ABA Banking Journal - January 2008 - (Page 36) INSURANCE REPORT Subprime crisis breeds class-action suits “Never stoops the soaring vulture, On his quarry in the desert,… But another vulture, watching,… Sees the downward plunge, and follows; And a third pursues the second,… Till the air is dark with pinions.” From “The Ghosts,” in The Song of Hiawatha, by Henry Wadsworth Longfellow hile financial services companies, mortgage investors, corporate stockholders, and homeowners either facing the effects of subprime and exotic loan resets or the aftermath of foreclosure live through their share of the current credit crisis, one profession has zeroed in on the mess as a fresh source of successful business: class-action lawsuit attorneys. Indeed, since the first cracks began appearing in the subprime and exotic mortgage field, about two dozen class-action suits have been filed against companies that made or purchased these mortgages, according to Charles B. Casper, chairman of the Class Action Defense Practice at Montgomery, McCracken, Walker & Rhoads, LLP. He has been tracking these cases. Casper, based in Philadelphia, who has served as Microsoft’s class-action counsel since 1993, says the first types of filings to appear were traditional shareholder suits against boards and managements of lenders and other financial players. Filed under federal securities laws, these concerned claims against decisionmakers who oversaw the companies’ subprime lending efforts. While some suits involve companies that have had trouble but that continue to operate, others are against those that went out of business or filed for bankruptcy. Another type of case that’s starting to be seen are those filed under state unfair and deceptive practices statutes, alleging that borrowers were misled. And, most recently, classes of employees of subprime lenders have filed suit against companies when their retirement savings, invested in company stock, has evaporated. These suits are being filed under the federal Employee Retirement Income Security Act against par- Foreclosure fallout W Subprime lending crisis adds to banks’ insurance headaches T Future impact on D&O market Consider shareholder suits. As the nearby box details, stockholders have sued a number of large financial players because of subprime missteps. Thus far, community banks haven’t been dragged into that, according to Mike Read, regional territory manager for the ABA-sponsored insurance program, underwritten by Progressive. However, Read points out By Steve Cocheo, executive editor CLASS-ACTION SUITS continues on page 38 36 JANUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html PHOTOGRAPH: ARCHIVE HOLDINGS INC. / THE IMAGE BANK he good news is that the subprime crisis hasn’t been a huge direct challenge to community banks on the lending side. The bad news is that when a depth charge like that goes off, the ripples flow far and wide, and those are affecting community banks and their insurance coverages in more ways than one. that community banks are not immune from shareholder suits, and the evolution of subprime-related cases is young, yet. And even though these banks aren’t being sued, they stand a good chance of feeling some of the pain, once removed. “We’re starting to hear some saber rattling,” says Progressive’s Read, “about a hardening of the directors and officers insurance market, and the subprime crisis is driving that.” Read thinks D&O rates may be going up in 2008, as carriers insuring larger banking companies see potential payments and future risks rising. The rattling will grow louder. Koorosh Talieh, partner at Howrey LLP, Washington, D.C., specializes in insurance coverage litigation—essentially, he’s the one called in when carriers won’t pay off. He says the subprime issue is already shap- http://www.mmwr.com/ http://www.mmwr.com/ http://www.howrey.com/ http://www.progressive.com/ http://www.ababj.com/subscribe.html
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