article
In the firing line
06 October 2008
It is a truth universally acknowledged that
commercial litigation increases during a period of recession.
Recently the former Lord Chancellor Lord Falconer has warned that
there will be a new era of mass litigation as a result of the
credit crunch. Indeed the CEO of Aon has warned insurers that they
could be stung for claims totalling $60bn.
Already there has been a raft of litigation
arising out of the credit crunch, much of it in the United States
by way of class action. The latest statistics show that class
actions in the United States are up by 58%. Last week saw judicial
comment upon the likely rise in claims when RAB Capital commenced
action against PWC, the administrators of Lehman brothers claiming
the return of $50m immediately rather than having to wait for the
administration to run its course. RAB Capital had suggested that in
effect that the claim ought to be fast tracked as it needed to
publish the funds Net Asset Value (NAV) on 1st October.
Mr Justice Morgan refused indicating that if he had allowed the
claim to proceed immediately it would lead to a stampede of claims
leading to the undermining of the litigation process. He did
however grant leave to appeal which is pending.
So in what areas can we expect litigation?
With the crumbling of certain banks expect litigation on two fronts
- firstly in establishing the banks’ liabilities and secondly in
the distribution of their assets.
Banks could also see themselves defending
claims of negligent mis-statement from investors, taking them to
task for purchasing asset-backed securities based on bad loans or
for improper accounting. Debt instruments such as collaterised debt
obligations (CDO’s) and structured investment vehicles (SIV’s)
could also come under the microscope as investment banks and rating
agencies face increasing pressure to justify their use ,
particularly in a distressed market.
Pension fund companies who face major
write-downs will be seriously considering litigation against
banks questioning their conduct in relation to sub-prime mortgages.
With encouraging overtones from the Office of Fair Trading and
European Commission angry shareholders are also waiting in line for
their turn on the litigation merry-go-round. There are already
reports of a group claim of up to 6000 shareholders against
Northern Rock.
We have also seen the first green shoots of
inter-bank litigation taking root with Barclays suing Bear Stearns
over its management of a collapsed hedge fund which it describes as
"one of the most high profile and shocking hedge fund failures in
the last decade".
Administrators can expect to be firmly in the
firing line as companies try to extract their monies immediately
rather than take their chances as unsecured creditors in the
administration. The action being taken by RAB Capital is just the
tip of the iceberg with some estimating that up to another 30
companies are looking to take similar action.
In this orgy of litigation even lawyers and
accountants are not immune with many potentially facing
professional negligence claims in relation to the setting up of
schemes and organising the purchase of the securities.
Budgets are now being set for the litigation
and for instance, the legal press is suggesting that PWC has
earmarked £20m for claims arising out of the Lehman Brothers
administration.
It is anticipated that the full force of this
litigation will not hit the courts for some time yet and it may
take up to four or five years for this litigation to work itself
out. One also has to bear in mind that in the past banks, the
professions and the financial institutions have been seen to some
extent as “soft” targets with an expectation that they would seek
to settle the claim.
The indications from the insurance companies
and reports in the trade press would suggest that this time round
things will be different and the message that is coming out loud
and clear is that claims will be defended vigorously. This message
is also borne out in the latest Ministry of Justice figures
released in the last week. These show that the number of defended
claims in the Queens Bench Division rose 16% between 2006 and
2007.
So it looks like a busy time for the courts
with the prediction that the legal fallout will dwarf that of any
other crisis of recent time including Enron.
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