Financials could face more investor lawsuits
JPMorgan lost a case Tuesday that opens the door for a greater number of aggrieved investors to sue banks.
Investors in financial stocks have a new reason to be nervous: On Tuesday, New York's highest court made it easier for disgruntled investors to sue banks and Wall Street firms. As a result, JPMorgan Chase (JPM), Bank of America (BAC) and Goldman Sachs (GS) -- among the many other possible targets of investors -- may face many new lawsuits in the coming months.
Depending on how many new cases are filed and their cumulative stakes, they might add up to real money, even for the largest banks. The financial meltdown, after all, created huge numbers of angry investors.
At issue in the case was whether or not New York's strong securities law, the Martin Act, prevented investors from suing companies that mistreated them illegally under the "common law" -- the law developed by judges over the centuries rather than enacted by New York’s legislature. If the Act blocked common law claims, investors would have to use the less protective federal securities laws in any situation other than outright fraud.
However, the Court decided that the Martin Act didn’t block investors' common law suits, a result that shocked many even though it was unanimous and firmly grounded in the statute's text and public policy. The surprise stemmed from the fact that in over 50 cases cited by JPMorgan Chase -- the loser in Tuesday's case -- judges had dismissed common law claims as preempted by the Martin Act.
The Court explained that, contrary to those judges' analysis, the only block to individuals' claims was the one expressed in the Martin Act's text, namely that only the AG could enforce the Martin Act. As a result, if an individual wanted to sue over conduct that only violated the Martin Act -- conduct that was legal under the common law -- then the individuals' actions were indeed blocked. But that's a very narrow class of claims. New York's courts are now wide open to aggrieved investors.
Since the financial meltdown created a legion of aggrieved investors, expect many more lawsuits to be filed. Even if some, or even most, of those claims wouldn’t win at trial, Tuesday's decision sharply raises the litigation costs for bankers and traders. Many of these claims will now survive motions to dismiss, forcing firms to spend more to defend each case and raising their incentives to settle.
That said, it’s really an open question whether or not a flood of expensive litigation will swamp the big players in the financial meltdown in a material way. Perhaps the result will simply be a higher but still affordable cost of doing business. What seems certain, however, is that shareholders will find out. A plaintiffs' attorney quoted by the Am Law Litigation Daily reporter Nate Raymond explained: "It's a landmark decision that will protect investors from misconduct in the financial markets [and] will tremendously enhance plaintiffs' ability to vindicate their rights under New York law."
The bottom line: While Tuesday's decision shouldn't have much impact on financials immediately, people who invest in them should keep an eye on the resulting tide of litigation. If that tide rises high enough -- a process that will take months at least -- the market will start factoring it into the companies' already beleaguered share prices. For now, investors should watch to see how companies address the topic in their litigation disclosures in their quarterly and annual reports, if at all.
Abigail Caplovitz Field is a writer and attorney in New York. Her blog, Reality Check, focuses on banking and the foreclosure crisis.
Where to begin.....
I hope any and all criminal activity gets prosecuted to the full extent of the law and especially those individuals that did the activity in question. This is why I do not invest in anything; because I could lose it all with no real recourse. After all I should have known the risk. Which brings me to the other issue. People may have been quite angry to see their investments evaporate, but in their zeal to get rich they put a lot if not all their eggs in the hands of people who do not care about them or their financial well being.
What I would like to see is fairness, clarity, and some accountability in the stock market. Unless I devote my life to a stock portfolio, how can I be sure my interests are being looked out for? I hope the entire financial sector does some deep reflection and realizes how greed, and fortune hunting has damaged this country. It's time to go back to basics, rebuild some trust both in the market and the businesses that trade their stock. Until then I will just pull up a chair and watch this train wreck.
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