Back when former Goldman Sachs director Rajat Gupta’s most pressing problem was the Securities and Exchange Commission’s civil case against him, his defense scored a small victory when the SEC agreed to drop an administrative proceeding against him and brought civil charges in federal court instead. Gupta’s lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, had fought to have Gupta’s case heard by a federal judge, rather than an SEC administrative law judge, because the rules of evidence in administrative proceedings favor the agency. Among other things, the SEC can admit hearsay evidence, and defendants don’t have the same rights to depose opposing witnesses. Although the SEC can’t seek the same penalties in administrative proceedings as it can in federal court, they can be an effective way for the agency to make a statement about improper conduct.
The Mortgage Electronic Registration Systems — or MERS, as it’s known — is the business everyone loves to hate. MERS was established in the 1990s to streamline the process of packaging mortgage loans into mortgage-backed securities. Its members, all players in mortgage securitization, reasoned that it would be easier to securitize mortgages if there were a centralized electronic database of the loans, rather than physical paperwork scattered at mortgage lending institutions across the country. The MERS mortgage registry was essential to the securitization boom of the 2000s. But after the housing bust, MERS has been something of a litigation piñata. Homeowners have filed a multitude of suits challenging MERS’s legal right to foreclose and its alleged robo-signing foreclosure practices. More recently, local officials have begun suing MERS for cutting them out of the mortgage registration process and supposedly cheating them out of mortgage recording fees.
When Philip Yeatts was born in Brownfield, Texas, in September 1962, he had no right leg. His right arm ended in a stump above his elbow, and he had a cleft palate and deformed tongue. Annette Manning, born in Green Bay in 1960, had only buds of fingers and an arm that ended in a stump — just like Mary Hurson, born the same year in New York City, and Tammy Jackson, a 1962 baby in Ranger, Texas. In a heartbreaking new complaint against GlaxoSmithKline, Sanofi-Aventis, Aventor, and Grunenthal, these four plaintiffs, along with eight others (in three parts here, here, and here) claim that their birth defects resulted from their mothers’ use of the now-notorious anti-nausea drug Thalidomide — and that the drug companies engaged in a 50-year scheme to cover up how widely Thalidomide was prescribed in the U.S., and how varied were the birth defects that could result from the drug.
The Justice Department and the Securities and Exchange Commission apparently do not have the evidence to assert a classic insider-trading case against former Goldman Sachs and Procter & Gamble director Rajat Gupta. Typically, the government brings insider-trading cases against people who profited directly from trades based on confidential information. Gupta doesn’t fall into that category. Neither the SEC nor the DOJ claims that he realized any direct profits from the trades Galleon Group chief Raj Rajaratnam allegedly made based on his tips. Indeed, Gupta’s lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, has said many times that Gupta “lost his entire investment” in Rajaratnam’s hedge fund. “[Gupta] did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo,” Naftalis told Reuters in a statement.
In 1998, 400 investors in a trust that distributed revenue from a communications satellite got word that their securitization trustee had settled a $41 million suit against the satellite’s fuel supplier. The trustee, IBJ Schroeder, filed a New York State Article 77 proceeding to obtain a judge’s endorsement of the $8.5 million settlement. Some of the investors protested the deal, arguing that the trustee didn’t have the power to settle the case without consulting them. In 2000, a New York appeals court ruled that, in fact, IBJ Schroeder did have that power, under both New York law and the contract governing the satellite revenue trust. The lower court ultimately ruled in the Article 77 case that even if investors considered the settlement amount too low, Schroeder hadn’t acted unreasonably or imprudently in striking the deal.
It’s way too early to assume that Manhattan federal judge William Pauley III will end up deciding the fate of Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. But that doesn’t mean it’s too early to start wondering what will happen to the proposed deal if he does.
A year ago, the New York Court of Appeals gave a big, shiny gift to accounting firms facing fraud claims. Both the Delaware Chancery Court and the U.S. Court of Appeals for the Second Circuit had asked New York’s high court to clarify its application of the common-law doctrine of in pari delicto, which basically holds that wrongdoers can’t demand compensation from their partners-in-crime. Trustees for two companies shattered by internal fraud had sued their auditors, claiming that the auditors failed to detect, and maybe even helped cover up, the wrongdoing by corporate insiders. But the Court of Appeals, in its October 2010 ruling in Kirschner v. KPMG, said that if the corporation benefited in any way from the insider’s fraud, in pari delicto shields the auditors.
The key paragraph in Manhattan federal judge William Pauley III‘s 21-page ruling Wednesday in Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed-securities investors is the last one.
Bank of America filed a motion late Monday to disqualify Quinn Emanuel Urquhart & Sullivan as counsel to AIG in the insurer’s $10 billion suit claiming BofA, Merrill Lynch, First Franklin Financial, and Countrywide misrepresented the mortgage-backed securities they sold AIG. According to BofA’s lawyers at Munger, Tolles & Olson, a Quinn Emanuel partner who reviewed a draft of AIG’s complaint previously worked at Munger — and was privy to confidential information about how Merrill Lynch and its mortgage origination unit First Franklin intended to defend against MBS claims. Munger asserted that its former partner, Marc Becker, has a direct conflict of interest that should result in Quinn Emanuel’s removal from the AIG case.
Grupo Mexico’s lead lawyer, Alan Stone of Milbank, Tweed, Hadley & McCloy, told me Monday that the company was “shocked” by Chancellor Leo Strine’s 106-page Oct. 14 ruling that the company owes $1.26 billion to the shareholders of Southern Peru Copper Company — the second-biggest shareholder derivative award in history.