Alison Frankel

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.

Instead, they chose to give back every penny they received from their mother’s Madoff investment. (The difference between Picard’s clawback claim and the $556,017 settlement is the fees and taxes the Beckers paid on their inheritance.)

A Picard spokesperson said the settlement “represents the recovery of an amount equal to 100 percent of the subsequent transfers received by the sons,” noting that to recover more than that, Picard would have had to reopen the probate proceeding, “a time-consuming, expensive and difficult undertaking under Massachusetts law.”

Becker’s lawyers at Latham & Watkins issued a statement pointing out that the Becker brothers are “returning 100 percent of the fictitious profits distributed to them,” which is entirely consistent with David Becker’s previous statements on his Madoff inheritance. “He always expected that he would return any fictitious profits that he unknowingly received,” the statement said. “Mr. Becker has done everything possible, both at the SEC and in his private affairs, to assist the victims of the Madoff fraud.”

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.

But don’t assume that the Lindsey and Africa sting debacles will curb the Justice Department’s enthusiasm for FCPA prosecution, particularly against corporations (as opposed to individuals). As Butler University law professor Mike Koehler told Brett Wolf of Reuters last week, the government still wields tremendous power against corporations accused of paying bribes — none of which, except for Lindsey, have gone all the way to trial to fight FCPA charges. That’s why the Chamber of Commerce and other business groups are agitating for amendments to the 1977 law, which doesn’t define exactly who is a “foreign official” or whether state-owned businesses qualify as “instrumentalities” of foreign governments. In a Feb. 21 letter to Assistant Attorney General Lanny Breuer and SEC Enforcement Director Robert Khuzami, the Chamber’s Institute for Legal Reform argued that “without a clear understanding of the parameters of ‘instrumentality’ and ‘foreign official,’ companies have no way of knowing whether the FCPA applies to a particular transaction or business relationship.” The letter asks the Justice Department to clarify its interpretation of the law. In fact, the DOJ has made its view of foreign officials and state-owned businesses perfectly clear in cases against Lindsey Manufacturing and Controlled Components Inc.: Prosecutors will interpret the statute language broadly if that’s what it takes to make a case.

FCPA litigation has been a notable success for the government in the six or so years since the Justice Department began aggressively prosecuting businesses under the theretofore obscure law. Attorney General Eric Holder felt compelled to respond last week to critics questioning the Justice Department’s failure to bring criminal charges against the executives responsible for the financial crisis. By contrast, no one, as far I can tell, has accused the government of going soft on foreign corruption cases. Indeed, the most-discussed criticism of FCPA prosecution posited exactly the opposite. In a May 2010 article called “The Bribery Racket,” Forbes asserted that line prosecutors at the Justice Department cranked up FCPA enforcement in order to assure themselves of subsequent posh jobs in the private sector, defending corporations against bribery allegations.

At the time I thought Forbes was putting too malign a spin on FCPA prosecution. The record in the Lindsey and Africa sting cases, though, is disquieting. Defense lawyers in those cases portrayed a Justice Department so determined to win headlines that it brought unwarranted charges. And judges in both cases agreed that the DOJ bent and twisted the law.

That brings me to the Justice Department investigation of possible FCPA violations at News Corp. Earlier this month, after British authorities arrested five senior staffers at London’s Sun newspaper for allegedly paying police and military defense officials for story tips, the Guardian‘s Ed Pilkington wrote a smart piece reporting that the new arrests strengthen the potential FCPA case against News Corp, which is based in the United States, since accusations of improper payments at the Sun make it harder for executives at the parent company to claim that phone and computer hacking at News of the World were an aberration they weren’t aware of. “The Department of Justice, working through the FBI on both sides of the Atlantic,” Pilkinton wrote, “is also likely to be exploring how much News Corporation executives in the UK were aware of a pattern of improper behavior and if so what, if anything, they did to stop it.” (A Reuters story that ran just before the arrests at the Sun made a similar point about the FCPA investigation centering on News Corp’s alleged “willful blindness.”)

News Corp is known to have hired an All-Star FCPA team, led by Mark Mendelsohn of Paul, Weiss, Rifkind, Wharton & Garrison, the former Justice Department prosecutor who dusted off the foreign corruption law and began bringing FCPA cases about 6 years ago. The corporation has reportedly been cooperating with investigators’ requests for information on alleged bribes paid by News Corp journalists.

