Alison Frankel

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.

Nevertheless, Madigan’s image of an “FCPA nest” set up specifically to charge defendants with illicitly bribing foreign officials is disquieting, to say the least. So are text messages that emerged at the latest Gabon sting trial, featuring federal agents joking about who would play them when Hollywood made a movie about the case (talk about klieg lights!) and coaching their informant on how to deceive sting targets with cold feet. Even Urofsky, the former FCPA prosecutor, said the government’s assertion of a global conspiracy — which depends heavily on the Gabon defendants’ attendance at a government-arranged meeting — has been a problem in the case.

So far, the Justice Department has not managed to convict a single Gabon sting defendant who contested its charges. As of Tuesday afternoon the jury was still deliberating the fate of Godsey and Caldwell’s co-defendants. The next Gabon sting trial, featuring four more defendants, is scheduled to begin in February. If those defendants aren’t convicted, the DOJ may want to rethink its Hollywood ending.

I left a request for comment at the Justice Department’s Office of Public Affairs but didn’t hear back.

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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.

But here’s the thing: The Republic of Ecuador asserts that the arbitration panel has exceeded its authority by issuing an unconstitutional order. According to the Republic’s lawyers at Winston & Strawn, the panel’s instruction calls for the country’s executive branch to breach the Ecuadorean constitution’s separation-of-powers doctrine by meddling with the judicial branch. “The claimants have claimed in these proceedings that the executive branch has wrongfully injected itself into the legal processes by its occasional public comments over the years touching on a matter of public interest (as Presidents and Prime Ministers across the globe are wont to do),” Winston & Strawn wrote in a Jan. 9 letter to the arbitrators. “But the claimants ask this tribunal to order direct and actual state intervention in the court processes. The Republic doubts that this would be lawful in any state. It surely is not lawful in Ecuador.”

The Lago Agrio plaintiffs, I should note, do not need the Republic’s permission to bring enforcement actions against Chevron outside of Ecuador. Those are private actions, although they’re subject to Ecuador’s treaties with other nations. Nevertheless, the plaintiffs have waded into the BIT arbitration. Last week, the Ecuadorean lawyer Pablo Fajardo sent a letter to Ecuador’s equivalent of our Attorney General, informing him that the Lago Agrio claimants have constitutional concerns about the arbitration, arising from “fundamental human rights” as well as separation of powers.

“It is abundantly clear that the ‘interim’ order that Chevron is now demanding would violate Ecuador’s Constitution, as well as international law, and therefore would be null and void were an arbitral panel to issue it,” Fajardo’s letter said. “Moreover, such an ‘order’ would violate the [bilateral investment treaty], which reflects the clean intent of the two parties to protect the sovereignty of their respective judicial systems — something completely contrary to what Chevron is now demanding at international arbitration.”

Moreover, plaintiffs’ spokewoman Karen Hinton told me in an email statement Monday that the Ecuadoreans are calling on the U.S. government to take a stand in the BIT arbitration. “The United States government cannot stand silent while a U.S. company uses the treaty as a cover to violate international law, deny the human rights of indigenous groups, violate the constitution of a U.S. ally, and threaten the credibility of the entire investor arbitration dispute system — just so it can gain a perceived advantage in a private litigation,” Hinton’s email said.

Chevron’s lead arbitration counsel, R. Doak Bishop of King & Spalding, told me Monday that it’s Chevron, not the Republic or the Lago Agrio plaintiffs, that has seen its rights trampled under the Ecuadorean constitution. As a procedural matter, Bishop said, Chevron’s BIT arbitration is against the entire state of Ecuador, not just the executive branch. “Separation of powers is irrelevant,” he said. “The [arbitration panel's] award is directed to the entire state.” Bishop also said the arbitrators’ interim award is intended just to preserve the status quo, so that Chevron isn’t harmed when and if it prevails on the merits of its arbitration claim against Ecuador.

More fundamentally, Doak told me, Chevron is asserting that the Republic breached its own constitutional duty to Chevron to assure due process and to take responsibility for miscarriages of justice. The Republic of Ecuador’s constitutional argument against the BIT arbitration interim award “turns that on its head,” Bishop said.

