Alison Frankel

In a footnote at the end of his October 14 ruling granting Southern Peru shareholders $1.3 billion from majority stockholder Grupo Mexico, Delaware Chancery Court Chancellor Leo Strine Jr. had cautionary words for the plaintiffs’ firms that won the extraordinary recovery. Prickett, Jones & Elliott and Kessler Topaz Meltzer & Check, the judge said, had been too slow to prosecute the derivative suit when it was filed back in 2005. He instructed the firms to confer with defense counsel from Milbank, Tweed, Hadley & McCloy (for Grupo Mexico) and Ashby & Geddes (for Southern Peru, now Southern Copper) to see if they could agree on a “reasonable” fee request, “with the plaintiff’s counsel taking into account the reality [that] their own delays affected the remedy awarded and are a basis for conservatism in any fee award.”

If the fee award Strine granted Monday in the Southern Copper case reflects “conservatism,” the mind boggles at how much money Prickett Jones and Kessler Topaz might have been awarded if not for that unfortunate delay. As Reuters’s Delaware ace Tom Hals reported, the judge ruled that the plaintiffs’ firms should receive 15 percent of the Southern Copper recovery, including interest. After an adjustment in Strine’s original calculations that will bring the underlying shareholders’ recovery to about $2 billion in damages and interest, attorneys’ fees should amount to about $300 million, or more than $35,000 per hour based on the more than 8,000 hours the plaintiffs’ firms logged on the case. (Hals reported Monday that the fee would total $285 million, or 15 percent of Strine’s original award calculation of $1.9 billion. But Strine said in court Monday that his recalculation of damages and interest will add $100 million to the shareholders’ recovery and thus $15 million to attorneys’ fees.)

Kessler Topaz and Prickett Jones had originally asked for 22.5 percent of the recovery they obtained. In an Oct. 28 brief that liberally quoted Strine’s own words from previous cases, the plaintiffs’ firms argued that they should be rewarded for the “huge risk” of hard-fought derivative litigation. The firms said they’d kept Strine’s admonition in mind, which is why they were asking for 22.5 percent instead of the customary 33 percent. But they asserted that if the chancellor refused to award a big percentage just because it amounted to hundreds of millions of dollars, he would be encouraging plaintiffs’ firms to settle quickly rather than fight for the best possible recovery.

“Limiting fee awards in large cases would create a strong disincentive to take the huge risk of trying large cases,” the brief said. “For example, how would lawyers be incentivized to take a potential billion dollar case to trial if they know that if they win a billion dollars they will get the same fee award as they would have if they settled the case for $200 million? It is clear that such a declining percentage approach would misalign the interests of the lawyers and those they represent.”

The defendants, meanwhile, argued that Kessler Topaz and Prickett Jones should receive no more than four times what their hourly billings would have been, or about $13 million. The recovery was really nothing like $1.3 billion, they asserted; given that Grupo Mexico owns 80 percent of Southern Copper, the award is a mere bookkeeping matter, transferring money from one Grupo Mexico entity to another. (Here’s Grupo Mexico’s opposition to the fee request.) Moreover, Southern Copper contended, it was simply perverse to award the plaintiffs’ lawyers $428 million — a number the plaintiffs couldn’t even bring themselves to spell out in their brief.

“The magnitude of plaintiff’s counsel’s request is unprecedented in this court,” the Southern Copper brief said. “To put it in perspective, the requested fee is equivalent to about 57 percent of the Delaware Division of Corporations’ total annual revenue. Moreover, research did not reveal any case anywhere in which counsel has been awarded anything close to an effective hourly rate that is more than the median American household makes in a year.”

So why did Strine agree to grant such exorbitant fees? Because he was sending a message not just to the lawyers in the Southern Copper case, but to the entire securities class action bar.

As both Hals and Professor Stephen Bainbridge of the UCLA School of Law noted Monday, Strine’s ruling comes with a very particular context. Delaware, according to some recent academic research, has been losing cases to other venues because plaintiffs’ lawyers perceive the Chancery Court as an unfriendly jurisdiction. Strine lashed out at proponents of that theory at a conference in November, accusing lawyers who file cases against Delaware corporations outside of Delaware of engaging in “forum shopping of the rankest kind.” He particularly called out Stuart Grant of Grant & Eisenhofer, who criticized the Chancery Court despite receiving his own handsome fees. “Delaware is open for business,” Strine said at the November conference, repeating one of his favorite catchphrases.

Monday’s hearing on the Southern Peru fee request made it clear that the chancellor wants a certain kind of (legal) business to remain in Delaware. At the 90-minute hearing Strine talked about why this case isn’t like the M&A injunction suits that settle quickly for minimum benefit to shareholders. According to Hals’s report: “A windfall, he said, was a quickly settled case in which the plaintiffs’ attorneys get a fee of a few hundred thousand dollars and the shareholders they represent get meaningless disclosures — a type of litigation that has surged recently.”

The chancellor also spoke about rewarding plaintiffs’ lawyers for taking risks — and chided defense lawyers for being envious when those risks pay off in big recoveries. If lawyers are willing to litigate big cases through discovery and trial, he suggested, Delaware will make sure they’re well compensated for their efforts.

A $300 million fee award certainly puts an exclamation point on Strine’s protestations.

