Without the extension, if a stock went down in 2007 and the law firm had some indication from an investor or client that there was reason to bring a suit, "you would have seen those cases undoubtedly in 2008."

Every year, he continued, plaintiffs firms evaluate their businesses. "This time around, the firms are looking at their pools of potential cases from the past and realizing that they don't know what's going to happen in the future. For there to be litigation potential for new stock drop cases over the next two years, "there needs to be a major re-inflation of the stock market," he said.

With the overall stock market falling so far down in 2008, typical stock-drop cases wouldn't survive in Mr. Rudman's view.

GOOD CASES IDENTIFIED

Still, a broker in the audience of an earlier session worried that her clients, who were caught in the stock market downdraft, could face securities lawsuits. "What should I tell them? What do you consider to be a good case?" she asked plaintiffs' lawyer, Sherrie Savett.

Ms. Savett, an attorney with Berger & Montague, P.C. in Philadelphia, said, "The very first thing you look at is was there a very significant and sudden stock drop. But that's just where the analysis begins."

"Then you have to look at the statements that were made during a prior period [and] you have to look at what caused the stock price to decline at the end."

From a plaintiffs' lawyers' perspective, "good cases" exist in situations where the reason for the decline relates to a company-specific problem that "had to have been going on for a number of years. If it was an endemic problem and it couldn't have happened overnight because of swift changes in the overall market," she said.

Then, she said, lawyers start to look at whether there was insider selling by any of the executives. "But even if there wasn't, was it the kind of problem that was really embedded in the company--that it had to be there [yet] their statements were so optimistic as to be incredible."

Stuart Grant, managing director or Grant & Eisenhofer, P.A. in Wilmington, Del., who also represents plaintiffs, said he has a simple "cocktail party test" that helps him decide whether he has good ammunition for a securities lawsuit.

"If I can't in 30-45 seconds tell you a compelling story as you're sitting there with a cocktail and have you say, 'Damn, we've got to go get [them],' then I don't have a good case," he said. He reasoned that while lawyers get more than 45 seconds before a district court, the judges probably make their minds up faster. He said he has to be able to present a convincing set of facts on the first page of the opening brief or complaint that the judge is going to read.

Ms. Savett gave a specific example of a "good case" from the latest round relating to subprime issues. An attractive case target, she said, is a bank that was originating loans for years, in a situation where almost all of the loans turned out to be bad leading to a takeover of the bank by a receiver.

The bank had been saying for the prior two years that its underwriting standards were excellent, its controls were excellent and its reserves were very much in line, "and suddenly there's a complete disaster and a complete write-down of all the assets."

Ms. Savett reported that a number of cases with similar facts have already prevailed against the initial attack of motion to dismiss, including those against Countrywide Financial, IndyMac Bancorp and Toll Brothers.

"We engage in very serious investigations, trying to look into businesses and talking to former employees. We talk to experts in the industry who say [potential defendants] couldn't have had good controls for this to happen so suddenly," she said. Experts can outline accounting principles, telling the lawyers that when delinquencies are going up and there are mortgage failures, the defendants could not have had their reserves the same over that year and been in compliance with accounting standards.

Going back to his cocktail party analysis, Mr. Grant said he holds up someone like Angelo Mazilo, former chairman of Countrywide, to make his case. While Mr. Mazilo asserted he shouldn't be blamed because the entire mortgage market was going down, "he sold a quarter of a billion dollars worth of stock while he was telling everyone that everything was great."

"When you tell people that, it makes them want to say, 'You got to get that guy.'"

LOOK OUT AUDITORS!

Boris Feldman, a defense attorney and partner with Wilson Sonsini Goodrich and Rosati in Palo Alto, Calif., who moderated the session, said that despite all the analysis "cream of the crop" plaintiffs' attorneys like Ms. Savett and Mr. Grant put into their class action filings, he still sees 10-50 plaintiffs' firms file complaints on soon as a stock prices tumble.

For 2008 and 2009, he noted, a large proportion of filings relate to financial meltdown cases. (Editors note: Sources like Stanford Law School in Palo Alto, Calif., Cornerstone Research in Boston, and New York-based NERA Economic Consulting put the percentage of filings related to the subprime and credit crises over 40 percent.)

"Are those really going to be litigated?" Mr. Feldman asked

"I think they are and they will have good value," Ms. Savett said, noting, however that only a few will be in the billions because of the poor financial condition of companies involved.

"I think the insurance in good cases will be all used up, and [defendants] are going to have to pay" out of their pockets, she said. "The insurance doesn't even come close to the losses," she said.

"I think whether the accountants are held in will be a heavily litigated proposition," she added.

