Alison Frankel

If there’s one federal jurist the Securities and Exchange Commission absolutely, positively did not want to see at the top of the docket in its $285 million settlement with Citigroup, it was Senior Judge Jed Rakoff of Manhattan federal court. Rakoff has been a festering sore for the agency since 2009, when he rejected a proposed $33 million settlement with Bank of America over failing to disclose bonus payments to Merrill Lynch executives in merger-related documents. In a March 2011 opinion in the Vitesse Semiconductor case, Rakoff took the agency to task for agreeing to settlements in which defendants neither admit nor deny wrongdoing. Then in July he claimed jurisdiction over the SEC’s case against former Goldman Sachs director Rajit Gupta, accusing the agency of forum shopping in filing an administrative action against Gupta. You can only imagine the teeth-gnashing at the SEC when Rakoff was assigned the Citi case. After the SEC tried to argue that Rakoff doesn’t have the power to consider the public interest in his evaluation of the proposed settlement, Monday’s rejection of the settlement was practically a foregone conclusion.

So you may be wondering — as I was — how it is that Rakoff ended up with the Citi case. The answer, according to his chambers and Chief Judge Loretta Preska of the Southern District, is that the assignment was purely random. Yes, there are 41 federal district judges in the district, so the odds of any of them overseeing multiple, unrelated cases filed by the same plaintiff are long. But according to Preska and Rakoff’s chambers, that’s what happened here.

The SEC filed the Citigroup case in federal court in Manhattan, rather than Washington, D.C. (where it filed a $75 million settlement with Citi in 2010) because the new Citi case includes SEC charges against Brian Stoker, a Citi Global Markets employee who allegedly structured and marketed the CDO that’s at the bottom of the case. Unlike the two Citi employees in the 2010 case, Stoker refused to settle with the agency. So in anticipation of litigation with him, the agency filed the entire Citi case in New York.

Once it was filed, it went into what’s known in the Southern Distrrict as “the wheel.” Preska said there are actually different wheels for each category of civil suit, but each active judge is equally represented on each wheel. (They’re also not actual wheels, but electronic simulations.) Rakoff is a senior judge, which means he can pick and choose which civil wheels he’s on. But like many of the judges who recently took senior status in the Southern District, he’s still on all of the civil wheels. He’s no more likely than any other judge in the district, in other words, to be assigned any particular case.

“It’s wholly random,” Preska told me. “There is no under-the-table nothing.” Rakoff’s chambers confirmed that both the BofA and Citi cases were assigned to the judge by random.

The Gupta case was a somewhat different matter. Under the Southern District’s rules, criminal cases and SEC enforcement actions “arising from the same alleged fraud” are assigned to the same judge. So once Rakoff was assigned the Galleon insider trading cases, the SEC’s Gupta action was considered related. (Lawyers in civil cases in Manhattan federal court can also indicate that new complaints are related to pending cases, which, as I’ve explained, is how Rakoff came to oversee so much of the district court litigation related to the Bernard Madoff liquidation.)

And before we get caught up in alternative conspiracy theories about how Rakoff got the Citi case, we should remember that the SEC’s litigation with BofA and Citi stand out mainly for the way Rakoff handled those cases. Rakoff wasn’t assigned the agency’s $535 million settlement with Goldman Sachs, which was approved by U.S. District Judge Barbara Jones of Manhattan federal court, nor the SEC’s $154 million deal with JPMorgan Chase, which got a green light from Manhattan federal judge Richard Berman in June 2011.

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In 2010, when the Securities and Exchange Commission brought a case against Citigroup for misleading investors about the bank’s exposure to subprime mortgages, the SEC filed the proposed $75 million settlement in Washington, D.C., federal court. Judge Ellen Huvelle gave the agency some gruff about the deal, in which two individual Citi defendants also settled SEC claims through an administrative action, but she eventually accepted the settlement without demanding any big changes.

The SEC and Citi must be looking back with regret at those halcyon days. For reasons the agency has not explained, when it filed a proposed $285 million settlement with Citi last month, it opted for the federal court not in D.C. but in Manhattan. There, the case — which involves claims that Citi defrauded investors in a mortgage-backed CDO — was randomly assigned to U.S. District Judge Jed Rakoff, who has recently been engaged in a highly-publicized campaign of insisting on corporate accountability in SEC settlements. The SEC proceeded to undermine its credibility in Rakoff’s court by arguing, as my colleague Erin Geiger Smith reported, that it’s not the judge’s role to consider the public interest in SEC settlements.

In a 15-page, eminently quotable exercise in rhetoric issued Monday, Rakoff pushed the agency into the grave it dug for itself, rejecting not only the proposed settlement but also the SEC’s assertion that he must heed its assessment of the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary.”

Rakoff took particular issue with the SEC’s standard operating procedure of permitting a defendant to settle claims without admitting to underlying allegations, describing the agency’s strategy as “hallowed by history but not by reason.” The SEC asserted that because Citi did not expressly deny its allegations the judge and the public could infer their truth. “This is wrong as a matter of law and unpersuasive as a matter of fact,” Rakoff wrote, adding later in the ruling, “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts — cold, hard, solid facts, established either by admission or by trials — it serves no lawful or moral purpose and is simply an engine of oppression.”

The proposed settlement, the judge said, offered an obvious benefit only to Citi; Rakoff wrote that it is “harder to discern” what the SEC gets from the agreement “other than a quick headline.” (He contrasted the terms of the SEC’s $535 million settlement with Goldman Sachs with the proposed Citi deal, asserting that the Goldman case “involved a similar but arguably less egregious factual scenario.”) The public, meanwhile, is left with unproven facts and inadequate relief, according to Rakoff. “How can it ever be reasonable to impose substantial relief on the basis of mere allegations?” he wrote. “It is not fair because, despite Citigroup’s nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent. … And, most obviously, the proposed consent judgment does not serve the public interest because it asks the court to employ its power and assert its authority when it does not know the facts.” (Interestingly, the plaintiffs firm Robbins Geller Rudman & Dowd filed a proposed amicus brief asking Rakoff to reject the deal for that very reason.)

