Another Subprime Class Action Dismissal: Plantiffs in for a Tough Road Ahead?

Last week Los Angeles federal district court judge John Walter dismissed a class action against the three top officials of the now defunct Downey Savings and Loan Association. In a concise 17-page ruling, Judge Walter found that the plaintiffs, represented by lead counsel Coughlin Stoia Geller Rudman & Robbins, failed to show that the defendants had made materially false or deceptive statements; failed adequately to plead scienter (despite evidence from 13 confidential informants and indications that the defendants had violated accounting standards); and failed to show loss causation. Two of the individual defendants were represented by Morrison & Foerster; the third by O'Melveny & Myers.

The important question is whether a pattern is beginning to emerge. Two huge subprime class actions--against Countrywide and New Century--survived motions to dismiss last fall. But they are beginning to seem like outliers. There was a dismissal of a Delaware derivative case against Citi board members and the dismissal of a securities class action against Impac Mortgage Holdings.

Judges in all three of the recent dismissals seemed strongly disinclined to hold defendants responsible for stock slides that could be attributed to an industry-wide collapse, absent clear evidence of fraud or intent to deceive. If that thinking turns out to be pervasive in the judiciary, plaintiffs are in for a tough road ahead.