Opinion

Alison Frankel

$90 bln answer: Rakoff says Picard has no standing in bank suits

Alison Frankel
Jul 29, 2011 19:57 UTC

In the end, it wasn’t even a close call.

Using words like “conjecture,” “bootstrapping,” and “a stretch,” Manhattan federal court judge Jed Rakoff on Thursday decimated trustee Irving Picard‘s multibillion-dollar campaign against the banks that allegedly helped Bernard Madoff engineer his fraud, in a 26-page opinion that left no room for doubt. Rakoff so thoroughly rejected each and every one of Picard’s arguments for why he had the right to bring common law fraud claims against HSBC and UniCredit that the judge didn’t even cite much legal precedent through the first half of the ruling. He simply applied what he calls “ordinary use of the English language” to conclude that no reading of the relevant laws or cases grants Picard standing to sue the banks for unjust enrichment and aiding and abetting fraud and breach of fiduciary duty. This ruling derived its power — and it is a very powerful opinion — from its simplicity.

Rakoff’s ruling immediately affected Picard’s $6.6 billion case against HSBC and a parallel $2.2 billion case against UniCredit. But it’s going to have huge repercussions beyond those suits. Judge Rakoff is also presiding over Picard’s $60 billion racketeering case against UniCredit and related defendants, and it’s a certainty that UniCredit’s lawyers at Skadden, Arps, Slate, Meagher & Flom will ask the judge to apply his ruling on Picard’s standing and bounce that suit as well.

Meanwhile, Judge Colleen McMahon, who is Judge Rakoff’s neighbor on the 14th floor of the Manhattan federal courthouse, is poised to rule on Picard’s standing in his common-law suits against UBS and JPMorgan Chase. McMahon is certainly an independent-minded judge so it would be a mistake to assume she’ll simply follow Rakoff’s lead. But Rakoff knew full well how intensely his ruling on Picard’s standing would be scrutinized, and nevertheless showed no equivocation in his opinion. It’s hard to imagine Judge McMahon reaching a contrary conclusion.

If McMahon — and, ultimately, the appellate courts — agree with Rakoff, Picard’s audacious attempt to hold the banks responsible for failing to end Madoff’s Ponzi scheme is doomed. As I reported a few weeks back, Picard’s standing to bring common-law claims against the banks is a threshold issue. To prosecute a suit, you have to be able to show that you were injured. Picard, as the bankruptcy trustee in the Madoff Chapter 11, stands in the shoes of the debtor, Bernard L. Madoff Investment Securities. But his common-law claims against the banks weren’t brought on behalf of Madoff’s now-defunct investment company — which, as Rakoff explained in Thursday’s ruling, is barred from suing alleged co-conspirators like the banks by a doctrine called in pari delicto. Instead, Picard’s lawyers at Baker & Hostetler said they were bringing claims against the banks on behalf of Madoff’s customers, who lost billions when Madoff’s scheme was exposed.

HSBC’s lawyers at Cleary Gottlieb Steen & Hamilton and UniCredit’s Skadden counsel countered that as bankruptcy trustee, Picard has no right to stand in the shoes of Madoff’s customers.

New study: SEC enforcement — and class actions — actually work

Alison Frankel
Jul 27, 2011 22:21 UTC

There are few scapegoats more overloaded with blame for all that ails the U.S. economy (at least when we’re not on the brink of defaulting on our loans) than securities class action lawyers and the Securities and Exchange Commission. You know the rap. Class action lawyers are accused of accomplishing nothing more than transferring money out the pockets of corporate shareholders and into their own wallets; the SEC, meanwhile, is derided for failing to detect flagrant fraudsters like Bernard Madoff and letting the true perpetrators of the mortgage crisis off the hook. (Reuters, incidentally, has a great story today about the SEC’s new hotline for fraud tips, so the next Bernie Madoff won’t get away with deceiving investors.) There’s precious little hard data to measure the deterrent effect of SEC enforcement or securities class actions — how can you count averted frauds? — so it’s all too easy to assume securities litigation and SEC enforcement don’t stop corporations from misbehaving.

But a new working paper by a trio of economics number-crunchers concludes not only that SEC enforcement and class action litigation are both associated with “significant deterrence,” but also that “effective deterrence requires sustained SEC activity and litigation in the industry.” In other words, corporations are likeliest to stay out of trouble when both regulators and plaintiffs lawyers are policing their industry. “We were quite surprised by that,” said study co-author Simi Kedia, an economics professor at Rutgers Business School. “In academics, class actions aren’t very well regarded.”

Kedia wrote the paper, “The Deterrence Effects of SEC Enforcement and Class Action Litigation,” with Emory accounting professor Shivaram Rajgopal and University of Washington accounting Ph.D. candidate Jared Jennings. (I heard about it at the Harvard Corporate Governance website.) She told me it’s a working paper they’ve presented at a couple of conferences but are still planning to refine before submitting for publication.

