Trustee Targets Investment Banks; Will His Suit Spark Others?
In a case that may be something of a signpost pointing to further litigation related to the subprime mortgage crisis, a bankruptcy trustee has filed suit against major investment banks claiming that their lax practices shored up a third-party lender, Philadelphia-based American Business Financial Services Inc., and thus cost ABFS investors money.
Investors, many of them elderly individuals, lost about $750 million when ABFS went bankrupt three years ago, the Wall Street Journal reported in a front-page article today.
Although the defendant investment banks—which include Bear Stearns Cos., Credit Suisse Group, JPMorgan Chase & Co. and Morgan Stanley—apparently had no direct duty to individual holders of notes that ABFS issued, the trustee claims the investment banks are responsible for helping ABFS inflate the value of securitized subprime loans that ABFS also made, according to the newspaper. Thus, the trustee contends, the investment banks are in part responsible for leading investors to believe that ABFS was on a stronger financial footing than it was when they purchased the notes.
The investment banks declined to comment for the newspaper article, but in pleadings deny any wrongdoing.
Representatives of the FBI and the Securities and Exchange Commission met recently with a lawyer and accountants working with the bankruptcy trustee on the case, the Wall Street Journal says.
