November 20, 2008 / 8:58 PM / 11 years ago

Banks, raters face subprime lawsuits, new rules

NEW YORK, Nov 20 (Reuters) - The U.S. subprime mortgage crisis has sparked more than 250 class action suits against Wall Street banks and rating companies and will lead to rising regulation in 2009, top litigators said on Thursday.

Global hedge funds also face a new regulatory environment and massive redemptions, and law firms are bracing for a flood of lawsuits related to the collapse of the mortgage and structured debt industry, according to Jonathan Sablone, a partner and co-chair of Nixon Peabody’s alternative investment litigation practice.

“There’s going to be a tidal wave of litigation,” Sablone said during a subprime mortgage conference in New York. “Invariably, when you’re fighting over a limited pool, someone’s going to get left out.”

Nixon Peabody has received many phone calls in preparation for legal filings and expects a new wave to hit in January.

“From the institutional investor side, it’s all bad,” Sablone said. “You’re probably not getting a check. Come Jan. 1, you’re probably getting a letter.”

For the loosely regulated $1.7 trillion hedge fund industry, more regulation is “inevitable,” he said.

“Hedge funds were fine as unregulated instruments when they were limited vehicles for a chosen few,” Sablone said. “It doesn’t make sense when you have huge amounts of capital and pension funds involved. The rules have changed.”

Rating companies also will be weighed down by rising litigation costs. Firms like Standard & Poor’s and Moody’s Investors Service have been blamed for assigning top “AAA” ratings for collateralized debt obligations that later plummeted in value as homeowners defaulted on subprime mortgage loans.

“The rock is being overturned,” said William O’Connor, a partner at Crowell & Moring LLP. “The ratings are going to be shook by these legal actions.”

S&P, Moody’s and Fitch Ratings so far have been successful arguing that they serve a role as publishers, much like the free press, and that their ratings represent opinions rather than investment advice.

“That industry may lose some of its First Amendment protections,” said Peter Haveles, partner at Arnold & Porter LLP in New York.

Panelists at the conference, sponsored by Duff & Phelps, all agreed there will be few winners in the upcoming fights.

“Once you’re in litigation, it’s more about how to avoid the biggest loss, not so much about winning,” Sablone said. “The buzzword for us right now in stress.” (Reporting by Walden Siew; Editing by Leslie Adler)

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