In push for settlement, judge tells Oracle, Google to get real

Alison Frankel
Jul 26, 2011 21:59 UTC

When Oracle and the European software developer SAP went to trial last winter to figure out what SAP owed Oracle for infringing software copyrights, Oracle asked for the moon. SAP argued that Oracle lost only about $40 million in actual profits as a result of its infringement. Oracle’s lawyers at Bingham McCutchen and Boies, Schiller & Flexner, however, told jurors to ignore lost profits and focus on what SAP should have paid Oracle in licensing fees. They ultimately persuaded jurors that Oracle could have received $1.3 billion in hypothetical licensing negotiations for the intellectual property SAP misappropriated. The jury verdict left SAP sputtering with astonishment; in attempts to set aside the award, SAP’s lawyers at Jones Day and Durie Tangri have called Oracle’s calculations of what it might have received in licensing talks “sheer speculation.”

That’s just what San Francisco federal district court judge William Alsup seems determined to avoid in Oracle’s do-or-die patent and copyright showdown with Google, which has allegedly incorporated parts of Sun’s Java code into its Android operating system. As Dan Levine has reported for Reuters, Judge Alsup held a contentious two-hour hearing last week on a report by Oracle’s damages expert, who asserted Google should pay Oracle between $1.4 and $6.1 billion. The next day, the remarkably efficient judge issued a 16-page order that called on Oracle to come up with a new damages estimate that’s better rooted in reality. The judge instructed Oracle to start with an actual number Sun proposed to Google in 2006 licensing talks–$100 million-and adjust that number up and down based on six factors he enumerates.

The judge seems pretty clear about dashing Oracle’s multibillion dollar dreams for the Google case. Oracle “simply served a [damages] report that overreached in multiple ways-each and every overreach compounding damages ever higher into the billions-evidently with the goal of seeing how much it could get away with, a ‘free bite’ as it were,” Alsup wrote. “Please be forewarned: The next bite will be for keeps.”

Muddy Waters indeed! China stock analyst claims blackmail, libel

Alison Frankel
Jul 22, 2011 22:13 UTC

The whirlwind of controversy surrounding supposed securities fraud by China-based, U.S.-listed companies spins ever faster. Today’s development: an utterly fascinating libel and defamation complaint that a tiny Hong Kong research outfit called Muddy Waters filed late Thursday in Los Angeles Superior Court against yet-unidentified defendants.

Muddy Waters and its founder, a onetime Jones Day lawyer named Carson Block, have been at the red-hot center of allegations that Chinese companies are fleecing U.S. investors. Block knocked around a bit after graduating from Chicago-Kent College of Law: he practiced law in Shanghai at Jones Day, then started up a Chinese self-storage company and wrote a book about doing business in China. In 2010, Block’s father, the founder of W.A.B. Capital, was considering an investment in a company called Orient Paper and asked his son to check it out. When Carson Block and a friend visited Orient Paper’s headquarters, according to a Dealbook profile of Block, they allegedly found heaps of junk masquerading as corporate assets.

Block put out a report on Orient Paper, urging traders to dump the stock. (As OTC reported yesterday, a federal judge in Los Angeles just green-lighted a securities fraud class action against the company.) And thus a research company — and short -seller — was born. Block was inspired to call his new firm Muddy Waters, according to the company website, by an old Chinese proverb that says it’s easy to catch fish when the fish can’t see what’s going on. His research philosophy is that some Chinese businesses have been taking advantage of U.S. investors who don’t know what’s really happening on the other side of the world. Muddy Waters promised to expose fraud-racked companies through on-the-ground investigation. It also wasn’t shy about admitting that it intended to make money by shorting the stocks of the companies it was about to expose.

Bondholder beats Argentina on appeal but still may not recover

Alison Frankel
Jul 21, 2011 21:59 UTC

For vulture funds holding defaulted Argentinean bonds, the U.S. Court of Appeals for the Second Circuit has been a brick wall with only the tiniest of chinks. In recent years, the appellate court has rejected all sorts of clever stratagems the bondholders and their lawyers have dreamed up in an effort to get their hands on Argentine assets, including an attempt to attach assets belonging to Argentina’s central bank and pension system.

One notable exception to the rule of bondholder frustration at the Second Circuit was the appellate court’s 2006 ruling that a holder called Capital Ventures International had the right to attach Argentine collateral (in the form of U.S. and German government securities) held by the Federal Reserve Bank in New York. Argentina put up the securities to back its 1992 issuance of so-called “Brady bonds,” which, under a plan pushed by then-Treasury Secretary Nicholas Brady, exchanged $28.5 billion in defaulted bonds for collateralized Brady bonds due in 2023. The Second Circuit’s 2006 ruling meant that if Argentina attempted to restructure or exchange the Brady bonds before their 2023 maturity, CVI was first in line to get its hand on the securities held at the Fed.