Rakoff’s ruling suggests that he’s not willing to approve a deal without an admission of wrongdoing from Citi. “The court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance,” he wrote. But as Andrew Longstreth has reported for On the Case, there are clear costs to the public if the SEC demands terms defendants simply won’t agree to.

That was substance of the SEC’s response to Rakoff’s ruling Monday. “The court’s criticism that the settlement does not require an ‘admission’ to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial,” enforcement director Robert Khuzami said in a statement. “It also ignores decades of established practice throughout federal agencies and decisions of the federal courts. Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court.”

The agency didn’t respond to my specific question about why it filed the proposed Citi deal in Manhattan rather than in Washington.

Citi counsel Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison didn’t return a call for comment.

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On June 28, 2010, the Enforcement Director of the Securities and Exchange Commission, Robert Khuzami, spoke on the phone with Mark Pomerantz, a partner at Paul, Weiss, Rifkind, Wharton & Garrison. Pomerantz and Khuzami had worked together as assistant U.S. attorneys in Manhattan in the 1990s; according to Pomerantz, he was partly responsible for Khuzami’s promotion to chief of the office’s securities unit. But this wasn’t a social call. Pomerantz represented Citigroup, which had agreed to settle SEC allegations that it drastically underreported its subprime mortgage exposure. The deal was held up, however, by the agency’s insistence that Citi CFO Gary Crittenden face fraud claims for allegedly misleading investors.

Pomerantz told Khuzami, as he had many times before, that Citi would suffer collateral damage if Crittenden were accused of fraud. According to Khuzami, he just told Pomerantz to “talk to Crittenden.” But soon after the June 28 call, another Citi lawyer, Lawrence Pedowitz of Wachtell, Lipton, Rosen & Katz, told SEC Associate Enforcement Director Scott Friestad that Khuzami had agreed to back a non-fraud settlement with Crittenden.

In July 2010 the SEC announced its deal with Citi. As part of the settlement, Crittenden and another individual defendant, former Citi investor relations chief Arthur Tildesley, settled administrative actions that didn’t involve fraud allegations. Six months later, an anonymous (but obviously insider) source tipped U.S. Senator Chuck Grassley that Khuzami had forced the agency to drop fraud claims against the execs as a favor to his friends in the defense bar. The SEC’s inspector general, H. David Kotz, undertook an investigation of the complaint.

The result of the investigation, announced Thursday, is an utterly compelling 43-page report. The inspector general cleared Khuzami of violating any SEC guidelines or offering any preferential treatment to Citi. The settlement, Kotz said, was the product of long negotiations between the bank and enforcement-division lawyers. And though it would have been “advisable” if another SEC lawyer had also been on the phone when Khuzami spoke with Pomerantz on June 28, 2010, Kotz said that Khuzami cured any misunderstanding about what he said to Pomerantz when he offered in an subsequent email to Friestad to insist on fraud claims if the staff felt it was important.

“The OIG found that Khuzami also included at least some staff members on every meeting he had with defense counsel, and in instances where certain staff members could not attend, Khuzami made sure to brief them after the meetings,” the report said. “In addition, the OIG found that Khuzami held several internal meetings with the staff in which he gave the staff members ample opportunity to express their views on the Citigroup case. The enforcement staff consistently testified to the OIG that they felt they had the opportunity to express their views throughout the Citigroup investigation.”

But it’s impossible to read the public version of the IG’s report (which is, unfortunately, heavily redacted) without getting the sense that the white-collar bar is a club of insiders. This is a rare window into how SEC settlements are made — and how defense lawyers’ access to SEC decision-makers may affect the process.

Citi was represented by Brad Karp of Paul Weiss and Pedowitz of Wachtell when it reached the outlines of a deal with the SEC enforcement staff in Sept. 2009. The deal would permit the bank to resolve the SEC’s investigation of its subprime disclosures by agreeing to claims that it misled investors without the intention of defrauding them — a so-called Section 17(a) charge under the Securities Act of 1933. (Section 17(a) is considered a fraud claim, but it’s not intentional fraud.)

When the SEC resolved to charge individuals, things got more complicated. The agency appears to have sent Wells notices to a number of potential Citi defendants, but the enforcement staff eventually decided to focus on Crittenden, the CFO, and Tildesley, the former investor relations head. Crittenden hired John Carroll of Skadden, Arps, Slate, Meagher & Flom. Tildesley was represented by Mark Stein of Simpson, Thacher & Bartlett. According to the IG’s report, Citi supplemented its team with Pomerantz of Paul Weiss, specifically to make the SEC aware of the implications for the bank-which faced securities fraud class actions — if individual Citi defendants were accused of fraud.

Carroll, Stein, and Pomerantz had all intersected with Khuzami in the Manhattan U.S. attorney’s office, according to the report. (Khuzami’s deputy, Lorin Reisner, overlapped with Khuzami, Carroll, and Stein but not Pomerantz.) Khuzami worked closely with Stein and Pomerantz, and he stayed in touch with Pomerantz after he left the prosecutors’ office and joined the legal department at Deutsche Bank. Khuzami actually hired Pomerantz on a long-running matter for Deutsche Bank.

In talks with the SEC enforcement staff, Tildesley and Stein agreed pretty quickly to a Section 17(a) settlement. Not Crittenden and his counsel, Carroll of Skadden. (Khuzami told the IG’s investigators that Crittenden was concerned he’d have to step down from a position in his church if he settled the SEC claims.)

Pomerantz of Paul Weiss, meanwhile, repeatedly contacted Khuzami to argue that Citi would suffer if the SEC charged Crittenden with securities fraud. According to the IG report, he sent an email directly to Khuzami on April 6, 2010; Khuzami immediately forwarded it to the enforcement staff. In June, Pomerantz emailed Khuzami to ask him to meet with Citi’s board chairman, Dick Parsons. Khuzami, Reisner, and Friestad all attended the Parsons meeting, which didn’t seem to change the dynamic of discussions between the SEC and Crittenden.