What about the Lago Agrio plaintiffs’ call for the U.S. government to get involved? “That’s not the place of the U.S. government,” Chevron spokesman Kent Robertson said. “And the subject of these plaintiffs suddenly becoming champions of the Ecuadorean constitution is laughable …. This is the same cast of characters who brought a case against Chevron that was unconstitutional right out of the gate. This is hypocrisy at its highest level.”

Eric Bloom of Winston & Strawn did not return my call for comment.

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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.

That’s why I’m skeptical that the new MBS fraud task force, introduced Friday at a press conference headlined by U.S. Attorney General Eric Holder, SEC Enforcement Director Robert Khuzami, and N.Y. AG Eric Schneiderman, is going to wreak vengeance on MBS wrongdoers.

Both Khuzami and Holder, in fact, emphasized what their lawyers have already done in probing financial fraud. “To be clear, investigations into RMBS offerings have been ongoing at the SEC. Along with experts across the agency, we have a specialized unit dedicated to the effort,” Khuzami’s press release said. “We already have issued scores of subpoenas, analyzed more than approximately 25 million pages of documents, dozens and dozens of witnesses, and worked with our industry experts to analyze the terms of these deals and the accuracy of the disclosures made to investors.” (Under Khuzami, the SEC has brought several actions against companies and banks that allegedly under-reported their exposure to subprime mortgages; and several more against banks and individuals that allegedly deceived investors in MBS derivatives.) Holder’s press release pointed to the securities, bank, and investment fraud cases the Justice Department has recently prosecuted, along with DOJ’s Fair Lending settlement with Countrywide parent Bank of America.

The benefits of creating an umbrella task force to oversee investigations already underway by state and federal regulators aren’t clear to me from the task force’s announcements. There will apparently be additional resources dedicated to MBS fraud. Holder said that there are now 15 DOJ lawyers, investigators, and analysts working on MBS matters. They will be supplemented right away with 10 FBI agents, and another 30 DOJ staffers will join the team “in the coming weeks.” Khuzami and the DOJ also said the task force will enhance coordination and streamline processes. “It will ensure that we pool the different capabilities, resources, legal theories and remedies that each of us bring to the effort,” Khuzami’s press release said.

Okay, streamlining is good. So is the apparent expansion of the state AGs’ mandate. “We have jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market,” Schneiderman said at the press conference, according to Housing Wire. (Here’s the AG’s press release.) “We have jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group.” As if to underline that point, the task force announced that in recent days it has subpoenaed 11 financial institutions.

But the AGs, according to a DOJ spokesperson, won’t have any greater prosecutorial reach via the task force than they already have in their own states. “Membership in the RMBS Working Group will not empower state Attorneys General to enforce any statute that they could not otherwise enforce,” the DOJ told me in an email. “The Working Group and its federal and state co-chairs will coordinate investigations and make decisions about which office or offices should conduct various pieces of these investigations and which should be done jointly depending on the facts, the law and the jurisdiction.”

So when you put aside the press releases, what the MBS task force really adds to existing investigations is some additional DOJ manpower and better coordination among the various state and federal agencies.

There are clearly political benefits that come with the announcement of the new task force. It’s a gesture to critics who want to see MBS securitizers and trustees answer for their actions. Reuters has also obliquely suggested that membership in the MBS task force may persuade Schneiderman and other AGs who have voiced opposition to the Obama Administration-backed mortgage abuse settlement with top banks to support the proposed $25 billion deal.

I hope that’s not why the President called for an MBS task force. I hope the task force will, in some manner, tell the country whether it’s true that MBS issuers abandoned even their own lax underwriting standards, ignored warnings from inside and outside mortgage loan reviewers, and packaged deficient loans into doomed securities. I hope that even if regulators and prosecutors don’t bring cases, they tell us who got rich in the securitization business. I want everyone who lost money through their mutual fund or pension fund’s investment in MBS — and all the people whose mortgage lenders told them they could afford a loan they really couldn’t — to know those names.

That’s what I want. But I’m not holding my breath.

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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.

“Whatever the merits of Chevron’s complaints about the Ecuadorian courts,” the opinion said, “the procedural device it has chosen to present those claims is simply unavailable: The Recognition Act nowhere authorizes a court to declare a foreign judgment unenforceable on the preemptive suit of a putative judgment-debtor.”