There was just one big problem with the 2006 appellate ruling for CVI and its lawyers at Ballard Spahr and Cozen O’Connor: it came too late. By the time the Second Circuit overturned a lower court ruling and granted CVI a right to the Fed-held collateral, Argentina had already completed an exchange of $2.8 billion in Brady bonds. Because CVI only had a right to the collateral at the Fed if Argentina was engaged in a Brady bond exchange, CVI was out of luck, despite its appellate win. CVI was left holding a big-money judgment against Argentina — more than $200 million in CVI’s case — with no foreseeable way to collect on it.

Picard drops $2bl in claims against UBS? Um, no, he doesn’t

Alison Frankel
Jul 20, 2011 22:44 UTC

The damages claims in Irving Picard’s pursuit of the banks that allegedly helped Ponzi schemer Bernard Madoff are so outsized that even a simple two-page letter from a federal judge can lead to a $2 billion kerfuffle. On Tuesday, Manhattan federal district court judge Colleen McMahon sent a letter to lawyers for Picard, the bankruptcy trustee for Bernard L. Madoff Investment Securities, and to lawyers for UBS, which is a defendant in two of Picard’s suits. UBS’s counsel at Gibson, Dunn & Crutcher had moved in June to transfer two Picard suits naming the bank as a defendant out of bankruptcy court and into federal court; Judge McMahon, who is overseeing Picard’s case against JPMorgan Chase, agreed to take the cases on July 7 and began requesting information, by letter, from Picard counsel at Baker & Hostetler and UBS counsel at Gibson Dunn.

To understand Judge McMahon’s July 19 letter — and how it was misinterpreted — it’s important to know that in the two actions naming UBS defendants, Picard is asserting different causes of action and seeking different amounts of money. In the case known as Luxalpha, Picard and Baker & Hostetler claim that UBS breached its fiduciary duty and aided and abetted fraud. That suit demands $2 billion from UBS and other defendants. The other case, known as LIF, is a clawback action demanding the return of all the money the bank and other defendants redeemed from Madoff or earned in fees, a total of $550 million, according to Picard. Though the press release announcing the LIF suit refers to “alleged financial fraud” by UBS, the suit actually claims only unjust enrichment and another common-law cause of action as an alternative to the clawback theory.

In a July 14 letter, Judge McMahon told Baker & Hostetler and Gibson Dunn that she needed more explanation of how the LIF and Luxalpha cases intersected and overlapped, and warned the lawyers that she wasn’t going to slow down the JPMorgan case to address complications in the UBS suit. In response, the Picard lawyers decided to simplify matters, reasoning that if they dropped the alternative-theory common law claims in the $550 million LIF case, there would be no reason for the case to stay in federal court. Picard could simply go after the $550 million in a bankruptcy court clawback action.

Who gets to sue News Corp?

Alison Frankel
Jul 19, 2011 22:33 UTC

Well, here’s a big shocker: Grant & Eisenhofer and Bernstein Litowitz Berger & Grossmann aren’t the only shareholders’ firms that think Rupert Murdoch’s News Corp is ripe for the picking. It’s been a little more than a week since G&E and Bernstein amended the complaint in their already-underway Delaware Chancery Court shareholder derivative suit against the News Corp board to include allegations from the British phone-hacking and bribe-paying scandal. Turns out that’s plenty of time for other shareholder lawyers to fire up their word processors and lodge their own complaints.

On Friday, a Massachusetts union pension fund represented by Labaton Sucharow filed a Delaware derivative suit. And on Monday, Manhattan federal court docketed a derivative complaint filed by Glancy Binkow & Goldberg on behalf of an individual News Corp shareholder. So now what? Who gets to control the shareholder litigation against Murdoch’s embattled company?

There’s no clear answer to that question, which means we may be in for a tussle between the Delaware and New York plaintiffs firms. As I mentioned in a post yesterday, Chancery Court judges are increasingly irritated that shareholders are filing mergers and acquisition and corporate governance suits in courts outside of Delaware. But there’s no formal framework for determining where cases like this should proceed. (That’s in contrast to federal securities class actions, in which the litigation process is strictly governed by the Private Securities Litigation Reform Act.)

Tale of two defendants: HTC, Nokia fates diverged in Apple case

Alison Frankel
Jul 18, 2011 22:51 UTC

Back in March 2010, Apple filed separate suits at the U.S. International Trade Commission against Nokia and HTC, accusing both cellphone makers of infringing Apple’s smartphone patents. In April, the ITC staff recommended that the patents Apple had asserted against both Nokia and HTC should be tested in a consolidated case. Nokia and HTC supported the proposal. Apple’s lawyers at Kirkland & Ellis complained that the partial consolidation would aid Nokia and HTC by creating “complexity and delay,” but the lawyers didn’t fight hard against it because they didn’t want the case — which had the potential to knock iPhone competitors out of the U.S. market — to get bogged down.

