It is a truth universally acknowledged that the amount of commercial litigation increases during a recession. Recently the former lord chancellor, Lord Falconer, predicted that the credit crunch would start a new era of mass litigation. Indeed, Greg Case, the chief executive of Aon Corporation, has warned insurance companies that they could be stung for claims totalling 35bn [pounds sterling].
The number of class actions filed in the US has already increased significantly since the credit crunch. Last month saw a judicial comment upon the likely increase in litigation when RAB Capital started a case against PricewaterhouseCoopers, the administrator of Lehman Brothers, seeking the immediate return of 29m [pounds sterling] rather than waiting for the administration to run its course. In effect, RAB argued that its claim should be fast-tracked because it needed to publish its fund's net asset value on October 1. Mr Justice Morgan refused, indicating that if he had allowed the claim to proceed immediately it would cause a stampede of similar claims, which would undermine the litigation process.
In what areas should we expect an increase in litigation? It's likely to happen on two fronts where failing banks are concerned: establishing their liabilities and distributing their assets. Banks could also see themselves defending claims of negligent misstatement as investors take them to task for improper accounting or for purchasing asset-backed securities based on bad loans. Debt instruments such as collaterised debt obligations and structured investment vehicles could go under the microscope, too, as investment banks and rating agencies face increasing pressure to justify their use, particularly in a distressed market.
Pension companies facing big write-downs will be seriously considering claims against banks concerning their conduct in relation to sub-prime mortgages. Taking encouragement from the Office of Fair Trading and the European Commission, angry shareholders are also waiting in line for their turn …