The first part of the Second Circuit opinion left open the possibility that Chevron could try again to block enforcement when and if the Ecuadoreans attempt to collect in New York. (Lawyers for the Ecuadoreans have said they will never attempt to enforce the judgment in New York.) But in the appellate panel’s discussion of international comity — a major theme of last fall’s oral arguments — the judges made clear their discomfort with a New York court interfering with international jurisprudence. Kaplan’s injunction, the opinion said, would establish New York as an international arbiter of justice, and that’s not what the Judgments Recognition law intends.

“As Chevron’s effort to secure injunctive relief illustrates, permitting such speculative declaratory relief would encourage efforts by parties to seek a res judicata advantage by litigating issues in New York in order to obtain advantage in connection with potential enforcement efforts in other countries,” the opinion said. “Such a regime would unquestionably provoke extensive friction between legal systems by encouraging challenges to the legitimacy of foreign courts in cases in which the enforceability of the foreign judgment might otherwise never be presented in New York.”

James Tyrrell Jr. of Patton Boggs, who represents the Ecuadoreans suing Chevron, welcomed the court’s opinion. “We are very pleased that the Circuit Court not only vacated the injunction, but also dismissed the declaratory judgment action in its entirety, making it clear that a New York court has no authority to decide enforcement of the now-affirmed Ecuadorean judgment for the rest of the world.”

The Second Circuit opinion does not address the merits of Chevron’s fraud argument (nor, for that matter, the fraud allegations that the Ecuadoreans have since lobbed at the oil company), and notes that Chevron’s racketeering suit against the Ecuadoreans and some of their lawyers and experts remains alive in Manhattan federal court. Chevron general counsel Hewitt Pate told me Thursday that the appeals court’s opinion means Chevron’s RICO case can now proceed. (That case, as I’ve reported, includes a motion for pre-trial attachment that could effectively preclude the Ecuadoreans from collecting on their judgment; Kaplan denied Chevron’s first attachment motion but indicated he’d reconsider.) “The Second Circuit’s opinion is a narrow procedural ruling that may change the order in which courts address the fraud being perpetrated in the Lago Agrio case, but it will not affect the ultimate outcome,” Chevron said in a statement. “Chevron will continue to pursue its fraud and racketeering claims against the Lago Agrio plaintiffs and the American lawyers who are perpetrating this fraud.”

As I’ve reported, Chevron has also appealed the Ecuadorean judgment to that country’s highest court, and has asked the arbitration panel overseeing its case against the Republic of Ecuador to block the Ecuadorean government from acting to enforce the judgment. On Wednesday, the bilateral treaty arbiters converted an interim order restricting the Republic into an interim award. Pate said the arbitration panel’s action underscores the Republic’s obligation to stop the Ecuadorean plaintiffs from enforcing the judgment, and enhances arguments Chevron will make elsewhere in the world if the Ecuadoreans try to collect. “It puts us in a more powerful position,” Pate told me. (The Republic has argued that the arbitration panel’s order is an impermissible violation of its separation of powers doctrine.)

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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.

A blogger named Teri Buhl got wind of the scuffle over the whistleblower affidavits and published a post accusing JPMorgan and Greenberg Traurig of attempting to intimidate the monolines’ whistleblower witnesses. The bank’s lawyers promptly responded with a letter to Crotty, complaining that Patterson Belknap was leaking non-public information. “We do object to plaintiff’s counsel’s repeated use of reporters such as this one to generate articles like this,” the letter said. “We would appreciate the court directing plaintiff’s counsel to refrain from this activity in the future.”

Patterson countered Greenberg’s assertion in a fiery Jan. 23 letter to Crotty. (All of the correspondence in the flap is here.) “[EMC's] letter falsely asserts that our firm disclosed non-public information to the press,” the Patterson response said. “That simply is not true.” Patterson pointed out that all of the factual information in Buhl’s post came from public-record documents — in a flap EMC itself precipitated when it disclosed the Watterson witness’s name in its demand for her affidavit.

Patterson also took the opportunity to needle EMC about the whistleblowers’ depositions: “EMC seeks to divert attention from the fact that the testimony the whistleblower gave on Friday (as well as testimony offered by a Georgia law enforcement officer on Saturday) confirmed the statements in the affidavits that EMC knowingly misrepresented in its due diligence process, which was fundamentally and deliberately deficient,” the Jan. 23 letter said.

