Well, we all knew it would come to this sooner or later. In the midst of billions in losses for investors who bought securitized home loans during the past several years, investors are looking to share their misery with those who prepared disclosure documents related to the investments.

As reported in a post on Breaking Legal News, the entire home loan securitization food chain is under close scrutiny because of the huge losses to investors. Besides investors, the New York State Attorney General's Office, and the IRS are scrutinizing the adequacy of disclosures given to investors and the trusts used to hold the securities.

One law firm with offices in New York and Washington, DC, that prepared disclosure documents for nearly $3 trillion in loan-backed securities since 2000, may come under fire - especially since the firm is reported to have made over $200 million in fees in 2006 alone related to their disclosure work. Another law firm is defending a $70 million malpractice lawsuit based on its loan securities work.

While the details are new, this is a familiar story among those who have paid attention to Wall Street for any significant period. The story goes something like this: clever folks on Wall Street come up with a way to sell something that's making lots of profit as a security and rush out to find investors, investors keen on making a killing jump on board without really understanding the associated risks, no one bothers to ponder (or even read) all the scary disclosure documents - hey, what's the worst that could happen? Then the bottom falls out of the market, investors are left with worthless securities, the accusations and recriminations fly, the litigation and regulatory investigations ensue... and then the clever folks on Wall Street come up with a way to sell something else that's making lots of profit as a security and the whole thing starts all over. Junk bonds, limited partnerships, and savings and loans are the most memorable catastrophes for me, but I'm under 40 - I'm sure people with more experience can chime in with other examples.

The moral of the story is twofold: first, the best policy is to understand and limit risk as an investor to keep your neck out of the noose; second, if you do get caught up in a catastrophe, get a good lawyer and quick!

That law firm that wrote all those disclosures is now shifting its focus to suing others on behalf of mortgage securities investors.