Bear Signals Start of Litigation Woes

Bear Stearns’ is merely the first in an array of companies facing an onslaught of sub-prime-related lawsuits. Stearns’ collapse will undoubtedly be followed by a slew of litigation as regulatory investigations conclude and credit markets continue to falter. 

According to Compliance Week, Jeff Nielsen, director of risk management services at Navigant Consultants, believes companies seeking to acquire these faltering lenders, will then need to address the litigation concerns that accompany their acquisitions.

Amid the escalating lawsuits, many observers believe that many of these clashes are a result of poor managerial decisions which resulted in unsound loans, forged collateral values, and acceptance of inaccurate information from credit rating agencies.

According to an Advisen Ltd. report approximately $170 billion has disappeared from these public companies’ bottom lines. Unlike the credit crisis of the 1980s or the downfall of conglomerates such as Enron, Arthur Andersen, and WorldCom, today’s sub-prime crisis goes beyond the financial sector.

Kevin LaCroix, a partner at Oakbridge Insurance Services, believes that lenders, mortgage services, and originators to bond insurers are involved, “to the point where this is bound to move beyond the financial sector.” LaCroix refers to Bristol Meyers Squibb and its $275 million in losses resulting from investments worth less than the company had predicted. He also cites the case of Metro PCS’ suit against Merrill Lynch. Metro PCS filed suit charging Merrill that investments in auction-rate securities resulted in an approximate $20-million loss.

D&O insurers should expect to see the affects of these sub-prime failures well into 2009. La Croix said that the current state of instability will affect the overall price of insurance policies for corporate directors and officers. He also predicts that the true damage of the sub-prime crisis will not be evident until the end of 2009.