Then came the crucial June 28 phone call between Pomerantz and Khuzami. Pomerantz, who gave testimony to the SEC inspector general, said he recalled Khuzami suggesting in that call that it might be possible to charge Crittenden with something other than securities fraud. “Pomerantz described Khuzami’s comment as ‘a little crack in the door’ and ‘a light and the light was not an upcoming train’ and noted that it reflected ‘some willingness to consider whether the staff could entertain a non-fraud resolution as to Crittenden,’” the report said. Khuzami, by contrast, told the IG that he never agreed to any such thing. “[He said] there was no such agreement, and [he] didn’t agree to any such thing, and [he] couldn’t agree to such a thing,” the report said.

Pomerantz, however, told his Citi co-counsel Pedowitz and Crittenden counsel Carroll that the SEC had moved away from charging Crittenden with fraud. Pedowitz emailed Friestad, and in a follow-up phone call, said Khuzami was now backing a non-fraud settlement with Crittenden. Friestad told the IG’s office that Pedowitz’s assertion came as news to him, but he pretended to know what the Citi lawyer was talking about. Then he went to Reisner since Khuzami was out of the office. (Reisner’s reaction is redacted.)

When Khuzami got word that Citi believed he’d agreed to a non-fraud settlement for Crittenden, according to the IG’s report, he was none too pleased. In a call on July 1, 2010, he told Pomerantz that the Paul Weiss lawyer had read too much into their previous discussion. Pomerantz told the IG’s office, however, that by the end of the July 1 call, he still believed Khuzami would support a non-fraud settlement with Crittenden, even though Khuzami told him the deal would have to be negotiated with Carroll, not with the Citi lawyers. “Pomerantz said that by the end of the conversation, he was ‘certain the state of play was that hopefully we would be back on track,’” the report said.

Carroll, according to the report, was surprised when Reisner and Friestad informed him that the SEC was still pursuing fraud claims against his client, whatever he had heard from Pomerantz. “Confusing day,” Carroll said in an email to Friestad; in a subsequent phone call, Friestad told the IG, Carroll said, “What the heck is going on? I’ve known you for 16 years. I don’t think I’ve ever had a call like this in my life from you guys.”

On July 3, 2010, Khuzami sent an email to Friestad that weighed heavily in the IG’s evaluation of his conduct. It’s partly redacted but said, “Regardless of whatever miscommunications or strategy is behind what Larry or Mark told John,” Friestad should “confirm the [enforcement team] is OK [with a non-fraud deal for Crittenden].”

Frustratingly, the public version of the report does not disclose how the enforcement staff came to accept a non-fraud deal with Crittenden. (Those terms were eventually offered to Tildesley as well.) But it was the IG’s conclusion that 43-page report Khuzami never intended to cut the enforcement staff out of decision-making or to confer preferential treatment on Citi.

SEC spokesman John Nestor told Reuters reporter Aruna Viswanatha that the agency is “pleased that the report found the anonymous allegations were completely without merit.” I left messages for Pomerantz, Carroll, and Pedowitz but didn’t get a response.

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At the beginning of his closing argument way back on Sept. 20, Micron counsel William Price of Quinn Emanuel Urquhart & Sullivan told jurors that his client and its co-defendant, Hynix, had fixed prices on some computer memory chips. They did it 11 years ago, he said, when the tech bubble burst and memory chip prices were plummeting. “That activity was wrong, and there were victims,” Price said, according to this transcript. “But Rambus wasn’t a victim …. And, so, what Rambus has done here is they’ve taken something that we have told you from the beginning was true and said they were victims when they weren’t.”

Price told jurors about an instruction New York City used to give its bus drivers:  if there’s a crash, lock the doors. “The reason wasn’t to keep people from leaving,” Price said. “The reason was to keep people from jumping on and saying they had hurt themselves, [that] they had hurt their back. Those people were called ‘ghost riders.’” Rambus, Price said, was a ghost rider. It claimed to be a victim of Hynix and Micron’s wrongdoing but wasn’t even on the bus. Rambus and its lawyers at Munger, Tolles & Olson asserted that Micron and Hynix conspired to wreck the market for its proprietary computer memory chip; Price and Hynix’s lead counsel, Kenneth Nissly of O’Melveny & Myers, had to show jurors that their clients’ admitted price-fixing involved the market for an alternative memory chip; the failure of Rambus’s chip, they argued, was due entirely to problems with the product.

“The challenge was to say, ‘Yes, there was price-fixing, but not this price-fixing,’” Price told me.

Quinn Emanuel and O’Melveny met the challenge, though they had to wait almost two months to find out they’d won the case. Twelve jurors began deliberations in late September. On Wednesday they finally returned a verdict, concluding that Rambus had not proved Micron and Hynix engaged in a price-fixing conspiracy to keep Rambus’s chip from becoming the industry standard. (Here’s the verdict sheet.) The jury also found that Micron and Hynix didn’t conspire to disrupt Rambus’s relationship with Intel. Those were the only questions jurors had to answer, since everything else in Rambus’s case depended on jurors finding a conspiracy to harm the company.

Price said the trial was truly a bet-the-company case for Micron. In its closing arguments, Rambus asked jurors to award about $4 billion in damages. With the trebling permitted under antitrust laws, the potential $12 billion exposure exceeds Micron’s market share. (Rambus had everything riding on the outcome as well; as Dan Levine reported Wednesday for Reuters, the company’s share price fell 61 percent after the verdict was announced.)

The relationship between Rambus and Intel, according to both Price and Nissly, was one of the keys to the trial. In the late 1990s, Intel agreed to use Rambus’s proprietary computer memory chip in its microprocessors, rather than the industry standard memory chips. (All of the random access memory chips have acronym names, but I won’t gum up the story by using them.) The deal had the potential to make Rambus the king of the memory chip business, but it didn’t work out that way; the relationship between Rambus and Intel soured a couple years before the contract ended in 2002. Rambus asserted that Hynix, Micron, and co-conspirators including Samsung poisoned its dealings with Intel. Price, Nissly and their teams countered that Intel was dissatisfied with Rambus’s product and its work.