Crotty — who still hasn’t issued the loss-causation summary judgment ruling that was expected by the end of last month — denied Greenberg’s request for a gag order on Tuesday, writing that “as to talking to the press about public judicial events, the parties should be guided by the code of conduct and related opinion on ethics, concerning good behavior of attorneys.”

I’ve reported that MBS suits against JPMorgan are suddenly in vogue. That trend continued this week with the 256-page complaint John Hancock’s lawyers at Grant & Eisenhofer filed in Manhattan State Supreme Court. The public record is already full of grist for the plaintiffs’ lawyers filing these suits, but deposition testimony from underwriting whistleblowers is going to be quite a significant addition to the record. Once again, the monolines are trailblazing for MBS investors.

I left a phone message for JPMorgan counsel Richard Edlin of Greenberg and sent an email request for comment to a bank spokesperson. Neither got back to me.

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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.

But that’s not the test Morrison dictates. The Supreme Court’s decision holds that the language of the relevant law is what counts. And under that test, as the New York Law School blog Legal As She Is Spoke (yes, that’s really its name) was the first to note, the government’s criminal copyright-infringement and racketeering counts could be in trouble.

If the current copyright laws applied to overseas activity, after all, there would have been no need for the much-maligned (and now apparently dead) Stop Online Piracy Act and Protect Intellectual Property Act. There’s also considerable precedent on racketeering and Morrison. In a pair of rulings just months after Morrison came down, the U.S. Court of Appeals for the Second Circuit concluded that the civil Racketeer Influenced and Corrupt Organizations law does not extend to overseas conduct. And in the most significant Morrison ruling in a RICO case, Washington, D.C., federal court judge Gladys Kessler found in March 2011 that the U.S. government has no racketeering case against British American Tobacco — even though she’d already entered a final judgment against BAT. (Here’s a comprehensive analysis of RICO and Morrison from the Vanderbilt Journal of Transnational Law.)

Morrison hasn’t been as deeply tested in criminal cases as it has on the civil side. If Megaupload defense lawyers try to dismiss part or all of the indictment on Morrison grounds, prosecutors from U.S. Attorney Neil MacBride’s office will counter with a 1922 Supreme Court opinion called United States v. Bowman, which holds that extraterritorial jurisdiction can be inferred from U.S. criminal laws. As I’ve reported, another D.C. federal district judge recently agreed with the government’s interpretation of Bowman. A Second Circuit panel has also rebuffed a Morrison defense in a criminal case, although not on Bowman grounds.

Even if Megaupload’s legal team (which no longer includes Robert Bennett of Hogan Lovells, as Reuters reported) manages to knock out the racketeering and criminal copyright-infringement counts via Morrison, I think they have a much tougher Morrison argument on the government’s money laundering allegations. The money-laundering statute specifically references United States jurisdiction over “foreign persons,” and includes a prohibition on moving money into and out of the country illicitly. Obviously, Megaupload and its executives can argue that they weren’t engaged in money laundering, but for Morrison purposes, the law does appear to have extraterritorial reach.

I left a message with Megaupload counsel Ira Rothken (here’s a Q&A he did with the Washington Post on the case) but he wasn’t immediately available.

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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.”)

If Chevron can’t use the U.S. courts to bar the Ecuadoreans from collecting, it has three ways to attempt to evade the $18 billion judgment: the Ecuadorean courts; enforcement disputes elsewhere in the world; and the bilateral treaty arbitration between the Republic of Ecuador and Chevron over the scope of the release the Republic granted Chevron predecessor Texaco more than 20 years ago.

Ecuador is fraught with danger for Chevron. On Friday , the oil company filed a notice that it is appealing the $18 billion judgment to Ecuador’s highest court. Under Ecuador’s procedures, the intermediate appeals court that just affirmed the judgment can set a bond that Chevron must pay if it wants to stay enforcement during the high court appeal. But according to the plaintiffs, if Chevron loses the appeal, it loses whatever it posts as a bond in addition to the judgment. Even if that’s not the case, Chevron has taken great pains to move all attachable assets out of Ecuador. Posting bond there puts money within easy reach of the Ecuadorean plaintiffs.

