Opinion

Alison Frankel

Grais fights to keep $8.5 billion BofA case in fed. court

Alison Frankel
Sep 15, 2011 20:57 UTC

On Wednesday night, Grais & Ellsworth filed a 29-page brief laying out its arguments for why Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors belongs in federal court, not in New York state court, where Bank of New York Mellon, as Countrywide MBS trustee, filed it. I’ll talk about Grais’s assertions in a moment, but first I want to explain why the jurisdictional question is so crucial to the ultimate fate of BofA’s proposed deal. Two transcripts tell that tale.

BNY Mellon, you’ll recall, used a highly unusual device when it asked for court approval of the proposed $8.5 billion settlement in late June. The bank filed the case as an Article 77 proceeding in New York state supreme court, taking advantage of a state law that permits trustees to seek a judge’s endorsement of their decisions. Using Article 77 was a deliberate tactic by BNY Mellon, BofA, and the 22 institutional investors who support the settlement. The lawyers who put together the deal considered and rejected other possible vehicles for court approval, but decided that Article 77 was the fastest, cleanest way to resolve claims involving 530 separate trusts. The provision, which is usually invoked in garden-variety trust cases, gives broad discretion to trustees, who are generally assumed to be acting in the best interests of trust beneficiaries.

The Article 77 strategy looked brilliant at the first hearing on the settlement before New York state supreme court judge Barbara Kapnick. According to a transcript of the August 5 hearing, Judge Kapnick shot down objectors to the deal who, in her view, wanted to proceed with discovery as if the case were a class action. “It’s important to remember that this petition was brought as an Article 77 petition,” the judge said. “It’s not a class action. There aren’t provisions in there to opt out that you are talking about. That’s not what this is. If you started it, maybe that’s what you would have done, but they started it and that’s what they did. I have to work, at least now, within the confines of the proceeding that is before me.”

But then David Grais of Grais & Ellsworth, in a move as bold and novel as the banks’ use of Article 77, removed the case to federal court, arguing that the settlement is a mass action under the federal Class Action Fairness Act. And there, BNY Mellon met with quite a different reception. At a Sept. 1 hearing, Manhattan federal judge William Pauley gave BNY Mellon’s counsel, Matthew Ingber of Mayer Brown, pretty rough treatment. “Isn’t it unusual to use an Article 77 proceeding to seek approval for a settlement of this type,” the judge demanded, according to a transcript of the hearing. “Isn’t it odd that the trustee appears to have chosen such a proceeding whose main benefit appears to be to limit the rights of the trust beneficiaries to opt out of the settlement? You don’t think that is in any way at odds with the trustee’s fiduciary duty to the beneficiaries of the trust?” Judge Pauley went on to grill Ingber on the experts BNY Mellon engaged to determine the fairness of the settlement and the controversial side letter to the settlement agreement in which BofA affirms indemnity for BNY Mellon as trustee.

These are the same issues Grais & Ellsworth and other objectors to the settlement have raised and Judge Pauley is clearly listening to their arguments. It’s dangerous to read too much into how judges behave at preliminary hearings, but if I were BofA, BNY Mellon, or any other supporter of the settlement, I’d prefer my chances before Judge Kapnick a lot more than another hearing in front of Judge Pauley.

Vulture fund alleged insider trading sinks WaMu Chapt. 11 deal

Alison Frankel
Sep 14, 2011 22:47 UTC

The shadowy market of distressed debt investing — trading in the bonds of troubled companies as they enter and exit Chapter 11 — has rarely, if ever, received the kind of public scrutiny it has been subjected to in the bankruptcy of Washington Mutual Inc., the parent of WaMu Bank.

Since 2008, when WaMu collapsed and its parent company went into Chapter 11, WMI notes were snapped up by some of the biggest players in the distressed debt game, including the hedge funds Appaloosa Management, Aurelius Capital, Centerbridge Partners, and Owl Creek Asset Management. The funds bought and sold WMI debt as the company negotiated its way to a $7 billion reorganization plan that would have paid all bondholders in full. But just as the plan was on the verge of confirmation, out-of-the-money WMI shareholders — in a truly last-ditch attempt to squeeze some money out of the WMI reorganization — claimed the hedge funds had traded on insider information about the settlement talks that led to the proposed plan.

