As litigations related to ABS losses mount in the U.S., European investors are beginning to show signs of similar uneasiness.
This has prompted an increasing number of U.K. law firms to consider the possibility of bringing a number of European banks to court.
But the litigation culture that is so prevalent in the U.S. won't translate as easily in Europe, industry sources said.
Larger U.K. firms are often bound by contractual obligations that prevent them from going after larger financial institutions.
Even as CDO losses mount, lawsuits are often and preferably settled out of court.
"Major investment banks are usually reluctant to litigate against each other because of the numerous commercial relationships between them," said Kate Learoyd, a partner at the international law firm of McDermott Will & Emery who specializes in financial services litigation and regulation. "Smaller banks and financial institutions are not as constrained."
These smaller firms are increasingly taking advantage of the demand for such litigation. Edwin Coe, a 26-partner commercial law firm based in London, is exploring a group claim on behalf of 6,000 Northern Rock shareholders. Meanwhile, Fox Williams has said that it would pursue credit crunch cases after representing a Belgian investment fund last year in a 100 million ($152.6 million) dispute with Goldman Sachs.
"It's always difficult to litigate against big banks, but there are firms who base their reputation on a willingness to take on financial institutions," a market source said. "These firms ready to sue the banks will be reasonably busy over the next year."
HSH Nordbank, the German public sector lender, earlier this month filed its claim against UBS in the face of significant losses incurred in connection with its $500 million investment in the North Street 2002-4 CDO, which is backed by U.S. mortgages and was structured and sold by UBS.
The investments were sold by UBS in 2002 to Landesbank Schleswig-Holstein, which subsequently merged with Hamburgische Landesbank to become HSH Nordbank. HSH Nordbank alleges that, in dealings involving the CDO, substitutions were made solely for the benefit of UBS. The lawsuit also claims breeches by UBS of their contractual obligations and fiduciary duties.
"Our investment in the North Street program was to be conservatively managed by UBS according to prudent investment objectives," said Bernhard Blohm, head of communications at HSH Nordbank, in a written statement.
"Our claims against UBS will show that the manner in which the investments were sold to HSH Nordbank and UBS's subsequent management of the assets were clearly contrary to our interests," he said.
Blohm added that his firm came to the realization that UBS seemed to have condoned actions that benefited only itself, at the expense of its clients.
"After repeated attempts to discuss our concerns with senior management at UBS, we find that, with regret, we have no alternative but to commence legal proceedings against UBS. HSH Nordbank is committed to the prudent management of its capital and to the recovery of its losses, which we regard as the responsibility of UBS," he said.
Specialized Groups Emerge in Europe
Paul Michael Rebus, co-head of the securitization and structured finance group at McDermott Will & Emery, said the firm had recently created a new subprime and credit markets group. "We have assembled a team of lawyers from across the firm to deal with the various issues clients are experiencing as a result of repricing in the debt markets," he said.
The group will advise the firm's banking and financial services clients, investment and pension funds, corporates and government agencies on issues relating to structured finance and derivatives, corporate restructuring and workouts, litigation and dispute resolution, taxation, civil and criminal regulatory investigations, government and legislative policy.
The group comprises 40 partners and 90 lawyers from McDermott's U.S., London and European offices. The new unit is led in New York by head of structured finance Thomas McGavin and in London by co-head of structured finance Nick Terras.
"The team we have assembled combines the skills required to provide clients with a comprehensive analysis of their risk and exposure to potential debt market fallout issues arising from the U.K., the U.S. and cross-border transactions, restructuring, litigation and regulatory investigation," Terras said.
The firm Cozen O'Connor also set up a similar group earlier this year via its U.S. offices, although its efforts are very well integrated with its London practice. Richard Allen, group managing partner in London, said the subprime group is dealing with specific requests looking at the potential for lawsuits in Europe.
"Like many companies, our clients are affected by the collapse of the subprime market, and they regularly seek our advice and representation on a wide range of issues related to those events," said Thomas Decker, president and CEO of Cozen O'Connor. "This new, focused practice group allows us to draw upon our wealth of expertise in different disciplines and serve our clients in an integrated and coordinated fashion."
However, a market source said that the chatter behind these new specialized groups was more for publicity for firms that want to appear to have a specialized focus. The source said that most of these law firms already had the people in place set up to deal with such client requests.
With U.K. banks reporting write-downs over the past month and with little room for growth in profits and dividends, the continued losses incurred are likely to bring up more lawsuits. Analysts expect more write-downs over the next three to six months. HBOS, Britain's biggest mortgage lender, announced that it had GBP41 billion in ABS exposure, and buy-to-let specialist Bradford & Bingley said it had the equivalent of a fifth of its market value in CDOs. Alliance & Leicester warned that higher funding costs - further fallout from the credit crunch - would take a GBP150 million ($298.8 million) out of profits.
Last week Fitch Ratings placed $16.2 billion-equivalent of European ABS CDOs on watch negative, citing exposure to U.S. subprime. The rating agency also downgraded all rated notes of Deerfield Capital Management's Coltrane CDO to CC' on negative watch following an event of default with the vehicle breaching a key market value trigger. Standard & Poor's recent downgrade of FGIC and XL Capital has affected selected wrapped bonds in Europe, predominantly among future flow ABS.
Meanwhile, S&P lowered the ratings on 86 European synthetic CDO tranches at the end of February. From this batch, 68 referenced U.S. RMBS and CDOs with U.S. RMBS exposure that have experienced recent negative rating actions while 18 experienced corporate downgrades.
S&P said that the 86 tranches represent 3.1% of the total number of European synthetic CDOs it rates.
Staying Out of the Court
UBS has put forward a counterclaim against HSH Nordbank, arguing that it had met all contractual obligations.
It has invited the bank to an arbitration process, which is less formal and quicker than court litigation that typically takes about a year from filing to resolution.
"Many banks deal with disputes without litigating," Learoyd said. "Senior managers or lawyers with an understanding of the market assess the bank's position in a realistic way and come to a commercial solution. This is usually preferable to litigation."
Angus Duncan, a partner at Cadwalader Wickersham & Taft, agreed, although said that even if most parties will try to settle out of court, there is still a minority that will make it to the courts. "We anticipate that more of these litigation lawsuits will be in the U.S., as it's the main market for ABS CDOs," he added.
The rules relating to class-action suits are also much more favorable in the U.S., making it a more attractive venue for securities litigation than England or any other European jurisdiction.
"In the U.S., the availability of pre-trial discovery, witness depositions and the fear of multiple and punitive damages act as a powerful incentive to settle cases that might be regarded as relatively weak in Europe," Learoyd said.
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