Alison Frankel

A month ago, when I wrote about the dismissal of a securities class action against UBS, George Conway III of Wachtell, Lipton, Rosen & Katz told me that the UBS case had been the last, best chance for plaintiffs lawyers to find a way around the U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank. Morrison, as you know, barred U.S. courts from hearing securities fraud cases against companies whose shares aren’t listed on U.S. exchanges. In the 16 months since the Supreme Court issued its Morrison ruling, federal courts have made it indelibly clear that securities suits against foreign companies — whether they involve the 1933 Act, the Exchange Act, common stock, CDOs, or swaps — are a non-starter under Morrison’s strictures. (Here’s Sullivan & Cromwell’s Sept. 29 overview of Morrison’s impact on securities litigation.) “Now it’s all over,” Conway told me. “They don’t even bother to bring these cases anymore.”

But it turns out that securities litigation was only the beginning of the story of the Morrison v. NAB ruling. Morrison citations are now turning up in the darnedest places: not just racketeering cases, where Morrison has been invoked since it first came down, but in trade secrets litigation, bankruptcy clawback cases, antitrust and alien tort suits, even criminal defense. If you represent a foreign defendant — or even a U.S. defendant accused of overseas wrongdoing — and you’re not at least considering Morrison’s implications, you’re not thinking hard enough.

The ruling’s key sentence is this one: “When a statute gives no clear indication of an extraterritorial application, it has none.” In other words, unless Congress specifies in any law that the statute applies to conduct that took place overseas or to non-U.S. defendants, then the law simply doesn’t cover that conduct or those defendants. Foreign racketeering defendants were the first to capitalize on the broad language of Morrison, arguing that the federal Racketeering Influenced and Corrupt Organizations Act doesn’t apply outside of the U.S. In the biggest Morrison ruling in a RICO case, Washington, D.C., federal court judge Gladys Kessler found in March that under Morrison, the U.S. government has no racketeering case against British American Tobacco even though she’d already entered a final judgment against BAT.

What about trade secrets defendants, though? The question of whether Morrison bars trade secrets litigation against foreign defendants is just beginning to hit the court. Here’s one example. The U.S. International Trade Commission barred imports of steel train wheels from a Chinese company called TianRui because the company misappropriated a confidential manufacturing process developed by a U.S. competitor. TianRui’s lawyers at Adduci, Mastriani & Schaumber and McDermott Will & Emery appealed to the U.S. Court of Appeals for the Federal Circuit, arguing, among other things, that under Morrison, federal trade secrets laws don’t apply to overseas conduct. (TianRui’s alleged theft occurred in China.) In a ruling Tuesday, two judges on the Federal Circuit panel disagreed and upheld the ITC’s import ban because, they found, TianRui’s conduct affected the domestic market. In a forceful dissent, however, Judge Kimberly Moore invoked Morrison: “United States trade secret law simply does not extend to acts occurring entirely in China,” she wrote. “Absent clear intent by Congress to apply the law in an extraterritorial manner, I simply do not believe that we have the right to determine what business practices, conducted entirely abroad, are unfair.”

And in another case against a Chinese defendant accused of stealing a U.S. competitor’s confidential information, Sidley Austin and Morgan, Lewis & Bockius argued in a brief to the Fourth Circuit that under Morrison, the Lanham Act and the Copyright Act don’t apply to overseas conduct. (That appeal is pending.)

On Tuesday, Manhattan federal judge Jed Rakoff agreed to decide whether Irving Picard’s $267 million clawback case against ABN Amro and related defendants belongs in federal court rather than in Manhattan bankruptcy court, where the Bernard Madoff bankruptcy trustee filed it as an adversary proceeding. That’s bad news for Picard and his team at Baker & Hostetler. So far, Judge Rakoff has decided that he has jurisdiction over at least part of every Madoff case he’s considered, and he’s proceeded to decimate Picard’s recovery theories in his HSBC and Mets rulings.