Delaware federal bankruptcy Judge Mary Walrath gave enough credence to the shareholders’ allegations that in February she granted the equity committee’s lawyers at Susman Godfrey permission to investigate the insider-trading claims. And when she held hearings on the WMI confirmation plan in July, Susman Godfrey and Arkin Kaplan Rice (representing WMI trust-preferred securities holders) pounded hedge fund witnesses about whether they’d received confidential information about WMI’s settlement talks with JPMorgan Chase, which had acquired WaMu Bank on the cheap in 2008, and the Federal Deposit Insurance Corporation, which oversaw the WaMu sale.

Accenture whistleblowers in bitter fee fight with former lawyers

Alison Frankel
Sep 13, 2011 23:02 UTC

The Justice Department’s announcement Monday of a $63.7 million settlement with Accenture for allegedly taking kickbacks in connection with U.S. government IT contracts is the latest triumph for Norman Rille and Neal Roberts, a pair of former accounting executives whose False Claims Act cases against information technology contractors have so far netted the United States more than $250 million. Rille and Roberts (who is also a lawyer) have, in turn, been handsomely rewarded for blowing the whistle. Despite a fight with the feds over their bounty in Hewlett-Packard’s $55 million FCA settlement, the whistleblowers have reaped more than $10 million in fee awards through the government’s settlements with Cisco, EMC, and other contractors. The Accenture settlement should add several million to their pot; whistleblowers typically collect between 15 and 25 percent of the government’s take.

For most of the seven-year history of the Rille and Roberts FCA cases, they’ve shared their bounty with lawyers from Packard, Packard & Johnson, the California firm that first filed the whistleblowers’ suits in federal court in Arkansas. But, in April, Rille and Roberts sued the Packard firm in Los Angeles county court, claiming their lawyers had tried to recover $1.4 million in costs from the whistleblowers even though the firm already recouped those costs from defendants. “PPJ maximized its potential fee recovery, while making Plaintiffs foot the bill for virtually all costs,” the complaint said. “This unilateral fee/cost allocation transformed a potential but previously unknown conflict of interest into a current and serious conflict of interest between the lawyers and their clients. Despite this inherent and undisclosed conflict, PPJ continued to advance its unfair and unjustified effort to shift the entire burden of paying for litigation costs on plaintiffs.”

Roberts and Rille, represented by Jeffers Mangels Butler & Mitchell, then moved to replace the Packard firm in the Arkansas FCA litigation. In its response, the Packard firm said the motion was “a further calculated step” to strip the whistleblowers’ lawyers of the fees they’re entitled to. Nonetheless, the firm said it did not object to being replaced as counsel to Rille and Roberts. Packard, Packard & Johnson was terminated in the FCA suits as of June 15.

NLRB judge: Employees can bitch about their jobs on Facebook

Alison Frankel
Sep 12, 2011 21:46 UTC

Note to disgruntled employees: you can’t be fired for complaining about your job on Facebook. That’s the upshot of the first ruling to address employees’ use of social media by a National Labor Relations Board judge. Last week, in a case called Hispanics United of Buffalo, administrative law judge Arthur Amchan said HUB violated the National Labor Relations Act when it fired five employees who commiserated about their jobs on Facebook. Judge Amchan’s ruling endorsed the NLRB’s stance that employees are protected from retribution for job-related postings. “Discussions about the workplace are protected whether they occur at the watercooler or the virtual watercooler,” said Laura Lawless Robertson of Greenberg Traurig, who sent out an alert about the NLRB administrative law judge’s ruling Friday.

The HUB Facebook posts came in response to an October 2010 Facebook warning from one HUB employee that a co-worker was complaining about people in the housing division. “[She] feels that we don’t help our clients enough at HUB,” the warning said. “I [have] about had it! My fellow coworkers how do u feel?”