Chevron also faces a deadline on a decision that affects almost half of the $18 billion judgment, which was imposed as a penalty for Chevron’s ongoing refusal to apologize for allegedly contaminating the Lago Agrio region of the rainforest. The penalty was first imposed by the trial court, after Chevron failed to meet its deadline for apologizing. The Ecuadorean appeals panel has given Chevron a new deadline to apologize and thereby eliminate about $8 billion of the $18 billion judgment. In a clarification the plaintiffs requested, the appeals panel said any apology would not be regarded as an admission of liability elsewhere in the world. But I seriously doubt Chevron will rely on the credibility of the Ecuadorean court system — which it has been calling corrupt for the last three years — as it opposes enforcement of the judgment in courts around the world. There’s almost no chance Chevron will apologize and risk the possibility that other courts will interpret the apology as an admission of liability.

Chevron made an interesting strategic decision before the intermediate Ecuadorean appellate panel that the plaintiffs believe gives them an edge in the international enforcement litigation that’s sure to follow any high court endorsement of the $18 billion judgment. There was some ambiguity in the Ecuadorean appellate ruling on the court’s consideration of Chevron’s fraud allegations. The plaintiffs requested clarification; Chevron did not, but was permitted to respond to the plaintiffs’ request. In the clarification issued last week, the Ecuadorian appeals panel said it had reviewed Chevron’s fraud allegations but hadn’t based its decision on them. The appellate judges said Chevron’s fraud case could be adjudicated in the United States.

The plaintiffs believe that the Ecuadorean court’s clarification — confirming that it reviewed Chevron’s fraud allegations and upheld the judgment despite them — will carry weight with other courts as they consider attachment motions by the Lago Agrio plaintiffs. Chevron, on the other hand, apparently intends to argue to judges around the world that there’s been no final determination on its fraud allegations. The oil company will also assert that the clarification is further evidence to support its claim that the Ecuadorean courts are in the pocket of the Lago Agrio plaintiffs. (“Any attempt to enforce this fraudulent Ecuadorian judgment will be met with a mountain of fraud evidence these plaintiffs and their counsel cannot surmount or even contest because it comes largely from their own admissions,” said Chevron counsel Mastro.)

Chevron’s perceived ace card, meanwhile, is the bilateral treaty arbitration. Last year, in a preliminary decision that didn’t get nearly as much attention as Kaplan’s worldwide injunction, the arbitration panel ruled that the Republic of Ecuador must act to bar enforcement of the Lago Agrio plaintiffs’ judgment. On Jan. 4, Chevron lawyers at King & Spalding sent an emergency letter to the arbitration panel, requesting that the panel demand a showing that the Republic is complying with its 2011 order. The Republic of Ecuador’s lawyers at Winston & Strawn responded on Jan. 9 with a 15-page letter explaining that the panel’s order would require an impermissible violation of Ecuador’s separation of powers between the executive and judicial branches. The panel has scheduled private hearings to take place in Washington, D.C., in February.

But for the first time in years, the Lago Agrio plaintiffs are beginning to talk with some swagger about prevailing against an embattled Chevron. They’re asserting their own fraud claims against Chevron before the Second Circuit and the BIT arbitration panel, and their lawyers at Patton Boggs and Smyser Kaplan & Veselka can point to a $18 million fee legal award the Ecuadorean appeals court imposed on Chevron for vexatious litigation tactics.

This case has already achieved epic status, but there’s still a long way to go. And the ultimate result seems harder than ever to predict.

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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.

The Golan backstory is fascinating. As the Court’s review of the history of copyright law explains, the United States was once a notorious copyright violator. Until the 1890s, this country offered no copyrights to foreign authors, so publishers regularly put out U.S. editions of their work without paying for the rights. According to the Golan opinion, the senator who championed an 1891 law to extend copyright protection to overseas authors said the U.S. was “the Barbary coast of literature” and its people “the buccaneers of books.”

More than a hundred years after the international Berne Convention for the Protection of Literary and Artistic Works took effect in 1886, the United States finally agreed to join. That meant foreign authors would get the same protection as U.S. rightholders in this country, and that U.S. authors’ rights would receive reciprocal recognition overseas. But Congress didn’t initially extend Berne rights retroactively, so music, films, and literature that had already entered the public domain in the United States remained public, even if it was still copyrighted abroad.

