Opinion

Alison Frankel

Bad news for BofA MBS deal objectors: Kapnick tosses Walnut suit

Alison Frankel
Mar 30, 2012 15:10 UTC

The key sentence in New York State Supreme Court Justice Barbara Kapnick’s 17-page decision dismissing Walnut Place’s $1 billion put-back suit against Countrywide is buried in the middle of the penultimate paragraph. But for Bank of America, it’s pure gold. The Manhattan judge said that contrary to Walnut’s assertion, Countrywide’s mortgage-backed securities trustee, Bank of New York Mellon, acted on Walnut’s complaints about deficiencies in underlying Countrywide loans by reaching the proposed $8.5 billion settlement announced last June. That language should shield BofA and BNY Mellon from reps and warranties claims by any Countrywide MBS investor — and may offer a hint of the fate of the proposed global deal, which is also now before Kapnick after a detour in federal court.

Walnut (a nom de litigation for the hedge fund Baupost) is the leading objector to the proposed $8.5 billion deal, mostly because at the time the settlement was filed as an Article 77 trust proceeding in New York state court last June, Walnut had already sued Countrywide and BNY Mellon for breaching representations and warranties about the mortgage pool underlying trusts it had bought into. Walnut’s lawyers at Grais & Ellsworth asserted in a complaint filed back in February 2011 that the investor had jumped through the requisite procedural hoops in the MBS pooling and servicing agreements. Walnut Place, the complaint said, controlled 25 percent of the voting rights in the trusts on whose behalf it was making claims; and it had demanded action from BNY Mellon before filing suit. The trustee, according to Walnut, failed to take appropriate action on its demands.

BofA’s counsel at Wachtell, Lipton, Rosen & Katz countered in a dismissal brief last July that in fact BNY Mellon had taken action on put-back demands: It had entered the negotiations that resulted in the proposed $8.5 billion settlement. “Far from ‘declining to act at all,’ the trustee has acted decisively by settling, among other things, the precise claims brought by Walnut Place here,” the bank’s brief said. “That it has done so underscores Walnut Place’s complete failure — indeed, inability — to plead refusal of its demand.”

Kapnick’s ruling Thursday didn’t offer much elaboration, but she said first that BNY Mellon’s responses to Walnut — that it needed more time to investigate its claims — “belied” Walnut’s “conclusory allegations that the trustee refused to sue.” Even more importantly, she continued: “Moreover, the trustee did, in fact, act upon [Walnut's] complaints, as demonstrated by the settlement agreement reached with the defendants and submitted to this court…. That settlement includes the claims at issue here.”

Given that the pooling and servicing agreements governing the 503 Countrywide MBS trusts in the proposed settlement are similar to those at issue in the Walnut case, it’s hard to see how any investor could get past Kapnick’s reasoning on the trustee’s action. That means all Countrywide reps and warranties claims against BofA and BNY Mellon are at stake in the proposed global deal.

NY high court warning: state laws don’t apply to overseas conduct

Alison Frankel
Mar 29, 2012 15:17 UTC

The New York Court of Appeals ruled Tuesday that a German company called Global Reinsurance cannot bring antitrust claims under New York state’s “little Sherman Act” against Equitas, the reinsurer created in 1996 to cap the liability of Lloyd’s of London syndicates. Happily, to understand the high court’s 22-page opinion, we don’t have to get into its analysis of the global market for retrocessionary reinsurance. We don’t even have to consider Chief Judge Jonathan Lippman‘s discussion of whether Equitas had the power to effect worldwide anticompetitive injury. We need only consider what the opinion called “an immovable obstacle” to Global’s case: New York’s antitrust law, the Donnelly Act, “cannot be understood to extend to the foreign conspiracy (Global) purports to describe.”

To reach that conclusion, the Court of Appeals looked to the Sherman Act, the federal statute on which the state’s Donnelly Act is based. In particular, the court considered the Foreign Trade Antitrust Improvements Act, which says that U.S. antitrust laws do not apply to conduct that took place outside of the United States. (I’ve previously written about the FTAIA’s fascinating implications for trade in the global marketplace.) The only exception to the FTAIA’s bar, Lippman’s opinion said, is when an antitrust plaintiff can show that the alleged conduct had a direct and intended effect on U.S. commerce. Global couldn’t do that, the Chief Judge said:

The London conspiracy here alleged was, according to the complaint, worldwide in its orientation; there is nothing in the pleadings to justify an inference that it targeted United States commerce specially… It is not necessary to know precisely the extent of the Donnelly Act’s extra-territorial reach to understand that it cannot reach foreign conduct deliberately placed by Congress beyond the Sherman Act’s jurisdiction.

