Monday, December 22, 2008

Securities and White Collar: Subprime Mortgage Meltdown Enforcement and Civil Litigation Heating Up

All levels of government are becoming involved in responding to the subprime mortgage meltdown. In addition private litigants are beginning to file legal actions.

The federal government's enforcement response will be spearheaded by the Securities and Exchange Commission and the Department of Justice.

The SEC has created a subprime task force to investigate cases associated with the subprime meltdown. The areas of investigation are numerous. Some of the issues will involve SEC filings such as whether companies properly reported the value of collateralized debt obligations including securitized mortgages. Others will involve whether those selling securities based on debt made adequate disclosure to prospective investors of the value of the offerings and the risks involved in trading them. Another issue is whether parties conducted proper due diligence before offering securities or recommending securities to clients. There will also be questions of whether insiders traded on non public information as the markets were about to collapse.

The Department of Justice will focus on many of the same questions. With DOJ the issue will be whether targets and subjects of the investigations acted with sufficient knowledge to constitute a criminal fraud. It is likely that the Department of Justice will model its actions on the efforts to investigate and prosecute fraud arising from the savings and loan scandals of the very early 1990's.

It is also likely that state attorneys general will undertake criminal and civil enforcement actions to protect their residents.

Finally, individuals will file suites to obtain recompense for monies the feel were lost due to fraud. These suits may mimic the allegations of actions brought by the SEC. It is likely that the next several years will produce an explosion of private litigation stemming from the subprime mortgage meltdown.

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