Proving misrepresentation is trickier than it first seemed

According to LA Croix at Oakbridge Insurance, of the 240 lawsuits that have been filed in connection with the credit crisis maybe 50 to 60 are connected to structured finance deals. "The legal requirement is that the plaintiff must show misrepresentation, material loss, and that the loss was caused by the misrepresentation," he says. "This is harder to achieve than you would think. The case must be judged by what was known at the time, not what is known now." It can be a challenge just to get to the table. If cases are brought as class actions then all plaintiffs must have bought into the initial distribution – everyone in the class action must have bought every security. If they are claiming misrepresentation then plaintiffs also have to prove justifiable reliance – that they relied on that specific information in making their investment decision. Given the nature of complex structured deals, however, the option for a class action is often not even there. "There were a limited number of buyers in these CDO deals and they were generally sophisticated institutions that knew the market well," says Jeffrey Smith, partner at Bingham McCutchen in New York. His firm is working for several banks in a range of cases relating to the sub-prime crisis including representing Credit Suisse in its claims against National Century Financial Enterprises over "the largest asset-backed fraud in history" and for JPMorgan over alleged misrepresentation about WaMu loan underwriting that concerns securities valued at $30 billion. "The use of a class action is generally not going to be available in CDO cases, which makes them less attractive to plaintiffs’ lawyers working on a contingency," Smith tells Euromoney. Indeed, a class-action suit brought against Royal Bank of Scotland was denied on January 18 on the basis that class action was not the best way to resolve investors’ claims. The court ruled that as investors were large and institutional they were able to pursue their own claims – the first time a court has ruled on class certification for a MBS action.