At least seven HUB employees posted responses, some of which were pretty angry. “Tell her to come do [my] fucking job,” one post said in part. “This is just dum.”

How porno piracy cases are breaking copyright ground

Alison Frankel
Sep 9, 2011 00:05 UTC

Imagine, for a moment, that some errant instinct prompted you to want to watch an independent film called Danielle Staub Raw, which features the erstwhile Real Housewife of New Jersey engaged in certain X-rated acts. You probably wouldn’t want anyone to know that you were spending your free time watching Danielle Staub Raw. And you might prefer not paying for the movie. So it’s not too tough to discern the motivations of the more than 5,000 people who illegally downloaded the film anonymously through file-sharing services like BitTorrent.

Last October, On the Cheap, the California company that owns rights to Danielle Staub Raw, sued those 5,000 illegal downloaders in San Francisco federal court. In filing the suit, On the Cheap joined what has become a swell of litigation between porn movie producers and alleged porno pirates. According to an anonymously-administered website that tracks the data, there have been more than 340 suits claiming video piracy (some assert illegal downloading of non-porn films). The twist in more than 300 of the suits is that the movie producers don’t know the identities of the downloaders. So rather than sue named defendants, they file complaints against John Doe downloaders — sometimes naming thousands of anonymous defendants in a single complaint, as in On the Cheap’s suit against Danielle Staub fans.

That tactic has put the porn piracy cases on the cutting edge of copyright law in the digital era. Movie producers have asked courts to issue subpoenas demanding information from Internet service providers that permits them to identify the alleged illegal downloaders. Some ISPs have fought the subpoenas, but in other cases, judges have authorized the demands for information. In On the Cheap’s Staub suit, for instance, magistrate judge Bernard Zimmerman ordered expedited discovery last February. On the Cheap and its lawyer, Ira Siegel of The Law Offices of Ira M. Siegel, reached settlements with about 70 Does without ever naming them in the litigation. Again, it’s not too tough to figure out why the accused pirates settle. Statutory damages can be as much as $150,000. If you received a letter threatening to identify you publicly as an illegal downloader of Danielle Staub Raw in a court that might be hundreds or thousands of miles from your home, you might well be inclined to agree to pay a few thousand dollars to make the whole embarrassing, inconvenient mess go away.

Judge: Herzog heirs can sue Hungary to recover Nazi-looted art

Alison Frankel
Sep 7, 2011 22:06 UTC

It’s been decades since Baron Mor Lipot Herzog’s children hid his renowned art collection in the basement of one of the family’s factories in the Hungarian countryside, hoping to protect their dead father’s beloved paintings and sculptures from the Nazi regime. No such luck. The cache was discovered and appropriated, with choice pieces from the Herzog Collection going to Adolph Eichmann himself. Eichmann’s leavings, according to a ruling last week by Washington, D.C., federal judge Ellen Huvelle, ended up in, among other places, the Budapest Museum of Fine Arts, the Hungarian National Gallery, and the Budapest University of Technology and Economics.

The Baron’s heirs, scattered around the world, tried over the years, with very limited success, to recover the Baron’s art. Early on they were stymied by the Communist regime. In later years, when an American descendant sued in Hungary to recover 11 paintings supposedly left directly to her, her claim was rejected because of a 1973 agreement between the U.S. and Hungary that granted her mother compensation for the misappropriated work.

In 2010, three Baron Herzog heirs (who are not related to the Baron Herzog kosher wine family) filed suit in federal court in the District of Columbia seeking to recover the pieces from Hungary and the state-run institutions that own pieces of the erstwhile collection. The case was billed as the last of the big Nazi art cases, and like its predecessors, claimed Hungary is not protected by the doctrine of foreign sovereign immunity. Counsel for the Baron’s heirs, Michael Shuster of Kasowitz Benson Torres & Friedman, argued that the Baron’s heirs had essentially been exiled from Hungarian citizenship at the time the art was seized; that the seizure was in violation of their human rights; and that the Hungarian owners had improperly capitalized on the art for commercial purposes in the U.S. through ticket and merchandise sales.

