Opinion

Alison Frankel

As crisis litigation draws to close, lessons for investors

Alison Frankel
Jul 16, 2014 22:12 UTC

We’re near the end. With the news Wednesday that Bank of America will pay AIG $650 million to settle their long-running and many-tentacled litigation over mortgage backed securities –along with a report in The Wall Street Journal that the credit rating agency Standard & Poor’s is contemplating a $1 billion settlement with the Justice Department for its MBS rating failures — it’s time to declare the twilight of financial crisis litigation.

Yes, there’s still some big work to be done, including BofA’s anticipated multibillion-dollar settlement with the Justice Department; the resolution of the Federal Housing Finance Agency’s last few cases on behalf of Fannie Mae and Freddie Mac; and dozens of private-investor breach-of-contract suits against the banks. But that’s the denouement, the last act.

So what have we learned, after six years of intense and expensive litigation? To me, the clearest lesson from financial crisis litigation is that investors cannot rely on anyone else’s assurances about complex securities.

Federal securities laws say otherwise, of course. Issuers and underwriters are supposed to disclose the risks built into the securities they’re selling. Credit rating agencies are supposed to provide realistic assessments of investment quality. State and federal regulators are supposed to make sure all of them are living up to their representations and to seek justice for investors if it turns out they’ve been deceived.

The first few years of MBS litigation, dominated by investor class actions and bond insurer suits against issuers, exposed the gap between bank representations about underlying mortgage loan pools and the pools’ actual risk profiles. After re-underwriting sample loans, MBS plaintiffs claimed breathtaking breach rates, asserting in case after case that 30, 50, 60 or even 70 percent of the mortgages underlying MBS trusts were deficient for one reason or another.

Kozinski amends opinion in 9th Circuit ‘Innocence’ case v. Google

Alison Frankel
Jul 15, 2014 19:46 UTC

Something strange happened Friday in the infamous case of Cindy Lee Garcia v. Google at the 9th U.S. Circuit Court of Appeals. Chief Judge Alex Kozinski, who wrote the opinion in February that enjoined Google from linking to the anti-Islam film “Innocence of Muslims,” filed an amended opinion, even as the entire 9th Circuit considers Google’s petition for en banc review of the controversial February ruling.

The amended opinion, in which Kozinski is joined by Judge Ronald Gould, left the injunction in place but walked back a step or two from the controversial holding that the actor Cindy Lee Garcia is likely to succeed on the merits of her claim that Google is infringing her copyrighted five-second performance in ‘Innocence.’ (Garcia, as you may recall, was deceived by the maker of the inflammatory film, who overdubbed her lines to make it appear as though her character was calling Mohammad a pedophile. The film led to riots in the Muslim world and death threats against Garcia.)

The panel’s original holding that actors may, in certain circumstances, have an independent copyright on their individual performances threw Hollywood, Internet companies and First Amendment fans into a tizzy; Google’s en banc petition attracted 10 amicus briefs from dozens of interested parties. The new opinion, which adds only a few paragraphs to the original, cautions that the 9th Circuit injunction does not dictate a finding that Garcia actually has a copyright on her performance nor that Google is not entitled to fair use of the copyrighted material.

DOJ should end secret selection process for corporate watchdogs

Alison Frankel
Jul 14, 2014 21:45 UTC

Thomas Perrelli just won quite a plum assignment. The former U.S. associate attorney general, who resumed his partnership at the law firm Jenner & Block in 2012, was appointed Monday to serve as Citigroup’s independent monitor as part of the bank’s $7 billion settlement with the Justice Department and five state attorneys.

Perrelli and the team of Jenner lawyers who will undoubtedly join him in watching over Citigroup will be paid by the bank, as is customary in corporate monitorships. The specifics on what Citi will pay him aren’t public, and, to be sure, Perrelli’s mandate under the settlement agreement is limited. But rest assured: He and his firm are going to earn a lot of money as Citi’s monitor. As a federal judge who has overseen a corporate monitor told my Reuters colleague Casey Sullivan, “It is a huge cash cow. These are very, very lucrative appointments.”