In Gupta case, U.S. must disclose Blankfein deposition prep

Alison Frankel
Mar 28, 2012 14:19 UTC

Jed Rakoff has bounced back quite nicely, thank you, from his appellate smackdown in the Securities and Exchange Commission’s collateralized debt obligation case against Citigroup. In the unlikely event you’ve forgotten, earlier this month the 2nd Circuit Court of Appeals stayed the SEC’s case before Rakoff, finding a strong likelihood that the government and Citi would prevail in their argument that the judge overstepped his bounds when he rejected their proposed $285 million settlement. Despite the notably critical language in the three-judge panel’s per curiam ruling in the Citi case, Rakoff, a U.S. Senior District Judge in federal court in Manhattan, seems undaunted in his determination to hold the SEC accountable. On Tuesday, he ruled that the agency must disclose documents used to prepare Goldman CEO Lloyd Blankfein for his deposition in the Rajat Gupta insider trading case.

Rakoff’s 10-page ruling, issued on the same day that he said the government can use wiretap evidence in the parallel Gupta criminal case, rejects the SEC’s argument that work-product privilege protects its preparation of Blankfein. The judge pointed to a 1993 case from the 2nd Circuit, In re Steinhardt Partners, and a 2003 ruling from the same appeals court, In re Grand Jury Subpoenas, in holding that the government waived its privilege claim when it voluntarily shared materials with Blankfein, a third-party witness. Rakoff said that Blankfein doesn’t have a “common interest” with the government in the Gupta case, so disclosures to him amount to “‘deliberate, affirmative, and selective’ use of work product [that] waives the SEC’s ability to now assert the privilege against the defendants.”

Here’s the fascinating backstory. At Blankfein’s deposition on Feb. 24, Gupta’s lawyers at Kramer Levin Naftalis & Frankel asked him standard questions about how he prepared to testify. Blankfein, according to Kramer Levin’s March 1 brief, revealed that on two occasions leading up to the deposition, he met with SEC lawyers, an agent from the Federal Bureau of Investigation, and prosecutors from the Manhattan U.S. Attorney’s office. At those two sessions, he said, prosecutors asked him 75 percent of the prep questions; the SEC asked the other 25 percent of the questions. Blankfein’s own lawyers at Sullivan & Cromwell, according to Kramer Levin, didn’t ask him questions at the two prep sessions with government lawyers. Blankfein also disclosed that government lawyers showed him 10 or 12 documents in advance of his deposition testimony.

What not to do if you’re suing a Facebook billionaire

Alison Frankel
Mar 27, 2012 14:47 UTC

If Paul Ceglia — the onetime wood pellet salesman from upstate New York who hired Mark Zuckerberg as a computer programmer before Zuckerberg founded Facebook — thought he’d wring a quick settlement out of his claim to own a piece of Facebook by virtue of a two-page contract Zuckerberg signed in 2003, boy did he think wrong. Facebook’s long-awaited motion to dismiss, finally filed Monday in federal court in Buffalo, asserts that Ceglia was out for an easy score based on a doctored version of the 2003 contract. But it’s not easy to put one over on Zuckerberg or his lawyers at Gibson, Dunn & Crutcher. Facebook’s 74-page dismissal motion is a virtual compendium of the tiny mistakes (alleged) frausters can make and the ways determined defendants can find them out.

I should say upfront that Ceglia’s lawyers at Boland Legal and Milberg dispute Facebook’s assertion that Ceglia is a con man. Milberg is a recent addition to Ceglia’s ever-changing legal roster, but Team Ceglia has intimated that if anyone has manipulated the evidence in this case, it’s Zuckerberg, a legendary computer whiz. Here’s the official comment from Ceglia’s lawyers on Monday’s motion to dismiss:

We have made a preliminary review of Facebook’s motion, which attempts to have this matter ended before Facebook has to provide any discovery and before going to a jury. The Federal Rules of Evidence say a jury should weigh the evidence in this case, including experts’ declarations in Mr. Ceglia’s favor about the authenticity of his contract with Mr. Zuckerberg. Mr. Ceglia deserves his day in court, where the jury will resolve this dispute over the ownership of Facebook.

Can takeover target force thwarted acquirer to pay costs?