What are Fannie and Freddie’s MBS cases really worth?

Alison Frankel
Sep 6, 2011 23:03 UTC

Last Friday evening, after the Federal Housing Finance Agency filed 17 blockbuster suits against just about every major issuer of mortgage-backed securities, the buzz was about the staggering size of Fannie Mae and Freddie Mac’s investments in mortgage-backed notes and certificates. The suits, 13 filed by Quinn Emanuel Urquhart & Sullivan and four by Kasowitz Benson Torres & Friedman, cite about $196 billion in MBS holdings by Fannie and Freddie. Under both state and federal damages theories, the suits demand rescission, or a buyback of the notes by their issuers. Does that mean we should we assume that FHFA has $196 billion in claims?

Nope. Not even close. FHFA doesn’t specify any damages numbers in the complaints filed Friday, but in the agency’s previously-filed $4.5 billion MBS suit against UBS, FHFA asserted that Fannie and Freddie had “lost in excess of 20 percent” of their investment in UBS notes, including unrealized losses. Apply that rough logic to the FHFA’s new suits, and the agency’s claims are knocked down to $40 billion — a huge number, to be sure, but not a heart-stopping one. The banks, meanwhile, are cranking up defenses to shrink even that reduced estimate of FHFA losses. One bank defense lawyer told me Tuesday that by his firm’s calculation, which I’ll explain later, Fannie and Freddie have actually realized losses of no more than about $50 million on their $4.5 billion investment in UBS mortgage-backed certificates. Do the math: if FHFA’s losses are similar across the board, that would put Fannie and Freddie’s recoverable damages on MBS securities claims in the universe of a few billion dollars.

That is, of course, a lot of supposition. But any estimate of banks’ MBS liability, by necessity, involves supposition. MBS investor litigation is so new that there’s not much precedent to guide predictions of how FHFA’s suits, or those of any other MBS investor, will fare in court or in settlement talks. So far, there’s only been one public settlement of an MBS securities case — Wells Fargo’s $125 million deal in a class action involving investors in 28 MBS offerings. Lots of other MBS investors have filed federal court cases, including several class actions, but the litigation hasn’t progressed very far. (Late Tuesday FHFA put out a press release that clarified its damages theories and claims, spelling out some of the same points I make below.)

Quinn Emanuel is not riding an MBS wave: it triggered a tsunami

Alison Frankel
Sep 2, 2011 21:44 UTC

The Federal Housing Finance Agency’s reported mortgage-backed securities suits against a slew of major banks haven’t yet been filed. But if you want to know what they’re likely to look like, check out Mass Mutual’s 168-page MBS complaint against Bank of America, Merrill Lynch, Bear Stearns, and J.P. Morgan, filed Thursday. (It’s so big the Massachusetts federal court docket split it into four parts: here, here, here and here.) Or you could look at AIG’s $10 billion megasuit against BofA, Countrywide, and Merrill, filed on Aug. 8, or Allstate’s 114-page complaint against Goldman Sachs on Aug. 15, or U.S. Bank’s MBS breach of contract suit against BofA, which came at the beginning of this week.

All of those complaints — and many, many more raising allegations that big banks misrepresented the quality of the mortgages underlying the asset-backed securities they packaged and sold — were filed by the law firm representing FHFA in its MBS investigation: Quinn Emanuel Urquhart & Sullivan. And that’s no accident. Quinn Emanuel, a 450-lawyer firm whose partners take home an average of more than $3 million a year, made a conscious decision more than three years ago to push into structured finance litigation against money-center banks, at a time when most litigators didn’t know the first thing about these instruments. In a way, the anticipated FHFA suits are the culmination of Quinn Emanuel’s four-year investment in MBS litigation.

