REAL ESTATE - European pension funds could join class actions against US sub-prime mortgage lenders currently under investigation for poor internal controls and decision-making, according to the law firm representing institutional investors.

US investors allege that companies such as New Century and Novastar made false statements to investors, and allowed flawed lending practices, risk controls and reserves – culminating in a fall in share price. States including California, New Jersey and New York are already investigating the companies.

"They created the impression that they had stringent lending policies, and that they had reserved accordingly," said Jerry Silk, a partner in law firm Bernstein, Litowitz, Berger & Grossman, which represents some of the institutional investors pursuing the claims.

"The truth was that their lending policies were lax, that underwriters were overridden, and that applications were sometimes not even completed. The companies and their management knew that the business was not properly underwritten. Despite all this, the companies never raised their reserves."

Silk said it was difficult to predict whether the actions would be successful. If they are, the net impact could be to encourage US regulators to tighten risk controls.

He believes auditors and banks could become targets for investor suits for failing to spot lenders’ risk management failings.

In the meantime, European investors will likely join the action. "We’ve seen European investors more engaged in litigation over recent years because they have equity in US-listed companies," said Silk. "They have the same right to pursue claims as any other investors."