Mr. Grant said he's seen very few audit firms named in these cases so far, conjecturing that the timing of audits, rather than diligent audit work explains their good fortune. The crisis really started heating up in July and August last year, a time when auditors only review quarterly financials but don't sign off on statements like they do at year-end. Now, problems are "so out there in the open that even a blind squirrel can find the nut," he said.

Ms. Savett said there have never been a lot of suits against accountants--only 10 percent historically--and they won't be sued in every one of the financial meltdown cases. Often, "it just doesn't fit the facts. But for certain banks that originated very poor-quality subprime loans, those loans were probably in serious trouble by the end of 2006 audit, and certainly by year-end 2007."

THE SPECIAL CASE OF MADOFF

Noting that another crop of recent securities cases has arisen out of the massive Ponzi scheme orchestrated by Bernard Madoff, Mr. Feldman asked the attorneys to gauge the odds of recovering lost investments through litigation.

"While these cases are very difficult, there are possible sources of recovery," Ms. Savett asserted. She explained that the main source of recovery cannot be Madoff Investment Securities, "because there's very little left there and trustees will be collecting those assets and distributing them."

Instead, plaintiffs' attorneys will have to find out, "How did someone get into a Madoff investment? Was it through a hedge fund? Is the hedge fund still solvent? Is the fund backed up by an insurance company?"

"The theory is there was a lack of due diligence by those funds and that they're responsible for that reason," she said.

Accountants that audited the hedge funds are another potential target, she said. "How could they have done a proper audit of the assets of a hedge fund if assets weren't really there? We now know Madoff didn't even trade for the last 13 years, so there was a real lack of due diligence on the part of the hedge funds and their auditors."

In the same vein, she said there are also good cases to be brought against bank custodians that were supposed to make sure the assets were there.

While Ms. Savett said the parties with dimmest hope of substantial recovery are those that dealt directly with Madoff through brokerage accounts, Professor John Coffee of Columbia University also foresees obstacles for those who invested in feeder funds that put assets in Madoff investments.

Direct investors, Ms. Savett said, are limited to a $500,000 recovery from the Securities Investor Protection Corporation or a tax benefit for writing off a theft loss.

Mr. Coffee, while agreeing that funds are the deep pockets to be tapped in Madoff-related litigation, said the funds' defenses are bolstered by a 2007 district court ruling in South Cherry Street LLC vs. Hennessee Group, currently on appeal in the Second Circuit.

In that case, an investment advisory firm, Hennessee, gave a sophisticated hedge fund known as Bayou Group "an absolutely strong rating," Mr. Coffee said, adding that Bayou was the last big Ponzi scheme before Madoff. Judge Colleen McMahon in the Southern District of New York ruled, however, that as long as the Hennessee did not know the Bayou Group was a total fraud, and so long as they only made misstatements about their own due diligence, they could not be on the hook for liability, he reported.

Indeed, he said, the advisor may not have looked even at other funds when it advised investors to put all their money in Bayou, but the case is dismissed because the judge held that "the real loss causation event was the fraud at Bayou and not lack of due diligence of the advisory group."

Should the decision be held up on appeal in the next few months, that could be a controlling force in limiting liability for the Madoff feeder fund litigation, Mr. Coffee predicted.

He said another obstacle to plaintiffs in New York, where many cases will be brought, is a state law known as the Martin Act, which preempts suits alleging breaches of fiduciary duty and does not permit private actions. The law gives exclusive jurisdiction over state law claims involving the purchase or sale of securities to the attorney general.

Professor Coffee predicted that in spite of the obstacles, there will be some recoveries against the feeder funds. "They don't have unlimited resources," however, he said, speculating that they'll bring at most $200 million--not billions--to the table.

Mr. Grant, who said his firm is already representing "a substantial number of people with losses of over nine figures" in Madoff-related cases, agreed that feeder funds are the "low-hanging fruits" among possible defendants.

"If you have a fund that's taking 1 percent of assets under management and 20 percent of the profits, and you find out that they've done no due diligence [and] just acted as a conduit, that's the kind of thing that ticks people off," he said, putting potential stories of fund managers with houses in affluent areas like Greenwich, Conn., and numerous summer homes through his cocktail party analysis.

"That's the type of story I want to tell to a jury. It's an attractive case," he said, adding that the funds have a surprising level of assets. "I don't think we're talking about millions, but billions or tens of billions combined," he said.

One interesting debate to be played out in the Madoff cases will be over the issue of damages. "If you invested $10 million 15 years ago and thought you made $100 million, did you lose $10 million or $100 million?" he asked. "Had you put it in the stock market, you would have $8 million now, so maybe the loss is only $8 million," he said, giving an alternative view that defendants might offer.

For more information on Madoff-related litigation and additional perspectives, see a related story, "Madoff Fallout To Cost D&O, E&O Insurers Nearly $2 Billion: Aon Benfield," which appeared in the January edition of NU's e-newsletter, E&S/Specialty Lines Extra.

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