Rambus, intriguingly, called no live witnesses from Intel. That left an opening for Hynix and Micron, and they took it. “We believed their testimony was helpful,” Nissly told me. A couple former Intel execs testified, but the most dramatic testimony, according to Price, came from an Intel engineer named Paul Fahey, who was subpoenaed by the defense. According to Price’s closing argument, Fahey said that Intel was working all-out to adapt the Rambus chips for its processors, to the extent that Intel employees canceled vacations, worked weekends, and risked their marriages. Rambus, meanwhile, seemed to take a much more cavalier approach — which was explained, according to Price’s account of Fahey’s testimony, only when Rambus filed a patent suit against Hitachi, claiming that Rambus patents were infringed in the industry-standard memory chips its rivals were producing. Intel then realized, according to Price, that Rambus had a backup plan if its propriety chips didn’t supplant the chips other companies were selling: it would sue those other companies for IP violations. (That’s the so-called ‘Plan B’ that allegedly resulted in Rambus shredding documents in company-sanctioned ‘shred days.’)

“Fahey exploded when he testified about that,” said Price, one of Quinn Emanuel’s most experienced trial lawyers. “It was the most emotional testimony I’ve ever seen at trial.”

When Hynix and Micron offered jurors an alternative theory for the demise of the Rambus/Intel partnership, their defenses were aligned. The two defendants had slightly different explanations, however, of their involvement with Rambus’s propriety chip technology — and with Samsung, which was banking on the success of Rambus’s chip. Hynix lagged far behind Samsung in gearing up to produce chips using the Rambus technology, as opposed to the industry-standard tech. Micron, on the other hand, had no plans to adapt to the expensive Rambus chips. Rambus asserted that even though the two companies were differently positioned, Hynix and Micron worked with Samsung to keep prices high for chips with the Rambus technology so it wouldn’t proliferate, and the industry-standard technology would prevail.

The Samsung link worked to Rambus’s benefit, since Samsung witnesses testified, in playbacks of videotaped deposition, to fixing prices. (Samsung paid Rambus $900 million to settle both IP and antitrust litigation in January 2010.) But according to Price, Micron and Hynix were able to show that the Samsung price-fixing testimony didn’t add up to a conspiracy with them. Their arguments, he said, were actually stronger because they were positioned differently in the market for Rambus chip technology.

“We had different stories, and that really helps in an antitrust conspiracy case,” Price told me.

The trial went much more quickly than San Francisco Country Superior Court Judge James McBride had originally anticipated. Jurors had been told that testimony might go on until Thanksgiving, so the late September closing arguments were a full two months ahead of the original timetable. Both Nissly and Price told me they were optimistic as jurors began deliberations.

Then came the long wait for a verdict. Price said all three of the law firms had betting pools on how quickly jurors would decide the case. None of them expected deliberations to go on for longer than two weeks. Instead, for almost two months, all of the firms sent a lawyer to the San Francisco county courtroom to wait for a verdict. Nissly and Price didn’t go every day; Price actually tried a case at the U.S. International Trade Commission — against Rambus — while deliberations wore on. O’Melveny partners Susan van Keulen and Tad Allan spelled Nissly and Quinn partners Jon Steiger and Patrick Shields manned the courthouse for Micron.

When word came Wednesday that the jury was back, Nissly made it to court for the reading of the verdict. Price was in Los Angeles, and sat by a computer waiting for news of the result. (Oddly, he first found out the jury had cleared his client from a Rambus shareholders’ blog.) Both lawyers said it’s still a mystery why the jury — which declined to be interviewed by lawyers immediately after the verdict — took so long to decide the case. Price said they didn’t ask the court many questions and never appeared to be deadlocked, but apparently went slowly through the evidence. “I’d still like to know why it took eight weeks,” Nissly said.

Rambus told Reuters last night that it’s reviewing the record for a possible appeal, though Price said “there isn’t much for them to complain about.” (As he pointed out, he’s a bit biased on this point.) Price said one argument Rambus might made — that the judge instructed jurors incorrectly on what standard to apply in deciding the conspiracy’s impact on customers — isn’t really relevant since jurors never reached the question of the alleged conspiracy’s impact.

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The big guns are rolling out on both sides of Microsoft’s patent infringement suit against Barnes & Noble at the U.S. International Trade Commission. Microsoft has no fewer than four firms (Sidley Austin; Orrick, Herrington & Sutcliffe; Woodcock Washburn; and Adduci, Mastriani and Schaumberg) working on the six-month-old case, in which it accuses Barnes & Noble’s Nook e-readers of infringing Microsoft patents. Barnes & Noble this week supplemented its team of Cravath, Swaine & Moore and Kenyon & Kenyon with Paul Brinkman‘s group from Quinn Emanuel Urquhart & Sullivan. The Quinn addition is notable because Barnes & Noble’s devices use Google’s Android operating system; Quinn, which is one of Google’s go-to IP firms, previously defended the Android system in Apple’s ITC case against HTC.

When it comes to Android, Microsoft and Google don’t exactly think the same way, as you’ll see below. But there is one issue on which they have a peculiar alignment of interests: they’re both trying to put the kibosh on supposedly confidential information that’s jumped from litigation into the public domain.

Google, as you’ll no doubt recall, has been fighting for months to undo the damage an email written by one of its Android engineers has apparently caused to Google’s defense of Oracle’s Java infringement claims. (The engineer, Tim Lindholm, said all alternatives to Java “suck” and Google should license the software code.) Google has been arguing, without any success, that Oracle improperly introduced the damning email into the record and all traces of it should be purged — even though, by now, Lindholm’s email is plastered all over the Internet.

Microsoft, meanwhile, has been gleefully roasted this week by tech bloggers citing disclosures from the Barnes & Noble case. (See, for instance, here, here, and here.) The Microsoft-is-a-troll taunting began way back in April, when the brainy folks at Groklaw first covered Barnes & Noble’s answer and affirmative defenses to Microsoft’s ITC complaint. The book-selling giant, Groklaw pointed out, was asserting a patent misuse defense, claiming that Microsoft is on a mission to destroy Android by demanding exorbitant licensing fees for trivial patents.

