Alison Frankel

Lawyers for latest acquitted FCPA defendants: DOJ ‘overreaching’

Alison Frankel
Jan 31, 2012 22:42 UTC

When Michael Madigan of Orrick, Herrington & Sutcliffe delivered a closing statement two weeks ago in the criminal trial of his client Greg Godsey, he told the federal jury in Washington, D.C., that the government had “danced with the devil.” In 2007, Madigan said, the Justice Department set up a “little nest out in Manassas, Virginia,” with the express intention of putting together Foreign Corrupt Practices Act cases. But when the FBI first tried to use an informant who appeared right after the Manassas base was established, it couldn’t make out any traditional cases based on his evidence. So according to Madigan, the Justice Department instead engineered a 2009 sting involving alleged bribes to the defense minister of Gabon in exchange for military supply contracts. That operation netted Justice 22 FCPA defendants and countless headlines touting its get-tough policy on foreign corruption.

On Monday, two of the Gabon sting defendants — including Madigan’s client — were acquitted by the jury. (Jurors said they were deadlocked on charges against three other defendants, but U.S. District Judge Richard Leon ordered them to keep deliberating.) Monday’s repudiation of the Justice Department’s case came a month after Leon entered an acquittal for a sixth defendant in the Gabon sting case, and two weeks after a federal judge in Texas dismissed an FCPA case against a former employee of an ABB Group subsidiary, who was accused of bribing a Mexican official. The Texas judge wouldn’t even let the government’s case go to a jury. The four recent acquittals extend a string of setbacks for the Justice Department in FCPA prosecutions, including a July mistrial in a previous Gabon sting trial against four different defendants, as well as the December dismissal of the Department’s case against Lindsey Manufacturing on prosecutorial misconduct grounds.

Lawyers for two of the acquitted Gabon sting defendants told me Tuesday that those results are no coincidence. “I think [prosecutors] got caught up in the klieg lights,” said Madigan of Orrick. “They were blinded with the idea of getting to the goal, and they ignored the means.” Stephen Bronis of Carlton Fields, who represented attorney Stephen Giordanella on the FCPA conspiracy charges Leon tossed earlier this month, said, “I do think this is somewhat systemic …. Juries and judges are troubled by this kind of use of federal resources.” Both Madigan and Bronis told me prosecutors may be overreaching to charge FCPA violations when they don’t have sufficient evidence. (Eric Dubelier of Reed Smith, who represents acquitted Gabon sting defendant R. Patrick Caldwell, declined comment.)

It’s not easy for U.S. officials to track what happens to alleged bribes when they disappear into the pockets of foreign officials. That’s why, according to FCPA guru (and former prosecutor) Philip Urofsky of Shearman & Sterling, the statute requires only a showing of a defendant’s intent to make a corrupt payment to a foreign official. “It’s a perennial problem in FCPA cases,” Urofsky said. “Most of the evidence is not available. You have to take the evidence as far as you can.”

Urofsky said, however, that the recent run of defense wins doesn’t mean that the Justice Department is stretched thin or that the FCPA is flawed. Instead, he said, “it has more to do with the difficulty of proving corruption,” particularly when defendants are represented by lawyers who challenge every piece of government evidence.

Ecuadoreans call for U.S. help in Chevron arbitration

Alison Frankel
Jan 30, 2012 23:36 UTC

In last week’s rejection of Chevron’s attempt to use U.S. courts to block enforcement of the Lago Agrio plaintiffs’ $18 billion Ecuadorean judgment, the U.S. Court of Appeals for the Second Circuit was clearly uneasy at the idea of American judges interfering with foreign jurisprudence. So far, the arbitration panel overseeing Chevron’s case against the Republic of Ecuador has had no such qualms. But with Chevron now relying heavily on the arbitration process to protect it from plaintiffs’ attempts to claim oil company assets, the panel’s power over foreign courts is going to become a key issue — and the Ecuadorean plaintiffs are now calling for the U.S. government to support Ecuador’s sovereignty. Chevron, meanwhile, argues that if anyone has caused harm to Ecuador’s constitution, it’s the Republic and the Lago Agrio plaintiffs, not Chevron and the arbitration panel.

