Opinion

Alison Frankel

Record $285 ml fee award is Strine’s message to plaintiffs’ bar

Alison Frankel
Dec 21, 2011 14:57 UTC

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.

Previewing the defense in SEC cases v. Fannie and Freddie execs

Alison Frankel
Dec 19, 2011 21:17 UTC

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.

Even if MBIA and BofA settle, MBS loss causation ruling en route

Alison Frankel
Dec 19, 2011 16:33 UTC

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.

Transcript, tape of analyst call fair game for news org

Alison Frankel
Dec 16, 2011 14:42 UTC

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.

Rakoff ripples: NY court says SEC boilerplate no defense

Alison Frankel
Dec 15, 2011 15:17 UTC

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.”

Vulture funds surrender $30 mln in new WaMu reorganization plan

Alison Frankel
Dec 14, 2011 00:24 UTC

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.

Can Ecuadorean plaintiffs keep funding case against Chevron?

Alison Frankel
Dec 12, 2011 22:36 UTC

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.

Baupost: We’re Walnut Place, and we’re not shorting BofA stock

Alison Frankel
Dec 12, 2011 15:10 UTC

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.”

In AT&T antitrust case, don’t forget about Sprint

Alison Frankel
Dec 9, 2011 16:13 UTC

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.”)

Marc Becker’s sad tale: Casualty of BofA attack on Quinn Emanuel

Alison Frankel
Dec 7, 2011 23:48 UTC

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.”

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