Then last week, Bloomberg noticed that Barnes & Noble had filed some pretty juicy documents to support its assertions, including a March 2011 letter Barnes & Noble’s Cravath lawyers sent to the Justice Department’s antitrust division, urging DOJ to investigate Microsoft for antitrust violations in its anti-Android campaign. In an accompanying slideshow presentation to the DOJ, Barnes & Noble detailed Microsoft’s Android-related license deals and the nondisclosure agreements Microsoft supposedly forced licensees to sign. Groklaw uploaded all the documents — including Cravath’s letter to the DOJ and the slideshow — and the blogosphere took over. (Kinda funny that the March 2011 letter from Cravath is addressed to then-Antitrust Division chief Christine Varney, who is now, of course, a Cravath partner.)

You can find the Barnes & Noble filings with a few clicks, but you can’t find them in the record of the ITC case anymore. That’s because Microsoft complained to ITC Secretary James Holbein that the B&N document dump contained confidential information. (I can’t even link to Microsoft’s Nov. 2 and Nov. 4 letters; they were filed under seal.)

Barnes & Noble, which has made Microsoft’s secrecy a theme of its defense, responded with a fiery six-page letter on Nov. 4. “Prior to the institution of this investigation and ever since, Microsoft has claimed confidentiality where none existed,” B&N’s lawyers at Kenyon & Kenyon wrote. “Over the course of license negotiations with Microsoft, Barnes & Noble repeatedly told Microsoft that it did not consider its negotiations to be confidential; Microsoft’s unilateral insistence on the confidentiality of documents given to Barnes & Noble over the course of negotiations does not create a confidentiality agreement.” (I highly recommend reading the letter, which details exactly how Microsoft attempted to extract a nondisclosure agreement from Barnes & Noble in a series of licensing meetings.)

Barnes & Noble said in the Nov. 4 letter that it would move to have the documents reclassified as not confidential, but the ITC docket doesn’t indicate it’s made a motion yet.

I left a message for Barnes & Noble counsel Peter Barbur of Cravath (who signed the DOJ letter) but didn’t hear back. Paul Brinkman of Quinn declined comment. Microsoft counsel Robert Rosenfeld of Orrick referred my call to a Microsoft spokesperson, who declined comment.

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On Monday the National Credit Union Agency announced a pair of breakthrough mortgage-backed securities settlements. Deutsche Bank agreed to pay the government’s credit-union regulator $145 million for its role in underwriting mortgage-backed notes purchased by five credit unions that subsequently failed. Citigroup threw another $20.5 million into NCUA’s settlement pot, which will offset the $5 to $9 billion in fees the agency is charging solvent credit unions to pay for losses associated with the five failed institutions.

As best I can tell, these are the first settlements of MBS securities claims (as opposed to put-back contract claims) since Wells Fargo’s landmark $125 million class action MBS settlement this summer. That means the NCUA deals are just the second and third MBS securities settlements that plaintiffs have scored. They’re also, as the Wall Street Journal noted, the first MBS securities recoveries by a government agency. (Again, I’m distinguishing between securities and put-back claims; Fannie Mae and Freddie Mac both reached put-back settlements with Bank of America in January.)

So, given the paucity of MBS securities settlements, what clues do the NCUA settlements offer for the future of the litigation?

Most crucially, the deals indicate that there’s value in MBS securities litigation — which had been an open question to date. National Credit’s legal team, led by Kellogg, Huber, Hansen, Todd, Evans & Figel, didn’t file complaints against Deutsche or Citi, but NCUA has previously sued Royal Bank of Scotland, JPMorgan Chase, and Goldman Sachs as underwriters on the mortgage-backed notes the five failed credit unions bought. Based on the agency’s most recent complaint, a 175-page behemoth against Goldman that was filed in Los Angeles federal court, NCUA’s theory of recovery is basically what we’ve seen in so many MBS filings: underwriters have broad liability under Sections 11 and 12 of the Securities Act of 1933. Investors aren’t required to show that underwriters intended to defraud anyone, but only that offering materials contained false statements or omissions. The NCUA’s Goldman complaint includes the now-familiar allegations that prospectuses for Goldman-underwritten mortgage-backed notes made false statements about the quality of the loans in the underlying mortgage pools, so Goldman is strictly liable. (The complaint also asserts California and Kansas state-law claims.)

Goldman hasn’t yet filed a motion to dismiss the NCUA case, but RBS’s lawyers at Kirkland & Ellis moved to toss the agency’s parallel case. the RBS motion raises the defenses that just about every MBS securities defendant has trotted out: The failed credit unions were sophisticated investors; the prospectuses were materially sound; and the NCUA’s claims are barred by the statute of limitations and the (more obscure) statute of repose. Presumably, those are the potential arguments lawyers for Citi and Deutsche Bank considered when they analyzed the banks’ odds of getting an NCUA complaint tossed. They nevertheless decided it made sense for the banks to settle.

That’s an encouraging sign, particularly for the Federal Housing Finance Agency and the Federal Depositors Insurance Corporation, both of which have brought Section 11 suits against MBS underwriters. (You surely remember the 17 FHFA cases, which hit the courts like a cluster bomb on the Friday before Labor Day weekend.) Government agencies have more leverage in litigation against regulated defendants — such as banks — than private plaintiffs. That leverage changes the risk/benefit calculation for underwriters considering settlements.

But there’s an interesting reason why NCUA was better positioned for deals than even the other government agencies with MBS claims. The credit union regulator actually knew how much damage its members have suffered from the mortgage-backed securities investments of its five failed institutions. As the NCUA press releases on the Deutsche and Citi settlements explain, the agency repackaged the securities once owned by those five credit unions, obtained U.S. government backing on the new notes, and sold them into the remains of the market for mortgage-backed securities. NCUA raised about $28 billion in the resale.