The three-person arbitration panel, appointed under the terms of a bilateral investment treaty between the United States and Ecuador, is presiding over Chevron’s claim that the Republic of Ecuador is liable for any judgment in the Lago Agrio litigation. (The argument is two-fold: Chevron asserts that it has been denied due process, in violation of the investment treaty, and that the Republic signed an indemnification agreement years ago with its predecessor, Texaco.) The arbitrators don’t have jurisdiction over the individual Ecuadoreans suing Chevron, but they do have power over the Republic. Last spring, following U.S. District Judge Lewis Kaplan‘s imposition of a worldwide injunction barring enforcement of the Ecuadorean trial court’s judgment against Chevron, the arbitration panel issued an interim order instructing the Republic to “take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment against in the Lago Agrio case.”

This month, after an intermediate appeals court in Ecuador affirmed the $18 billion judgment, Chevron went back to the BIT arbitration panel to request emergency relief. Among other things, Chevron asked for a finding that the Republic has not complied with the panel’s interim order. Last week, the arbitrators converted their interim order into a interim award, which Chevron believes will be a big help in its attempts to persuade courts around the world not to permit the Ecuadoreans to take control of Chevron assets. In early February, the panel will hear evidence on Chevron’s allegation that the Republic is helping the Lago Agrio plaintiffs.

Expectations for the new mortgage-backed securities task force

Alison Frankel
Jan 30, 2012 14:53 UTC

I follow mortgage-backed securities litigation closely enough to be disgusted at the greed that fueled the securitization of insufficiently underwritten mortgages issued to homeowners who had no hope of paying them off. Sure, MBS investors and the bond insurers that backed MBS trusts were sophisticated and, to some extent, forewarned about the timebombs lurking in those mortgage pools. But you can’t read the voluminous MBS filings by monolines and investors — including the federal agency that oversees Fannie Mae and Freddie Mac — without wishing that someone be held accountable for sending the housing market on a slide, and dragging down the rest of the economy with it.

To date, accountability has been an elusive goal. I’m not talking about private suits or breach-of-contract put-back claims, in which MBS issuers are beginning to acknowledge billions of dollars of exposure to investors and insurers. But state and federal regulators and prosecutors have lagged behind the private plaintiffs bar (and the Federal Housing Finance Agency). As best I can tell, there have been no criminal prosecutions of people or institutions involved in mortgage-backed securitizations. On the civil side, the U.S. Attorney for the Southern District of New York, Preet Bharara, brought an MBS-based suit against Deutsche Bank last May. This summer, the New York Attorney General, Eric Schneiderman, filed Martin Act claims against Bank of New York Mellon for its conduct as Countrywide MBS securitization trustee. In October, the Delaware AG, Joseph Biden III, filed a civil suit against the Mortgage Electronic Registry System that accuses the banks that established MERS of using it as a vehicle to bundle mortgages they didn’t actually own. And last week, the Illinois AG, Lisa Madigan, sued Standard & Poor‘s for giving undeserved AAA ratings to overly risky mortgage-backed notes.

Those, however, are the only major government cases stemming from mortgage-backed securitizations that I’m aware of. For well over a year, the MBS industry has been under intense scrutiny by government investigators, from (among others) Congress, the Justice Department, the Securities and Exchange Commission, and the N.Y., Delaware, and Massachusetts AGs’ offices. So far, we haven’t seen a lot of tangible results from those investigations.

Chevron opinion doesn’t go its way

Alison Frankel
Jan 27, 2012 22:13 UTC

If Chevron was still hoping for a ruling from New York’s federal courts that would make it impossible for Ecuadorean plaintiffs to collect their $18 billion judgment against the oil company, Thursday’s long-awaited opinion by the U.S. Court of Appeals for the Second Circuit puts an end to that strategy. The appellate panel’s 30-page opinion — which explains the court’s Sept. 2011 order lifting the worldwide injunction barring enforcement of the Ecuadorean judgment — gives Chevron the chance to argue once again that the Ecuadoreans can’t collect in New York, under the state’s Uniform Foreign Country Money-Judgments Recognition Act. But in no uncertain terms, the Second Circuit advised that even if Chevron eventually persuades a New York judge that the Ecuadoreans procured their judgment through fraud, that judge cannot bar enforcement of the judgment outside of the United States.

