Experimental feature

Listen to this article

Experimental feature

Investor lawsuits are back and they’re taking subprime write-downs personally. After a two year lull, securities class action lawsuits have risen sharply, from a low of 53 in the second half of 2006, to 110 in the first six months of 2008, according to Stanford University’s Securities Class Action Clearinghouse. If the pace of filings keeps up, investor lawsuits this year could reach levels not seen since the 2002 collapse of Enron and the tech bubble.

Even more noteworthy, the new lawsuits are seeking damages far larger than the losses being claimed just a year ago. The 2008 filings claim an average loss of market capitalisation of $8.3bn, more than double the historical norm.

The huge jump in claim size comes despite a series of US Supreme Court decisions that have made it much harder to win big damages. Since plaintiffs’ lawyers generally work on contingency, their decision to head back to the courthouse suggests they genuinely think they can win this time, even with the tougher rules.

The root of the lawsuit surge is easy to find: credit crunch-related lawsuits accounted for 58 of this year’s filings. Most of them take aim at banks that made repeated promises that the worst was over and followed up with additional writedowns and dilutive capital raising. In just one example, Merrill Lynch two weeks ago valued its collaterised debt obligations holdings at $11.1bn and then sold the lot on Monday for $6.5bn. Merrill is already facing two class-action lawsuits and that transaction could easily become fodder for a third.

It is a long way from filing class action lawsuits to winning them. Merrill has successfully beaten back such claims in the past, and it argues that no one could have anticipated a crunch of this magnitude. But investors should remember that the last big wave of securities lawsuits was followed by record settlements.

Post and read comment on this Lex

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe now

If you have questions or comments, please email help@ft.com or call:

US and Canada: +1 800 628 8088

Asia: +852 2905 5555

UK, Europe & Rest of the world: +44 (0)20 7775 6248

Get alerts on Central banks when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article