The resale also permitted the agency to calculate its losses on the MBS underwritten by various potential defendants. That means NCUA can go into settlement talks with a reasonable expectation of damages — and with the facts to back its damages theory. According to an NCUA spokesman, the four underwriter suits that have been filed so far claim $2 billion. It’s a big number, but it’s grounded in actual losses. NCUA’s MBS resale may turn out to have important implications for other cases. Damages have been an open question in the MBS securities litigation. Plaintiffs can demand recission, or buyback of entire bond offerings. That’s not realistic, but it’s why early reporting on the FHFA cases, for instance, generated market-moving headlines about $200 billion in claims by Freddie and Fannie’s overseer. Similarly, the Wells Fargo $125-million settlement was criticized for delivering cents on the dollar for the class’s total noteholdings. The NCUA deals should help other MBS securities claimants, which haven’t repackaged and resold their securities, to estimate damages realistically — a trail marker for damages in litigation that’s proceeding in uncharted territory.

A Deutsche Bank spokesperson said that the bank “is pleased to have resolved the NCUA’s claims without the parties having to resort to litigation.” He declined additional comment and said the bank was not disclosing its outside counsel. Citigroup didn’t respond to my request for comment. A Citi spokesperson said the bank was represented by Paul, Weiss, Rifkind, Wharton & Garrison but declined additional comment.

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One of the most controversial aspects of the U.S. Supreme Court’s June 2011 ruling in Janus v. First Derivative Traders was that the Justices rejected the Securities and Exchange Commission’s interpretation of federal securities laws. The SEC said Janus Capital wasn’t liable for the allegedly misleading statements in a prospectus issued by a Janus mutual fund, even though the SEC argued that it was — and even though federal courts traditionally pay deference when they ask agencies to offer their expertise in interpreting the law.

The SEC took another blow Monday, when a three-judge panel of the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of an auction-rate securities class action against Merrill Lynch, despite an SEC brief arguing the case should proceed. The SEC agreed with a Merrill ARS investor who asserted that the boilerplate disclosure Merrill posted after a 2006 SEC consent decree shouldn’t shield it from claims it manipulated the market for ARS. The Second Circuit panel felt otherwise.

To be sure, Judge Robert Katzmann, writing for a panel that also included Judges Robert Sack and Amalya Kearse, said that the Merrill opinion should be read narrowly. “We see no need to fix the ‘exact molecular weight’ of the deference that we owe to the SEC’s position,” Katzmann wrote. “We readily acknowledge that at least some deference to the agency’s position is appropriate, given the SEC’s expertise and accountability. Here, however, we are unable to agree with the SEC’s application of the legal principles governing Merrill’s disclosures.”

But it’s notable that the appeals court declined to adopt the SEC’s view after expressly asking the agency to weigh in. U.S. District Judge Loretta Preska of Manhattan federal court had dismissed the class action in March 2010, ruling that Merrill’s posted disclosures, which followed an SEC investigation of the ARS market, were an adequate warning that the firm bid on its own securities to prop up prices. The Second Circuit already had considered the post-2006 disclosures all ARS issuers agreed to in a July 2011 ruling, Ashland v. Oppenheimer, but hadn’t asked the SEC about the reach of the disclosures. So after Girard Gibbs appealed Preska’s dismissal of the Merrill class action, the appeals court sought a letter brief from the agency.

The SEC, like the class, asserted that Merrill’s disclosure didn’t go far enough in disclosing its interference in the ARS market. The Second Circuit said that it did. “We find no error in the district court’s conclusion that Merrill’s disclosures of its support bidding practices sufficed to preclude [the class's] claim that these practices were manipulative,” the opinion said. “These disclosures revealed, at the very least, the possibility that Merrill would place support bids in some auctions that it managed and that in the absence of these bids, some of these auctions might fail.”

I asked an SEC spokesman for the agency’s response but didn’t hear back. Class counsel Jonathan Levine of Girard Gibbs said, “We’re disappointed that the Court of Appeals disagreed with the SEC conclusion that investors should have been allowed to proceed with claims.”

Merrill was represented by Jay Kasner, Scott Musoff, and Paul Lockwood of Skadden, Arps, Slate, Meagher & Flom, which also prevailed in the appeals court’s Ashland ruling in July.

Even though the Second Circuit has now upheld the dismissal of two ARS cases, that’s not the end of all ARS litigation, according to George Carpinello and Adam Shaw of Boies, Schiller & Flexner. They represent individual plaintiffs in two ARS cases brought by individual investors, including a case against Merrill that Preska — the judge who dismissed the Merrill case at issue before the Second Circuit — greenlighted. “The court made it clear that this is a limited ruling,” said Carpinello. “It clearly had problems with the way the facts were pled…Our cases are about what was said to our clients at a particular point in time when the broker had knowledge of what was going on.”

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With very little fanfare, Motorola Mobility announced Monday that it has reached a memorandum of understanding to resolve shareholder litigation that might have stood in the way of a vote on Google’s proposed $12.5 billion all-cash acquisition of the company. The memo is, alas, not public, so we don’t know just what the settlement entails, or how much the plaintiffs’ lawyers who challenged the deal will get in fees. Motorola Mobility did file an 8-K amending its proxy materials, giving shareholders marginally more information about (among other things) how the Google deal came together and what kind of equity awards Motorola officers will receive. These relatively insignificant disclosure amendments are a typical ending for the rash of M&A shareholder suits that have broken out in the last few years; it’s a pretty good bet that, in this case, the additional disclosures aren’t going to sway very many Motorola Mobility shareholders when they vote on the Google deal on November 17.

So why am I highlighting an unremarkable settlement that basically amounts to a litigation footnote in a blockbuster $12.5 billion tech deal? Because the Motorola Mobility shareholder M&A litigation is a case study in the weird, private regulatory system that’s evolved as a check on deal activity. In rare instances, when plaintiffs’ lawyers uncover shady behavior by deal participants, shareholders wind up with sweetened offers. But much more often — as in the Motorola Mobility case — the primary beneficiaries of this M&A scrutiny are lawyers: both the plaintiffs’ lawyers who say they have a right to make sure insiders were looking out for shareholders and the defense lawyers representing those insiders.