“Nothing in the New York statute, or in any precedent interpreting it, authorizes a court to enjoin parties holding a judgment issued in one foreign country from attempting to enforce that judgment in yet another foreign country,” wrote Second Circuit Judge Gerald Lynch, for a panel that included Judges Rosemary Pooler and Richard Wesley. “The court presuming to issue such an injunction sets itself up as the definitive international arbiter of the fairness and integrity of the world’s legal systems.”

The appellate panel’s ruling is based on what it said was Chevron’s inappropriate attempt to use New York’s Judgment Recognition Act to bar enforcement of a judgment that wasn’t even final at the time Chevron brought its case. The opinion explains that the New York statute is intended to be invoked only after the holder of a judgment attempts to enforce it inside the state’s borders. Chevron tried to get around that issue by asking for the injunction via a declaratory judgment action, in which it alleged that the Ecuadoreans procured their $18 billion verdict through fraud and political machinations. But the Second Circuit said Chevron’s interpretation of the Recognition Act, and U.S. District Judge Lewis Kaplan‘s endorsement of that interpretation, was “a legal misapprehension.” The act may only be used defensively, the panel said, not prospectively. For good measure, the Second Circuit also dismissed Chevron’s declaratory judgment suit.

Suing JPMorgan over MBS? Say thanks to bond insurers

Alison Frankel
Jan 26, 2012 22:36 UTC

Attention everyone who’s suing or planning to sue JPMorgan Chase, Bear Stearns, or Bear’s onetime mortgage unit EMC over mortgage-backed securities gone bad: Those indefatigable bond insurers are busy amassing whistleblower evidence for you. Last Friday, Patterson Belknap Webb & Tyler — which represents the monolines Syncora, Assured Guaranty, and Ambac in fraud and breach-of-contract suits stemming from EMC mortgages — began deposing witnesses from outside companies that evaluated the underlying loans in Bear’s mortgage-backed offerings. (The Nov. 18 amended complaint in Assured’s Manhattan federal court case against EMC and JPMorgan outlines the whistleblower assertions Patterson has come up with.)

The first deposition was of a former employee of Watterson Prime, a contractor that re-underwrote mortgages in EMC securitizations. The employee has claimed that Watterson simply rubber-stamped the loans; even mortgages that the contractor rejected, she has said, were nevertheless placed in MBS loan pools. Assured and the other monolines argue, of course, that they were deceived about the supposedly independent review of the underlying mortgage loan pools in the securities they agreed to insure. Whistleblower deposition testimony could be powerful evidence to support their arguments.

We only know about the whistleblower depositions because of a letter JPMorgan’s lawyers at Greenberg Traurig sent to Manhattan State Supreme Court Justice Charles Ramos, who is overseeing the Ambac case in state court, and to U.S. District Judge Paul Crotty, who’s presiding over Syncora’s Manhattan federal court case against EMC. (JPMorgan isn’t a defendant in that action.) The Jan. 18 letter identified the Watterson confidential witness by name, accused Patterson Belknap of “ambush litigation tactics,” and asked the judges to order Patterson to turn over a signed affidavit from her in advance of the Jan. 20 deposition. Greenberg also asked for affidavits from three other whistleblowers whose depositions have been scheduled. Despite a Jan. 19 Patterson letter claiming privilege for the whistleblower affidavits it has obtained, the monolines were ordered to turn over the witness statements.

Megaupload, meet Morrison

Alison Frankel
Jan 24, 2012 23:02 UTC

I like to think of the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank as Godzilla, rampaging across the landscape of civil litigation as plaintiffs’ lawyers scramble away in horror. Morrison, as you know, was a securities case, and in the narrowest sense, the ruling simply precluded securities-fraud suits based on foreign-traded shares. But the Court’s warning that U.S. laws shouldn’t be presumed to apply overseas unless the statute’s language specifies it has turned out to be a powerful weapon for foreign defendants in all sorts of civil cases, from antitrust and trade secrets to racketeering and Securities and Exchange Commission enforcement.

Can Morrison now save the accused online pirates at Megaupload?

The U.S. government is accusing the file-sharing service and seven of its executives of conspiring to commit racketeering, conspiring to commit money laundering, and engaging in criminal copyright infringement. All of the Megaupload defendants are foreign. The company is based in Hong Kong, and the indicted execs have ties to Hong Kong, various European countries, and New Zealand. None is a citizen or resident of the United States. (Here’s Reuters’ story on the charges, and here’s the Justice Department’s press release.)