Some countries in the Berne convention objected to that policy — and threatened to restrict U.S. copyrights on their turf in retaliation. In response to calls from U.S. copyright holders, Congress reversed course and passed a new law in 1994 that effectively took a vast number of recordings, films, and books out of the public domain. (The list includes Sergei Prokofiev’s Classical Symphony and Peter and the Wolf, Dmitri Shostakovich’s Symphony 14, and Igor Stravinsky’s Petrushka.)

A group of orchestra conductors, film archivists, movie distributors, and educators sued to overturn the 1994 law. As their case made two trips through the trial court and U.S. Court of Appeals for the Tenth Circuit, their chances dimmed: The Supreme Court, in 2003′s Eldred v. Ashcroft, upheld Congress’s Constitutional right to extend the length of copyright protection. But the Golan plaintiffs claimed that even after Eldred , the Constitution’s Copyright Clause did not give Congress the power to take works out of the public domain, and even if it did, the First Amendment’s protection of free speech trumps any law that extends retroactive protection to works that are already public. (Here’s the Supreme Court brief filed by the Center for Internet and Society and its co-counsel; the voluminous amici briefing on both sides is here.)

In an opinion written by Justice Ruth Bader Ginsburg, a majority of the Court disagreed. “Nothing in the historical record, subsequent congressional practice, or this Court’s jurisprudence warrants exceptional First Amendment solicitude for copyrighted works that were once in the public domain,” the opinion said. “[The 1994 law] simply placed foreign works in the position they would have occupied if the current copyright regime had been in effect when those works were created and first published.”

Falzone of the Center for Internet and Society told me Thursday that the Court’s ruling “is a continuation of the trend in Eldred, in which the Court shows a great deal of deference to Congress’s decisions about the scope of copyright and IP laws.” I asked if that’s bad news for opponents of the proposed anti-piracy legislation. Falzone’s answer: “One of the lessons of Golan is, ‘Don’t wait.’ You have to stop the legislation before it gets passed. You have to stop it in its tracks before it gets to the courts.”

And as disappointing as the Golan ruling was, Falzone said he was encouraged by the popular uprising against SOPA and PIPA. In the wake of Wednesday’s blackout, he said, legislative support for the bills is waning.

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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.

There’s no mystery why Citi favors such settlement language. Even though the FINRA consent bars the bank from implying in any way that FINRA’s allegations are unfounded, it also expressly states that “nothing in this provision affects [Citi's] right to take legal or factual positions in litigation or other proceedings in which FINRA is not a party.” That means that if Citi is accused of disclosure lapses by shareholders — or even by the SEC — it’s not hamstrung by the agreement with FINRA, however much it appears to concede in the consent letter.

Nor is FINRA’s reflexive acceptance of “without admitting or denying” boilerplate terribly surprising. As I’ve reported, that’s the standard language of enforcement agreements between corporate defendants and federal regulators, whether the Justice Department, the Commodity Futures Trading Commission, or the Federal Trade Commission.

Rakoff’s rejection of Citi’s proposed $285 million settlement with the Securities and Exchange Commission has certainly put a spotlight on such settlement language. The SEC, you’ll recall, recently conceded the silliness of its boilerplate in settlements involving defendants who have already admitted to or been convicted of related criminal charges. So it’s fair to ask why FINRA had no fear of including “without admitting or denying” language in the Citi consent.

The answer is that FINRA is an industry regulatory body, not a government agency whose settlements must be reviewed and approved by a federal judge. FINRA’s enforcement department must satisfy only itself of the fairness of a consent deal. In other words, no judge can call out FINRA or the bank for reaching a settlement that obscures the facts and violates the public interest.

FINRA said in a statement that Citi “failed to make required conflict of interest disclosures which prevented investors from being aware of potential biases in its research recommendations,” even though the statement went on to note that Citi “neither admitted nor denied the charges.” (Go figure.) The agency had similar language in an August 2010 press release announcing a similar settlement with Morgan Stanley, which agreed to pay a $800,000 fine for disclosure failures.

Citi counsel Romano of Morgan Lewis referred my call to a Citi spokesperson, who sent an email statement: “We are pleased to have settled this matter with FINRA. We take our disclosure systems very seriously and began adopting enhancements to our procedures prior to the inquiry.”

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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.

