The nation’s largest banks — and public companies, for that matter — are preparing for a timeout from the courtroom following years of being pummeled by shareholder and investor lawsuits in the wake of the Great Recession.
At the end of 2017, the country’s largest banks collectively decreased their estimates for future legal costs to their lowest levels since 2012, and legal experts predict the move is a harbinger of what’s to come for Corporate America in an era of strong job growth and loosening regulations at the federal level.
Between 2012 and the end of 2017, the nation’s 10 biggest banks by assets saw a 56 percent decline in their anticipated litigation expenses beyond their required cash reserves, according to financial statements filed with the U.S. Securities and Exchange Commission. The estimates signify the amounts banks expect to pay in litigation and legal costs beyond what they are required to set aside as emergency legal funds. The estimates are published each quarter with the SEC.
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Leading the way was Regions Financial Corp., which saw a 100 percent reduction in its anticipated legal costs in excess of reserves over the past five years, indicating the bank isn’t expecting any major settlements in the coming months. Regions did not respond to requests for comment on its legal position.
The downturn in litigation is not limited to the banking sector, said Dennis Tracey, chair of Hogan Lovells’ litigation practice in New York.
Recent U.S. Supreme Court cases tightening personal jurisdiction rules have made it much harder to file suit against a company outside of the state where it is domiciled or has its principle place of business. Tracy said that has helped to limit the number of lawsuits across all industries.
Another plus for corporations: The Supreme Court recently handed down decisions reining in intellectual property cases and making it harder for so-called patent trolls to advance legal claims. Tracey also pointed to the election of President Donald Trump, whose administration has made it a priority to loosen the regulatory climate for corporations.
“There has really been a decline in litigation since the financial crisis, when many companies began to rethink their legal spending,” Tracey said. “I don’t know if it’s permanent or temporary.”
Which is not to say companies were without significant legal costs in 2017. Wells Fargo topped all U.S. companies with some $2.1 billion in after-tax legal and settlement costs, followed by Alphabet at $1.8 billion and drug maker Johnson & Johnson at $955 million, according to regulatory filings.
Tracey said the reductions in bank-litigation costs are partly due to the fact that many lawsuits filed in the wake of the financial crisis are winding down. Banks were in many cases required to pay multimillion-dollar — even multibillion-dollar — settlements to resolve a wave of litigation stemming from last decade’s financial and housing crises.
“The financial crisis spawned a huge amount of very high stakes litigation and regulatory actions,” Tracey said. “There are some remaining large matters, but among our clients that happen to be large banks, most believe the worst is behind them.”
Wells Fargo is one major exception. The banking giant has faced a raft of lawsuits in recent years, with claims ranging from allegations over unauthorized accounts to discriminatory mortgage practices to fraud affecting retail clients. Regulatory filings highlight the company’s legal challenges, as Wells Fargo increased its estimate for litigation costs in excess of reserves to $2.7 billion in 2017’s fourth quarter, roughly double where it was in 2012.
Wells Fargo is a Hogan Lovells client.
Tracey said a strong economy also is contributing to the decline in legal challenges for banks, as low unemployment and rising wages have sapped some of the motivation that’s driven prior shareholder lawsuits.