As a journalist, I’m horrified that News Corp may have paid the police for tips. If I were a British taxpayer, I’d be irate that cops and Defense Ministry officials allegedly took the bribes. I’d be at the head of the line calling for a full investigation and harsh penalties for anyone who broke the law.

But as a U.S. taxpayer, I’d rather the Justice Department spent my money investigating, say, mortgage-backed securitization than whether British journalists bribed British police officials for tips on British news stories. In an age of limited resources, I’m not convinced that our government should be bending and twisting the FCPA to make a case against News Corp, however sexy and high-profile that case would be.

Remember, just about every FCPA case we’ve seen in the recent flurry of prosecutions has involved alleged bribes of officials in countries with inadequate anti-corruption enforcement systems. Nigeria wouldn’t have undertaken an investigation of KBR’s bribes. They could only have come to light through the U.S. government’s use of the Foreign Corrupt Practices Act. Britain, on the other hand, seems utterly willing and able to investigate and prosecute News Corp bribes.

There’s also a more fundamental question of whether bribes to police and defense officials for news tips is the sort of corruption the FCPA was intended to address. As Jim Ledbetter wrote in a great Reuters op-ed last summer, the statute is written to prohibit classic kickbacks, in which a company pays a bribe “to assist in obtaining or retaining business.” Even in the recent FCPA prosecution campaign, prosecutors have interpreted the statute to require a “business nexus” for the bribes: payments are to obtain a government contract, say, or to get around government customs requirements. “As offensive and explicitly illegal as paying police for information might be, it is a huge stretch to say that it is part of the business nexus of a multinational corporation,” Ledbetter wrote. “Of course, if Americans really want our laws to prohibit police bribes overseas, we can change the FCPA statute. But as a rule, you don’t want to see it stretched to cover behavior outside its intended scope.”

Ledbetter said he doubted that U.S. prosecutors could make an FCPA case against News Corp. I’m not so sure about that. The Sun arrests improve prosecutors’ chances; as the FCPA Professor blog has explained, if the alleged bribes to police and defense ministry officials were falsely reported in the corporation’s financial records, News Corp may have run afoul of the FCPA’s books and records and internal control provisions. Given the cost of defending a years-long investigation, as well as the risk of senior corporate officials facing criminal indictment, News Corp may well decide it’s better off reaching a deal with the Justice Department.

Just because you can prosecute, however, doesn’t mean you should. If the Justice Department has learned anything from the Africa sting and Lindsey embarrassments, it should be that the FCPA is to be used, not abused. There’s plenty of wrongdoing for U.S. investigators to uncover and prosecute instead of stretching the FCPA to go after News Corp.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.

“Absent immediate intervention by this court, PIMCO will deprive plaintiffs and all other shareholders of their fundamental right, enshrined in the controlling bylaws, to elect trustees at an annual meeting to be held ‘on at least an annual basis’ — and not on a ’19-month basis,’ as PIMCO now intends,” said the Brigade complaint (available here as part of a PIMCO filing with the Securities and Exchange Commission.)

PIMCO and Brigade, like Airgas and Air Products, engaged in considerable back-and-forth about the meaning of the word “annual.” Brigade contended the bylaws required PIMCO funds to hold meetings every calendar year; PIMCO said it was bound by the fiscal year, not the calendar year.

Massachusetts Superior Court Justice Peter Lauriat dispensed with both interpretations. In a summary judgment ruling sent to both sides earlier this week, the judge said annual, as it’s used in PIMCO’s bylaws, means approximately every 12 months.

“Sound corporate governance principles require that the funds enable their shareholders to approve or disapprove the funds’ directions at ‘regular meetings of the shareholders,’ which should be held not less than every twelve months,” Lauriat wrote. “Delaying the shareholder meeting deprives shareholders such as Brigade of that timely and essential voice.”

The judge granted summary judgment to Brigade and ordered PIMCO to schedule the shareholder meetings “as soon as practicable.”

Brigade counsel at Weil declined comment. A PIMCO lawyer from Ropes & Gray referred me to a PIMCO spokesperson, who didn’t return phone messages.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.