What’s intriguing about the ABN Amro withdrawal motion, though, is that the bank’s lawyers at Latham & Watkins, as well as Morrison & Foerster on behalf of co-defendant Rye Portfolio, are pointing to a June 23 U.S. Supreme Court opinion involving Anna Nicole Smith’s claim to part of her billionaire husband’s estate. Sadly, neither the former Playboy Playmate nor the stepson she sued to recover more than $400 million lived to see the high court’s ruling. But the Supreme Court’s opinion in Stern v. Marshall could turn out to be the most important legacy of the onetime tabloid darling Anna Nicole Smith, or, as she’s known to the Justices, Vickie Lynn Marshall.

The Supreme Court’s controversial 5-to-4 decision isn’t one of those rulings whose implications are immediately evident, like, say, Morrison v. National Australia Bank. Indeed, to call the facts underlying Stern v. Marshall idiosyncratic would be sort of like saying Anna Nicole was buxom. Here’s a highly abbreviated version of the story: Anna Nicole’s billionaire husband (of a little more than a year) left her nothing in his will. She filed for bankruptcy. Her stepson, Pierce Marshall, filed a claim in the bankruptcy, alleging that Anna Nicole defamed him when she said in state probate court that he fraudulently induced his father to disinherit her. Anna Nicole responded to her stepson’s bankruptcy court claim with a counterclaim for tortious interference. After a bench trial, the bankruptcy court agreed with Anna Nicole and entered a $400 million judgment against Marshall.

The drumbeat of calls for Bank of America to put what remains of Countrywide into Chapter 11 has grown so loud and relentless that according to a report last month by Bloomberg, BofA is actually considering what’s been called the “nuclear option.” Resorting to a Countrywide Chapter 11 would be fraught with unknown but surely devastating consequences for a commercial bank, as bankruptcy guru Harvey Miller of Weil, Gotshal & Manges explained in a fascinating Bloomberg video. But more significantly, there’s a good chance it wouldn’t accomplish the intended goal of roping off BofA’s liability for Countrywide’s mortgage-backed securities mess.

If Bank of America can succeed in limiting its MBS litigation losses to Countrywide’s remaining assets, it will have to show that it didn’t assume liability for Countrywide’s conduct when it acquired the mortgage company in 2008. That’s known as successor liability, and it was one of the key questions Bank of New York Mellon considered as it weighed the fairness of BofA’s proposed $8.5 billion settlement with Countrywide MBS investors. BNY Mellon’s expert, Professor Robert Daines of Stanford Law School, produced a 58-page treatise that concluded it would be very difficult for MBS investors to establish BofA’s successor liability.

Professor Daines looked at a variety of theories plaintiffs could pursue to stick BofA with the hot potato of Countrywide MBS liability. Most, he said, are non-starters, but if there’s any route to successor liability it would probably be through an argument, under New York law, that BofA’s acquisition of Countrywide was a de facto merger. There’s a four-prong test for such a determination, according to the professor, but its interpretation depends to a very large extent on the judge hearing the case. “The doctrine is thus unpredictable and there is even a disagreement about how the four-factor test should be applied: several decisions suggest that the courts apply a ‘flexible’ standard: i.e., they consider all of the factors and that any of these factors could trigger a de facto merger,” Professor Daines wrote in the analysis for BNY Mellon.

This post was co-written with Erin Geiger Smith.

Like hundreds other Twitterati this weekend, we read with righteous amusement Joshua Brown’s Reformed Broker screed against Bank of America. The bank, you probably know, disclosed Friday in a Securities and Exchange Commission filing that it is paying former executives Sallie Krawcheck and Joseph Price a total of $11 million for the pleasure of their departure, a year-long non-compete agreement, and a promise not to sue for, as the British say, being made redundant. The Reformed Broker found the deal offensive, to say the least.

“This is why they hate you and want you to die,” Brown wrote, in a post that ricocheted around Twitter like tween commentary on Kim Kardashian’s wedding. “Elevenmilliondollars? What the hell world are you inhabiting?” Brown wrote. “You look completely ridiculous with news like this at a time when thousands of people are massing in every major city in the country to make the case that you don’t deserve to exist. At a time when you’re being investigated for employing robosigners just to maintain a certain level of foreclosures processed per month. At a time when you’re laying off rank-and-file employees not by the hundreds, not by the thousands — but in the tens of thousands…This Is what you do with the money? With OUR money? Are you crazy?”

