At least seven law firms have filed complaints this week accusing Capstead Mortgage Corp. of misleading investors about its financial health for more than a year.
The suits were filed in a U.S. district court in Dallas, where the company is based. The plaintiffs intend to consolidate them eventually as a class action, said Robert Roseman, a partner at Spector & Roseman, one of the law firms.
The complaints vary in language but make essentially the same allegations.
Capstead's stock tanked last month after the company announced it had to sell a large chunk of its investment portfolio-$977 million of interest- only strips and $1.3 billion of adjustable-rate mortgage securities-at a loss of nearly $255 million.
The company also took a $45 million impairment charge in the second quarter because of expected runoff in its servicing portfolio. Capstead is among the top 20 servicers of residential mortgages.
The plaintiffs charge that Capstead management knew long before last month's announcements that prepayments in its portfolio were coming in faster than expected.
They say top brass conspired to inflate the company's stock price by intentionally misrepresenting its financial results. Capstead's chief executive officer, Ronn Lytle, was not available for comment.
Other lawyers said the charges sounded familiar.
"These allegations are typical of what one would find in a shareholder lawsuit after this kind of disclosure," said Andrew Sandler, partner at Skadden, Arps, Slate, Meagher & Flom, Washington. "Such allegations generally should be taken with a grain of salt."
Such cases are "usually settled with an agreed-upon payment to the plaintiff," added Leonard Bernstein, a partner at Reed, Smith, Shaw & McClay, Philadelphia.
Last year Congress passed a law making it harder for shareholders to win a class action. That law was strengthened by another law signed by President Clinton last week.
Nevertheless, "anytime a public company has a loss that exceeds analysts' expectations, there's a reasonable likelihood they're going to be sued," said Larry Platt, a partner at Kirkpatrick & Lockhart, Washington.
Other mortgage companies recently hit with shareholder suits following writedowns include Green Tree Financial, Mego Mortgage Corp., and Cityscape Financial Corp.
In most cases the writedowns occurred because the companies made judgments about prepayments that turned out to be overly optimistic.
"The narrow legal issue is whether the assumptions were made with reckless disregard for the truth," Mr. Platt said.
Spector & Roseman's complaint cites internal reports on the company's performance that were submitted to Capstead's top managers monthly. The complaint said the reports included comparison of actual and predicted performance.
The executives "each knew Capstead's business, specifically its investment portfolios, was not performing as well as publicly represented," the complaint says.
Still, "internal debate is not determinative," Mr. Platt said. "Reasonable people within a company could differ."
Capstead set itself apart in the mortgage banking world as a large servicer with no origination capability. Most mortgage companies originate and service loans to protect themselves against interest rate movements.
Last year Mr. Lytle told American Banker he believed that the high fixed costs of an origination franchise outweigh the benefits of having loan production as a "macro hedge."