SAN FRANCISCO--Financial institutions face wide-ranging litigation triggered by the subprime mortgage debacle and

the ensuing economic crisis, according to insurance and legal experts.

Plaintiffs include homeowners, shareholders, cities

and regulators alleging various deceptive practices, fraud and improper employer practices, the experts noted during panel

sessions at the 21st Annual Professional Liability Underwriting Society's International Conference.

But plaintiffs will

face challenges proving their cases, an attorney said during one session at the Nov. 5-7 conference in San

Francisco.

Mortgage lenders face numerous claims alleging misrepresentation and concealment of lending practices, a lack of

internal controls and portfolio valuation overstatements, said claims executive Anthony Tatulli, the New York-based president

of financial lines at lines at AIG Domestic Claims Inc., a subsidiary of American International Group Inc.

In addition,

shareholders have filed two dozen derivative lawsuits, in which investors seek recoveries for the organization, rather than

themselves, from directors and officers.

"They are significant cases now," Mr. Tatulli said.

Companies cannot

indemnify executive management in such cases, so the defendant executives would be insured only by Side A coverage of

traditional D&O policies and any separate Side A coverage they might have.

At the same time, unsecured creditors, which

"are looking for every penny," are "more aggressive than (shareholder) plaintiffs attorneys," Mr. Tatulli

said.

Lenders also face errors and omissions claims, including charges of predatory and unfair lending and discrimination,

he said.

And some whistle-blowing employees have filed employment practices liability claims, he said.

Meanwhile,

securities dealers and investment banks face lawsuits from clients drawn into auction rate securities, Mr. Tatulli said. The

market for those securities froze up earlier this year.

The plaintiffs argue that the defendants told them the auction rate

securities market was as safe as money markets, which are not federally insured but historically have been safe investment

vehicles, Mr. Tatulli explained.

Rating agencies are another lawsuit target for not catching the subprime problem, said

insurer attorney George M. Gowen III, a member of Cozen O'Connor P.C. in Philadelphia.

Claims executive Paul Lavelle said

cities eventually could form another big block of plaintiffs against financial institutions.

Mr. Lavelle, the New

York-based president of LVL Claims Services L.L.C., cited a lawsuit filed by Cleveland against 21 financial institutions. The

city claims that the defendants violated a city nuisance ordinance when they engaged in lending practices that caused

numerous foreclosures and abandoned homes.

If the city's case succeeds, it could trigger a wave of similar lawsuits

against financial institutions by other cities, Mr. Lavelle said. He likened the situation to tobacco company liability

litigation, which failed for years before plaintiffs won a case in 1988. The tobacco industry eventually agreed to pay

hundreds of billions of dollars to settle liability lawsuits and finance anti-smoking campaigns.

Baltimore filed a similar

lawsuit against Wells Fargo Bank N.A. The suit charged that the bank's subprime lending activities violated federal fair

housing regulations by focusing on African-American homebuyers.

Financial institutions also face litigation by state

attorneys general and the Securities and Exchange Commission, Mr. Tatulli said.

The good news for defendants, he said, is

that courts have dismissed a "significant number" of these claims. The bad news is that judges dismissed the cases

without prejudice, which means plaintiffs may refile them.

But one dismissal in particular shows a big problem for

plaintiffs, said defense attorney Mark Meyer, a partner with Edwards Angell Palmer & Dodge U.K. L.L.P. in London.

In June,

a federal judge dismissed the securities fraud lawsuit against subprime lender NovaStar Financial Inc. with prejudice. The

judge ruled that the plaintiffs could not point to a single false statement in the company's financial results nor identify

"the 'truth' that should have been disclosed" (BI, June 23).

Mr. Meyer noted that the NovaStar complaint exceeded

100 pages and still the court concluded it did not contain specific evidence that executive management intended to defraud

investors.

"It's quite a hurdle for the plaintiffs bar" to clear in all cases, he said.

But the ability of

defendants to obtain case dismissals with that argument likely will vary by judge, said Mr. Meyer and Dion N. Cominos,

managing partner at Gordon & Rees L.L.P. in San Francisco.

However, there is an argument that the crisis was foreseeable,

said Frederick C. Dunbar, senior vp for New York-based NERA Economic Consulting, a unit of Marsh & McLennan Cos. Inc.

When

Mr. Cominos asked why no one saw the potential economic crisis in extending mortgage loans to subprime borrowers, Mr. Dunbar

responded, "The academics did."

A major mistake that financial institutions made was calculating that there was

"safety through diversification," Mr. Dunbar said, referring to the concept that housing prices in various regions

of the country are not correlated.

"They're all correlated," he said.

Exacerbating the crisis was the

tightening of bank credit "for no good reason" even before Lehman Bros. failed, he said. That occurred because of

an "information cascade," which leads people to act with a "herd mentality" rather than process

information independently, he said.