Opinion

Alison Frankel

Former SEC GC Becker gives $556k gift to Madoff investors

Alison Frankel
Feb 29, 2012 18:24 UTC

There’s a very good chance that former Securities and Exchange Commission general counsel David Becker owes absolutely nothing to the folks who lost money in Bernard Madoff’s Ponzi scheme. Nevertheless, on Monday, Becker and his two brothers agreed to turn over every penny of the proceeds they received from their mother’s long-ago Madoff investment account, a total of $556,017. Becker, a partner at Cleary Gottlieb Steen & Hamilton, didn’t return my call seeking comment. But he is doubtless hoping that the $556,017 settlement with Madoff bankruptcy trustee Irving Picard of Baker & Hostetler puts an end to the ugliest chapter in his career.

For a brief while last year, you’ll recall, Becker was the favorite whipping boy of Madoff victims and their congressional champions. Becker and his two brothers were what’s known as net winners in the Madoff pyramid. After their mother’s death in 2004 they transferred the approximately $2 million in her Madoff investment account to a Smith Barney probate account. By September 2006, the will was probated and the account was liquidated. But in December 2010, Picard sued Becker and his brothers, demanding the return of $1.5 million in allegedly fraudulent profits from their mother’s estate.

At the time, Becker was the SEC’s general counsel. And though he informed the agency’s ethics office of his inheritance (and SEC Chairman Mary Schapiro was aware of Becker’s Madoff proceeds), the GC was not asked to step out of SEC deliberations — and did not recuse himself from the debate — on the appropriate method for compensating investors. When word got out of Becker’s Madoff money, Schapiro took a beating in Congress.

Becker faced even more potentially serious consequences. An exhaustive September 2011 report by then-SEC Inspector General David Kotz concluded with the finding that Becker’s actions merited a referral to the Justice Department’s Office of Public Integrity for a criminal investigation. Becker, who had resigned from the SEC in February 2011 to return to his partnership at Cleary, defended himself before a congressional committee buzzing about Kotz’s allegations; in November, the Justice Department told Becker’s counsel, William Baker of Latham & Watkins, that it was not opening a criminal investigation of the former SEC GC.

Meanwhile, U.S. Senior District Judge Jed Rakoff issued a ruling in Picard’s case against the owners of the New York Mets that could have wiped out any Picard claims against Becker and his brothers. Rakoff determined that Picard could not attempt to claw back allegedly fictitious profits dating back more than two years before Madoff’s firm collapsed. By any measurement, the Beckers’ ties to Madoff ended more than two years before December 2008, when the Madoff fraud was exposed. If Rakoff’s reasoning is upheld on appeal, Becker and his brothers would be off the hook entirely.

News Corp and the FCPA paradox

Alison Frankel
Feb 28, 2012 16:33 UTC

For the Justice Department’s Foreign Corrupt Practices prosecutors, last week was the best of times and the worst of times. A federal judge in Houston sentenced the former CEO of the Halliburton spin-off KBR Inc. to 30 months in prison for his role in a 10-year scheme to pay $182 million in bribes to Nigerian officials in order to secure $6 billion in military oil and gas contracts. Albert Stanley’s sentencing marked the end of one of the DOJ’s most successful FCPA prosecutions, in which KBR agreed to pay $579 million in criminal fines and disgorged profits — the second-highest fine in an FCPA case at the time the guilty plea and Securities and Exchange Commission settlement was announced in 2009. The KBR case is an FCPA paradigm, a classic demonstration of the law’s power to expose and punish corruption that would otherwise have stayed in the shadows.

The Stanley sentencing came a day after the end of the Justice Department’s biggest FCPA blunder, the so-called Africa sting charges against more than 20 defendants accused of agreeing to pay bribes to Gabon officials who supposedly controlled military contract awards. U.S. District Judge Richard Leon in Washington granted the DOJ’s motion to dismiss charges against all of the defendants who hadn’t pleaded guilty, after prosecutors failed to obtain any convictions in the first two Africa sting trials. Leon took the opportunity to castigate prosecutors for a “very, very aggressive conspiracy theory” that turned out to be unsupported by “the necessary evidence to sustain it.” I’ve written about the troubling backstory of the Africa sting prosecution, in which the government set up an operation center and deployed a highly compromised informant specifically to manufacture FCPA charges, with federal agents all the while texting one another about the attention they’d get when news of the case broke.

