Lawsuits aren’t that shocking

The queue to get to the counter at the U.S. District Court clerk’s office in Seattle must have resembled a bank teller line last week, so numerous were the lawyers hustling to sue Washington Mutual Bank.

Five separate class-action suits were filed against the giant savings and loan within hours of the release of its quarterly earnings, which were a shocking 50 percent below those for the same period in 2003. We know they were shocking because news releases from two of the firms announcing their litigation tell us so.

“This news shocked the market,” say the releases from Murray Frank & Sailor LLP of New York and Schiffrin and Barroway LLP of Bala Cynwd, Pa.

Not so shocking, perhaps, is the fact that the identical quotes were contained in paragraphs from the releases that were also identical. Word for word.

They must be using the same software package, filling in the blanks on their way to the courthouse. The game here is to attract the shareholder who lost the most money. The firm that does so gets to go forward with the lawsuit.

All five lawsuits make essentially the same allegation: that the company and its management not only did not disclose the difficulties Washington Mutual was experiencing in its mortgage business, but issued misleading statements about the company’s financial outlook.

Those who purchased Washington Mutual shares between April 15, 2003, and June 28, 2004 are supposedly entitled to compensation for their losses. The first date marks the release of record first-quarter earnings; the second the disclosure that second-quarter earnings would fall significantly short of expectations. Last week’s quarterly report confirmed the worst.

But analysts say the worst should have come as no surprise. They have been downgrading the stock since November 2003, when Washington Mutual issued a report regarding its hedging of interest rates in its mortgage portfolio. When officers lowered their outlook for 2004 on Dec. 9, 2003, the price of a share plunged $3.88. The “shock” of the June report, by comparison, caused a $2.84 decline in price.

R. Jay Tejera, a portfolio manager at Wells Fargo Investment Management, says the December report should have clued even the average investor into Washington Mutual’s troubles. For more sophisticated investors, he says, the red flags have been up since the second quarter of 2003.

Tejera, who closely tracked the region’s banking industry for years, says several factors coalesced this spring to create a “perfect storm” that wrecked management efforts to mend Washington Mutual’s mortgage operations.

“This company has been very comprehensive in its disclosures,” he says.

Adds D.A. Davidson, analyst Jim Bradshaw; “Washington Mutual over the years has been one of the best companies I follow in terms of disclosing information.”

Sure, Washington Mutual executives made mistakes. That happens when you increase the size of your savings and loan ten-fold over a little more than a decade, creating the largest such institution in the United States in the process. Their hedging strategy failed to offset volatile interest rates in the second quarter. They raised dividends twice during the period encompassed by the litigation. Maybe they should have been more conservative.

Change engenders opportunity, and risk. Sometimes, investors remember the former and forget the latter. Shares in Avista Corp. rocketed in early 2000, when analysts were gaga about potential profits from energy trading. Itron Inc. stock soared in the mid-1990s. Then the bubbles burst, and the lawyers were at their door. So far, no shareholder aggrieved by the collapse of Avista share prices in 2000 has collected a dime. Itron settled for $12 million, paid by its insurer, in part because the expense and time of fighting the claim was so bothersome.

Fortunately, this kind of litigation has become less common. According to the Securities Class Action Clearinghouse at the Stanford Law School, filings in federal court declined 22 percent from 2002 to 2003. Those involving losses of more than $3.3 billion in the stock market valuation of a company declined even more. But the big settlements are bigger. Bank of America made a claim against it go away for $490 million in 2003.

The potential for a jackpot like that triggers a courthouse dash like last week’s.