedly misleading statements and for acting as controlling persons during the offering.
These securities-related class actions potentially represent a new wave of class actions. Differences in the shareholders’ investment experience, receipt, review and/ or comprehension of the offering circulars may pose challenges to class certification. The failure to establish the requirements of class certification, including numerosity, commonality, typicality, and predominance may preclude class certification under Federal Rule of Civil Procedure 23. If you have any questions about defending against securities class actions, please contact Charles Wachter and Julie Sneed.