Leon is the second federal judge with harsh words for the government in an FCPA case. In December, U.S. District Judge Howard Matz in Los Angeles threw out the conviction of Lindsey Manufacturing and two Lindsey executives after concluding that the prosecution had “gone badly awry.” In the Lindsey case, according to Matz, agents wrongfully obtained a warrant and misled the grand jury, and prosecutors compounded the errors by failing to turn over evidence to defense lawyers.

PIMCO can’t move annual meeting to block Brigade board nominee

Alison Frankel
Feb 24, 2012 00:13 UTC

Remember a couple years back when Air Products, in its takeover assault on Airgas, attempted to force Airgas to move up its annual shareholder meeting? Air Products wanted to rush a vote on a slate of board nominees it supported en route to gaining control of Airgas’s staggered board. The hurried-up meeting seemed at first like a clever maneuver by the company and its lawyers at Cravath, Swaine & Moore: After some tediously hair-splitting testimony about whether “annual” means once in a calendar year or once every 12 months, then-Chancellor William Chandler of Delaware Chancery Court blessed the moved-up shareholder meeting date. But Chandler was subsequently overturned by the Delaware Supreme Court, which said the Airgas board members whose seats were at stake were entitled to serve out their full three-year terms.

The shareholder meeting shuffle was nonetheless apparently not forgotten as a defensive device. Last September, the hedge fund Brigade Capital informed PIMCO that it intended to nominate a Brigade partner to serve on the board of trustees of two PIMCO funds, Income Strategy and Income Strategy II. In previous years the PIMCO funds held annual shareholder meetings in December, and a November 2010 proxy statement said the 2011 meetings were likely to take place in December as well. But in October 2011, PIMCO abruptly announced that Income Strategy and Income Strategy II would hold their next shareholder meetings not in December 2011 but in July 2012.

Brigade and its lawyers at Weil, Gotshal & Manges smelled a rat. On Dec. 1, they filed a declaratory judgment action in Massachusetts superior court, asking for a ruling that PIMCO had violated the funds’ bylaws in pushing the annual meeting back seven months, leaving a gap of 19 months between shareholder meetings.

Why Rakoff dumped Picard’s $60 bln RICO case v. Unicredit

Alison Frankel
Feb 23, 2012 15:48 UTC

Over the last six months, U.S. Senior District Judge Jed Rakoff has made Irving Picard of Baker & Hostetler look more like Don Quixote than a white knight riding to the rescue of investors who lost billions in Bernard Madoff’s Ponzi scheme.

Rakoff has already squelched the Madoff trustee’s fraud claims against the banks that allegedly aided and abetted Madoff’s scheme, as well as cutting off Picard clawback claims that date back more than two years. On Tuesday, in Rakoff’s biggest-dollar ruling in the Madoff case, the judge said Picard does not have standing to pursue a $60 billion racketeering suit against UniCredit and two other foreign banks that allegedly participated in a scheme to funnel $9.1 billion to Madoff in exchange for kickbacks to a woman named Sonja Kohn. (Picard had claimed $20 billion in damages, which can be tripled under the Racketeer Influenced and Corrupt Organizations Act.)

Interestingly, Rakoff did not use the same analysis to dismiss the RICO claims as he did in tossing fraud claims against UniCredit and the other banks. In a quick dismissal of the fraud counts, the judge reiterated his July 2011 holding that Picard can’t stand in the shoes of Madoff investors to assert fraud against the financial institutions that allegedly abetted Madoff’s Ponzi scheme. He could have simply said the same is true in the trustee’s racketeering case (which is what I assumed he would do when I wrote about the fraud dismissal in July). Instead, Rakoff seemed to accept, for the purposes of considering the banks’ motion to dismiss, Picard’s argument that Sonja Kohn’s alleged racketeering scheme was, at least to some extent, distinct from Madoff’s scam.

IBM’s oddest-ever trade secrets victory

Alison Frankel
Feb 17, 2012 22:54 UTC

There’s a really important lesson in IBM’s summary judgment victory in a trade secrets case that could have exposed the company to more than $100 million in claims. IBM’s lawyers at Paul Hastings amassed all kinds of evidence to undermine the allegations of Bruce Bierman, who said the company stole his technology to create the Rapid Resume feature embedded in millions of IBM personal computers. But the case ended up turning on a weird little technicality about — of all things — what Bierman’s mother knew about IBM’s software before she died in 1998. The lesson? Even when you’ve got what you think are great facts, the quickest route to victory may be in relatively obscure law. It’s less psychically satisfying, but it gets the job done.