The consolidation had clear advantages for the defendants and disadvantages for Apple. Nokia and HTC could mount a joint challenge to the validity of the Apple patents, pooling ideas and resources. Meanwhile, on the infringement side of the case, Apple’s Kirkland lawyers had a doubled workload to master the technology in phones made by both Nokia and HTC.

When the case was tried before ITC administrative law judge Carl Charneski in April and May, Nokia and HTC both had A-list defense counsel: Alston & Bird for Nokia; Keker & Van Nest and Quinn Emanuel Urquhart & Sullivan for HTC. (Quinn, remember, regularly represents Google; HTC phones run on Google’s Android platform.) The three defense firms worked together, incorporating one another’s briefs and presenting joint expert witnesses to opine on the validity of the Apple patents.

Gibbs & Bruns comes to NY to sell investors on $8.5bl BofA deal

Alison Frankel
Jul 16, 2011 03:05 UTC

Kathy Patrick wants to set the world straight.

The Gibbs & Bruns partner, who represented 22 major Countrywide mortgage-backed securities investors in the negotiations that led to the June 29 proposed $8.5 billion Bank of America deal, has come East from her home office in Houston to sell Countrywide MBS noteholders and anyone else who will listen on the settlement she and her partner Scott Humphries negotiated with BofA and Countrywide MBS trustee Bank of New York Mellon.

In the face of questions about the deal from six Federal Home Loan Banks, the New York State Attorney General, and a North Carolina Congressman, Patrick and Humphries spent Thursday in Washington and Friday in New York, meeting with MBS investors and “other interested parties” they declined to identify. The Gibbs lawyers’ message: The proposed BofA settlement represents a far better outcome for noteholders than continued litigation of loan-by-loan breach of contract claims against Countrywide. In that scenario, they insist, there would be no guaranteed outcome, no assurance investors can obtain a judgment against BofA as Countrywide’s successor, and none of the mortgage loan-servicing provisions that are a big part of the proposed deal. (The Gibbs & Bruns lawyers and some of their institutional investor clients argue that the servicing component of the deal, in which Bank of America has agreed to outsource loan servicing to specialists tasked with renegotiating troubled mortgages, could end up being as valuable as the cash part of the settlement.)

Patrick is particularly exercised that one objector to the proposed settlement has asserted that the deal “fails to address” securities claims pending against Countrywide. The settlement agreement specifically states that securities fraud claims are not part of the deal, and even if BNY Mellon, as trustee, wanted to give away investors’ right to sue for securities fraud, it has no power to do so. Patrick said she was so determined to preserve her own clients’ securities law claims that Gibbs & Bruns very nearly walked away from late-stage negotiations when Bank of America’s lawyers from Wachtell, Lipton, Rosen & Katz demanded a release. “We said not only no, but hell no,” Patrick said, adding that she was ready to leave $8.5 billion on the table.

BoNY releases expert reports backing $8.5bl BofA MBS deal

Alison Frankel
Jul 14, 2011 20:52 UTC

Faced with a barrage of investor criticism (see here, here, and here) of its proposed $8.5 billion mortgage-backed securities settlement with Bank of America, Bank of New York Mellon, the MBS trustee, has released the expert reports underlying the agreement. The reports—in particular the valuation report by Brian Lin, the managing director of RRMS Advisors—provide an extraordinary window into how this deal got done. They may not change anyone’s mind about the fairness of the settlement proposal, but they answer a lot of the questions that challengers of the deal have raised.

Let’s start with the numbers that were on the table when Gibbs & Bruns and its group of 22 major Countrywide MBS investors sat down across from Bank of America and its lawyers from Wachtell, Lipton, Rosen & Katz. The outside range of the investor group’s demands was $52.6 billion, according to Lin’s report. At the low end, the investors asked for $27 billion. Bank of America, according to the Lin report, calculated that investors could claim no more than $4 billion.

Lin began his evaluation of the investors’ Countrywide MBS claims by reviewing the presentations that the Gibbs group and BofA made to one another. (His company, RRMS, is a mortgage-backed securities consultant that advises MBS investors, packagers, and issuers. BoNY and its Mayer Brown lawyers selected Lin’s firm to provide an expert opinion after beauty contest interviews with several candidates, which had to have MBS expertise but couldn’t have a significant relationship with Bank of America.) Interestingly, Lin’s report indicates that the valuation methodology employed by both the investors and BofA was almost the same, although the two sides obviously plugged different assumptions into the basic formula.

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