In the past year, the banking crisis has resulted in an increased call for accountability and a growing number of investigations to uncover abuses and misconduct in the financial industry. This call also appears to have spurred activity from the plaintiffs’ class action bar.
The Norton Rose Fulbright Litigation Trends Report for 2024 noted that among the 28 percent of respondents who experienced class actions in 2023, 21% were involved in bank or financial fraud class actions — a 12-point jump from the prior year.
Insecurity in the commercial real estate market, which has not recovered in the years since the pandemic, may continue to keep scrutiny on the financial industry. By the end of 2025, banks may face about $560 billion in CRE maturities – a total that comprises over half of the total property debt due over that period. Continuing concerns over the state of the financial industry and the resultant government investigations will likely continue to manifest in a growing number of class actions in the wake of regulatory action.
Enforcement aids class actions
Plaintiffs’ class action bar is taking note of the increased scrutiny in the financial industry and increasing their own vigilance and tempo with the intent to file class actions following government-led investigations. For instance, Virtu Financial, Inc. (Virtu) disclosed in its February 17, 2023 annual report that it was providing information for a Securities and Exchange Commission (SEC) investigation into its information access barriers, which was followed by a May 1, 2023 Wall Street Journal article on the investigation.
Thereafter, Virtu was hit with two class action complaints alleging it maintained deficient policies and procedures with respect to information access barriers, and had made false or misleading statements regarding those deficiencies, in essence a parroting of the apparent issues that formed the substance of the SEC inquiry.
Also in February 2023, Reuters reported that the Swiss Financial Market Supervisory Authority was reviewing remarks by a financial institution’s then-chair pertaining to customer outflows to find out how much the then-chair and other bank representatives knew regarding clients withdrawing funds after public statements that outflows had steadied.
On Oct. 20, 2023, those who had purchased bonds from this financial institution during the period of the chair’s statements filed a class action, including against the board and its accounting firm, alleging violations of federal security laws by misrepresenting the institution’s prospects and failing to disclose material adverse information.
Again, closely tracking the lines of inquiry raised by regulators. The breakneck speed of the tagalong class actions has probably been most pronounced in fintech, which remains under immense regulatory and enforcement activity. On Dec. 13, 2022, the Department of Justice criminally charged FTX founder Samuel Bankman-Fried for a “fraud of epic proportions” in a scheme perpetrated to deceive and defraud FTX’s customers, lenders, and the United States through misappropriation of billions of dollars of customers’ funds.
FTX’s extremely public collapse and Bankman-Fried’s widely publicized arrest was followed days later, on December 27, 2022, with the filing of a proposed class of over 1 million
FTX customers. Distinguishable from other class actions, this one asserted an ownership interest over the company’s remaining assets explaining that “class members should not have to stand in line along with secured or general unsecured creditors in these bankruptcy proceedings just to share in the diminished estate assets of the FTX Group.
In another instance, the SEC brought suit on January 11, 2024 against the CEO of Future FinTech alleging manipulative trading and failing to disclose his ownership in the company prior to becoming CEO. Just five days later, a Future Fintech investor filed a class action alleging that class members overpaid for company stock and were intentionally misled by the company’s false and misleading statements. Once more leveraging the groundwork of the SEC.
Takeaways
The timing of these tagalong class actions, filed a few days to a few months after public disclosure of government inquiries, show that the class action bar is refining detection skills to use even a hint of agency disapproval or an unconfirmed investigation as fodder for a class action on the same issues.
The class action bar has a long history of using government inquiries and actions to script their next filing. The record this past year demonstrates that banking and financial institutions are by no means immune to this risk and perhaps the risk is heightened while public scrutiny remains on the industry to increase accountability.
Companies can mitigate the risk for class action following enforcement action in a few ways. Even remediating any alleged misconduct may not bar a class action on the preexisting conduct. However, it reduces the exposure posed by ongoing ineffective due diligence measures or lethargic efforts to remedy malfeasance, thereby narrowing the plaintiffs’ window to bring further litigation or narrow damage claims.
Whenever possible, developing a good working relationship early with the government regulators and enforcement teams can also earn much needed goodwill that is well-invested in carefully negotiating the ultimate resolution as well as public facing statements.
Blanco is a partner at Norton Rose Fulbright US LLP, while Fetsick is an associate and Braun is a law clerk.