If you are in a class action and someone is representing you, you have the right to "opt out" and bring your own action.

A lot of big entities have been opting out and bringing their own actions. Allstate and MassMutual, for instance, have mounted their own actions against the banks. AIG brought a $10 billion claim against Bank of America, stating that the bank sold it RMBS that were overvalued. The Federal Housing Finance Agency (FHFA) is suing 17 different financial institutions for misrepresenting the quality of MBS sold to Fannie Mae and Freddie Mac.

According to Lawyer Links, a legal consulting firm, there are actually about 18 different cases such as these that are mounted against financial institutions. "In theory these are all opt-outs; these investors are bringing in their own actions," said Neil McCarthy, editor in chief at Lawyer Links.

McCarthy said that if the plaintiffs are successful, it is unlikely that they will settle for pennies on the dollar. The FHFA's original deal amount, for example, is around $200 billion, which is about $50 billion of exposure for the banks. The cases are potentially a bigger liability for banks than the class-action lawsuits.

James Hamilton, a principal federal securities law analyst at Wolters Kluwer Law & Business, said the Securities and Exchange Commission's (SEC) enforcement actions have also proved a successful route on which to recover funds for investors.

"I think it's very difficult to get recovery in some of these cases in private suits by investors. Sometimes we have the SEC coming in and getting a settlement and some of that can go to investors" Hamilton said. "There are two possibilities - one in the private litigation by investors themselves and secondly SEC enforcement actions, which can recover funds for investors but sometimes it may be difficult to prove intent to defraud. At the end of the day, there will be settlements and people will get some recovery and we've seen some of that already, but it's a difficult road that is faced here. People are frustrated and nobody is happy about it."

The U.S. regulator exerted pressure on JPMorgan Chase by announcing in June that the bank would pay $153 million to settle charges of allegedly selling $1.1 billion in MBS that were destined to fail. The SEC asserted that as the housing market crumbled in March and April 2007, JPMorgan executives urged the marketing of Squared CDO 2007-1, a synthetic CDO linked to a collection of residential mortgages, without informing investors that a hedge fund - Magnetar Capital - helped select the assets in the CDO portfolio and had a short position in more than half of those assets.

Consequently, the hedge fund was positioned to benefit if the CDO assets it was selecting for the portfolio defaulted.  

 

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