Law Suits & Courts

Justice Watch: BankAtlantic verdict to buoy suits against big banks

Posted on Wednesday, December 1, 2010

As part of their Contract with America, Republicans in Congress tried to shut the door on shareholder class actions against publicly traded companies in 1995. Many lawmakers at the time felt shareholders needed to learn to take losses when fickle markets dipped and not blame hard-working executives.
Since enactment of the Private Securities Litigation Reform Act, attorneys in the field say only about 12 cases have gone to trial in 15 years.
But some legal observers say last week’s verdict in a securities fraud class action against BankAtlantic Bancorp may nudge that door open a little bit as plaintiff attorneys look to capitalize on the nation’s appetite for holding financial institutions accountable for the recession.
"It is certainly going to be a blueprint for plaintiffs attorney to look at," said former Securities and Exchange Commission attorney Richard Serafini, who is now of counsel for Ruden McClosky in Fort Lauderdale.
Andrew Hall, partner at Hall Lamb and Hall in Miami, said any publicly traded company in the financial sector is a likely target for litigation if its management is untruthful. "There is a substantial exposure because of involvement in subprime mortgages and the awareness of the failure of credit rating companies to adequately perform," he said.
Serafini and Hall were not involved in the BankAtlantic case.
The nine-member jury found the Fort Lauderdale-based bank holding company and executives including chairman and CEO Alan B. Levan made eight false statements in a critical six-month period in 2007. It calculated investors who bought stock from April 26 to Oct. 26 that year should be paid $2.41 a share. Total damages won’t be known until claims are made, but they are expected to be substantial. Shares dropped to an all-time low Thursday and again Friday, closing at 67 cents, down 4 cents, or 5.5 percent. The company has vowed to appeal, saying it did not get a fair trial because the judge handed jurors the conclusion that four Levan statements were false.
Still, no one is more excited about litigation opportunities than members of the legal team for shareholders who sued on behalf of lead plaintiffs State-Boston Retirement System and Erie County Employees’ Retirement System.
"We have dozens of cases that are ongoing against banks," said Matthew Mustokoff, a partner with Barroway Topaz Kessler Meltzer & Check near Philadelphia and a member of the plaintiff legal team. "I think the credit crisis in the last few years has really brought these cases into focus. This is what the securities laws were designed to protect against: financial institutions and other public companies that lie about the exposure they have."
He said his firm is working on litigation against Citibank and Wachovia alleging misrepresentations to investors. While the suit against BankAtlantic focused on the deteriorating quality of developer loans as the commercial real estate market skidded downhill, other suits will take on subprime mortgages and collateralized debt obligations in the context of SEC filings.
Mustokoff blames greed. "The higher the stock price, the higher the paycheck," he said.
On the other end of the spectrum is Kevin M. LaCroix, a partner in OakBridge Insurance Services in Beachwood, Ohio. The insurance company focuses on executive liability including director and officer insurance and is not involved with BankAtlantic.
By his count, only 10 trials have gone to a jury for a verdict since Congress passed the 1995 law. Plaintiffs have won six times, while defendants have prevailed four times. Other cases with trials may have resulted in settlements, he said.
"The potential damages are so large most companies would rather settle than running the risk of a large verdict," LaCroix said. The BankAtlantic Bancorp verdict is a wake-up call to others companies and executives facing similar lawsuits that the recession is not a solid defense, he said.
"They want to be able to contend there may have been economic downturn, but that doesn’t mean that people can’t be held liable for fraudulent misconduct," he said.
That view is echoed by securities law expert Mike Perino, who is Dean George W. Matheson Professor of Law at St. John’s University School of Law in New York and author of the new book, "The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance."
"The Private Securities Litigation Act was intended to make it tougher to win, but it was never intended to insulate defendants from actual fraudulent conduct," he said. "One verdict in favor of one set of plaintiffs in one trial does not undo the entire act."
That said, Perino said the law is flexible enough to bend when banks are seen as a catalyst in a financial crisis.
"These are not hard-and-fast rules, and certainly in times of great public anger at the financial industry juries might be more willing to see the plaintiff’s way than see things the defendant’s way," he said.
Not Backing Down
BankAtlantic Bancorp isn’t backing down from its aggressive defense. Company attorney Eugene Stearns, co-founder of Stearns Weaver Miller Alhadeff & Sitterson in Miami, predicted class members won’t ever see a nickel of the verdict.
Levan in a statement faulted Ungaro’s findings on false statements by him. He said those statements during conference calls with analysts were "forward-looking" and fall under the safe harbor protections of the Private Securities Litigation Reform Act.
Perino wasn’t so sure since the jury found the company purposefully misled investors through statements downplaying problems with the loans to major developers including Miami-based Lennar, then the nation’s largest home-builder.
"That is a tough case for the defendants," he said.
By May 2007, the company had identified about $175 million in troubled developer loans, while Levan was making statements such as, "There’s really nothing significant to note on the credit front."
Hall said BankAtlantic made a good effort after the verdict to puff up its feathers and bluster about appeal. But he noted the company has problems with Levan’s statements as well as quarterly and annual SEC filings.
"There is a duty to communicate openly and fairly," Hall said. "If it’s false, it’s false."
He said the verdict will not sit well with banking regulators or help BankAtlantic Bancorp raise capital after 12 consecutive losing quarters.
"It affects every piece of the formula," Hall said.
But he agreed BankAtlantic Bancorp didn’t have much chance once Ungaro ruled before trial on Levan’s statements and limited expert testimony.
"I don’t know how you overcome that," Hall said. "That’s a real problem for any trial lawyer."
John Pacenti Daily Business Review

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