Lee Rudy of Kessler Topaz and Ronald Brown Jr. of Prickett Jones declined comment. Grupo Mexico counsel Alan Stone of Milbank and Southern Copper counsel Stephen Jenkins of Ashby & Geddes didn’t return my calls.

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For the last three years, since the housing bubble burst, the Securities and Exchange Commission has been investigating the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac). Fannie and Freddie, after all, were the biggest players in the mortgage lending and securitization business, and there’s a lot of sentiment that they deserve a hefty share of blame for encouraging the financial industry’s voracious appetite for mortgage loans, no matter how deficiently underwritten. The problem for regulators hoping to hold Fannie and Freddie accountable, though, is that the previously quasi-private agencies went into public receivership conservatorship in 2008. Any SEC suit against Fannie and Freddie would essentially be one wing of the U.S. government seeking damages against another.

But the people who ran Fannie and Freddie in the run-up to the mortgage meltdown were another story. About nine months ago the SEC issued Wells notices to top Fannie and Freddie executives. I’ve heard there was virtually no give-and-take between regulators and defense lawyers for the executives after initial defense responses. So it was a disappointment but not a big surprise to the defendants when, on Friday, the SEC sued three former top officials from both Fannie and Freddie. (Here’s the SEC’s complaint against Richard Syron, Patricia Cook, and Donald Bisenius of Freddie Mac; and here’s the complaint against former Fannie Mae execs Daniel Mudd, Enrico Dallavecchia, and Thomas Lund.) The SEC complaints charge two defendants in each case with full-on securities fraud (the third official in each complaint faces aiding and abetting claims) for allegedly misleading investors about their agencies’ exposure to subprime mortgages. In the Freddie complaint, the SEC asserts that the agency claimed only $2 to $6 billion of its single-family guaranteed mortgages were considered subprime loans, when, in fact, $140 billion to $244 billion in loans fit that classification. Fannie allegedly reported $4.8 billion in exposure when its subprime lending exceeded $40 billion.

There are a few points to keep in mind about the Fannie and Freddie suits. First, the allegations all center on disclosures. There’s no accusation of accounting manipulation or more obvious fraudulent acts. Yet four of the defendants are accused of intentionally defrauding investors — partly because Fannie and Freddie were not registered entities during the entire period of alleged wrongdoing, which means the execs couldn’t be accused of negligence. That’s a high bar, in which the agency has to show the defense acted with fraudulent intent. Second, the former Fannie and Freddie executives — unlike the Citigroup executives who agreed to an administrative settlement in the bank’s 2010 subprime exposure agreement with the SEC — had no leverage because the SEC wasn’t also negotiating with their employer. There was little reason for financial regulators to reign in aggressive allegations, especially because there’s a strong public-relations incentive for the SEC to charge senior executives of agencies that ended up in such severe straits that they had to be placed in receivership, with taxpayers bearing the burden of management’s overly risky strategy.

But if you parse the SEC’s complaints, you’ll see the weaknesses in the agency’s cases. Let’s start with which sector of Fannie and Freddie’s business the allegations involve. The government-sponsored entities, as they’re known, bought lots of subprime loans for the portfolios they securitized and resold as mortgage-backed notes. But that’s not where the SEC accusations lie. The SEC asserts that the Fannie and Freddie officials misrepresented subprime exposure in the mortgage-guarantee business, in which the agencies offered government backing for individual mortgage loans.

Both Fannie and Freddie had, at least in theory, strict guidelines on these guaranteed loans, in which they required mortgage lenders to assure, for instance, that borrowers met income requirements. Fannie and Freddie also bought guaranteed loans from prime lenders, not traditional subprime lenders.

It’s unquestionably true that as Wall Street’s hunger for mortgages to securitize encouraged prime lenders to abandon their own underwriting standards, Fannie and Freddie backed ever-shakier loans, as their internal controls noted. But were loans by prime lenders who purported to meet underwriting guidelines “subprime” loans for disclosure purposes?

The SEC says they were. The Freddie Mac complaint cites a glossary of terms the agency presented to its own board: “There is no longer a clear-cut distinction between prime and subprime mortgages as the mortgage market has evolved,” the glossary said, but Freddie officials relied on the old definitions — that subprime exposure came from loans originated by subprime lenders — in investor disclosures. Similarly, the complaint against Fannie cites a 2008 10Q in which Fannie Mae admitted that more of its traditional guaranteed mortgages resembled subprime loans, but it was not classifying them as such because they didn’t meet Fannie’s definition of subprime loans. (Nor, for that matter, the definition the Treasury Department promulgated in 2007.)

Both Fannie Mae and Freddie Mac — even as they declined to reclassify loans as “subprime” and failed to disclose that increased exposure to investors — did disclose reams of information about the loans they guaranteed. Expect their lawyers to argue that investors were fully apprised of the increasingly risky nature of the mortgages the GSEs were backing.

