Litigants renew focus on banks’ conflicts of interests

It is imperative that litigants try to attack quickly where they have the best chance of success. Experience has shown that it is not enough simply to claim that a security lost value. "By 2007 there was already enough noise in the system that sophisticated investors should have realized that things were going tits up," says one litigation expert. "If you were out there investing in synthetic CDOs in late 2007 then you simply weren’t paying any attention at all." Recent cases have therefore been more targeted towards claiming fraud in particular deals rather than in general mortgage origination. For example, in 2007 claims relating to mortgage loans made up 39% of all credit crisis-related filings, according to NERA Economic Consulting. Filings relating to CDOs and CDS made up 23.2% and 2.9% respectively. In 2010, mortgage loans made up 7.4% of all cases while CDOs accounted for 37% and CDS 40%. "People are now starting to run with the idea that the bank did not disclose a conflict of interest rather than the idea that they were mis-sold securities," says one lawyer. "Just because a deal doesn’t work out doesn’t mean that there was fraud. These cases are not slam-dunk winners. Plaintiffs need to get past some high thresholds. They need more than: "This thing plunged in price and is now worthless." The surge in conflict-of-interest cases is no surprise following the settlement of the SEC’s investigations into Goldman Sachs’ Abacus 2007 CDO last year. Bringing suits in the wake of an SEC decision is a no-brainer. "If the government brings a series of successful cases then the number of private cases will grow," predicts one lawyer. "Because Goldman Sachs settled in the Abacus case it leaves them much more exposed in a private case. Plaintiffs will be much more willing to bring cases as the government has done the heavy lifting for them."