Regions Financial Hit with Subprime Lawsuit

Posted on April 2, 2008


It is one of those necessary but scary things that I believe I need to do as a corporate lawyer- read securities lawsuits and cases.  When it comes to securities litigation, the fight can sometimes be as terrible as the result.  As was widely reported in the press, Regions has recently been hit with a securities lawsuit.  Reading these lawsuits is always frightening for lawyers because it is the hindsight that comes into play.  Regardless of whether these lawsuits are with or without merit, the plaintiff’s and the plaintiff’s attorney have the benefit of 20/20 hindsight.  So, with trepidation, I wallowed through the complaint.

One interesting allegation is that Regions knew, or should have known,
that the subprime crisis was more substantial than disclosed because
they sold their subprime subsidiary business (see Count 113(b) in the
Complaint).  The
implied argument is that because you sold off your subprime unit you
knew that the bank had more exposure to subprime loans (with respect to
the residential construction loans) then you disclosed and you also
should have taken preventive steps.

Should Regions have put two and two together? Should Regions have said,
"hey, we are unloading our subprime arm because we think conditions are
bad, so we had better go check the rest of the loan portfolio?"   Is it
inherently obvious that if you sell one division on essentially a bet
that the subprime crisis will not be contained, then you then have to
check your residential builder portfolio?  That is a pretty high
standard.  Sure, it would be nice if our business leaders had that
vision, but that is a high standard to hold them legally accountable
for such inaction.  If the subprime crisis was contained, then Regions
shareholders would have lost the opportunity on the investment.

So ultimately, I do not see legal liability being present in this
instance.  Every shareholder of every bank is hurting.  Greed of course
fueled that desire and Regions (as well as numerous other banks) fueled
that greed with their subprime unit and their investment in
collateralized debt obligations.  However, unless more facts come to
light about what Regions knew and when they knew it, the acts of the
board seem to fall clearly in the realm of the business judgment rule
and do not rise to the level of a valid securities claim.  Of course,
this is just one man’s opinion.

Mike Goodrich, Goodrich Law Firm, LLC