In other words, the case will turn on how Fannie Mae and Freddie Mac defined subprime loans, and whether executives committed fraud when they did not revise internal definitions to reflect the changing mortgage market. (The complaints are filled with phrases like “subprime-like” and “otherwise subprime.”) From what I hear, the defendants are vowing to fight the SEC all the way to trial (where, OTC has reported, the agency has a decidedly mixed track record). The agency will also have to face formidable defense teams. Here’s the lineup: Thomas Green of Sidley Austin for former Freddie CEO Richard Syron; Steven Salky of Zuckerman Spaeder for former Freddie Chief Business Officer Patricia Cook; Walter Ricciardi of Paul, Weiss, Rifkind, Wharton & Garrison for former Freddie Executive Vice-President Donald Bisenius; James Wareham of DLA Piper for Fannie Mae CEO Daniel Mudd; Laurie Miller of Nixon Peabody for Chief Risk Officer Enrico Dallavecchia; and Michael Levy of Bingham McCutchen for Executive Vice-President Thomas Lund.

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The folks who follow every development in the mega-billions poker match between Bank of America and the bond insurer MBIA have last week been buzzing even more loudly than usual about the prospect of a global deal. Tuesday’s settlement between MBIA and Morgan Stanley leaves BofA as the most important remaining member of the dwindling bank group challenging MBIA’s 2009 restructuring. There’s a de facto deadline of Dec. 30 for settlements in that case, since that’s the day New York’s top financial regulator, Benjamin Lawsky of the Department of Financial Services, has to file a key response to the banks’ allegations. Both Lawsky and MBIA execs have been very clear: they want resolution. So the pressure is on BofA to make a deal.

Moreover, MBIA really needs a global settlement with BofA, in which the bank not only drops out of the restructuring case but also ponies up to resolve the bond insurer’s mortgage-backed securities claims. MBIA filed an 8K with the Securities and Exchange Commission Thursday, disclosing the good news that its commutation deals have wiped out $20 billion in exposure, including more than $10 billion its has eliminated just in the fourth quarter of 2011. The bad news in the filing, however, is that MBIA’s payments to banks have exceeded its statutory loss reserves by $500 million, and the insurer may not have enough liquidity to reach more settlements. Remember, MBIA has already booked a $2.8 billion anticipated recovery on MBS put-back claims. Clearly, the bond insurer is counting on getting some big money from BofA on the MBS side.

The wild card in this poker game is loss causation and MBS liability for BofA (and other issuers). You’ll recall that in early October, New York State Supreme Court Justice Eileen Bransten heard arguments on a summary judgment motion by MBIA in its case against Countrywide. MBIA asked the judge to rule on the issue that will determine the magnitude of bank exposure to MBS claims by bond insurers: are the banks liable for misrepresenting the underwriting on loans in underlying mortgage pools starting from the day they signed deals with monoline insurers? Or can the banks cite the economic crisis — and not their own deficient underwriting — as the reason so many mortgage loans have gone bad? Bransten’s reasoning on loss causation could swing billions, or even tens of billions, of dollars of liability between the banks and the monolines.

Banks, bond insurers, and MBS investors have been waiting anxiously for the judge’s loss causation ruling since that October hearing. But Friday is Bransten’s last day in chambers before she leaves for a vacation that will keep her out of court until after New Year’s. So with BofA and MBIA looking at a December 30 deadline for settlement in the restructuring case, is there a chance that a global deal will moot Bransten’s loss causation ruling in the MBS case?

Never fear, MBS players. Even if MBIA and BofA settle, Bransten still has to rule, thanks to Syncora. MBIA’s case against Countrywide gets all the ink, but the much-smaller bond insurer Syncora also has an MBS case against Countrywide — and has also moved for summary judgment on the loss causation issue. Syncora counsel Donald Hawthorne of Debevoise & Plimpton argued for an expansive interpretation of bank liability at the October hearing before Bransten, alongside MBIA counsel Philippe Selendy of Quinn Emanuel Urquhart & Sullivan.

Unless BofA also reaches a deal with Syncora, come January it and other MBS issuers are going to have to face the consequences of a crucial ruling from a judge who has so far sided against the bank at just about every turn.

A BofA spokesman declined comment.

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Bloomberg LP’s lawyers at Willkie Farr & Gallagher got more than they asked for this week from U.S. District Judge Alvin Hellerstein of Manhattan federal court. The lawyers had asked Hellerstein to wait until they’d developed a fact record before ruling whether the financial-news agency infringed Swatch’s purported copyright on a recording of its February 2011 earnings call with a select group of analysts. Instead, Hellerstein reversed his own reasoning from a ruling in August and granted Bloomberg a preliminary judgment on the pleadings. (Hat tip: Jeff John Roberts at paidContent.)

In a one-page ruling that should be a boon to news organizations, Hellerstein concluded that even if Bloomberg infringed Swatch’s copyright when it offered subscribers access to a recording and transcript of the analyst call, its actions are “protected as fair use.” That’s a big shift from Hellerstein’s August decision denying Bloomberg’s motion to dismiss Swatch’s case, when the judge said he couldn’t decide the fair-use question on the basis only of the pleadings.

So what happened between August and December? Hellerstein actually read the transcript of the earnings call and considered its content in light of Bloomberg’s argument that by publishing the recording and transcript it was disseminating material financial information. “American investors trade in Swatch American Depository Receipts over U.S. exchanges,” the Bloomberg brief said. “Those investors are entitled to access to the same material information that Swatch’s favored analysts received, and Bloomberg discharges its role as the ‘eyes and ears of the public’ in providing that access.” That Bloomberg makes money by doing so, the Willkie lawyers argued, doesn’t affect its First Amendment right to publish the news.

