NEW YORK (
) -- Big banks are facing lawsuits like never before, with accusations ranging from swindling investors to racial profiling to
and, in one case, requesting nudie pics from a depositor.
But experts say the unprecedented tidal wave of litigation is still unlikely to crash down on the industry's bottom line.
According to a review of federal district court filings on
Justia.com, the country's six biggest banks faced a 72% rise in such civil litigation from 2008 to 2009. Litigants have initiated 3,500 additional claims since then; with nearly 14,000 of such suits filed since the financial crisis erupted in September 2008.
"Many lawsuits were filed immediately after the financial crisis," says Walt Mix, a managing partner at the consultancy LECG who advises banks.
A former bank regulator on the West Coast, Mix specializes in an array of issues that have become a much greater liability: Risk management, corporate governance, financial advisory services, regulatory compliance and M&A.
Several high-profile suits filed by regulators garnered attention last year, including the
Securities and Exchange Commission's
Bank of America
, related to its acquisition of Merrill Lynch. There were also the
shareholders who tackled
in lieu of the company they had invested in.
More recently, the SEC's civil fraud charges against
and sexual harassment charges filed against
by a former bank teller have garnered the most attention.
A few smaller cases have gotten some press as well:
Seattle homeowners who don't want their homes foreclosed upon;
minority borrowers in Baltimore who want to be treated more fairly; a
hedge-fund that wants its money back; and individual investors who plunged millions into structured products, only to
later describe themselves as "lambs being led to the slaughter."
While most of those are related directly to the financial crisis and economic strife, perhaps the
most incredible suit is one alleging that a bank representative "clearly implied that he wanted naked photographs in exchange for providing his customer service." Apparently, the customer had called to rectify a transaction, and later received text messages from the representative requesting some "phone fun" and asking whether she was "near a bathroom."
Banks have denied many of those charges, or said they would be handled appropriately. They have also said in annual reports that non-interest expenses have risen because of increased litigation.
But the swarm of cases isn't likely to line litigants' pockets nearly as well as those of the legal teams filing billable hours. Nearly all of the high-profile cases over the past couple of years have been settled for less than $500 million, and most in the tens of millions -- chump change relative to balance sheets of $1 trillion to $3 trillion. The likelihood of other cases holding up in court also appears uncertain at best.
For instance, Goldman Sachs is reportedly in protracted settlement talks with the SEC over charges filed on April 16. The firm has vehemently denied the charges and doesn't want to admit any wrongdoing. The SEC needs to restore its reputation after an embarrassing legal snafu last year regarding Bank of America.
Experts are split on whether the SEC can offer a believable case in court. It's debatable whether Goldman's actions -- even if unsavory -- actually broke any laws, and the regulator has so far presented little evidence to that effect. But in the meantime, the mood has further soured against Goldman, implicitly bolstering the SEC's case.
Meanwhile, investors have been piggybacking on charges and claims filed by the government.
Private investors tend to file claims after action by regulators, attorneys general or public pension funds, and then lie in wait for the outcome. This has happened recently with class-action suits regarding
auction-rate securities and
the Merrill deal, as well as long-running, but yet-to-be-proven claims that Wells Fargo has discriminated against borrowers on the basis of race.
In the case of Goldman, a hedge-fund firm broke the seal last week, demanding $1 billion in damages over another CDO deal gone awry. The firm pegged its allegations to details uncovered by the SEC and Congress.
Banks are eager to settle as quickly as possible -- as long as they don't have to admit to any wrongdoing. Such an admission would only lead to a wave of even more viable suits.
For instance, Judge Jed Rakoff's initial refusal to accept the SEC's $33 million settlement with Bank of America set off a flurry of fear. Rakoff demanded more information, said the amount was too small, and told the regulator to try harder to determine who, specifically, was culpable. He also noted that the investors the SEC was purportedly protecting would have ended up paying for the damages.
begrudgingly OK'd a revised deal after months of intransigence and colorful rhetoric. But his behavior led Evan Stewart, a partner with the law firm Zuckerman Spaeder, to assert in the
New York Law Journal
that the judge had opened a "Pandora's Box" of negative legal consequences.
Stewart and others noted that the investigation was threatening attorney-client privilege rights and could prod regulators to get excessively tough to avoid another Rakoff-SEC imbroglio. Banks worried that regulators might strongarm them into releasing proprietary information that would harm their competitive edge.
Perhaps the most fearsome outcome would be Rakoff denying the settlement and forcing the case into court. The thought of a guilty verdict -- which would have dire results not just for Bank of America but the industry at large -- left many executives gulping.
Pointing to that type of culpability factor, Mix also points out that "there's a significant area that's relatively uncharted, which deals with, 'Who in the system of producing loans is responsible for the fact that a loan ended up being a problem?'"
A broker may refer a loan to a bank that originates it, which then passes it onto Wall Street, which then gets the deals rated by agencies for securitization. Investors who buy those securities are supposed to perform due diligence, and the initial borrower signed a contract, whether or not he understood it.
With so many fingers in one pie, it's hard to figure out who, specifically, is to blame for any segment of the process -- and therefore who ought to cover the loss.
"It's a game of hot potato," says Mix. "I think it will take many years to resolve the pending cases."
In the meantime, the sheer number of cases piling up against big banks appears intimidating - not to mention the scope of the claims and negative attention surrounding them.
For instance, Goldman is now reportedly dealing with a criminal probe in addition to the SEC's charges. Top executives, including CEO Lloyd Blankfein, as well as traders involved in the controversial "Abacus" deal have been hauled before Congress. They also face the constant drumbeat of negative press in a 24-7 news cycle.
The SEC and Justice Department are also reportedly investigating other Wall Street players for their practices. Then there's the potential for additional suits from investors riding the government's coattails.
The domino effect would seem to be a major distraction for bank management, even if legal fees and settlements are shrugged off as the cost of doing business.
But Joseph Lynyak, a partner with Venable LLP who works with large financial firms, says the cases pose relatively little risk to firms with tons of litigation experience and bigger problems on their hands. Furthermore, while the dollar-amount of settlements can seem startlingly large, they're minuscule compared to the size of banks' balance sheets.
Lynyak says he once called a client to give his assessment of a lawsuit.
"I said, 'It looks like one of those "bet your company" lawsuits,'" says Lynyak, using a colloquial term for a claim whose bark is bigger than its bite. "And he said, 'We have one of those "bet your company" lawsuits filed every couple of days.'"
"And that's just it -- nothing has really come to the top as something that would jeopardize one of these institutions," he continues. "It's second-queue position in terms of other problems they're facing."
Nonetheless, Goldman shares have plummeted 27% since the SEC charges were announced -- far more than other big-bank stock over that course of time. There's no guarantee value will suddenly return just because a settlement is reached.
-- Written by Lauren Tara LaCapra in New York