Alison Frankel

If the Securities and Exchange Commission were an ordinary investor, it would already be too late in trying to sue the banks that issued (allegedly) deficient mortgage-backed securities.

The SEC is not, of course, an ordinary investor. On Wednesday night, the Wall Street Journal broke the news that the SEC plans to send Wells notices, otherwise known as target letters, to several banks that issued mortgage-backed notes and certificates. The Journal said the agency is looking at whether the banks misled investors about the quality of mortgage loan pools underlying securities issued in 2007 and 2008.

But here’s the thing: The first federal-court MBS class action, against Countrywide, was filed in 2007. By 2008, bond insurers and private investors were busily suing MBS issuers in state and federal courts in New York, starting the clock on the three-year statute of limitations for suits under the federal Securities Act of 1933 and the two-year time limit for fraud cases under the Exchange Act of 1934. Private investors who entertained thoughts of bringing federal claims for mortgage-backed notes issued in 2007 and 2008 would be tossed out of court quicker than you can say “time-barred.”

The SEC, in other words, is running at least three years behind the private securities bar when it comes to MBS litigation. I’ve heard, in fact, that the agency has recently been working with private lawyers to hone its MBS investigation. That makes sense: The list of plaintiffs’ firms that have sunk thousands of hours and millions of dollars into their MBS cases includes Quinn Emanuel Urquhart & Sullivan; Bernstein Litowitz Berger & Grossmann; Kasowitz Benson Torres & Friedman; Patterson Belknap Webb & Tyler; Cohen Milstein Sellers & Toll; Robbins Geller Rudman & Dowd and others.

The mystery is why the SEC has taken so long to see what’s been in front of its face. Remember, the agency spent years investigating Countrywide and its leadership. Weren’t mortgage-backed securities part of the investigation? Same thing with Fannie Mae and Freddie Mac, the two biggest players in mortgage securitization. The SEC began looking at Fannie and Freddie in 2008, and ultimately sued three top execs from each housing agency for allegedly misleading investors about subprime mortgage exposure. Surely someone at the SEC looked at the MBS portfolios Fannie and Freddie amassed — particularly because both agencies reached MBS settlements with Bank of America and GMAC’s Residential Capital in 2010.

Kessler Topaz Meltzer & Check and Prickett, Jones & Elliott have absolutely nothing against Delaware Chancery Court. They’d be crazy if they did: The two firms were just awarded a record-setting $300 million fee for their work in the $1.3 billion Southern Peru derivative suit. Kessler Topaz and Prickett Jones lawyers make a very good living by litigating in Delaware.

So why, you might wonder, did the two firms team up with Klausner, Kaufman, Jensen & Levinson to file nine — yes, nine — complaints this week against corporations with bylaws mandating Delaware as the exclusive forum for shareholder litigation?

According to Lee Rudy of Kessler Topaz, it’s because the firms have had it with corporations attempting to curtail shareholder rights. “These cases aren’t saying Delaware is not an appropriate venue,” Rudy told me. “We want to allow the Chancery Court to say whether what these companies are doing is proper under Delaware law.” In parallel suits against Chevron, Curtiss-Wright, Danaher, Priceline, SPX, Superior Energy, AutoNation, Franklin Resources, and Navistar, the plaintiffs’ firms assert that the corporations adopted exclusive forum bylaws without consulting shareholders. Such bylaws, they argue, “conflict with federal constitutional and statutory provisions and impinge on federal jurisdiction and the jurisdiction of other state courts.”

The megabillion-dollar game of chicken between Bank of America and the bond insurer MBIA just got even more perilous. On Monday MBIA filed a notice that it is cross-appealing the ruling by Manhattan State Supreme Court Justice Eileen Bransten. MBIA wants reconsideration of Bransten’s finding that the bond insurer is not entitled to summary judgment on its claims that Countrywide breached representations and warranties on the mortgage-backed securities MBIA agreed to insure. You might think MBIA’s decision to appeal is a surprise, given the many routes to recovery Bransten gave MBIA on its insurance fraud claims against Countrywide. But as always in the incredibly complex litigation between Bank of America and MBIA, there are many layers to every move by either side.

Bransten’s rulings were undoubtedly a boon for the monolines Syncora and MBIA. The judge said the bond insurers don’t have to establish a direct causal link between the alleged deficiencies in the mortgage loans underlying the securities they agreed to insure and the subsequent payouts the insurers had to make on those MBS policies. Under Bransten’s opinion, MBIA and Syncora can prove insurance fraud merely by establishing that they relied on Countrywide’s alleged misrepresentations when they agreed to write the policies at issue in the litigation. And to prove a breach of the insurance agreements, they need only prove that Countrywide materially misrepresented the risk profile of the underlying mortgage pools.

Nevertheless, two days after Bransten issued her opinion, Syncora’s lawyers at Debevoise & Plimpton filed a notice of appeal. That’s because the decision wasn’t all good news for the monolines: Bransten denied Syncora and MBIA summary judgment on their interpretation of the MBS contracts they signed with Countrywide. The monolines argued that Countrywide was required to buy back every underlying mortgage that didn’t live up to the representations and warranties the issuer made about the mortgage pool. Bransten, however, said the contract language was too ambiguous for the issue to be decided on summary judgment. Syncora said it was seeking a reversal of that part of the ruling.

After New York Attorney General Eric Schneiderman filed his new complaint against JPMorgan Chase, Bank of America, Wells Fargo, and the Mortgage Electronic Registry System, I got an email from the AG’s spokesman. “Looking forward to your story on the MERS lawsuit in the wake of your inaccurate conjecture this week,” it said, referring to my column expressing skepticism that the recently-announced joint mortgage-backed securities task force will accomplish more than the individual task force members have.