The 72-page indictment is nevertheless littered with references to activity that allegedly took place in the Eastern District of Virginia, where the case was filed and where Megaupload leased servers from a company called Carpathia Holding. (The Washington, D.C.-based Cogent Communications was allegedly an Internet service provider for Megaupload.) The government asserts the Eastern District is an appropriate venue because allegedly illegal uploading and downloading took place there, and because Megaupload did business, via the Internet money processer PayPal, with users who live in eastern Virginia.

Chevron’s options to evade $18 billion judgment narrowing

Alison Frankel
Jan 23, 2012 21:29 UTC

On Thursday, the U.S. Court of Appeals for the Second Circuit denied Chevron’s bid to re-impose a worldwide injunction barring Ecuadorean plaintiffs from acting to enforce the $18 billion environmental contamination judgment that an Ecuadorean appellate panel upheld earlier this month. That’s Chevron’s second big rebuff in its U.S. campaign to knock out the Ecuadorean judgment, which the oil company contends was fraudulently obtained. Two weeks ago U.S. District Judge Lewis Kaplan in Manhattan — theretofore a reliable backstop for Chevron — refused the oil company’s motion for an attachment order in its racketeering suit against the Ecuadorean plaintiffs and some of their lawyers and experts.

Chevron counsel Randy Mastro of Gibson, Dunn & Crutcher painted Kaplan’s ruling as a temporary setback, since Kaplan said the oil company could try again for a pre-trial attachment. But it’s impossible to spin the Second Circuit’s order Thursday as anything but bad news for Chevron. The appellate judges, you’ll recall, lifted Kaplan’s injunction on enforcement of the Ecuadorean judgment last September. They also stayed Chevron’s declaratory judgment case before Kaplan, in which the oil company sought to prove its fraud allegations against the Ecuadoreans and their lawyers. At the time of those rulings by the Second Circuit, the $18 billion judgment was still under consideration by the Ecuadorean appeals court, and the Ecuadoreans asserted that there was no need for an injunction because the judgment couldn’t be enforced while the Ecuadorean appellate process was underway. When Chevron went back to the Second Circuit this month, Gibson Dunn argued that since the Ecuadoreans are poised to enforce their judgment, the oil company now needs the injunction.

The Second Circuit’s denial of Chevron’s motion suggests that the U.S. appellate panel (which still hasn’t issued an opinion explaining its September orders) had bigger problems with Kaplan’s injunction than mere timeliness. Although there’s a chance the appeals judges based Thursday’s decision on ripeness, which was one of the issues both sides briefed, it seems likelier — both from the denial of Chevron’s motion and last September’s oral argument — that the U.S. judges are concerned about undercutting the authority of another country’s judiciary. If that’s the case, the Second Circuit simply isn’t going to permit Chevron to use the U.S. courts to block enforcement of the Ecuadoreans’ judgment around the world. Chevron’s racketeering case is still alive and kicking before Kaplan, but without an injunction or pre-trial attachment order, the RICO suit can only provide an after-the-fact remedy. (In an email statement, a Chevron spokesman said the company is “disappointed that the Second Circuit did not grant our motion to lift the stay, and we await the court’s opinion.”)

Amid SOPA debate, SCOTUS gives Congress broad copyright power

Alison Frankel
Jan 19, 2012 23:57 UTC

If you hadn’t heard of the House of Representatives’ Stop Online Piracy Act or the Senate’s corresponding Protect I.P. Act before Wednesday, you surely have now, after Wikipedia, Craigslist, and many other Internet information providers went dark in protest of the pending legislation. SOPA and PIPA, as the bills are known, are being pushed by movie studios, publishers, and other copyright holders who want to curb online piracy by overseas websites. But lots of U.S. Internet companies contend that SOPA and PIPA undermine the safe-harbor provisions of the Digital Millennium Copyright Act, which protects websites that inadvertently publish copyrighted material.

Among the sites that turned off the lights Wednesday was Stanford Law School’s Center for Internet and Society. In a note to followers, the Center’s executive director, Anthony Falzone, explained that even as support for SOPA dries up, PIPA still seems to be alive and well, with “dangerous” provisions that “threaten both the universality and the security of the Internet itself.”