Shareholder M&A litigation amounts to a “deal tax” companies pay in order to assure their equity holders that the board and its advisers fulfilled their duties. And that leads to a question that’s previously arisen in litigation over cigarettes and guns: do we want private lawyers to do what public regulators seemingly can’t or won’t?

Here’s the background: On August 15, Google announced an all-cash deal to acquire Motorola Mobility for $12.5 billion, or $40 a share. That price represented a whopping 63 percent premium for Motorola Mobility’s shareholders, but Google was considered to be under such intense pressure to acquire the company’s patent portfolio that it was willing to tack on a near-record sweetener to assure the support of Motorola Mobility’s shareholders.

Seems like a pretty generous deal, right? Wrong, according to the 16 — 16! — shareholder class actions filed in the wake of Motorola Mobility’s announcement. These are the times we live in, when a deal that offers shareholders a guaranteed 63 percent windfall on their investment is regarded as suspect.

Of course, the purported class actions were filed in a variety of jurisdictions. The first suit, as Reuters’ Tom Hals reported, was a derivative case in Cook County, Ill., the headquarters of Motorola Mobility’s former parent, Motorola. Three additional class actions followed in Cook County Circuit Court. Another eight were filed in Circuit Court in Lake County, Ill., where Motorola Mobility is based. The Delaware Chancery Court ended up with three parallel class actions, and the 16th suit was filed in Chicago federal court. As Motorola Mobility explained in an Oct. 14 proxy statement, all of the class actions played a variation on the same theme: the company, its board, and (according to almost all of the suits) Google had breached (or abetted a breach) their duty to shareholders. The suits all sought to enjoin a vote on the deal by Motorola Mobility shareholders.

Wachtell, Lipton, Rosen & Katz, which represented Motorola Mobility in negotiations with Google and in the ensuing shareholder litigation, moved to consolidate the injunction class actions in one venue. The various plaintiffs’ firms that filed cases eventually agreed that the litigation would proceed in Cook County, with Robbins Geller Rudman & Dowd leading the way. (Interestingly, such other big securities class action players as Grant & Eisenhofer, Bernstein Litowitz Berger & Grossmann, and Labaton Sucharow sat this one out.)

Randall Baron of Robbins Geller, who won Delaware Chancery kudos for his work in exposing Barclays’ conflict of interest in the Del Monte case, has told me that these M&A injunction suits are a bit of a question mark when they’re filed. Plaintiffs’ firms often don’t know, until they’ve obtained discovery, whether the board and its advisers acted properly in agreeing to a deal. In the Del Monte and J. Crew class actions, for instance, shareholder counsel turned up evidence that led to enhanced offers.

It’s not clear from the Cook County docket how much discovery Robbins Geller and the other plaintiffs firms that sued Motorola Mobility conducted, and Baron and two other Robbins partners didn’t respond to my requests to discuss the litigation. It appears from the docket that most of the litigation was procedural, although a hearing was scheduled before the Cook County judge on Nov. 8, the day Motorola announced the memorandum of understanding.

The 8-K disclosing changes in Motorola Mobility’s proxy statement on the Google deal includes a paragraph explaining that Motorola Mobility shareholder Carl Icahn tried to negotiate for a portion of the reverse-breakup fee the company will receive if the deal doesn’t go through, but the board turned him down, saying it wasn’t willing to treat Icahn differently than other shareholders. The filing also discloses details of the back-and-forth between Motorola’s Wachtell lawyers and Google’s counsel at Cleary Gottlieb Steen & Hamilton over the termination and reverse-termination fees and equity grants to Motorola execs. There’s also an additional disclosure of the $21 million in fees Motorola Mobility and its former parent have paid its financial adviser, Centerview, in the last two years.

As I mentioned, we don’t know yet how much Robbins and its co-counsel will receive as compensation for obtaining these additional disclosures, which seem, if anything, to reinforce the good faith of Motorola Mobility’s board in reaching a deal that’s apparently a boon to shareholders. (Robbins Geller’s Baron did tell me, in an email, that the firm intends to pursue damages against the Motorola Mobility defendants though he didn’t respond to my follow-up request for details.) We’ll never know how much the company paid Wachtell to defend the shareholder litigation, but you can be sure Wachtell’s work doesn’t come cheap.

You could limit the question of whether the disclosures the Motorola Mobility shareholders obtained were worth the cost, but I think there’s a more fundamental question this case raises. Why do we have so little faith in the integrity of corporate boards — and of our regulators’ ability to oversee their conduct — that shareholder lawyers are willing to challenge even a deal that offers a rich premium to equity owners?

There’s got to be a better way.

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For all of its zeal in squelching what it considers unfounded class actions against U.S. businesses, the Chamber of Commerce rarely strays from appellate courts to venture into the weeds of a federal district court discovery dispute. But Monday, the Chamber filed an amicus brief in an uncertified wage-and-hour class action against the accounting firm KPMG, warning that if U.S. District Judge Colleen McMahon of Manhattan federal court adopts the order of a magistrate judge, the ruling will set “a dangerous precedent” that will be of “profound significance to businesses in America.” Piling on in their own Nov. 8 amicus brief, the Washington Legal Foundation and the International Association of Defense Counsel assert that the magistrate’s ruling could fundamentally distort class-action litigation by potentially making it cheaper to settle a case than to comply with discovery orders.

So what is this supposedly devastating, albeit preliminary, ruling? On Oct. 11, U.S. Magistrate Judge James Cott issued an order resolving a dispute between KPMG and Outten & Golden, the law firm representing two proposed classes of entry-level auditors who claim the accounting firm owes them overtime wages. The fight involved the computer hard drives of potential class members: KPMG and class counsel agreed that the plaintiffs could use sampling software to limit the electronic information KPMG would have to preserve, but they couldn’t agree on the sampling criteria or the number of computer hard drives to include in the sample. KPMG’s lawyers at Sidley Austin moved for an order limiting the sample size to 100 randomly selected hard drives.