As I said in that piece, I’m eager for my skepticism to be proved unfounded. I hope the task force tells the world exactly who is responsible for the greed-driven securitization deficiencies already alleged in private MBS suits and in Congressional reports. I hope someone comes up with a legal theory to hold wrongdoers accountable for packaging mortgages that never should have been issued into securities that were (allegedly) not what they were represented to be.

That, however, is not what the AG’s new case does.

The suit, filed Friday in New York State Supreme Court in Brooklyn, asserts that the Mortgage Electronic Registration Systems — the privately-held organization established in the 1995 to streamline the securitization process by centralizing mortgage-transfer records — was essentially a sham operation that swindled localities out of $2 billion in mortgage-transfer fees and improperly foreclosed on homeowners whose mortgages it didn’t actually own. The AG’s office alleges that MERS and the defendant banks, all members of the MERS system, have foreclosed on hundreds of homes to which MERS was nominally the mortgage assignee, even though such foreclosures were “faulty and deceptive in several respects.” (The alleged deficiencies include MERS’s lack of standing to bring foreclosure actions; MERS’s misrepresentation of its foreclosure rights to homeowners and judges; and the mortgage registry’s submission of robosigned affidavits to courts in foreclosure cases.) Moreover, according to the complaint, MERS’s deeply flawed, private database hid mortgage transfers from courts and homeowners who needed to track them down.

None of the firms battling Countrywide and Bank of America on behalf of mortgage-backed securities investors has dedicated more resources to the fight than Quinn Emanuel Urquhart & Sullivan. Quinn represents some of the biggest MBS claimants in suits against Countrywide, including AIG and the Federal Housing Finance Agency. The firm also represents MBIA in the bond insurer’s long-running New York State case against Countrywide. If anyone on the plaintiffs’ side has the goods on Countrywide and Bank of America, in other words, it’s Quinn Emanuel.

That’s why a ruling Thursday by U.S. District Judge Mariana Pfaelzer of Los Angeles federal court is such a blow to Countrywide MBS investors. Pfaelzer, who’s overseeing the consolidated federal-court MBS litigation against Countrywide, dismissed Allstate’s successor-liability and fraudulent-conveyance claims against Bank of America, with prejudice. Quinn represents Allstate, and offered detailed allegations that Bank of America’s 2008 acquisition of Countrywide was structured to deliver Countrywide’s revenue-producing businesses to BofA while simultaneously walling off the mortgage company’s looming liability for subprime mortgages and mortgage-backed securities.

Pfaelzer said, however, that Quinn Emanuel hadn’t come up with sufficient facts to back its assertions. She rejected two different theories: first, that Bank of America and Countrywide engaged in a fraudulent conveyance or transfer; and second, that BofA’s acquisition of Countrywide was a de facto merger. The judge has previously found for Bank of America in two other rulings on the de facto merger question (here’s Pfaelzer’s April 2011 opinion in an MBS class action against Countrywide), but this is the first time she’s delivered a definitive ruling on fraudulent-conveyance allegations.

Buried on page 93 of Facebook’s Securities and Exchange Commission registration for its $5 billion initial public offering is a very interesting disclosure.

“The Enforcement Division of the Securities and Exchange Commission has been conducting an inquiry into secondary transactions involving the sale of private company securities as well as the number of our stockholders of record,” the disclosure said. “In connection with this inquiry, we have received both formal and informal requests for information from the staff of the SEC and we have been fully cooperating with the staff. We have provided all information requested and there are no requests for documents or information that remain outstanding. We believe that we have been in compliance with the provisions of the federal securities laws relating to these matters.”

The fact of that paragraph alone is news. The New York Times reported in Dec. 2010 that the SEC was looking into the red-hot secondary market for trading in the privately-held shares of Facebook, Zynga, LinkedIn, Twitter, and some other Internet darlings. The leading market-maker for such trading, SecondMarket, confirmed last January that it had received a voluntary request for information from the SEC (which has never confirmed the investigation). But Facebook is the first company to offer any hard facts about what the agency is probing.

On Tuesday, administrative law judge Theodore Essex of the U.S. International Trade Commission dealt a blow to Barnes & Noble. As the bookseller heads into trial next week on Microsoft’s claim that its e-readers infringe four Microsoft patents, Essex dismissed Barnes & Noble’s patent-misuse defense. B&N, you’ll recall, has waged an aggressive antitrust campaign against Microsoft, claiming that Microsoft is attempting to squelch the Android operating system by improperly asserting its patents. But next week’s trial won’t consider whatever evidence Barnes & Noble’s antitrust lawyers — at Cravath, Swaine & Moore and Boies, Schiller & Flexner — have amassed. The ALJ will determine only the validity of Microsoft’s patents and whether Barnes & Noble infringes them.

Florian Mueller of FOSS Patents, who was the first to report on Essex’s patent-misuse ruling, interpreted the dismissal as a broad repudiation of Barnes & Noble’s antitrust case against Microsoft. I’m not so sure about that — and my understanding is that when the ITC case is over, the bookseller can and will fire up its patent-misuse claims in the parallel Seattle federal court litigation between Barnes & Noble and Microsoft.

The ITC docket is a journalist’s nightmare. Just about every substantive document is confidential, including Microsoft’s brief on patent misuse, the ITC staff’s recommendation on the B&N defense, and Essex’s ruling, so we don’t know for sure why Essex ruled the way he did. But there’s guidance in the leading en banc decision on patent misuse by the U.S. Court of Appeals for the Federal Circuit. In its August 2010 opinion in Princo Corporation v. International Trade Commission, the Federal Circuit held that the ITC should construe patent-misuse defenses narrowly, looking only at the patent-holder’s assertion of the patents at issue in the underlying infringement case.