It’s more than a little ironic that on a day the Center’s site was protesting Congress’s perceived encroachment on free speech, the U.S. Supreme Court issued a decision that rejected CIS’s argument in a case challenging Congress’s power to restrict what’s in the public domain. Even worse for opponents of Congress’s anti-piracy legislation, the Court’s opinion in Golan v. Holder expressly endorses Congressional authority to determine the scope of copyright protection. If some version of SOPA or PIPA is enacted, in other words, it will be tough to overturn in the courts.

Citi’s FINRA deal: Why ‘neither admit nor deny’ isn’t a problem

Alison Frankel
Jan 19, 2012 15:23 UTC

On Wednesday, the Financial Industry Regulatory Authority disclosed a settlement with Citigroup that U.S. Senior Judge Jed Rakoff might find interesting. Citi agreed to pay a $725,000 fine to resolve allegations that it committed thousands of disclosure lapses in research reports issued between January 2007 and March 2010. (A big thanks to my Thomson Reuters colleague Stuart Gittleman of Accelus, who told me about Citi’s FINRA deal.) Among other disclosure problems, Citi failed to note its role as a manager or co-manager of a related public offering in 8 percent of the 80,000 reports it issued annually; it neglected to report investment banking revenue in 330 research reports; and it didn’t disclose its beneficial ownership in about 1,800 companies its analysts covered.

The FINRA consent letter, signed by Citi counsel Robert Romano of Morgan, Lewis & Bockius, sure makes it sound as though Citi was aware of its disclosure failures. The bank itself identified most of the lapses, which violated strict FINRA disclosure guidelines imposed on Wall Street firms after a 2003 investigation of conflicts of interest in analyst reports. (Citi agreed to pay a $400 million fine after that investigation.) The bank has already conducted two internal reviews of its disclosure systems, one in conjunction with a previous $350,000 fine for lapses committed between 2004 and 2006. In 2010, after continuing problems with internal systems and data from outside affiliates, Citi hired an independent consultant to recommend improvements in its technical disclosure processes. In Wednesday’s consent, the bank agreed (again) to accept a FINRA censure, which is now part of its permanent disciplinary record.

But you won’t find any outright admission of wrongdoing by Citi in Wednesday’s signed consent. To the contrary, the document is sprinkled with the phrase that has become known as Rakoff’s Scourge: “without admitting or denying.” Citi didn’t admit or deny the latest batch of disclosure failures, just as it didn’t admit or deny regulatory allegations in 2003 or alleged disclosure failures in 2006. The latest FINRA consent repeats the boilerplate from Citi’s two previous disclosure agreements with the industry regulator.

In Citi appeal, who will speak for Rakoff?

Carlyn Kolker
Jan 17, 2012 23:26 UTC

Who will speak for Jed Rakoff?

The Manhattan federal judge is certainly not shy about speaking for himself. In November, as you’ll surely recall, Rakoff blocked a negotiated $285 million settlement between the Securities and Exchange Commission and Citigroup over mortgage-linked securities. To say Rakoff had harsh words for the parties would be the understatement of the year. He railed against the bank and regulators and called the SEC’s practice of allowing companies to settle cases without admitting or denying wrongdoing far outside the public interest. For good measure, the judge also accused the SEC of being out for a “quick headline” and called the settlement amount “pocket change.”

The SEC wasn’t happy, either: In December the agency appealed Rakoff’s order to the U.S. Court of Appeals for the Second Circuit; the appeals court hasn’t ruled yet on the threshold question of whether the ruling is even appealable at this juncture. Rakoff himself has said he doesn’t think the issue is ripe for appeal and in December declined to issue a stay in the case, which is scheduled for trial in July. Motions are due today to the Second Circuit on the SEC’s request for a stay. But when the argument on the merits of Rakoff’s opinion goes to the Second Circuit — and it is sure to go there eventually — an essential question remains: Will we hear Rakoff’s voice, either in the flesh or in spirit? By proxy or in person?

Remember, without the judge’s involvement, the case is basically an appeal without an adversary. The two parties to the suit, the SEC and Citi, consented to the settlement and both want the Second Circuit to override Rakoff and approve their deal. Their “adversary” — Rakoff — is not a party to the case and does not have any enshrined rights as an advocate in the litigation.