Opinion

Alison Frankel

Must read: Deal Prof’s study of competition for M&A litigation

Alison Frankel
Jan 17, 2012 22:21 UTC

I usually bail out of academic studies on litigation pretty quickly; if the data is stale or the papers don’t seem to account for real-world tactics by plaintiffs’ and defense lawyers, I don’t bother to keep reading. That’s why a just-released analysis by Matthew Cain, a finance professor at Notre Dame, and Steven Davidoff of Ohio State’s Moritz College of Law, is such a rarity. The paper, titled A Great Game: The Dynamics of State Competition and Litigation, features up-to-the-minute commentary and a deep understanding of why lawyers do what they do.

It’s probably not a coincidence that Davidoff moonlights as Dealbook’s Deal Professor, where he tracks day-to-day developments in shareholder litigation. A Great Game opens with a look at the $300 million fee award Chancellor Leo Strine Jr. of Delaware Chancery Court bestowed on plaintiffs’ lawyers in the Southern Copper case in December, and prominently mentions Strine’s already-legendary comments at the November 2011 Columbia Law School conference on Chancery Court.

More importantly, Davidoff and Cain looked at the litigation spawned by 955 public deals, completed between 2004 and 2010 and valued at more than $100 million. From that hand-curated sample, they examined Securities and Exchange Commission filings, court filings, and other public documents to find out where cases were filed, whether they were dismissed or settled, what kind of benefits shareholders achieved in settlements, and what plaintiffs’ lawyers were awarded in fees. They assembled the data into a series of charts and tables that show some significant trends in M&A shareholder litigation.

Their bottom line: “Entrepreneurial plaintiffs’ attorneys constantly recalibrate the optimal jurisdiction in which to bring litigation.” M&A shareholder litigation has become a given in major deals, according to the paper. (Only 38.7 percent of transactions from 2005 were challenged in shareholder suits; 84.2 percent of 2010 deals generated litigation.) Plaintiffs’ lawyers can typically choose to file in the target’s state of incorporation or its headquarters state. The paper documents the increasing likelihood that shareholder suits will be filed in multiple jurisdictions — not very surprising to anyone who follows M&A litigation — but it also shows that plaintiffs’ lawyers seem to respond to the results they get in various jurisdictions. State courts that have lower dismissal rates and higher fee awards appear to attract cases. “States thus have a choice,” Davidoff and Cain write. “They must either compete to attract litigation, or cases will migrate to jurisdictions which are more willing to compete to attract litigation.”

The paper posits two levers that state courts can manipulate to attract plaintiffs’ lawyers: dismissal rates and fee awards. Strine and other Delaware judges have implied that the cases they want are those that result in significant benefits to shareholders, rather than those that end in “disclosure-only” settlements that merely beef up proxy statements. Strine promised plaintiffs’ lawyers at the November conference that if they bring good cases, such as Southern Copper or Del Monte, they’ll be handsomely rewarded. Cain and Davidoff demonstrate, however, that Delaware Chancery Court has become less likely to dismiss cases as venue competition has increased. So, despite the court’s protestations, “Delaware thus appears to be catering to entrepreneurial plaintiffs’ attorneys who prefer to diversify and obtain smaller awards in many cases rather than large awards in a smaller number of lawsuits.”

Inside the shadowy market for Madoff claims

Alison Frankel
Jan 14, 2012 00:19 UTC

One of the most intriguing offshoots of the mess Bernard Madoff created is the underground market for claims against the estate of his bankrupt securities firm. Last June, when the Wall Street Journal ran a revelatory story on big banks’ trading in Madoff claims, suits by Madoff trustee Irving Picard of Baker Hostetler seemed so promising that claims were trading at 75 cents on the dollar. But according to fascinating new litigation between Deutsche Bank and two Madoff feeder funds, the value of claims has been dropping ever since, and was down to 60 cents on the dollar last month. The billion-dollar declaratory judgment complaint by Kingate Global and Kingate Euro against Deutsche Bank doesn’t offer an explanation for the declining value of Madoff claims. But it’s not much of a leap of inference to guess that U.S. District Judges Jed Rakoff and Colleen McMahon of Manhattan federal district court have more than a little to do with it.

Some background: The British Virgin Islands-based Kingate funds channeled billions of dollars to Madoff before his Ponzi scheme was exposed in December 2008. When Madoff’s securities business collapsed, Kingate investors were out $3.5 billion, according to the funds’ complaint against Deutsche Bank. The funds asserted that they were net losers in Madoff’s scheme, meaning that their losses exceeded their withdrawals from Madoff accounts. They claimed more than $1.6 billion against the Madoff estate.