That was, however, Picard’s only success. Rakoff, who is the co-editor of a leading guide to RICO litigation, found that Picard’s RICO suit against the foreign banks failed under at least three defense theories. First, Rakoff said, Picard couldn’t show a link between the banks’ alleged participation in Kohn’s kickback scheme and any injury to Madoff investors. The trustee tried to rely on a 1992 ruling by the U.S. Supreme Court in Holmes v. SIPC, which acknowledged the difficulty of proving indirect injuries under RICO. But Rakoff said Picard was misreading Holmes. According to the judge, the Supreme Court’s ruling requires RICO plaintiffs to establish a direct connection to the defendant’s conduct.

The judge also rejected Picard’s extremely nuanced argument for why his RICO claims against UniCredit and the other banks are not barred by the Private Securities Litigation Reform Act. According to Rakoff, the 2nd Circuit Court of Appeals has held, in a case called MLSMK v. JPMorgan Chase, that under the PSLRA, securities claims cannot serve as predicate acts in a civil RICO suit. (A related 3rd Circuit ruling specifically said that the bar applies to RICO claims related to a Ponzi scheme.) Picard tried a tricky argument, asserting that because Madoff investors can’t bring a securities case against UniCredit and the other banks under Morrison v. National Australia Bank, the PSLRA bar shouldn’t apply to their RICO suit. Rakoff rejected Picard’s reasoning, noting that RICO has its own limits under Morrison, according to the 2nd Circuit’s holding last month in Cedeno v. Castillo.

“[Picard's argument] is too clever by half and would in many cases allow artful pleading to eviscerate either the territorial reach of the Securities Exchange Act or the purpose of the RICO Amendment to the PSLRA,” the judge wrote.

Finally, and most fundamentally, Rakoff said that Picard hadn’t alleged sufficient facts to proceed to discovery under the heightened pleading standards the U.S. Supreme Court established in Ashcroft v. Iqbal. In a fairly cursory consideration of the trustee’s complaint, Rakoff derided Picard’s “paltry and otherwise unexceptional” allegations, writing that the trustee casts his assertions in a “sinister” light only by “invoking the specter” of a RICO scheme.

UniCredit counsel Susan Saltzstein of Skadden, Arps, Slate, Meagher & Flom said the bank is pleased with Rakoff’s ruling. A spokesperson for Picard sent me an email statement: “The SIPA Trustee and his counsel remain confident in his RICO and common law claims against [UniCredit and related defendants]. The SIPA Trustee will appeal to the United States Court of Appeals for the Second Circuit.”

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.

During that time he ran into some financial difficulties. Intellisoft entered bankruptcy in 1988. Bierman eventually founded a successor company with the same rights to Bookmark. But in 1991 — pay attention here — he sold and transferred all rights to Bookmark to his mother, Sonia Bierman, for $80,000. In 1994 he bought back the assets for $1.

There were many additional twists and turns in the saga of Bierman’s personal finances and their intersection with Bookmark IP rights, but for the purposes of the IBM litigation, the next important development came in 2010, when Bierman allegedly learned of a Toshiba patent that apparently made use of his prior art. He asserted that when he investigated, he discovered that IBM had also patented technology to store user data and resume operations after an unexpected shutdown, and was including it on personal computers under the name Rapid Resume. Bierman alleged that the inventor listed on IBM’s patent application had been his contact at the company in Bookmark licensing talks. In September 2010 he filed a complaint in federal court in San Francisco that accused IBM of trade secret theft.

As the judge noted in her opinion, there were huge factual holes in Bierman’s story. He produced no evidence, for instance, of the talks he supposedly held with IBM — no confidentiality or non-disclosure agreements, which he said he had disposed of, nor any other evidence that he’d ever met with anyone at IBM aside from his own statements. Moreover, an IBM expert testified that Bierman’s purported copyright could not have been issued by the U.S. Copyright Office only two days after Intellisoft applied for it, which is what Bierman asserted. That expert testimony cast significant doubt on a 1987 document in which Bierman supposedly transferred the Bookmark copyright to himself. IBM called the document a fraud.