Perrelli also bears enormous responsibility. His charge, according to the Citi settlement agreement, is to make sure that the bank properly distributes $2.5 billion in mortgage relief to homeowners who were allegedly injured by Citi’s voracious appetite for loans to bundle into mortgage-backed securities. It’s up to Perrelli to verify that the bank follows through with promises to modify and refinance mortgages for borrowers struggling to make payments or paying mortgages on houses worth less than the loans.

Wal-Mart case in Delaware: How much discovery can shareholders get?

Alison Frankel
Jul 11, 2014 20:56 UTC

Shareholder lawyer Stuart Grant of Grant & Eisenhofer told me Friday that he was feeling pretty good about his oral argument at the Delaware Supreme Court the previous day, in a case that will determine how much discovery plaintiffs are permitted when they sue to see corporate books and records.

Grant said his opponent, Wal-Mart counsel Mark Perry of Gibson, Dunn & Crutcher, gave so smooth and polished a presentation that the state justices might easily have glided along with what, according to Grant, was Perry’s “radical rewriting” of Delaware law. Instead, Grant said, “the court was not buying into Wal-Mart’s extreme theory.”

Wal-Mart, you will not be surprised to hear, had a different view of the argument: “We think it went very well,” Perry told me Friday. “We presented strong arguments and look forward to the court’s decision.”
Both sides agree on one thing: If the Delaware Supreme Court affirms then-Chancellor Leo Strine’s 2013 discovery order in IBEW v. Wal-Mart, it’s great news for shareholders and a big reason for Delaware corporations to worry. (Strine, who is now Chief Justice of the Delaware Supreme Court, was recused from hearing Thursday’s argument.)

Motorola to 7th Circuit: Make Judge Posner follow the rules

Alison Frankel
Jul 10, 2014 22:23 UTC

I didn’t think Motorola’s antitrust appeal at the 7th U.S. Court of Appeals could get any stranger. This, after all, is the billion-dollar case that prompted a bizarre showdown over international antitrust policy between the U.S. solicitor general and a three-judge appellate panel led by Richard Posner.

Earlier this month, the panel backed down and vacated a highly controversial ruling that had effectively erased U.S. antitrust liability for foreign price-fixing cartels that sell component parts to foreign subsidiaries of U.S. companies. Posner and the other judges ordered Motorola and the liquid crystal display screen manufacturers it has accused of price-fixing to submit new briefs on the merits of their arguments, and I thought the case would return to something resembling normalcy.

Boy, was I wrong.

Motorola submitted a brief yesterday, meeting the incredibly tight deadline the Posner panel set. But instead of laying out for the panel the reasons why precedent and policy favor Motorola’s right to sue the alleged LCD cartel, Motorola’s lawyers at Goldstein & Russell asked the entire 7th Circuit to take the case en banc – not to hear the merits, but to reverse the “terrible judicial policy” that has divided the 7th Circuit from every other federal appeals court.

The last, best chance for besieged bank defendants

Alison Frankel
Jul 10, 2014 20:51 UTC

Goldman Sachs has a little more than two months for a miracle to happen.

Otherwise, on Sept. 29, the bank will go to trial in federal court in Manhattan against the Federal Housing Finance Agency to defend claims that Goldman deceived Fannie Mae and Freddie Mac about the quality of the mortgage-backed securities it was peddling before the financial crash.

For defendants in the FHFA litigation, trying to explain to jurors — and to a deeply skeptical judge — that you’re not responsible for woefully deficient securities is so unappealing a prospect that 15 other big banks have coughed up a collective $15 billion to Fannie and Freddie’s conservator. Only Goldman and three other banks have stuck out three years of lopsided litigation in which U.S. District Judge Denise Cote has consistently ruled against them on matters large and small.

These four holdouts have only one possible advantage over the defendants that have already capitulated: the U.S. Supreme Court’s ruling last month in an environmental case called CTS Corporation v. Waldburger.

Is this the inside info that triggered Goldman’s MBS ‘big short’?

Alison Frankel
Jul 9, 2014 22:12 UTC

It is an axiom of the financial crisis that Goldman Sachs realized before any of the other big banks that the mortgage-backed securities market was going to implode in 2007. Goldman dumped MBS and shorted the market, turning a profit in its mortgage department when every other major financial institution suffered record losses.