Picard had rather a different view of the Kingate funds, which he said ignored warning signs of Madoff’s fraud. He sued Kingate Global and Kingate Euro to claw back $1 billion in withdrawals the funds made in the run-up to Madoff’s collapse, as well as allegedly excessive compensation the funds paid top executives.

No free-speech protection for rating agencies… again: CA judge

Alison Frankel
Jan 13, 2012 15:34 UTC

The rating agencies S&P and Moody’s have struck out in their second attempt to nix a billion-dollar negligence suit by the California Public Employees’ Retirement System on free-speech grounds.

On Wednesday, San Francisco Superior Court Judge Richard Kramer denied the rating agencies’ motion to strike CalPERS’s suit. In a two-part analysis under California’s anti-SLAPP law, which is intended to bar unwarranted defamation suits, Kramer agreed with S&P and Moody’s that the ratings they conferred on private-placement mortgage-backed securities were “acts that arise from their right of free speech under the United States or California Constitution in connection with a public issue.” But the judge went on to conclude that CalPERS and its lawyers at Berman DeValerio had established a prima facie likelihood that the pension fund would succeed on its negligence claim, so the anti-SLAPP law doesn’t apply.

The ruling is very good news for CalPERS, which previously fended off a rating agency effort to toss its case on First Amendment grounds. Like U.S. District Judge Shira Scheindlin of Manhattan federal court in Abu Dhabi Commercial Bank’s case against S&P and Moody’s, Kramer ruled in 2010 that the agencies’ First Amendment right to public expression does not protect them from liability for ratings conferred on special investment vehicles, or SIVs, which are not publicly circulated but shown only to a limited number of investors. After the California state judge denied the rating agencies’ motion to dismiss in 2010 — and the intermediate state appellate court declined to review the ruling — the agencies’ lawyers moved to strike the CalPERS suit under the anti-SLAPP law. Essentially, the motion gave them a second chance to argue that free-speech rights shield them from liability for their SIV ratings.

Google mandamus on Lindholm email: key test of client privilege

Alison Frankel
Jan 12, 2012 17:19 UTC

Remember the draft email from Google engineer Tim Lindholm that’s become the most hotly-litigated issue in Oracle’s Java software infringement case? In the now-notorious message, Lindholm informed the Google VP in charge of the Android operating system that he’d considered various technical alternatives to Java and concluded that “they all suck.” (He recommended taking out a license on Java software, which Google nevertheless opted not to do.) Google’s lawyers at Keker & Van Nest have fought like hell to keep the damning Lindholm email out of evidence, but U.S. District Judge William Alsup of San Francisco federal court has nevertheless ruled three times that the draft — whose recipients included a Google in-house lawyer — is not privileged and should stay in the public record. In November, Google took the drastic step of filing a petition for a writ of mandamus at the U.S. Court of Appeals for the Federal Circuit to reverse Alsup’s rulings.

You won’t find either side’s briefs in the scant public docket at the appeals court. But I’ve gotten hold of the mandamus petition and Oracle’s response to it. The documents suggest that the already infamous Lindholm email could end up generating important Federal Circuit precedent on the bounds of attorney-client privilege.

Google’s central argument is that Alsup and San Francisco federal magistrate Donna Ryu didn’t pay enough heed to the U.S. Supreme Court’s 1981 opinion in Upjohn v. United States, which held that privilege applies to communications about legal strategy between a corporation’s in-house lawyers and its employees. The Lindholm draft email was generated in anticipation of Oracle’s infringement suit, Google asserted, and its recipients included a Google lawyer. Google’s mandamus petition said that only by “adopting and expanding upon” a D.C. Circuit opinion called In re Sealed Case, which requires a “clear showing” that communications involve legal questions, could Alsup conclude that the email isn’t protected.

Refco redux: Weil witnesses will be key if Collins retried

Alison Frankel
Jan 11, 2012 16:34 UTC

The U.S. Court of Appeals for the Second Circuit overturned the fraud conviction of former Mayer Brown partner Joseph Collins Monday because the Manhattan federal judge who oversaw the end of Collins’s 2009 trial, U.S. District Judge Robert Patterson, didn’t call in defense lawyers when he advised a dissident juror to resume deliberations. The Second Circuit’s 23-page opinion makes for pretty dramatic reading; the juror came to see Patterson with an account of being harassed and threatened for disagreeing with fellow jurors in the course of four days of deliberations. The jury foreman also sent notes to the judge pleading for help in defusing tensions in the jury room. Rarely are we privy to such a vivid, well-documented account of jury-room dynamics.

