Hedgeweek Comment: Here comes the litigation wave

Hedgeweek Comment: Here comes the litigation wave

One of the few sectors that have not really been hit hard by the credit crunch is the legal profession - at least its litigation specialists. It has been reported that a group of hedge funds are planning to sue the Financial Services Authority for 'millions of pounds' in losses stemming from ban on short selling introduced on Friday.

Hedge fund managers are said to be ready to argue that the UK financial watchdog illegitimately extended its powers by banning for nearly four months the short selling of financial stocks - a move swiftly followed in the US by similar action from the Securities and Exchange Commission - and that its action unfairly impacted on their trading business, leading to 'widespread capital destruction'.

One can only hope the FSA - and others - are prepared for the spate of litigation that seems in prospect with no sign of an end to the market turbulence and the number of disgruntled investors rising by the day. History suggests that litigation is an increasingly frequent response to large losses. In particular, in difficult economic times litigation may not just be an option but a necessity.

Financial institutions and the individuals who run them are probably in greatest danger of becoming the target of lawsuits, but regulatory organisation should also tread cautiously in these high-risk times.

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