Swatch, represented by Collen LP, had initially contended that Bloomberg secretly recorded the earnings call, which the news organization was not invited to participate in. Bloomberg responded that it obtained the recording and transcript from an invited participant who had hired an unidentified transcript service to record the session. (That’s an important consideration; Bloomberg’s fair-use defense would have been seriously compromised if it hacked into Swatch’s call or got hold of the recording through illicit means.)

Swatch argued in an October motion for judgment on the pleadings that Hellerstein’s August ruling had essentially decided the case. In denying Bloomberg’s motion to dismiss, Swatch said, the judge had concluded that Swatch executives’ spoken words were entitled to copyright protection. And according to Swatch, Bloomberg infringed that copyright when it published the transcript. “As the sufficiency of the plaintiff’s claims, including the validity of plaintiff’s copyright, has already been determined by this court, law of the case governs,” the Swatch brief said. Bloomberg’s fair-use defense, Swatch added, didn’t apply because the news organization had “appropriated 100 percent of [Swatch's] expression,” which, according to Swatch, is unreasonable use of the call and transcript.

In this week’s denial of Swatch’s motion and preliminary judgment for Bloomberg, Hellerstein ordered Swatch to submit by January 20 a brief on whether there are any triable issues with respect to Bloomberg’s fair-use defense.

Bloomberg counsel John DiMatteo of Willkie referred me to a Bloomberg spokesman, who didn’t return my call. I left a message for Swatch counsel Jess Collen but didn’t hear back.

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In 2006, Bear Stearns entered a $250 million settlement of Securities and Exchange Commission allegations that its traders engaged in illicit market timing for certain preferred customers. Like scores of SEC defendants concerned with liability in related civil litigation, Bear insisted on the language that’s become boilerplate in SEC settlements. So “without admitting or denying” the SEC’s findings, the bank agreed to disgorge $160 million and pay a $90 million penalty.

Bear and its successor, JPMorgan Chase, turned to Bear’s insurers to cover the disgorgement. (Penalties aren’t indemnified in Bear’s policy.) The insurance agreements said the bank was covered for damages awards and charges incurred by regulatory investigations, with one catch: The policies excluded claims “based upon or arising out of any deliberate, dishonest, fraudulent, or criminal act or omission,” if there were a final adjudication reflecting that wrongdoing.

No problem, right? The SEC settlement explicitly said that Bear didn’t admit deliberate or dishonest behavior when it agreed to the disgorgement. The insurers, represented by DLA Piper, Drinker Biddle & Reath and several other firms, balked at paying, but JPMorgan, with counsel from Proskauer Rose, sued to enforce the policies. In September 2010, New York State Supreme Court Justice Charles Ramos agreed that Bear hadn’t admitted anything. “An insured’s settlement or consent to entry of an order with the SEC, wherein it did not admit guilt, will not preclude if from disputing those findings in subsequent litigation with its insurers,” Ramos wrote in an order refusing to dismiss JPMorgan’s suit. “The [SEC settlement] does not contain an explicit finding that Bear Stearns directly obtained ill-gotten gains or profited by facilitating these trading practices.”

Ramos’s decision was issued before the SEC’s “neither admit nor deny” boilerplate became a source of controversy, thanks to U.S. District Senior Judge Jed Rakoff of Manhattan federal court. I’ve speculated on the consequences if other judges opt to abide by the rules Rakoff seems to want to impose on corporate defendants setting with federal agencies. But a ruling Tuesday by the New York state Appellate Division, First Department, suggests the boilerplate language that Ramos cited — and Rakoff has derided — may no longer offer defendants much benefit even without judges specifically rejecting it.

As my Reuters colleague Joseph Ax reported, the appeals court dismissed the JPMorgan suit against the insurers. But the decision’s implications may be broader than that. In an opinion written by Justice Richard Andrias, the state judges simply didn’t pay much heed to the SEC “neither admit nor deny” boilerplate. “Read as a whole,” the decision said, “the offer of settlement, the SEC Order … and related documents are not reasonably susceptible to any interpretation other than that Bear Stearns knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.” Moreover, in a footnote, the opinion referred explicitly to Rakoff’s criticism of SEC boilerplate in SEC v. Vitesse Semiconductor.

JPMorgan counsel John Gross of Proskauer referred my call to a JPMorgan spokesman, who didn’t get back to me. Insurance counsel Joseph Finnerty III of DLA Piper didn’t return a call for comment.

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Just before midnight on Monday, Weil, Gotshal & Manges filed the seventh amended plan of reorganization for Washington Mutual Inc, the bankrupt onetime parent of WaMu Bank. The seventh time may just be the charm for WMI — according to the accompanying disclosure statement, everyone is now on the reorganization bandwagon, including, for the first time in this three-year case, the equity holders. As you may recall, WMI equity holders and their lawyers at Susman Godfrey have until now stood staunchly in the way of WMI’s reorganization. In the new plan, equity holders will receive an additional $75 million, which WMI senior and subordinated bondholders are kicking into the company that will emerge from Chapter 11 and will be owned by shareholders of the old WMI.