Its lawyers at Paul Hastings, led by Peter Stone, also questioned why Bierman didn’t list his purported IP rights in Bookmark when he declared personal bankruptcy in 1993 and 2005. It’s clear from Hamilton’s opinion that Bierman would have had quite a lot of explaining to do if the case had gone to trial.

That’s not going to happen (absent a successful appeal by Bierman), but not because of the lies IBM alleges Bierman told. Instead, IBM won the case because Bierman couldn’t prove that his dead mother didn’t know about its 1993 introduction of Rapid Resume software.

IBM argued that, putting aside the merits of his trade secrets claim, Bierman waited too long to sue. Its Rapid Resume feature was used in personal computers beginning in 1993, more than 15 years before Bierman filed a complaint. Bierman said he didn’t know about the technology until 2010. But at the time Rapid Resume was introduced, Sonia Bierman actually owned IP rights to the allegedly stolen technology. IBM asserted — and the judge agreed — that Bierman had to produce evidence that his mother didn’t know about Rapid Resume in order to get around the statute of limitation.

Bierman said his statement should suffice, since he was the source of all of his mother’s information about computers. Hamilton said that wasn’t enough. “Bierman’s statement about his mother’s interest or lack of interest in aspects of the computer world say nothing about what she actually knew about any accrued claims, or whether she did or did not act diligently during the time she owned the intellectual property,” the judge wrote.

As a result, she concluded, Bierman’s case is time-barred — and IBM won’t have to go to the trouble and expense of testing the rest of Bierman’s assertions.

Bierman counsel Thomas Stolpman of Stolpman Krissman said the judge failed to consider the 75-year life of copyrights. “Under this ruling, all you have to do is steal it and hide the theft until somebody dies and you’re home free,” he said. Stolpman said Bierman will appeal Hamilton’s ruling.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.

After hearing from 32 commenters and reviewing the court’s docket, Herron concluded in no uncertain terms that the mass tort docket has become clogged. Asbestos suits, Herron said, were the most backed up, but he said cases involving hormone replacement therapy drugs, the antidepressant Paxil, the pain reliever Vioxx, and other medications were also taking too long to resolve.

The judge ordered 15 reforms. Many are directed specifically at Philadelphia’s asbestos cases, but others will have an impact across the mass torts docket. And overall, they seem to be designed to make Philadelphia considerably less attractive a destination for plaintiffs lawyers.

Most significantly, punitive damages in all mass tort cases “shall be deferred.” There’s no explanation of exactly what “deferred” means, but I can’t think of a definition that’s good for claimants. That’s not all, though. Mass tort cases can’t be consolidated without the consent of defendants. Discovery has to be conducted in Philadelphia, “unless otherwise agreed by defense counsel or upon showing of exigent circumstances.” And those out-of-state plaintiffs lawyers are only allowed to try two cases a year, limiting their leverage in settlement talks.

Herron’s order also said that the mass tort judge who has presided over the court (and made the 2009 comments that were perceived as an invitation to out-of-state plaintiffs) will take senior status at the end of 2012. Another judge will immediately join her on the mass torts bench and will take over the entire docket at the beginning of 2013.

If you need proof of the implications of Herron’s order, look no farther than the American Tort Reform Foundation, which named Philadelphia its No. 1 judicial hellhole for 2010 and 2011. ATR’s Judicial Hellholes website applauded the new Philly rules as “sweeping” changes “that should go a long way in mitigating the complex litigation center’s troublingly plaintiff-friendly reputation.” I called two Philadelphia plaintiffs lawyers and leading asbestos lawyer Perry Weitz of Weitz & Luxenberg for an alternative view of Herron’s new rules but didn’t hear back.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.”

Block first called on both SEC and defense lawyers — Hughes Hubbard & Reed for Cioffi; Brune & Richard for Tannin — to explain why the settlement was finalized only on the verge of trial. (He was irritated that he’d cleared three weeks on his calendar.) More fundamentally, though, he asked how the two sides expected him to evaluate the fairness of the deal.

“We all know about my colleague, Judge Rakoff, and everything that happened in a case that apparently is more profound than this one, right?” he said. “But I just wonder at what the role of the court is when the court is being asked to sign off and give its consent to your arrangement. I mean, I guess no judge likes to feel that he or she is a rubber stamp. So what do you envision the role of the court is?”

