This is the first of a series of trend reports tailored for our clients and friends to help companies stay a step ahead of legal issues that may affect their businesses. In this issue, we scrutinize financial analyst reports to identify potential litigation trends in the financial services industry. For the most recent three-month period, the following potential trends have been identified:

Further Mortgage Fraud Investigation/Enforcement

On January 27, the Justice Department announced a new task force focused on investigating and prosecuting fraud in connection with the mortgage crisis. Eleven subpoenas have already been served. The focus of the new investigation is on origination conduct — specifically, fraud in packaging and pooling mortgages for securitization purposes — and will also extend to tax-related issues. This investigation could lead to a wide variety of litigation, including class actions, whistleblower proceedings, and commercial litigations among parties to the securitization process for as-yet-undiscovered frauds or other alleged misconduct.

European Debt and Sovereign Stress

The European debt crisis appears far from resolution and has already impacted the financial sector. Despite intervention by the European Central Bank, the growing consensus is that the crisis will only escalate. In that event, there is potential for litigation related to defaults on debt obligations, credit-linked transactions and defaults on currency-linked transactions, general credit risk/default litigation with respect to both banks and commercial borrowers, insolvency/bankruptcy proceedings, and stock-drop class actions or shareholder proceedings.

Bank Failures, Mergers, and Acquisitions

As the stresses from lingering domestic financial weakness and the European/foreign debt crises continue to build, so does the trend of institutional weakness in the banking sector, particularly among smaller or medium-sized banks. This has contributed to the continuing trend of bank failures and merger/acquisition transactions, which could lead to increased litigation activity including, for example, merger break-up litigation.

Municipal Securities

In recent months, the SEC has intensified its institutional focus on the municipal securities market. More recently, the SEC created a new specialization unit to focus on municipal securities and public pensions. The SEC has also started a new whistleblower program, offering significant payments to municipal insiders and others. The SEC's focus encompasses five primary areas: (1) offering and disclosure fraud, (2) tax or arbitrage-driven fraud, (3) pay-to-play practices and public corruption, (4) valuation and pricing fraud, and (5) accounting and associated disclosure violations. This activity raises the specter of whistleblower proceedings, class actions, statutory indemnification actions, municipal insurance coverage actions, and professional and/or fraud liability actions among municipalities, banks, accounting firms, and others.

Copyright 2012. Morgan, Lewis & Bockius LLP. All Rights Reserved.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.