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Financial Reform Leaves Vile Law Intact

So far there have been a grand total of 13 class action settlements in cases involving the financial crisis, and the list includes some big names. One of the earliest was Merrill Lynch's January 2009 subprime settlement, $550 million in two suits, just before it was acquired by Bank of America (BAC). This year there are a grand total of four settlements related to the financial crisis: MoneyGram (MGI), General Growth Properties (GGP), and two companies people have heard of, Charles Schwab (SCHW) and Countrywide Financial (also acquired by Bank of America). The Countrywide settlement was just before Memorial Day. Nothing since.

In contrast to a mere baker's dozen settlements, the court dockets have been chock full of dismissals. Reams upon reams of dismissals. From IndyMac (IMB) back in 2007 to New Century (NCBC)right afterwards, Novastar Financial, Washington Mutual (acquired by JPMorgan Chase (JPM)), Citigroup (C), the Blackstone (BX). Just the other day, the Ninth Circuit Court of Appeals sustained a lower court's dismissal of one of those cases, brought against Impac Mortgage Holdings (IMH)and two of its officers. Impac vigorously fought the charges and won a resounding victory, with no small help from the PSLRA.

The plaintiffs contended that "Impac's executives committed fraud by representing that Impac's underwriting guidelines were strict and that its loans were high-quality, while in fact the executives were overriding the underwriting guidelines to originate and purchase poor-quality loans." It wasn't for lack of trying. The plaintiffs did their homework. They produced five former employees who backed up their case. But the appellate court, citing the strict rules of the PSLRA, said the plaintiffs didn't meet the law's requirement that they "state with particularity facts giving rise to a strong inference" that the defendants intentionally or recklessly made false statements.

It's one hell of a barrier to surmount, and this case shows just how high it is.

The former employees "claim that Impac's officers received reports and spreadsheets detailing the poor-quality loans, and further that the officers themselves approved loans that did not meet the underwriting guidelines by overriding the underwriters' recommendations," the appellate judges said in their ruling. Convincing? Not to the Ninth Circuit Court of Appeals. "The former employees' allegations, however, consist of general allegations of mismanagement that omit the necessary details of when or how the underwriting guidelines were ignored. No specific underwriting guidelines are discussed, and the alleged violations are not sufficiently tied to the class period," the court ruling said.

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