But if Collins — who was sentenced to a seven-year prison term but has been out on bail pending appeal — is retried, we should get to see an equally vivid fight over whether he engaged in criminal conduct when he decided not to disclose a side agreement between his client, Refco, and the Austrian bank known as Bawag to T.H. Lee, the private equity fund that led a 2004 leveraged buyout of Refco. As Patterson has said, “The evidence which led principally to [Collins's] conviction was his admitted, intentional determination to not disclose the existence of the [side deal].”

That dispute will once again pit Collins against two Weil, Gotshal & Manges partners, who represented T.H. Lee in the LBO and testified at Collins’s first trial that the so-called “upstream” Proceeds Participate Agreement had been hidden from them. This time, however, Collins’s lawyers from Cooley will have some new evidence, uncovered after the first trial, to counter key elements of the Weil testimony.

Employee class actions okay, Concepcion doesn’t apply: NLRB

Alison Frankel
Jan 10, 2012 15:37 UTC

The National Labor Relations Board stood up staunchly for the rights of employees Friday. In an 18-page ruling in a case called D.R. Horton, Inc. and Michael Cuda, the NLRB chairman and two members of the board held that a company may not cut off employees’ rights to collective action through private arbitration agreements. The ruling does not say employees are always entitled to litigate claims via class actions, but concludes that “employers may not compel employees to waive their [National Labor Relations Act] right to collectively pursue litigation of employment claims in all forums, arbitral and judicial.”

Early reports on the Horton decision have called it a repudiation of the U.S. Supreme Court’s June 2011 decision in AT&T Mobility v. Concepcion, which isn’t quite right. Concepcion upheld AT&T’s right to compel consumers to submit to arbitration even though a California state law seemed to permit them to bring a consumer class action. Shrewd employment lawyers subsequently pounced upon Concepcion (in combination, of course, with Wal-Mart v. Dukes) to make headway in employment class actions against their clients; according to a just-released study on employment class-action litigation by Seyfarth Shaw, Concepcion had already been cited in 215 judicial rulings by the end of 2011. But according to Cliff Palefsky of McGuinn, Hillsman & Palefsky, who advocated for employees’ rights in the Horton case, the NLRB correctly drew a distinction between the issues in Concepcion and the real issue confronting employment litigators: an apparent conflict between labor laws and the Federal Arbitration Act, which empowers corporations to enforce private employment-related arbitration agreements.

In D.R. Horton, the NLRB concluded that employees’ federal rights under the National Labor Relations Act and its predecessor, the Norris LaGuardia Act, include the absolute right to collective action — either through a consolidated arbitration or a class action. It’s important to remember that in the D.R. Horton arbitration agreement at the heart of the case, Horton employees had to agree to adjudicate claims through binding, individualized arbitration and to waive any right to bring class action claims. The board balanced Horton’s rights under the Arbitration Act against its employees’ rights under the NLRA, and found that public policy and accommodation analysis favor employees.

SEC settlement-language change is (at best) mere cosmetics

Alison Frankel
Jan 9, 2012 15:28 UTC

Late Friday the Securities and Exchange Commission confirmed in a statement what the New York Times first reported Friday morning: it has changed its policy on the boilerplate “neither admit nor deny” language in most SEC settlement agreements. But don’t get too excited. The change will affect only cases in which the defendant has admitted guilt or been convicted in a related criminal action. In settlements with those criminal defendants, the SEC will delete “inconsistent” concessions and instead “recite the fact and nature of the criminal conviction or criminal [admission] in the settlement documents.”

In other words, defendants whose guilt has already been established under the higher standard of criminal law can no longer evade responsibility for civil charges. Which leads, of course, to the question of why it took the SEC 40 years to change such a ridiculous policy.

In the weeks since U.S. Senior District Judge Jed Rakoff of Manhattan federal court rejected the agency’s proposed $285 million settlement with Citigroup for misleading investors about a synthetic CDO, the SEC has argued long and loud that the boilerplate Rakoff scorned is intrinsic to its ability to reach settlements with defendants worried about liability in follow-on civil suits by private plaintiffs lawyers. I get that. And as I’ve reported, just about every other federal agency with enforcement power has a similar practice of permitting defendants to settle without conceding they’ve done anything wrong. I have my doubts that deleting pro forma “neither admit nor deny” language from settlement agreements would result in a dramatic change in the value of follow-on private settlements, but perhaps I, like most federal judges, have become inured to boilerplate.