That $75 million sweetener, plus a $125 million credit facility the reorganized company can tap (and some smaller enhancements as well), is the result of a stunning ruling the equity committee won in March from Delaware federal bankruptcy judge Mary Walrath. Walrath refused to confirm WMI’s previous plan because she found shareholders had a colorable claim that four distressed-debt hedge funds had engaged in insider trading in WMI subordinated notes. The equity committee asserted a claim for “equitable disallowance,” arguing that the hedge funds learned about progress in WMI’s settlement talks with JPMorgan Chase from their lawyers, and then traded on the basis of that information. The judge concluded that Susman Godfrey had presented sufficient evidence that the funds “acted recklessly in their use of material nonpublic information” to keep alive the shareholders’ claim.

The four funds — Aurelius, Owl Creek, Appaloosa, and Centerbridge — didn’t think much of Walrath’s reasoning. In scathing briefs requesting leave to appeal, the hedge funds said the judge had ignored the facts and misinterpreted federal securities laws. “The absence of any legal support for the bankruptcy court’s decision is palpable,” three funds asserted in a joint brief.

So how much were the equity committee’s claims against the funds worth? Based on the new disclosure statement, less than $30 million. The hedge funds own about 80 percent of senior subordinated WMI debt, according to analyst Kevin Starke of CRT Capital Group. Subordinated debt holders are contributing $35 million of their WMI recovery to the reorganized company to be owned by old WMI shareholders. So the hedge funds’ share is about $29 million, according to Starke. (The funds are also backing the $125 million credit facility cited in the disclosure statement.)

Senior noteholders are contributing the other $40 million of the $75 million equity committee sweetener. But as Starke points out, that’s proportionally much less than the subordinated noteholders; $40 million is just under 1 percent of the senior noteholders’ projected recovery, while subordinated debt holders are giving up a little more than 2 percent of their recovery.

Starke said the equity committee, which will own a company capitalized with a total of $285 million when WMI emerges from Chapter 11, should be satisfied with the $75 million enhancement. “That’s a good outcome, considering how weak these insider trading claims were likely to be,” he said.

Equity committee counsel Edgar Sargent of Susman Godfrey said his clients are “very happy” with the new plan. In addition to the $75 million bondholder contribution to the reorganized company, other creditors are contributing $10 million. “The reorganized debtor is going to be well-capitalized, and we think there’s now a chance for shareholders to receive real recovery,” he said. (The reorganized company will likely “acquire or build assets in the financial or insurance spaces,” Sargent said, although he cautioned that it’s too early to say for sure.) In addition, Sargent said, equity holders will control any subsequent antitrust or business tort claims WMI brings against third parties through its two seats on the litigation committee of the WMI liquidating trust.

I left messages with WMI bankruptcy counsel Brian Rosen of Weil and lawyers for the four hedge funds (Paul Hastings for Appaloosa; Schulte Roth & Zabel for Owl Creek; Latham & Watkins for Centerbridge; and Kramer Levin Naftalis & Frankel for Aurelius). Latham referred my call to a Centerbridge spokesman and the others didn’t respond.

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There was a very interesting paragraph near the end of Burford Capital’s announcement Monday that it has acquired a British litigation insurance provider. Burford, you may recall, is the litigation-finance company that in November 2010 made a controversial $4 million investment in the Ecuadorean litigation accusing Chevron of despoiling the Lago Agrio region of the Amazonian rainforest. Burford put up the money to pay the plaintiffs’ new lawyers at Patton Boggs after Chevron’s counsel at Gibson, Dunn & Crutcher succeeded in driving their longtime lawyer, Steven Donziger, out of the litigation.

Burford’s investment — along with money from other, less conventional litigation funders — kept the Ecuadoreans’ case alive through a megabillions Ecuadorean court judgment against Chevron and into appellate review of the award. It has also permitted the Ecuadorean plaintiffs to battle Chevron’s efforts to block enforcement of the judgment through U.S. courts.

But according to Monday’s press release, Burford is not putting any more capital into the Chevron case, despite a maximum financing commitment of $15 million. “Further developments have led Burford to conclude that no further financing will be provided and thus decide to reduce the commitment level in the special situations portfolio accordingly,” the release said. Burford also disclosed that it hedged its initial $4 million investment by selling a corresponding interest in the case to a third party in December 2010. So at this point, according to Burford, it has no remaining exposure in the Chevron litigation, only upside potential.

James Tyrrell Jr. of Patton Boggs told me that Burford decided to distance itself from the case after Chevron “made it clear that there would be repercussions if [Burford] continued funding,” he said. “Chevron dealt with them directly.” (Burford principal Christopher Bogart didn’t respond to my email request for comment.) According to Tyrrell, Burford sold the hedge against its initial $4 million investment to “a corporate entity.” He said Burford’s decision not to up its investment doesn’t mean the litigation funder has developed doubts about the plaintiffs’ case, but rather is a sign that Chevron has intimidated funders. (As Leigh Jones of Reuters has reported, Patton Boggs made the same assertions in two suits against Gibson Dunn that have been dismissed; Tyrrell said the firm is appealing the dismissals.)