So what tipped Goldman to start off-loading its MBS exposure at the end of 2006? In a new brief in its securities fraud case against the bank, the Federal Housing Finance Agency has an intriguing theory.

According to the conservator for Fannie Mae and Freddie Mac, Goldman received a report on December 10, 2006 from the CEO of Senderra, a subprime mortgage lender partially owned by Goldman. Goldman had taken a stake in Senderra — a relatively small mortgage originator — to stay informed about the state of the mortgage market, according to FHFA.

Early test of Delaware ‘loser pays’ bylaws looms in Biolase dispute

Alison Frankel
Jul 8, 2014 21:19 UTC

(Reuters) – On Monday, a Delaware shareholder firm issued a press release urging shareholders of the dental laser company Biolase to get in touch if they’re concerned about allegations that board members leaked corporate financials, among other supposed shenanigans. You know what that means: Class action firms are circling the beleaguered company, looking for a reason to file a shareholder derivative suit accusing Biolase’s board of breaching its duties.

Meanwhile, Biolase’s former chairman and CEO — ousted in June after months of fighting in Delaware courts to keep his job — has sent a demand for books and records to the company’s board. Deposed CEO Federico Pignatelli claims that his fellow Biolase directors are working for their own interests, not for shareholders. Represented by Baker Marquart, he’s spoiling to keep litigating against the directors who tossed him out.

That’s a risky proposition for Pignatelli and for Delaware shareholders. At the same June 26 meeting at which the board got rid of Pignatelli, Biolase became one of the first public companies in Delaware to adopt a “loser pays’ fee-shifting bylaw.

Health benefits for retired public workers: the next muni bond crisis?

Alison Frankel
Jul 7, 2014 21:25 UTC

The Illinois Supreme Court set off some pre-holiday fireworks ruling Thursday that the state constitution protects health benefits for retired public workers — even though the constitution’s so-called pension protection provision does not specifically mention healthcare coverage.

The state high court said that subsidized healthcare is one of the benefits of membership in the state’s public pension systems so it falls within the broad ambit of the clause, which bars impairment of state employees’ pension and retirement benefits.

The ruling in Kanerva v. Weems aligns Illinois with Hawaii and Alaska, the two other states that have construed constitutional protection for public pensions to encompass healthcare benefits. Other states, most notably New York, have held that similarly phrased clauses shielding state workers’ pensions do not prohibit states from shifting healthcare costs onto retirees.

When MDL judges go rogue

Alison Frankel
Jul 3, 2014 19:18 UTC

Five years ago, the Judicial Panel on Multidistrict Litigation assigned Michael McCuskey, then chief judge of the federal district court in Urbana, Illinois, to oversee consolidated class action claims that the roofing company IKO Manufacturing misled customers about the quality of certain organic asphalt shingles. McCuskey accepted the assignment in December 2009, but just four months later, he informed lawyers for IKO and the purchasers that he was swamped with other cases. Before he’d done much of anything in the shingle litigation, McCuskey turned the case over to the only other judge in the courthouse, Harold Baker.

Neither judge, nor any of the lawyers in the shingle litigation, went to the trouble of informing the MDL panel about the reassignment, even though the MDL panel has exclusive authority to appoint the judges who preside over big consolidated cases. The MDL judges continued to send tag-along suits against IKO to McCuskey, presumably unaware that all he did was pass them in turn to Baker. Only in February 2014, four years after the unauthorized transfer and a couple of months before McCuskey retired from the federal bench, did the MDL panel formally order that the shingle litigation be transferred to Baker.

By then, as the 7th U.S. Circuit Court of Appeals explained in an unusual opinion Wednesday, Judge Baker had already denied class certification to shingle purchasers. According to the 7th Circuit, that ruling — and every other decision Baker made in the IKO shingle case before the MDL panel’s transfer order in February 2014 — exceeded the scope of Baker’s authority under the rules of procedure for multidistrict litigation. Because the MDL panel had assigned the case specifically to McCuskey, wrote Judge Frank Easterbrook for an appellate panel that also included Chief Judge Diane Wood and Judge Michael Kanne, McCuskey’s unauthorized decision to shift the MDL from his docket to Baker’s was “a foul-up in the process.”

  •