Before 2007, Quinn Emanuel was usually competing for a seat on the banks’ side of the table. Then name partner John Quinn, a onetime Cravath, Swaine & Moore lawyer, had a revolutionary thought. Quinn Emanuel doesn’t have a big corporate practice, he reasoned, so there were no conflicts to keep the firm from suing financial institutions. Rather than vie with a pack of premier law firms for bank business, he decided the firm should give up its relationships with banks and accounting firms and start representing corporate clients with claims against big banks. “We deduced there weren’t very many prestigious law firms willing to be adverse to financial institutions,” name partner William Urquhart told me Friday.

Google and Motorola shouldn’t worry about DOJ’s AT&T suit

Alison Frankel
Sep 2, 2011 15:21 UTC

When the Justice Department stomps in to block a $39 billion deal that would have brought 5,000 jobs to the U.S., you have to believe that regulators are serious about wielding their antitrust enforcement power. DOJ’s 25-page complaint seeking to bar AT&T’s acquisition of T-Mobile is an emphatic document that asserts competition in the wireless industry is “essential to ensuring continued innovation and maintaining low prices.” So if that’s the case, what about the other enormous wireless deal under Justice Department antitrust scrutiny, Google’s proposed $12.5 billion merger with Motorola Mobility?

From my reading of the AT&T complaint, Google and Motorola don’t need to worry. The Justice Department’s suit to block the AT&T deal is a classic protest of a classic horizontal merger, in which market competitors join up. DOJ maintains that AT&T and T-Mobile compete directly in both the product and geographic markets for wireless service, since both companies are looking to sign up ordinary consumers and corporate and government wireless customers (the product market) who want nationwide wireless coverage (the geographic market). Combining AT&T and T-Mobile would reduce the number of competitors in those markets from four to three and would give the combined company more than 40 percent of the wireless business in more than half of the Federal Communication Commissions’ defined cellular market areas, according to the Justice Department’s analysis.

The Justice Department suit turns AT&T and T-Mobile’s own words against them to argue that competition between the companies is good for consumers. T-Mobile’s December 2010 strategy statement, quoted in the complaint is a good example: “[T-Mobile] will attack incumbents and find innovative ways to overcome scale disadvantages,” it says. “Our approach to market will not be conventional, and we will push to the boundaries where possible. [T-Mobile] will champion the customer and break down industry barriers with innovations.” AT&T, meanwhile, fretted about T-Mobile’s system upgrade, noting in an internal 2010 document that “the more immediate threat to AT&T is T-Mobile.”

FHFA purposefully vague on Bank of America’s MBS deal?

Alison Frankel
Sep 1, 2011 21:36 UTC

Monitoring the docket Tuesday afternoon, as motions to intervene in Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities noteholders piled up, was sort of like watching guests arrive a cocktail party. Oh, here come the hedge funds. Look, there’s a bunch of insurance companies. The public pension funds always head straight for the shrimp. Homeowners? Did anyone invite them? And, of course, Goldman Sachs had to show up fashionably late.

Other party guests may have looked glitzier, but none of Tuesday’s intervention motions is more important to the ultimate determination of the proposed settlement’s fairness than the one filed by the Federal Housing Finance Agency, the government agency that oversees Fannie Mae and Freddie Mac. No one knows the value of mortgage repurchase claims-the claims the proposed BofA deal resolves-better than FHFA.

Here’s why. In the MBS boom years, Fannie Mae and Freddie Mac bought hundreds of billions of dollars of mortgages from Countrywide and many other lenders. The government-sponsored entities packaged the loans into mortgage-backed bonds, just like other MBS issuers. But after the housing bubble burst, and Fannie and Freddie were placed under the federal government’s conservatorship, FHFA had both more of an incentive to get information about those underlying loans than other MBS issuers–and more power to get the information. In July 2010 the agency announced that it had issued 64 subpoenas for mortgage loan documents. Last October it brought in Quinn Emanuel Urquhart & Sullivan to advise on litigation against mortgage lenders that breached representations and warranties about the loans they sold to Fannie and Freddie.

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