Funding for the plaintiffs’ case has become a big issue in the most recent briefing in the 18-year (and counting) litigation. In November, two months after the U.S. Court of Appeals for the Second Circuit lifted an injunction barring the Ecuadoreans from acting to enforce the foreign court’s judgment, Chevron returned to the trial judge who originally entered the injunction, U.S. District Judge Lewis Kaplan of Manhattan federal court, with a new request. Gibson Dunn asked Kaplan for a prejudgment attachment of any award against it by the Ecuadorean court, citing its interest in its own pending racketeering suit against some of the plaintiffs and some of their former lawyers and experts.

In a 44-page brief that details the plaintiffs’ funding arrangements, Chevron argued that the Ecuadoreans are selling interests in what the oil company calls “a corrupt judgment” because that’s their only asset. If they disperse their judgment to overseas funders, Chevron asserted, Chevron won’t be able to collect whatever award it obtains in the RICO suit. The brief disclosed that in addition to $4 million from a Cayman-based Burford subsidiary, the Ecuadoreans have received $4.25 million from Torvia Limited, a Gibraltar company owned by online-poker billionaire Russell DeLeon. According to Chevron, several other funders have invested smaller amounts in the Ecuadoreans’ case, ranging from $150,000 from an individual investor to $1 million from a U.S. entity called the New Orleans Group.

The Ecuadoreans responded to Chevron’s latest sally not in Kaplan’s courtroom but at the Second Circuit. In an appellate brief filed this weekend, Patton Boggs argued that Chevron’s attachment request was simply an alternative route to the injunction the appeals court lifted in September. The firm asked the appeals court to extend its stay on one piece of Chevron’s countersuit against the Ecuadoreans to halt the oil company’s racketeering claims as well. “The TRO and attachment that Chevron seeks would effectively restore the portion of the vacated preliminary injunction that this court apparently considered to be most objectionable of all — barring the Ecuadorean plaintiffs from funding their cause,” the brief said. “They would prevent the Ecuadorean plaintiffs from being able to fund the preparation and analysis of any future recognition or enforcement actions. Perversely, they would also prevent the Ecuadorean plaintiffs from funding the defense against Chevron’s racketeering allegations in New York.”

The Second Circuit still hasn’t issued an order explaining its decision in September to lift the injunction, so I’m not sure of the basis for Patton Boggs’s assertion that the appeals court was more deeply concerned about the Ecuadoreans’ ability to fund the litigation than, say, respect for foreign courts. Certainly Patton Boggs and its clients are concerned with funding this case to a conclusion.

I sent emails requesting comment to a Chevron spokesman and Chevron counsel Randy Mastro of Gibson Dunn but didn’t hear back.

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My colleague Karen Freifeld was in Manhattan State Supreme Court Thursday when Bank of America counsel Theodore Mirvis of Wachtell, Lipton, Rosen & Katz stood up to argue for the dismissal of Walnut Place’s suit demanding millions of dollars in put-backs in two Countrywide mortgage-backed securities trusts. Everyone who follows MBS litigation knows that Walnut, represented by Grais & Ellsworth, is the leading objector to BofA’s embattled $8.5 billion settlement with Countrywide MBS investors. But Freifeld was the first journalist to pick up Mirvis’s big disclosure: Walnut Place, he told Justice Barbara Kapnick, is actually the distressed debt hedge fund Baupost.

Late Friday, Baupost informed its partners (as the fund calls clients) that it is indeed Walnut Place. But according to a source who disclosed the memo’s content to Reuters, the hedge fund said it is litigating to protect its clients’ investment — and not, as a blog suggested Thursday night, because it has shorted Bank of America stock.

“From time to time and for a variety of reasons [Baupost] forms legal entities to consolidate investments. Walnut Place is such an example,” the Baupost memo said. “It holds certain of our residential mortgage-backed securities investments. Walnut Place has initiated legal actions against the originator of the loans underlying those securities because we believe there have been egregious deficiencies in the underwriting of mortgages. That litigation is intended to protect the interests of our investors and is ongoing.”

The hedge-fund blog Zero Hedge speculated Thursday night that Baupost, as Walnut Place, may be fighting the proposed BofA MBS settlement because it has shorted Bank of America stock and taken a long position on MBIA, which is also engaged in do-or-die MBS litigation with BofA. The Baupost client memo — without naming the Zero Hedge blog — firmly rejected that assertion as “unfounded and completely false.”

“We have on occasion owned a small amount of default protection on Bank of America debt as part of our overall portfolio hedging strategy through which we hold credit default swaps on a diverse group of financial institutions and other corporate issuers,” the memo said. “We currently have no long or short position in equity, corporate debt, or credit default swaps of Bank of America or MBIA.”

The back story on Baupost and Walnut Place certainly supports Baupost’s position that it wasn’t using Walnut as a vehicle to hide its investment in Countrywide mortgage-backed notes. BofA counsel Mirvis called Baupost a vulture fund in court Thursday, but the fund and its president, Seth Klarman, are renowned investors. In a profile of Klarman last June, Absolute Return + Alpha reported that Baupost has profited mightily in the economic downturn, expanding from about $7 billion under management in 2007 to more than $21 billion in 2010. (It’s now $23 billion.) Last month, Klarman got the Charlie Rose treatment in a 40-minute interview about his charitable foundation, Facing History and Ourselves, and investing strategy. (The distressed-debt blogosphere scrutinized the interview for pearls of investment wisdom, as Business Insider noted.)