In particular, Block questioned a proposed injunction barring the former Bear Stearns fund managers from the securities industry for a limited time. After Worland tried to justify the terms of the settlement, Block said, once again, “Am I just a rubber stamp here or is there some inquiry I ought to be making about these provisions? About the fairness of it? Or the reasonableness of it? I’m not so sure I necessarily agree with everything Judge Rakoff wrote, but what should be the judge’s role when the judge is being asked to consent to one of these types of things?”

Then, again citing the relatively small money penalty compared to the investor losses the SEC alleged, Block asked, “Should I write Judge Rakoff, you know, to reflect on whether these hundreds of thousands of dollars and these relatively small penalties adequate or not?” Despite assurances from the SEC and defense counsel (who reminded the judge that their clients had been acquitted in a criminal trial) that the settlement was fair and appropriate, Block asked both sides to submit letter briefs “in light of Judge Rakoff’s standards, which I may not totally agree with.”

I called defense lawyers at Brune & Richard and Hughes Hubbard but none were available to comment. An SEC spokesman declined to comment on Block’s Rakoff-related remarks. The agency, remember, has asked the 2nd U.S. Circuit Court of Appeals for leave to appeal Rakoff’s rejection of the Citi settlement; it has previously argued (to its own detriment before Rakoff) that it’s not the role of a judge overseeing an SEC settlement to consider the public interest.

Carlyn Kolker wrote a terrific piece for On the Case posing the question of who will argue Rakoff’s side of that question if and when the 2nd Circuit takes the SEC’s appeal. If the appeals court is looking for volunteers, Brooklyn is just a subway ride away.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.”

The big question for the other banks that signed the nationwide foreclosure settlement, though, is whether Illston’s robosigning ruling improves the prospects for shareholder derivative suits against them. JPMorgan Chase, for example, was just hit with a Manhattan State Supreme Court robosigning derivative complaint filed by Robbins Geller, one of the plaintiffs’ firms in the Wells Fargo case. Earlier this month, shareholders in a consolidated derivative class action against Bank of America in Manhattan federal court voluntarily dismissed their robosigning-based case, but said they planned to refile in Delaware Chancery Court. Two derivative suits against Citigroup alleging flawed foreclosure practices were consolidated in Manhattan federal court in December, but the docket indicates no activity since then.

But those banks, according to the plaintiffs’ allegations in the Wells suit, were quicker to renounce robosigning than Wells Fargo. JPMorgan Chase and Ally Financial were the first to halt foreclosures to investigate robosigning allegations, doing so in September 2010. Bank of America followed in October. Wells Fargo was still insisting at the time that its foreclosure practices were sound. According to the shareholder complaint, Wells continued to permit robosigning of foreclosure documents well into 2011, after it told shareholders it was cooperating with the government investigation.

Illston’s ruling rests on the alleged discrepancy between what Wells Fargo was telling its shareholders and what it was actually doing (according to the plaintiffs). Shareholders from the other banks may have a harder time persuading a judge of that discrepancy. Nevertheless, I’m sure that won’t stop them from trying.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.”

It’s not, based on what I’ve been told about the nitty gritty of the settlement terms. Most pooling and servicing contracts between MBS issuers and investors have explicit provisions prohibiting issuers from modifying loans without investors’ consent. Bondholders have assumed that banks would attempt to override those provisions. But I’ve been told that the $25 billion settlement agreement will include a specific provision that investors’ contractual rights under pooling and servicing agreements (PSAs) remain in place. And if banks attempt to breach those agreements to satisfy obligations under the deal with state and federal regulators, there’s no indemnity for them in the settlement.

There’s also a built-in disincentive to attempt to earn credit for modifying securitized loans, as opposed to bank-held mortgages: Banks only receive a partial credit for writing down principal on loans they service but don’t own. So if they write off $100,000 of unpaid principal on a mortgage in their own portfolio, they receive a $100,000 credit toward the billions they’ve pledged to modify; on a securitized loan they will get only a $40,000 or $45,000 credit.