Here’s a highly abbreviated version of the backstory, courtesy of U.S. District Judge Phyllis Hamilton‘s 15-page summary judgment ruling. Back in the 1980s, according to Bierman, he created a data protection system he called Bookmark, which automatically saved the work of PC users in the event of a power failure, system shutdown, or hardware malfunction. Bierman founded a company, Intellisoft, to market and license the software. He and the programmer who actually wrote the code for Bookmark jointly applied for a patent; Intellisoft applied for a copyright on the code, listing the programmer as the sole author.

Bierman subsequently assigned all of Intellisoft’s rights and interests in Bookmark to himself. Over the next 10 years, according to him and his lawyers at Arias Ozzello & Gignac and Stolpman Krissman Elber & Silver, he engaged in licensing talks with IBM. Bierman said he entered into non-disclosure agreements with the software company and had no fewer than 65 conversations with IBM officials about Bookmark.

Tort reform by fiat in Philly

Alison Frankel
Feb 17, 2012 22:38 UTC

In a mere five pages issued late Wednesday, Administrative Judge John Herron of the Philadelphia Court of Common Pleas singlehandedly effected defense-friendly changes that it usually takes a state legislature to enact.

The judge, reacting to what he said were “concerns and criticisms of this court’s mass tort program,” found that filings by out-of-state plaintiffs in asbestos and pharmaceutical cases have become a serious problem. Since the mass tort court rolled out a welcome mat in 2009, Herron said, Philadelphia has been attracting filings from plaintiffs and lawyers with no connection to Pennsylvania; “an astonishing 47 percent” of the court’s asbestos filings in 2011, the judge said, were by out-of-state claimants.

Herron didn’t cite similar statistics for pharmaceutical products liability cases, but Bayer sure complained loudly about the out-of-state issue in an extraordinary filing at the Pennsylvania Supreme Court last November. Bayer’s lawyers at Eckert Seamans Cherin & Mellott called Philadelphia’s Court of Common Pleas “a mecca for lawsuits from across the country with little or no connection to Pennsylvania.” The petition asked the high court to overrule a decision that nine cases involving alleged injuries to out-of-state plaintiffs who took Bayer birth control drugs shouldn’t be dismissed on forum non conveniens grounds. The Supreme Court denied the petition last week, but Bayer’s cry for help led to Herron’s call for comments on the mass tort program last November.

Judge in SEC’s Bear Stearns case catches Rakoff fever

Alison Frankel
Feb 15, 2012 23:02 UTC

U.S. District Judge Frederic Block of Brooklyn federal court will probably, in the end, approve a $1 million settlement between the Securities and Exchange Commission and former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. He said as much in open court Monday, presiding over a settlement hearing rather than the civil trial scheduled to begin that day. But for everyone except Cioffi, Tannin, and their lawyers, the real story at Monday’s hearing was Block’s stream-of-consciousness musings on the appropriate role of a judge overseeing an SEC case. If there was any doubt that U.S. Senior District Judge Jed Rakoff has inspired soul-searching in the nation’s federal judiciary, the utterly compelling transcript of the hearing before Block should put it to rest. (My Reuters colleague Jessica Dye attended the hearing and sent me the transcript.)

Rakoff, as you’ll doubtless recall, last November rejected the SEC’s $285 million proposed settlement with Citigroup over an allegedly misleading mortgage-backed CDO. The Manhattan federal judge said he had to consider not only the interests of Citi and the SEC, but also the public interest in the settlement. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary,” Rakoff wrote.

Those are powerful words, and Rakoff’s Brooklyn colleague apparently heard them. “You allege [in the complaint] that [Cioffi and Tannin's] activity caused $1.8 billion of investors’ losses, and yet, when all is said and done, this case is being settled for — relatively speaking — chump change,” Block said to the SEC’s John Worland. “I think there’s a public interest in all of these things.”

Shareholders and robosigning: Is Wells Fargo ruling a portent?

Alison Frankel
Feb 14, 2012 23:05 UTC

The state and federal regulators who announced the $25 billion foreclosure settlement with five major banks last week aren’t the only folks complaining about robosigning. The exposure of that practice — in which bank representatives, in order to speed up foreclosures, signed thousands of mortgage-related affidavits without actually reading them — sparked the nationwide foreclosure investigations that led to the $25 billion settlement. The robosigning scandal also spawned shareholder derivative suits. Board members at Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase have all been accused of breaching their duty to shareholders by permitting robosigning and other flawed foreclosure practices to take place.