Baupost contacted Bank of New York Mellon (the Countrywide MBS trustee) under its own name back in August 2010, as BofA revealed in a May 2011 motion to dismiss the Walnut Place put-back suit. In a pair of letters from the hedge fund’s lawyers at Grais & Ellsworth and Hanify & King, Baupost demanded that BNY Mellon assert put-back claims against Countrywide for deficient mortgages in two MBS trusts in which the fund was a noteholder.

Interestingly, the Baupost letters landed at BNY Mellon at about the same time that major institutional investors represented by Gibbs & Bruns distanced themselves from a plan by Countrywide MBS noteholders working through Talcott Franklin’s Investors Clearinghouse to send a demand letter to the Countrywide MBS trustee. I haven’t seen any evidence that Baupost was active in the Clearinghouse, but the hedge fund’s counsel, David Grais, certainly was.

According to the BofA motion to dismiss the Walnut case, BNY Mellon next heard from Baupost in December 2010 — but in the December letter, Grais & Ellsworth wrote on behalf of Walnut Place, which said it had been assigned the hedge fund’s interests in one of the Countrywide MBS trusts. In January, BNY Mellon received a second Walnut Place letter asserting Baupost’s interest in another trust. BofA later confirmed that various Walnut Place entities were incorporated in Delaware in December, just before Grais & Ellsworth sent the first Walnut letter to BNY Mellon. The bank’s lawyers subsequently called Walnut a “made-for-litigation” fiction; Baupost’s memo to client Friday, however, made it seem as though the hedge fund frequently aggregates investments for administrative reasons, which was its stated reason for creating Walnut.

As BofA and BNY Mellon engaged in negotiations with the Gibbs & Bruns investor group last fall and winter, Walnut Place counsel Grais rejected BNY Mellon’s overtures to talk. (The two sides vehemently disagree on the terms of the trustee’s invitation.) Walnut filed its put-back suit in February and has since fought to preserve its rights to litigate its own case, rather than see its claims subsumed in the $8.5 billion settlement BofA proposed in June.

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The Justice Department’s case seeking to block AT&T’s $39 billion acquisition of Deutsche Telekom’s T-Mobile is rocketing toward a Feb. 13 trial date. AT&T has everything riding on either a win at trial or a settlement that satisfies DOJ’s concerns about the combined entity’s dominance in nationwide wireless markets; as On the Case has reported, AT&T withdrew its application for Federal Communications Commission approval of the merger after the FCC announced it wanted an administrative law judge to consider the agency’s problems with the proposed deal. AT&T and T-Mobile are apparently betting that they’ll be able to come back to the FCC with a stronger case after they’ve appeased (or vanquished) the Justice Department.

But there’s another potential roadblock. Sprint Nextel Corporation and two regional wireless companies have also filed a suit to bar the AT&T/T-Mobile merger. At a hearing Friday in Washington, D.C., federal court, U.S. District Judge Ellen Huvelle will consider two very different scenarios for when Sprint’s case should be heard. Her answer will determine whether Sprint and its lawyers at Skadden, Arps, Slate, Meagher & Flom will get a shot at stopping the deal.

AT&T, represented by Kellogg, Huber, Hansen, Todd, Evans & Figel and Haynes and Boone, said as recently as Wednesday that it fully intends to complete the merger, although the company’s CFO declined to answer reporters’ questions about talks with the Justice Department. Meanwhile, the special master overseeing discovery in the DOJ suit indicated in a ruling Wednesday that AT&T’s withdrawal of its FCC application won’t affect the pretrial process. (The Justice Department had taken the opportunity of a third party’s bid to quash an AT&T subpoena to ask AT&T about its intentions; AT&T, according to the ruling, “responds that the recent events with the FCC proceeding have not altered the posture or timelines in the instant case.”)

Sprint originally wanted to consolidate its case with the Justice Department’s, but Huvelle denied that motion. She did, however, rule last month that Sprint could proceed with some of its antitrust claims. So in a filing this week in advance of Friday’s hearing, Sprint argued that Huvelle should hear its case immediately after the conclusion of the DOJ trial in February, taking advantage of discovery from that case. “Plaintiffs contemplate a streamlined trial in which evidence admitted in the DOJ trial would be deemed admitted in the private actions,” Sprint said in a joint case-management report. “Trial could start on the earliest available date following the close of evidence in the DOJ action. Plaintiffs’ proposal would greatly limit the need for live witnesses, narrow the fact issues to be resolved, and require significantly less of the court’s time than trial of the DOJ action.”

AT&T, however, has a different view of when the Sprint trial should be heard. It’s asking Huvelle to conduct Sprint discovery on a separate track from the Justice Department, and to postpone the Sprint trial until the second half of 2012 — after the scheduled close of the T-Mobile deal. Sprint, as you might imagine, doesn’t think much of AT&T’s proposal. “Defendants in effect are asking the court to allow [them] to close the transaction and ‘scramble the eggs’ of AT&T and T-Mobile prior to plaintiffs having their day in court,” Sprint argued. “It could prevent plaintiffs from ever obtaining an effective remedy.”

In the Sprint plan, its trial would take place as the FCC considers a revised AT&T application. Of course, unless AT&T gets past the DOJ neither the FCC nor Sprint will have to proceed.

