Credit Crisis Litigation Doubles in 2008: Report

Beyond billions in writedowns, the credit crisis produced a jaw-dropping 576 new litigation matters filed in U.S. federal courts in 2008, according to a report released Wednesday by Navigant Consulting, Inc., a global consulting firm providing dispute, investigative, operational, risk management and financial advisory solutions. According to Navigant’s report, the 576 subprime-related cases filed in federal courts in 2008 were twice the number filed in 2007 and by themselves exceed the 559 savings-and-loan cases handled by the Resolution Trust Corporation over its entire six-year existence. Since Jan. 1, 2007, a total of 866 cases have been filed in federal courts – and the litigation wave has shown few signs of abating, Navigant said. Almost 70 percent of those cases remained active at year-end 2008. “Whether you’re talking about the economic collapse or the related litigation, the year 2008 was by any measure historic,” said Jeff Nielsen, a managing director who leads Navigant Consulting’s Financial Services Disputes & Investigations group and is lead author of the report. “The credit crisis continues to find new ways to inflict damage, and each time a new wellspring of litigation seems to emerge.” The number of subprime-related filings on a quarterly basis peaked at 179 in the first quarter of 2008; however, new cases continued to be filed at a rate of more than 100 per quarter throughout the year and even inched up slightly following the Lehman bankruptcy filing in September 2008. Securities cases drove much of the litigation in 2008 — 38 percent — followed by borrower class actions, which accounted for 24 percent of litigation, and contract disputes which made up 17 percent of litigation. The report also found an expansion in the scope of litigation tied to the financial crisis. For example, the 2008 figures included more than 50 cases tied to auction-rate securities, a category that did not even exist in 2007. Geographically, New York and California account for approximately half of all cases filed in 2008, according to the report’s findings. For 2009, Nielsen noted that more than two new cases continue to be filed for every one that is disposed, meaning that the backlog continues to grow. The Navigant report also presented an analysis of savings-and-loan era litigation and concluded that certain types of government-driven litigation, which are yet to be filed, could run on for years. “One thing you can bank on,” said Nielsen, “is that however long it takes for credit market conditions to improve, it will take considerably longer to work through the related litigation.” Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.