The ongoing turmoil in the financial markets has shaken the foundation of the banking world. This crisis, which started with a crack in the armor of subprime mortgage loans, has grown into a global dilemma that threatens governments around the world with the collapse of their financial and credit markets. Many of the oldest and most revered financial firms in the US have fallen or been rescued by the government. In a recent article on financial institution litigation, Tom Vartanian, Dan Loeb, and Nick Arni discuss the unprecedented challenges institutions that are fortunate enough to remain standing face after the first wave of this crisis. Financial Crisis Brings Surge in Securities Litigation Against Banks, 92 Banking Rep. (BNA) 457 (Feb. 24, 2009). Included in these challenges are a dramatic surge in federal securities class actions filed against banks and other financial institutions and a yet-to-come increase in actions brought by the Federal Deposit Insurance Corporation as receiver against parties deemed responsible for bank failures.
The authors conclude that securities fraud claims against banks face significant hurdles due to the structure of the federal securities laws and the ongoing and widespread instability in the financial markets. Nevertheless, in light of the substantial increase in the number of securities fraud class actions filed against banks in 2008, the authors suggest that financial institutions should exercise significant caution when issuing public statements regarding their operations. This is a good time for financial institutions to reevaluate the processes they employ to (i) reach disclosure decisions and (ii) identify information that would be or could reasonably be perceived as being material to the public’s investment decisions. Most important is the process employed by financial institutions to ensure they are not institutionally aware of any material facts that are contrary to their public statements. Similarly, any forward-looking statements should be identified as such and accompanied by specific, tailored, and meaningful cautionary language warning investors of any known or anticipated risks. Although financial institutions would be prudent to follow these steps under any circumstance, doing so is essential in the current financial climate.