Last week U.S. District Judge Susan Illston of San Francisco federal court ruled that shareholders can proceed with their case against Wells Fargo board members. In a 13-page opinion, the judge found that the plaintiffs, represented by Robbins Geller Rudman & Dowd and Barrett Johnston, had adequately alleged the futility of demanding action from the Wells Fargo board because board members’ “substantial likelihood of liability for breach of fiduciary duty” presented a conflict of interest. Illston pointed to allegations that at the same time the bank was attempting to stymie a federal investigation of its foreclosure practices, board members signed a proxy statement advising shareholders to vote down a proposed internal investigation because it was already cooperating with the government. “If, as alleged, defendants did not disclose material information within the board’s control, defendants breached their duty of loyalty to the company,” Illston wrote.

The judge dismissed claims of gross negligence and abuse of control, but refused to toss the breach of duty allegations. (She also dismissed claims the board wasted corporate assets in granting executive bonuses but said plaintiffs’ lawyers could replead them.) Wells Fargo counsel Gilbert Serota of Arnold & Porter told me Tuesday that the bank believes Illston’s finding on the demand futility question is “erroneous,” and Wells Fargo is “considering the best way to remedy that.” The bank also disputes the allegations in the shareholders’ complaint. “When the real facts are disclosed,” Serota said, “the court is going to see that Wells Fargo properly cooperated with the government.”

Rest easy, MBS investors: You’re protected in mortgage settlement

Alison Frankel
Feb 14, 2012 00:39 UTC

Asking investors in mortgage-backed securities to trust the banks that issued them is like asking Charlie Brown to trust Lucy van Pelt. MBS noteholders are so convinced they’ve been duped by the folks that packaged and sold shoddy mortgage loans that it’s little wonder the banks’ $25 billion settlement with federal and state regulators has been greeted with a tsunami of skepticism. Sure, MBS investors understand that the settlement doesn’t preclude them or regulators from suing over deficient securitizations. But their fear, in the absence of the actual settlement documents, is that the loan modifications the deal calls for will reduce the revenue stream to MBS trusts.

It’s an understandable fear. The five banks that agreed to the settlement — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial — carry some troubled mortgage loans on their own books. Others were bundled into MBS trusts, in which the banks transfer ownership of the mortgages and remain as servicers. MBS noteholders are supposed to receive a stream of income from the principal and interest payments on the underlying mortgage loans. So if a bank agrees to reduce the unpaid principal a homeowner owes on a mortgage that’s been securitized, less money flows to the trust and into MBS investors’ hands.

Investors have complained that banks will modify securitized loans, shifting the $25 billion price tag to MBS noteholders. PIMCO’s Scott Simon told Bloomberg News that because the settlement gives banks credit for reducing principal in loans held by MBS trusts, investors like those in his bond fund “are going to pick up a lot of the load.” The American Association of Mortgage Investors called the settlement “flawed and opaque,” and asserted that the deal penalizes responsible investors. Time wondered if the settlement is “A Stealth Bank Bailout.”

Rakoff: DOJ may have engaged in a ‘shuffle’ in SCOTUS brief

Alison Frankel
Feb 13, 2012 15:04 UTC

The Solicitor General’s office of the Department of Justice is home to some of the smartest lawyers in the country. These are the people who represent the views of the United States in the most important public policy cases at the U.S. Supreme Court. They go on to head appellate practices at prestigious law firms — or to their own seats in the federal judiciary. Lawyers in the SG’s office are accustomed to deference.

Jed Rakoff, however, isn’t much for deference.

In a Feb. 7 ruling on a claim of attorney-client privilege in a Freedom of Information Act dispute, the Manhattan federal court senior judge conceded that when the Solicitor General’s office makes a representation to a court, “trustworthiness is presumed.” But Rakoff said that when he dug into the SG’s justification for an assertion in a 2009 case at the Supreme Court, he couldn’t find anything aside from some emails exchanged amongst lawyers in the office. “It seems the government’s lawyers were engaged in a bit of a shuffle,” the judge said.

He cited a Peter Finley Dunne aphorism — “Trust everybody but cut the cards” — but might just as well have quoted Ronald Reagan’s famous “Trust, but verify” (itself an adaptation of a Russian proverb favored by Vladimir Lenin). Because Rakoff couldn’t verify the SG’s assertion in the Supreme Court brief, except in emails over which the Justice Department was claiming privilege, he said privilege doesn’t shield parts of the emails.

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