We assumed — and we know we’re not alone in this — that BofA had to fork over the $11 million to Krawcheck and Price because the October 6 “separation agreements” were part and parcel of their prior employment contracts. That was the infuriating but understandable explanation AIG offered in 2009 when Congress raked it over the coals for paying $169 million in bonuses to some of the execs who cratered the company.

Last week a rumor made the rounds of hedge funds that trade in Bank of America and MBIA shares: The bank had reputedly agreed to settle the bond insurer’s mortgage-backed securities fraud and put-back claims for $5 billion. The rumor turned out to be false, or at least premature, since no settlement is in the offing at the moment. But the size of the rumored deal gives you a sense of the magnitude of the litigation between the banks that packaged and sold mortgage-backed securities and the bond insurers that wrote policies protecting MBS investors. We are talking about billions of dollars — perhaps tens of billions — at stake in suits by MBIA, Syncora, Ambac, and Financial Guaranty against Countrywide, Credit Suisse, GMAC, Morgan Stanley, and other MBS defendants.

Last week, Manhattan state supreme court judge Eileen Bransten, who has been the leading jurist in the bond insurer cases against MBS issuers, heard oral arguments on the issue that will determine the magnitude of the banks’ liability: Can bond insurers demand damages based on banks’ misrepresentations on the day deals were signed? Or can MBS issuers point to the housing bust, and not their deficient underwriting, as the reason so many loans have gone bad in the years after the MBS were sold? The case argued Wednesday before Judge Bransten concerned summary judgment motions in the MBIA and Syncora suits against Countrywide, but as the judge noted in her introductory remarks to the overflow crowd in her courtroom, “I understand that this [argument] has a major impact on lots of people.”

For everyone who couldn’t squeeze into Judge Bransten’s courtroom, I’ve gotten hold of transcripts of the day-long hearing. I’m going to focus on the morning session on the loss causation issue, but here’s a link to the afternoon session on consolidating the issue of Bank of America’s successor liability for Countrywide MBS, which is specific to BofA.

With the news Wednesday that Massachusetts Attorney General Martha Coakley has “lost confidence” in the multistate AG talks with five big banks and is revving up to sue, coupled with last week’s announcement by California AG Kamala Harris that she’s also dropping out of talks and launching her own investigation, I’ve been wondering what shape an AG suit against mortgage lenders would take. I reached out to both the New York and Delaware attorneys general offices, since they were the first to start talking about filing their own cases. They didn’t return my calls. But according to the bank lawyers I talked to (caveat emptor), there’s a huge gap between the wrongs the states will be able to show and the relief for troubled homeowners that they say they want.

“There’s a fundamental disconnect between what they want and they claims they might have,” one bank lawyer said.

Let’s put aside securities fraud claims the states may have for troubled mortgage-backed securities, since those have nothing to do with the robosigning revelations that led all 50 states to enter talks with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial a year ago. The basis of the talks has been deficiencies in the foreclosure process. Mortgage servicers took all sorts of shortcuts as they pushed an unprecedented surge of homeowners into foreclosure beginning in 2008. It’s pretty much undisputed that foreclosure law firms filed untold numbers of false certifications and deficient affidavits with the courts in states that require foreclosures to be approved by a judge.

The $3.4 billion Indian trust land settlement known as Cobell has been one of the most hotly-litigated and longest-running class actions in history. It took almost two decades for lawyers representing hundreds of thousands of Native Americans with land held in trust by the U.S. Department of the Interior to win recompense for their clients. Even then the settlement wasn’t final until Congress signed off and Washington, D.C., federal judge Thomas Hogan approved the deal on June 21.