There are few precedents for this situation. The most directly analogous case dates back to 1995, when another maverick judge, U.S. District Court Judge Stanley Sporkin of Washington, D.C., federal court, rejected an agreement between two equally high-profile parties, Microsoft Corp and the Justice Department. The two sides had inked a consent decree over Microsoft’s anticompetitive software practices, but Sporkin ruled that the agreement was not in the public interest (sound familiar?) and that it did not sufficiently meet antitrust standards. (This was the consent decree the Justice Department later accused Microsoft of violating, sparking the epic antitrust trial of the late 1990s.) Microsoft and the DOJ appealed, and the D.C. Circuit reversed Sporkin, saying he had exceeded his judicial authority. The appeals court also remanded the case to a new judge because, in its view, Sporkin appeared to be biased against the parties. In the appellate proceedings, Sporkin didn’t speak or submit any supplemental briefing.

“Nobody represented me,” said Sporkin, now practicing at Stanley Sporkin, Esq. “It’s a tough issue, where nobody is supporting the judge.” (Sporkin noted that despite the stinging reversal from the appeals court, he felt vindicated nearly ten years later when Congress amended the relevant antitrust law to clarify the role judges have in reviewing similar agreements.)

So will Rakoff get a voice that Sporkin did not?

That may depend on whether the Second Circuit takes the Citi case as a straight appeal or as a writ of mandamus, which is essentially a suit against the judge and a direct challenge to his integrity. (If the Second Circuit does not take the case as an interlocutory appeal, the SEC has already made it clear that it will seek mandamus review.)

There are four possible scenarios:

1) The Second Circuit could do nothing, letting the record that Rakoff created at the district-court level speak for his position at the appellate level. After all, Rakoff hardly minced words in his 15-page order rejecting the settlement; any circuit judge could dissect his language and get a pretty good idea of his argument. Moreover, after penning his initial ruling, Rakoff continued to take the parties to task, saying they were potentially “misleading” the court. “Certainly, Rakoff made it clear he was foreshadowing the appeals argument,” said Hillary Sale, a securities law professor at Washington University in St. Louis.

2) The Second Circuit could put out a call for amicus briefs supporting Rakoff’s view. The problem with that, said Sale, is that few groups have stepped in to support Rakoff’s position. (So far just one amicus group, the Business Roundtable, has asked to enter the fray, and it is supporting the appealing parties.) Defendants, government agencies, and plaintiffs’ lawyers all generally support the practice of settling cases without admitting wrongdoing, Sale noted, and no academics have publicly come forward to say they agree with Rakoff’s position. A public interest group, perhaps? “Let’s say Occupy Wall Street — whoever they are,” said Sale. If no one answered a call for amici, the appeals judges could simply rely on their law clerks to brief Rakoff’s argument, according to Sale.

3) The appeals court could appoint a lawyer, also in an amicus position, to represent Rakoff’s view. This practice occurs occasionally at the U.S. Supreme Court, usually when the Court wants to review a case but one party has abandoned a position expressed in the lower courts. The Justices typically appoint a former Supreme Court clerk to present an argument to the high court (pro bono, of course). A recent Stanford Law Review article noted that such arguments have been presented to the Court 43 times since 1954.

“It’s a weird job,” said Ernest Young, a Duke University law professor and specialist in federal procedure. “On the one hand, you’ve been appointed to argue this cool case. On the other hand, you’ve been appointed to argue it because no rational lawyer has taken that position.”

4) Rakoff himself could provide briefing to the Second Circuit or seek out a lawyer to speak on his behalf. This is where things get trickier. The federal rules of appellate procedure are clear that when a writ of mandamus is involved, the court of appeals can invite the judge to address the writ. When the Republic of Germany brought a mandamus action against Sporkin over a Holocaust-era dispute, Sporkin hired Harvey Pitt — then of Fried, Frank, Harris, Shriver & Jacobson, later the chairman of the SEC — to represent him. In another mandamus action Sporkin hired noted Washington lawyer Lloyd Cutler of the firm now known as Wilmer Cutler Pickering Hale and Dorr. In a strict appeal situation, appellate procedure does not contemplate a request to the district court judge for his or her submission — but nor does it preclude it, says Paul Cassell, a professor at University of Utah’s SJ Quinney College of Law and former federal judge.

Still, Cassell said, most judges would likely prefer to remain silent and let their decision speak for itself.

“I think judges get a bit queasy when they are asked to assume an adversarial role,” said Cassell. “Judges are in the business of deciding cases, not advocating positions.”

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