Moreover, the settlement is expected to include provisions that restrict loan modifications to situations in which the write-down increases the so-called net present value of the mortgage to investors. If, for instance, a homeowner is on the verge of default in an area of the country where the housing market is depressed, a principal reduction that permits the homeowner to continue making mortgage payments and avoid foreclosure could be the best way to minimize investor losses. If, on the other hand, a loan modification would merely delay an inevitable foreclosure in a region where the house could be resold quickly, that’s a better alternative. My understanding is that the settlement will require banks to analyze the impact on net present value of securitized loans before they’re permitted to be modified. It may even require banks to obtain the consent of MBS investors before modifying a loan held in an MBS trust.

The settlement architects anticipated that the PSA contract protection and built-in disincentives make it more cost-effective for banks to find candidates for principal reduction among their own mortgage holdings, rather than in securitized pools. Other critics of the $25 billion settlement have complained that it will inspire homeowners to stop paying their mortgages. That may be so, but if homeowners take that risk, their chances of obtaining a loan modification should be a lot better if they hold a bank-owned mortgage.

There may still be wholesale modification of MBS-trust owned mortgages, but those would likely be through investor-negotiated settlements such as the proposed $8.5 billion Bank of America deal with Countrywide MBS investors. That deal, which has been challenged by some investors, calls for BofA to write down unpaid principal in underlying loans under terms that protect investors. (Write-downs, for instance, have to be net-present-value positive.) My understanding is that if JPMorgan, for instance, decides to negotiate a global MBS settlement with investors — not an entirely far-fetched idea, since the investor group that pushed BofA into a settlement has sent demand letters to JPMorgan MBS trustees as well — it can receive credit toward the $25 billion settlement from any loan modifications made through that deal. That’s all very hypothetical, however.

The easiest way to stop all the guesswork about the $25 billion settlement would be to publish the agreement. I understand that getting signoff from five banks, 49 state AGs, and a slate of federal agencies isn’t easy. But neither is correcting misimpressions created by the information-vacuum.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

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.

The dispute stems from a brief filed in a case called Nken v. Mukasey, which posed the question of whether aliens are entitled to a stay of deportation orders until all their appeals are exhausted. In a January 2009 brief, the Solicitor General’s office assured the Supreme Court that the United States has a “policy and practice” of helping deported aliens who are subsequently cleared return to this country and “the status they had at the time of removal.” The Justices relied (in part) on that assurance in holding that aliens aren’t entitled to a stay because they aren’t irreparably harmed by deportation. (The case name changed to Nken v. Holder because President Obama had taken office when the opinion was issued in April 2009.)

The National Immigration Project, the American Civil Liberties Union and some other public interest groups had doubts about the asserted “policy and practice,” for which the Solicitor General’s brief didn’t offer a specific citation. So they filed a FOIA request with the Justice Department, the State Department and the Department of Homeland Security. The Solicitor General’s office produced only a four-page email chain, which was almost completely redacted. The Justice Department asserted three theories of privilege over the emails: work product, attorney-client, and deliberative-process.

The plaintiffs sued for access to the email, arguing that only the Solicitor General communications could clarify the supposed policy or reveal that the Justice Department mistakenly cited a policy that doesn’t exist.

Rakoff agreed, after reviewing the emails and the materials other arms of the government produced in response to the FOIA request. None of those materials, he found, indicated that the United States has a policy and practice of helping wrongfully deported aliens return to this country. Nor did a memorandum of understanding the Justice Department cited to Rakoff. “The OSG made a new factual representation on appeal and cited nothing in the record to support it,” he wrote. “The government even now has come forward with nothing of consequence to support its representation beyond the facts set forth in the emails.” (And Rakoff didn’t seem to consider the email chain very good justification: “As reviewed by the court in camera, evidences an attempt to cobble together a factual basis for making the representations the OSG made to the Court in Nken,” Rakoff wrote.)

Since the SG communications amounted to a statement of policy, Rakoff said, it can’t be shielded from the public. He ordered the disclosure of all portions of the emails that “contain factual descriptions of the putative policy.”

Gregory Garre, the Latham & Watkins partner who was Solicitor General when the Nken brief was filed and appears as counsel of record on the document, declined comment. I also left a phone message with Deputy Solicitor General Edwin Kneedler, who argued the Nken case at the Supreme Court, and with the Justice Department’s Office of Public Affairs. None of them got back to me.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter