Subprime Investor Losses: Coughlin Stoia Takes Action

March 26, 2008
Coughlin Stoia Corporate Governance Bulletin

Investors have been feeling the pain of the enormous losses in mortgage-backed securities, many of which were heavily exposed to subprime mortgage defaults. The worst may be yet to come.

In late 2007, Citigroup and Merrill Lynch both announced losses of over $8 billion due to exposure to risky investments – and the market sharply discounted the value of both banks’ stock. As losses continue to mount, a number of investors are actively pursuing litigation against the institutions which issued and sold these mortgage-backed derivative investment vehicles (often referred to as collateralized debt obligations, or “CDOs”). Coughlin Stoia is at the helm of several of these shareholder derivative and class actions.

Rumblings of an imminent collapse in the CDO market began early last year, as loan delinquencies and defaults began to rise in response to the cooling of the over-heated housing market. As homeowners began to default on rising payments due on subprime or adjustable-rate mortgages, the value of the pooled securitized mortgage instruments in turn is collapsing. The result has been a plunge in the value of mortgage-backed securities and CDOs, with write-downs of $80 billion worldwide in 2007. A leading business periodical estimated that subprime defaults would reach a level between $200 - $300 billion. The fiasco has seen the capitalization of trusted companies like bond insurer Ambac Financial Group, Inc. evaporate, and its suspected malfeasance has led to subpoenas issued from the Massachusetts State Attorney General.

As officials from the FBI and SEC begin to conduct their own investigations into the lending and securitization debacle, a team of senior partners at Coughlin Stoia have already initiated numerous class-action lawsuits against the financial institutions that packaged and sold subprime mortgage-backed securities, alleging violations of the Securities Exchange Act. As Coughlin Stoia partner Samuel Rudman explained to the New York Law Journal, “In many cases, CDOs and mortgage-backed securities were overvalued and their risks were not sufficiently disclosed to investors. In fact, some of the companies that packaged mortgage-backed securities into CDOs, and others associated with their sale, did not disclose that a large number of the underlying mortgages were issued to some of the least credit-worthy borrowers . . . . As a result, the securities are no longer marketable at prices anywhere near the prices paid by investors because the securities lost, or will soon lose, their [AAA] credit rating.”

Attentive investors have filed suits against Citigroup, Merrill Lynch, Washington Mutual, Ambac, Countrywide Financial, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Huntington Bancshares, UBS AG and a host of other institutions. The fallout of the subprime deception has led, in short order, to the hasty retirement of several CEO’s including Merrill Lynch’s Stan O’Neal, Citigroup’s Charles Prince and Angelo Mozilo of Countrywide. Incredibly, The Sydney Morning Herald revealed that at the same time the devastating financial news was announced in late 2007, the executives of the seven largest Wall Street banks, many of them implicated in the financial frauds, awarded themselves a net total of $33 billion in bonuses for the year.

Coughlin Stoia intends to aggressively pursue litigation on behalf of defrauded investors.

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