Louboutin red-sole trademark case: color war at the 2nd Circuit

Alison Frankel
Jan 6, 2012 15:12 UTC

When the U.S. Court of Appeals for the 2nd Circuit hears oral arguments later this month in shoe designer Christian Louboutin’s appeal to protect his trademark on red lacquered soles, the court will be presented with two starkly different views of what purpose color serves in fashion design.

Louboutin, who is known around the world for the flashy Chinese red on the bottom of his posh high heels, will argue that the colored soles serve only to identify the Louboutin brand. Louboutin’s red soles, according to the designer’s lawyers at McCarter & English, are purely brand ID, just like Owens-Corning’s pink fiberglass or Tiffany’s robin’s-egg blue packaging. (Tiffany filed an amicus brief endorsing Louboutin’s interpretation of color and trademarks.)

Yves Saint Laurent has countered that Louboutin, by his own admission, had an aesthetic purpose for lacquering the soles of his shoes red. So, according to YSL’s counsel at Debevoise & Plimpton, Louboutin is not entitled to a trademark under the U.S. Supreme Court’s 1995 opinion in Qualitex v. JacobsonProducts, which holds that a color can be trademarked only when it “can act as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function.” When color serves an aesthetic function (as YSL contends it does in Louboutin’s shoes), it cannot be trademarked.

No joy for MBS investors in NY judge’s bond insurer rulings

Alison Frankel
Jan 4, 2012 22:35 UTC

Tuesday’s parallel rulings by Manhattan State Supreme Justice Eileen Bransten in MBIA and Syncora suits against Countrywide were a big win for the bond insurers. The judge concluded that MBIA and Syncora need only show that Countrywide materially misled them at the time they agreed to write insurance on Countrywide mortgage-backed notes, not that the alleged misrepresentations led directly to MBS defaults and subsequent insurance payouts. Bransten is considered a leading judge on MBS issues, so her grant of summary judgment on the insurance fraud and contract issues should be a boon to all of the monolines engaged in do-or-die litigation with MBS issuers.

But for MBS investors hoping Bransten would set a low bar for claims that Countrywide breached mortgage-backed securitization agreements, the rulings have to be considered a disappointment. Both Syncora’s lawyers at Debevoise & Plimpton and MBIA’s counsel at Quinn Emanuel Urquhart & Sullivan had moved for summary judgment on a baseline question: could they demand that Countrywide repurchase any underlying mortgage loan that materially breached the MBS issuer’s representations and warranties in securitization agreements?

If Bransten had agreed with the Syncora and MBIA interpretations of the agreements’ put-back clauses, the bond insurers would have had to show only that an underlying loan was deficient, not that the alleged deficiency contributed to the mortgage’s default — or, for that matter, that the underlying loan even was in default. The insurers wanted the judge to rule that as a matter of contract, Countrywide was required to repurchase every flawed mortgage in underlying pools.

NY judge gives bond insurers many routes to MBS recovery v. BofA

Alison Frankel
Jan 4, 2012 15:24 UTC

There’s a cautionary note to MBIA deep in Manhattan State Supreme Court Justice Eileen Bransten‘s long-awaited, 27-page loss-causation decision in MBIA’s mortgage-backed securities case against Countrywide. The bond insurer, Bransten warned, must prove that it was damaged as a “direct result” of Countrywide’s allegedly material misrepresentations about the MBS certificates MBIA agreed to insure. “As has been aptly pointed out by Countrywide, this will not be an easy task,” the judge wrote.

But unless I am seriously misreading Bransten’s ruling (and her companion decision in Syncora’s case) it’s going to be a lot easier for the bond insurers to recover against Countrywide as a result of the judge’s reasoning. Yes, MBIA and Syncora have to prove they were duped into writing insurance policies on Countrywide mortage-backed securities. The monolines have never asserted that they don’t have to show Countrywide made material misrepresentations at the time they agreed to issue insurance. They believe they’ve got plenty of evidence — from the MBS pooling and servicing agreements, from the loan tapes they were permitted to see, and from the shadow credit ratings conferred on the MBS notes — that Countrywide misled insurers about the quality of the mortgages in the underlying loan pools.

Instead, the key question before Bransten was whether the insurers would also have to show that Countrywide’s alleged misrepresentations were the direct cause of the MBS failures for which insurers had to pay out policy claims. And on this issue, the judge sided squarely with the monolines. “No basis in law exists to mandate that MBIA establish a direct causal link,” she concluded.

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