So you can certainly understand why the lawyers representing the class members who have waited so long for justice weren’t happy that Ted Frank of the Center for Class Action Fairness filed a notice of appeal of Judge Hogan’s ruling to the U.S. District Court for the District of Columbia Circuit in August. Frank, who represents an objector named Kimberly Craven, has argued that the Cobell settlement suffers from the same problems that led the U.S. Supreme Court to overturn the certification of a class of female Wal-Mart employees in the Dukes case — a decision handed down the same day Judge Hogan approved the Cobell settlement. Frank and Craven aren’t exactly beloved for standing in the way of billions of dollars going out to allegedly victimized Native Americans, but Frank told me Thursday that his client’s appeal is a matter of principle: No matter how righteous the cause, the process must be legitimate.

That’s little solace to class counsel, who reacted with dismay to Craven’s notice of appeal. “The delay caused by Craven’s appeal means that more elderly and more infirm class members will pass on without obtaining justice that they deserve,” the class brief said. “The human cost of Craven’s appeal can never be quantified, and as this court has found, many of the class members depend on their trust funds for the most basic staples of life,” wrote class lawyers Dennis Gingold and Keith Harper and Michael Pearl of Kilpatrick Townsend Stockton. It was a heartfelt argument, and all the more so because, according to the Cobell lawyers, Craven has tried to block this settlement in both Congress and the courts, and has managed to rally almost none of the nearly half-million class members to her cause.

In August, when Johnson & Johnson disclosed its deal to resolve criminal allegations that it falsely marketed the potent schizophrenic drug Risperdal, I said that if ever a board was ripe for a big, fat shareholder derivative suit, it was J&J’s. The Risperdal settlement was the company’s third criminal plea in a little more than a year, on top of a Justice Department and Food and Drug Administration investigation of its over-the-counter children’s drugs, state attorneys general subpoenas, whistleblower suits, and product recalls. The 111-page consolidated complaint that Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd filed against J&J’s board members last December offered more red flags than a training school for toreadors.

Judge Freda Wolfson of New Jersey federal court agreed in a Sept. 30 opinion that the allegations the plaintiffs firms had raised were “troubling and pervasive,” noting in particular that claims the board ignored systemic illegal conduct were “disconcerting to the court.” Near the end of the ruling, after analyzing all of the shareholders’ assertions, the judge cited “what appears to be serious corporate misconduct on J&J’s part.”

And then she threw out the case.

Judge Wolfson found that the shareholders’ complaint didn’t offer sufficiently specific evidence that individual board members were aware of problems at the company and nevertheless failed to do anything. “None of the various types of red flags suggest that the board acted in bad faith,” the judge wrote. “Adding all of those allegations together does not lead me to a different conclusion in this case. While plaintiffs’ allegations are disconcerting, they do not contain the [requisite] detail.”

The most dramatic moment at the Sept. 21 hearing on Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors came near the end, when Gibbs & Bruns partner Robert Madden stood up to address Manhattan federal judge William Pauley’s concerns about how the settlement came to be. Tall and clear-spoken, Madden captured the judge’s attention as he explained that his clients, a group of 22 large institutional investors, hadn’t entered a sweetheart deal with BofA, but had banded together to force the bank to pony up billions to investors for claims BofA thought it would never have to deal with.

“The problem was that these repurchase claims were lying fallow,” Madden said, according to the transcript of the hearing. “No one was doing anything. None of (the investors now objecting to the deal) were doing anything. And, I’m sorry to say, the trustee wasn’t doing anything. Limitations were running on those claims, and nothing was happening.”

Or was it?

I’ve learned that in the summer of 2010, as Gibbs & Bruns began to push Countrywide MBS trustee Bank of New York Mellon to act on its assertions that mortgages underlying the Countrywide securities were deficient, another group of Countrywide MBS investors was finalizing its own notice of default to serve on BNY Mellon. Members of the RMBS Clearinghouse, run by former Patton Boggs partner Talcott Franklin, had undertaken an extensive analysis of the underlying Countrywide mortgages, and, according to two sources familiar with the Clearinghouse’s activities, were on the verge of sending BNY Mellon a notice that would trigger put-back litigation.