Skadden referred my call to a Sprint spokesman who declined comment. AT&T and T-Mobile counsel Michael Kellogg of Kellogg Huber also declined comment. T-Mobile also has lawyers from Cleary, Gottlieb, Steen & Hamilton and Wiley Rein in the antitrust litigation.

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Late Tuesday, U.S. District Judge Barbara Jones of Manhattan federal court denied Bank of America’s motion to disqualify Quinn Emanuel Urquhart & Sullivan from representing AIG in its $10 billion mortgage-backed securities case against BofA, Merrill, and other bank subsidiaries. BofA’s lawyers at Munger, Tolles & Olson had argued that a former Munger partner, Marc Becker, acquired confidential information about Merrill’s MBS litigation strategy before departing to join Quinn Emanuel in 2008, then proceeded to work on AIG’s case against BofA and Merrill. The judge faulted Quinn’s screening process for failing to identify Becker’s potential conflict. But she said Becker had performed only non-substantive editorial work on AIG’s complaint and remand motion, didn’t share any confidences, and took steps to segregate himself from the AIG case as soon as he was reminded of his previous work for Merrill Lynch and its former mortgage unit. “There is no meaningful showing here that the trial process will be tainted,” Jones wrote. “The court finds that it would be unduly prejudicial to disqualify Quinn.”

But what about Marc Becker?

In October, after learning that Munger Tolles had raised the issue of his previous work for Merrill Lynch and First Franklin Financial, Becker resigned from Quinn Emanuel’s London office. In a Nov. 3 declaration, Becker said that he hadn’t remembered working for First Franklin when he spent a total of 5.8 hours reviewing the two AIG documents. “Had I remembered it, I never would have had anything to do with the [BofA] action,” he wrote. “None of what I did during those 5.8 hours on the [BofA] action was in any way focused on, or specific to, First Franklin or Merrill Lynch. I did not use or disclose any confidential information of First Franklin or Merrill Lynch. In fact, I did not at that time, and do not now, recall any confidential information of First Franklin or Merrill Lynch.” Becker asserted that Munger’s account of his work for Merrill — which cast him as a lead partner in Merrill and First Franklin’s MBS defense strategizing — didn’t jibe with his refreshed recollection of a “far more limited” role.

Becker remained at Quinn Emanuel for a month after Munger first alerted the firm of his potential conflict. During that time, according to his declaration, he met with Quinn’s outside counsel, Gregory Joseph, to discuss his work for Merrill, without any Quinn partners present. “Thus, even if I had recalled any confidential information regarding Merrill Lynch or First Franklin, which I did not, Quinn Emanuel would not have been exposed to it,” he wrote. “I understand that defendants have suggested that I was aware of and deliberately ignored the existence of a conflict of interest arising from my work on the First Franklin matter. That is totally untrue.”

Nevertheless, on Oct. 19, Becker resigned from Quinn Emanuel. “The firm and I agreed to take this step because … we wanted to do everything in our power to eliminate any possible basis for disqualification,” Becker wrote. Quinn Emanuel name partner John Quinn had told Munger Tolles in an email when he first learned of the potential Becker conflict that Becker might have to resign if Munger pressed for Quinn’s disqualification. So Becker’s declaration includes a poignant paragraph hinting at his sense of betrayal: “I am deeply disappointed that my former partners at [Munger] — with whom I worked as a trusted and respected colleague and partner for almost 20 years — would contend that I improperly shared client confidences. I do not believe that they genuinely believe that I did or ever would do so. But by having claimed that there is a risk of future disclosure of confidences by me, they precipitated my departure from Quinn Emanuel, and have caused me great professional and personal hardship.”

Becker said in the declaration that he was planning to start up a solo practice as a solicitor in London, but hoped to be able to return to Quinn Emanuel when the conflict question was resolved. Quinn Emanuel, in its response to the disqualification motion, reiterated that Becker’s resignation was voluntary. “This step was not taken because of any doubt as to the fact that no confidences were or would be shared, or as to the efficacy of the firm’s screen,” the firm’s response said.

In fact, according to Jones’s decision denying the disqualification motion, Quinn Emanuel asked the judge to rule that the firm’s ethical wall between Becker and the AIG case is sufficient to permit Becker to return to the firm. Unfortunately for Becker, the judge said she “declines to do so.”

That would appear to leave Becker in limbo, unless BofA agrees he’s adequately walled off from the case against it. Quinn Emanuel, after all, is engaged in other cases against BofA and Merrill Lynch — most notably the Federal Housing Finance Agency’s suits — and the firm doesn’t want to face another disqualification motion based on Becker’s previous work for Merrill.

In a brief phone interview, Becker told me he’s pleased that Jones found he behaved ethically. “I am deeply gratified that the court agreed I did not share any client confidences,” he said, adding, “I believe this motion was a tactic move to [by Munger] to eliminate an adversary that they would prefer not to face.” Becker declined any additional comment, but it’s well-known that Munger Tolles and Quinn Emanuel have butted heads in two big trials in the last year: star bond-trader Jeffrey Gundlach’s dispute with his former employer TCW, which resulted in a split verdict in September; and Rambus’s antitrust trial against Micron and Hynix, in which a jury last month cleared Quinn client Micron.

Quinn Emanuel declined comment on the Becker matter. Munger partner Marc Dworsky didn’t respond to Reuters’ request for comment.

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