Addressing the regulatory, litigation and restructuring issues arising from the credit crisis spreading across world markets involves a diverse set of legal disciplines. Subprime lending and structured finance issues can be exceedingly complex. Central to the ability to deal with controversies involving subprime instruments and structured products is a thorough understanding of the mechanics of the products, the accounting for and valuation of these products, and the myriad ways these products find their way into the marketplace. At Sutherland, our transaction lawyers have been intimately involved in the creation of derivative instruments and their use as financing vehicles as well as the securitization and collateralization of credit instruments. Our professional liability and regulatory lawyers have been involved in assisting clients in resolving both professional liability and regulatory issues as markets have become more volatile and accounting rules have changed how companies value such instruments. The end result of the volatility and change, all too often has been litigation involving disparate claims reaching all aspects of the creation, valuation, disclosure and distribution of such products. Sutherland possesses the variety of skills and knowledge to cost effectively address the issues.
Our Current Involvement in Structured Finance and Subprime Controversies
Sutherland was among the first firms to represent clients in the latest round of structured finance controversies, beginning in the spring of 2007 as the turmoil began in the credit markets. With this early start, Sutherland attorneys have obtained hands-on experience with the issues involving structured finance and credit market lending, including valuation, reporting and market issues. Sutherland currently represents financial institutions in inquiries by the SEC, state securities commissions and FINRA relating to structured finance products. We have litigated cases involving accounting for large pools of subprime loans, fair value accounting and fair lending practices. We are currently defending class actions relating to subprime products and auction rate securities, as well as numerous arbitrations arising from sales of subprime-related products Examples of our involvement in the latest round of subprime controversies include the following:
- We represent a national bank and its broker-dealer subsidiary in one of the first class actions alleging fraud in connection with the marketing of auction rate securities.
- We represent a national broker-dealer and a number of individuals in investigations and examinations by the SEC, state regulators and FINRA relating to the valuation of subprime portfolios and related issues concerning disclosure and suitability.
- We represent the officers of a proprietary mutual fund offered by a regional broker-dealer in a series of class actions alleging prospectus disclosure violations of the Securities Act of 1933 arising from mutual funds with subprime investments.
- We represent a broker-dealer in several dozen FINRA arbitrations filed by customers who purchased shares in a fund that invested in structured finance products.
- We represented the defendant in the only litigated SEC administrative proceeding addressing fair valuing assets.
- We represent the former chief accounting officer of a national homebuilding firm in a series of securities class actions, derivative actions, and ERISA actions involving issues arising, in part, from the homebuilding firm’s subprime mortgage loan and accounting practices.
- We counsel financial institutions as they address valuation, suitability and other issues related to the structured finance and subprime crisis.
In addition to these cases directly relating to subprime and structured products, we have experience defending financial institutions in actions involving lending and derivative subprime issues. Our practice includes the representation of:
- A Small Business Administration lender in matters related to loan origination, underwriting, credit quality, appraisals, sales in the secondary market and servicing;
- Public companies and their officers in SEC investigations into fair value practices;
- A subprime lender in various aspects of its lending business, including litigation involving alleged mortgage fraud, misrepresentations and breach of contract;
- A leading payday advance company in a class action defense and other state and federal court litigation work; and
- Automobile finance companies with respect to fair lending practices issues.
Our Experience in Subprime Accounting Issues
Our experience in subprime accounting matters dates back to the early 1990s, when the credit markets first experienced the effects of widespread defaults in subprime instruments and issues emerged related to fair value accounting. Our knowledge of accounting rules, and the impact of their application to the financial markets, is an essential component of the value that Sutherland brings to an engagement. Much of the turmoil in the credit markets is tied to the valuation of subprime portfolios under FAS 157, and we currently advise our clients on matters related to the application and effect of FAS 157, along with FAS 5. Likewise, the tumult in the auction rate markets is closely related to the classification standards set forth in FAS 95.
We have firsthand knowledge of the accounting rules based upon our years of defending the Big Four accounting firms, other national and regional accounting firms as well as companies and individuals. We represent accounting firms in litigation and regulatory investigations related to accounting for structured finance, derivatives and large pools of subprime loans. Our experience in this area led to several important decisions that have shaped the case law applied to accountants and other professionals:
- We defended an accounting firm in two class actions filed by investors in companies engaged in the subprime premium finance business. The consolidated cases were resolved in the accounting firm’s favor by summary judgment, and the judgment was affirmed by the appellate court in an opinion that significantly clarified the law applicable to accountants. White v. BDO Seidman, LLP, 249 Ga. App. 668, 549 S.E.2d 490 (2001).
- We defended an accounting firm in a suit brought by a bankruptcy trustee on behalf of hundreds of investors in an automobile dealership offering subprime loans against allegations related to loan loss allowances and other accounting and auditing issues.
- We defended an accounting firm in a shareholders’ securities fraud class action, in adversary and arbitration proceedings brought by a post-bankruptcy litigation trustee, and in a joint SEC/DOJ investigation, related to a retailer that carries its own subprime credit.
Our Experience in Structured Finance Transactions
Our litigation group also has at its fingertips the experience of our interdisciplinary team of securities, tax and real estate lawyers who regularly deal with structured debt products including securitized mortgage loans, Collateralized Debt Obligations ("CDOs") and Collateralized Loan Obligations ("CLOs"). These attorneys are well versed in the contractual, structural and regulatory constraints inherent in structured debt products, as well as rated structured debt products, mortgage servicing and non-performing loan resolution.
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