| Subprime mortgage-related lawsuits against company executives or board members have little chance of succeeding, according to a firm that provides insurance against such claims. XL Capital Ltd. CEO Michael McGavick said yesterday that it will be tough for investors to meet the legal threshold required to extract damages. Investors filed about 100 class-action securities lawsuits in 2008 seeking to recover losses related to more than $1.7 trillion in global writedowns and other credit losses. Jamie McGee, Bloomberg 12/09/2009 |
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By Jamie McGee
Dec. 9 (Bloomberg) -- Investors have little chance of extracting damage awards from executives and board members at firms that lost money betting on subprime mortgages, said the chief executive officer of XL Capital Ltd., which insures directors and officers against legal claims.
"It's very hard to pick out the management team that did something wrong to the level that the law requires," Michael McGavick said yesterday at a Goldman Sachs Group Inc. conference in New York. "Being collectively stupid is not a basis for a lawsuit."
U.S. securities class action suits climbed to a four-year high in 2008 with almost half of the 210 claims related to the collapse of the subprime mortgage market, according to a report by Stanford Law School and Cornerstone Research. Investors are seeking to recoup losses from a crisis that contributed to more than $1.7 trillion in writedowns and credit losses worldwide.
XL is among insurers, including Ace Ltd. and Chubb Corp., that sell coverage for lawsuit costs tied to management errors or negligence. The Bermuda-based insurer and reinsurer said claims rose in its professional liability business in 2008 as the pace of lawsuits increased.
XL reported 45 claims related to Bernie Madoff's $65 billion Ponzi scheme and said it had three new subprime-related claims in the third quarter. The insurer said in October it has confidence in its reserve levels for claims.
'Early Days'
"You also have this global economic downturn, which will give rise to greater failure and greater opportunity for losses as well, and I think that's still pretty early days in evaluating" losses, McGavick said.
Federal securities class actions fell to 87 claims in the first half of 2009, a 22 percent drop from the year-earlier period, Stanford and Cornerstone said in a separate statement.
"The market was much more volatile in the second half of 2008," John Gould, vice president of Cornerstone research, said in the statement. "Moving forward, greater market stability may signal a reduced number of securities class action filings."
New directors and officers claims at Chubb dropped 5 percent in the third quarter, the insurer's Chief Operating Officer John Degnan said in October.
"The predicted wave of directors and officers litigation does not seem to be materializing yet," Degnan said in a conference call in July. "We are now about two years into this developing claims scenario in an arena which has been traditionally characterized by a rush to the courthouse on the part of plaintiffs' lawyers."
'Really Big'
Chubb's rates for the coverage increased 22 percent in the three months ending Sept. 30 for financial companies, Degnan said. This compares to a 5.8 percent rate decline in overall U.S. commercial insurance in the same period, according to the Council of Insurance Agents and Brokers.
"This is an issue that was six months ago a really big topic for insurance investors, and it has largely kind of gone away and the reason is we just haven't seen the lawsuits," Paul Newsome, an analyst at Sandler O'Neill & Partners LP, said yesterday in an interview.
XL has more than quadrupled this year and is the best performer in the 24-company KBW Insurance Index. The company closed at $17.74 yesterday after dropping 33 cents in New York Stock Exchange composite trading. Chubb, based in Warren, New Jersey, has fallen 4.7 percent this year.
McGavick said the acquittals last month of two former Bear Stearns Cos. hedge-fund managers bode well for the industry, and similar defenses will "for the most part hold ground."
Acquitted
Ralph Cioffi and Matthew Tannin were acquitted of six counts including conspiracy and fraud in the first trial stemming from a federal probe of the subprime crisis. The men were accused of misleading investors about the health of two hedge funds that later collapsed, erasing $1.6 billion of investor assets.
"You had at least some damning evidence," McGavick said. "And yet the defense was in essence, 'We were caught up in tsunami not of our own making, we didn't see it for what it was, we were more optimistic than that, but that's no crime.' And the jury agreed. That message I think is very positive and powerful for where this all goes."
The Bear Stearns hedge funds collapsed in 2007. Bear Stearns itself failed less than a year later and was bought by JPMorgan Chase & Co.
To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net.
Last Updated: December 9, 2009 09:09 EST
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