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Lawyer Says Subprime Suits Could Be ‘Bigger Than Enron’

American Bar Association (By Martha Neil)

A lawyer at a well-known British firm says a wave of lawsuits being filed over subprime mortgage issues could eventually exceed the scope of the litigation over the infamous Enron debacle. "In terms of the potential numbers of lawsuits, the subprime crisis could be bigger than Enron,” Tim House, an Allen & Overy banking litigation partner, tells the London Times. "But this time, we can expect banks to be much less willing to simply settle quickly.” Adds Calum Burnett, another litigation partner at the firm, “There is a feeling that banks probably overpaid to settle litigation following the big corporate collapses, such as Enron.”

One reason for the expected influx of litigation work is that the banks targeted in the subprime suits are expected to defend aggressively and even file claims against one another. Another is the ingenuity of plaintiffs lawyers, who are reportedly busy thinking up innovative claims to file over the many nontraditional mortgages made to borrowers with dubious qualifications that were then bundled together and sold as packages to investors worldwide before they went into default.

In the United Kingdom, subprime suits are also likely to be encouraged by a recent landmark ruling that addresses so-called nonreliance clauses in sales agreements concerning financial instruments sold by banks and other financial institutions to sophisticated investors. In the past, such provisions barring investors from relying on information provided in sales pitches, unless the information also is included in the final written sales agreement, have been recognized as valid. But in Quest 4 Finance Limited v. John Maxfield and Others, EWHC 2313 (QB) (Oct. 12, 2007), the Times explains, a judge held that the seller can invoke a nonreliance clause in a signed contract only if it can prove that the buyer actually didn't rely on previous sales pitches.

Subprime issues are believed to have boosted the number of U.S. class actions filed by corporate shareholders, although the overall number of class actions being filed still falls short of records set in the late 1990s. Subprime suits typically are alleging that lenders overstated the values of their mortgages and failed to disclose material information that suggested the stated values of the mortgages were dubious.