Instead, Cott ruled that KPMG has to preserve the hard drive of every potential class member. “Prudence favors retaining all relevant materials,” Cott wrote, pointing to the seminal e-discovery ruling, Zubulake v. UBS Warburg. The magistrate judge reasoned that because McMahon, the district judge, hasn’t yet ruled on class certification in the KPMG audit associate case, every entry-level auditor in the opt-in action is a potential “key player” under Zubulake, whether in the Manhattan class action or in another case that could be filed depending on how McMahon ultimately defines the class.

“These audit associates are, at the very least, key players in any one of many potential actions that could result if the motion to certify is denied,” Cott wrote. “With so many unknowns involved at this stage in the litigation, permitting KPMG to destroy the hard drives is simply not appropriate at this time.”

The magistrate judge clearly expected to revisit the hard-drive preservation issue after McMahon rules on class certification, but KPMG nonetheless sent up a howl of protest in its Oct. 28 brief to the district judge. The audit firm said it has already spent $1.5 million to preserve the hard drives of about 2,500 potential New York class members who have left KPMG, at a cost of $600 per drive. Complying with Cott’s order, KPMG said, would cost millions more. More significantly, the Sidley lawyers wrote, Cott imposed a duty that would essentially preclude businesses from ever getting rid of anything.

“If companies were required to retain documents whenever there is a mere possibility that they could be sued, they effectively would face a perpetual duty to preserve and thus would be unable to implement document-retention policies,” the KPMG brief said. “The mere ‘potential’ that a hypothetical putative class member or opt-in plaintiff conceivably could file an individual suit at some time in the future if certification is denied cannot trigger a duty to preserve the hard drives of every member of the putative class or collective.”

The Washington Legal Foundation brief carried the KPMG argument to the next step: “By imposing a sweeping preservation order on a class-wide basis in a case that currently is limited to three named plaintiffs, the magistrate judge has imposed substantial costs that KPMG can avoid only by entering into a settlement agreement — thereby undermining the public policy favoring merits-based resolution of disputes.”

The Chamber of Commerce, represented by Wachtell, Lipton, Rosen & Katz, urged McMahon to step in so Cott’s order doesn’t set a “dangerous” precedent. “His decision, if not overturned, would exert an inordinate influence on how practitioners perceive the law,” the brief said. “Every decision on the subject of discovery is important, because courts so sparsely write about it, as discovery disputes tend to be fact-bound and often settled. More significantly, however, because of the threat of sanctions, a decision — like the magistrate judge’s — that overstates the duty of preservation will effectively become the law.”

Outten Golden was granted an extension until early December to respond to KPMG’s brief. I left a message for Outten partner Justin Swartz but didn’t hear back.

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Like a stage mom watching from the wings, Bank of America and its lawyers at Wachtell, Lipton, Rosen & Katz have so far been observers — and not direct participants — in the fight to win court approval of the bank’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities holders. BofA signed the settlement, of course, but the case was filed as an Article 77 proceeding in New York State Supreme Court by Bank of New York Mellon, as Countrywide’s MBS trustee. The 22 institutional investors that negotiated the proposed deal with BofA and BNY Mellon intervened in the proceeding in support of the settlement. And their lawyers from Gibbs & Bruns have worked alongside BNY Mellon’s counsel from Mayer Brown and Dechert to ward off opposition to the deal, without overt involvement from BofA and Wachtell. When the case was removed to federal court, it was Mayer Brown and Gibbs & Bruns that argued before U.S. District Judge William Pauley III of Manhattan that the proceeding should be remanded to state court; then, when Pauley decided to retain jurisdiction, it was BNY Mellon and the Gibbs clients who asked the U.S. Court of Appeals for the Second Circuit to review the district court judge’s decision.

Late Monday, BofA took the stage. In a pair of filings at the Second Circuit, the bank’s Wachtell lawyers petitioned for leave to submit an amicus brief and filed the proposed brief itself. We can all chuckle at the idea that BofA is a mere friend of the court in this case, given that the bank was relying so heavily on the proposed $8.5 billion deal to remove the black cloud of Countrywide MBS liability from its attempt to return to market stability. But the bank makes a strong argument for why it should be heard if the Second Circuit decides to take the appeal of Pauley’s ruling: it is, after all, BofA’s settlement.

The bank’s lawyers repeat in summary (though quite elegant) fashion the same arguments we’ve already seen from BNY Mellon and the Gibbs investors about Pauley’s alleged errors. BofA’s proposed amicus brief argued that the judge twisted the language of the Class Action Fairness Act in a way Congress never intended in order to hold onto the $8.5 billion case. The judge improperly construed a state court proceeding that sought what amounts to a declaratory judgment on the trustee’s conduct into a mass settlement for money damages, BofA argued. He considered the dissident Countrywide MBS investors (known as Walnut Place) a defendant under CAFA, even though Walnut Place doesn’t fit the traditional definition of a defendant. And, most significantly, the proposed BofA brief said, Pauley misapplied the Second Circuit’s own precedent on the securities exception to CAFA, interpreting the exception in a way that would essentially strip it of any meaning. For all of those reasons, the bank argued, the Second Circuit should accept the appeal.

I was most intrigued, however, by a paragraph near the end of BofA’s proposed amicus brief. I’ve posed the question of whether Bank of America might try to walk away from the $8.5 billion settlement if it stays in federal court. BofA’s filing hints that the bank just might do that.

“It is essential that this settlement be considered by, and that any approval come from, a court of unquestionable jurisdiction,” the brief said. “This point is so critical that the settlement agreement itself specifically provides for review of the trustee’s decision to enter into the settlement agreement in a proceeding under Article 77 … in the state court. The settlement agreement obliged the trustee to file the Article 77 proceeding in the Supreme Court of the State of New York, County of New York — which it defines as the ‘settlement court’ — seeking the specified final order and judgment.”

The settlement, BofA goes on to note, is conditioned on approval from the settlement court — which means the New York State Supreme Court. And if final court approval is impossible, the brief said, the deal is null and void. BofA doesn’t come right out and say the deal’s off unless the Second Circuit sends the case back to state court. But to stick with my opening metaphor, that paragraph is sort of like the gun on the mantelpiece in Act One. Get ready for it to be shot off later in the show.

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