Monday, February 22, 2010

Continued Pursuit of New Defendants for Lehman Losses

The collapse of the financial markets that began in mid-2008 has spawned quite a bit of litigation, and at the forefront of much of that litigation is Lehman Brothers. That is not too much of a surprise, given the fact that the government refused to prevent its bankruptcy. Once Lehman went under, any security that was based on its creditworthiness also collapsed. See,  Investors Filing Claims Against Lehman BrokersLehman Note Sales Under Fire, and Lehman Principal Protected Note Arbitrations On the Rise.

Investors have been filing, and in some cases winning, cases against UBS, who sold a significant amount of principal protected notes to the investing public. Last week, investors scored another victory in Lehman related litigation - a federal court judge in New York denied, in part, a motion to dismiss a class action complaint against Lehman, its affiliates, and certain individuals who signed registration statements for the offering statements for one group of Lehman offerings.

The complaint seeks damages for alleged violations of the Securities Act of 1933 in the issuance, distribution and sale of over ninety separate offerings of mortgage pass-through certificates by affiliates and subsidiaries of Lehman Brothers Holdings, Inc. (collectively, "Lehman") between September 2005 and July 2007. The Certificates are a form of mortgage-backed security ("MBS").

The complaint alleges, in part, that the registration statements for the securities failed to disclose certain material facts, and were therefore misleading. The complaint seeks damages from the individual defendants for these alleged misstatements and omissions under Section 11 and 15 of the Securities Act of 1933, on the theory that they signed the registration statements and on the theory that they controlled Lehman Brothers, Inc., the depositor in the securitization process, and the trusts that issued the Certificates.

The defendants include include certain officers and directors who participated in the registration and sale of these securities. They moved to dismiss the complaint as against them.

Legally, in order to win a claim under Section 11 of the Securities Act of 1933, the plaintiff must allege that (1) it purchased a registered security, (2) the defendant adequately participated in the offering in a manner giving rise to liability under Section 11, and (3) the registration statement "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." Section 15 creates liability for individuals or entities that "control[led] any person liable" under Section 11.

The court dismissed the claims in 88 of the subject offerings, since the plaintiffs did not purchase securities in those offerings, and therefore lacked standing to bring those claims. However, the court denied the motion to dismiss as to the remaining 6 offerings, leaving the individual defendants to defend themselves in the class action. We can also reasonably assume that another case will be brought, with investors in the other 88 offerings as plaintiffs.

Investors continue to seek out new defendants in order to recoup their losses in investments that were tied to Lehman, and we can expect to see more of the same in the future.

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