Alison Frankel
Mar 26, 2012 14:47 UTC

Tenet Healthcare brought a gun to its knife fight with Community Health Systems. At the end of 2010, Community Health, the second-largest hospital operator in the United States, offered to acquire Tenet in what ended up as a $4.1 billion, all-cash bid. Tenet made the typical moves of hostile takeover targets, enacting a phalanx of defenses that included a bylaw amendment postponing its annual meeting by six months so shareholders couldn’t vote on Community’s proposed slate of directors. But that wasn’t all Tenet, the third-largest U.S. hospital operator, did. Its lawyers at Gibson, Dunn & Crutcher also filed a suit in federal court in Dallas that accused Community of bilking Medicaid and private insurers through unwarranted hospital admissions.

Community eventually gave up and walked away from its bid for Tenet. Tenet, however, wasn’t done fighting. In an amended complaint filed last May, it demanded that Community repay Tenet for the cost (including attorneys’ fees) of investigating Community’s allegedly fraudulent hospital admission policies. Tenet’s theory: Community was liable for materially false and misleading statements to Tenet shareholders. “But for these material misstatements from CHS during its proxy solicitation efforts,” the complaint said, “Tenet never would have been forced to expend considerable sums investigating CHS and uncovering troubling facts about CHS’s business.”

Interesting, right? And outrageous, according to Community and its lawyers at Kirkland & Ellis and Andrews Kurth. “It is the height of corporate hubris that Tenet now seeks to present CHS with the bill of costs for Tenet’s scorched-earth battle tactics,” Community said in a motion to dismiss. Community asserted that it actually filed no preliminary or definitive proxy statement on the Tenet takeover with the Securities and Exchange Commission and sent no definitive proxy statement to Tenet shareholders. More fundamentally, according to Community, Tenet didn’t have standing to sue under the proxy provisions of the Exchange Act of 1934.

Forget Greg Smith. For Goldman exposé, read Hudson CDO ruling

Alison Frankel
Mar 22, 2012 21:41 UTC

Goldman’s sweep for internal emails containing client insults like “muppet,” a scoop by my Reuters colleague Lauren LaCapra, got lots of well-deserved snark as the bank’s latest too-little-too-late response to Greg Smith’s “Why I Am Leaving Goldman Sachs” op-ed. In case you’re just returning from a vacation in Antarctica, which is pretty much the only way you could have avoided the financial world’s equivalent of Kim Kardashian’s divorce, Smith, a London-based Goldman executive director, said he was sick and tired of the bank’s callous treatment of its clients. “It’s purely about how we can make the most possible money off of them,” Smith wrote in the New York Times. “If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”

Why Smith’s piece was considered a revelation is mystifying, given Goldman’s starring role in last April’s 635-page Senate report on Wall Street and the financial crisis. We all know about the Securities and Exchange Commission scrutiny of the Abacus deal, in which Goldman permitted hedge fund manager John Paulson to pick underlying mortgages that doomed the collateralized debt obligation it was hawking to clients, and the famous “one shitty deal” otherwise known as the Timberwolf mortgage-backed CDO. As the Senate report explains, both were part of Goldman’s institutional effort to secretly reverse its own long position in residential mortgage-backed securities even as it marketed MBS investments to clients.

That’s the campaign U.S. District Judge Victor Marrero of federal court in Manhattan detailed in a 64-page ruling Wednesday that greenlights most securities and common law fraud claims by investors in two other rigged-to-fail CDOs, Hudson 1 and Hudson 2. (Here’s Jon Stempel’s Reuters story on the ruling.) Marrero’s decision doesn’t have the freewheeling rhetorical flair (or 1980s pop references) of Delaware Chancellor Leo Strine‘s much-discussed opinion on Goldman’s conflicts in Kinder Morgan’s proposed acquisition of El Paso Corporation, but in a way it’s a much more devastating ruling. Marrero portrays a sweeping, months-long effort, initiated by Goldman CFO David Viniar, to shed the bank’s exposure to subprime mortgages in mortgage-backed securities — and simultaneously to take advantage of clients who were slower to perceive the looming MBS market collapse.

In Diamond case, judge appoints MissPERS — but not its lawyers

Alison Frankel
Mar 21, 2012 21:57 UTC

The Mississippi Public Employees Retirement System is not a professional securities class action plaintiff, according to U.S. District Judge William Alsup of San Francisco federal court. Late Tuesday, after a bruising fight between MissPERS and the New England Carpenters Guaranteed Annuity and Pension funds, Alsup appointed the Mississippi fund to lead a juicy securities class action against Diamond Foods. Alsup rejected arguments by the New England funds’ lawyers at Robbins Geller Rudman & Dowd that MissPERS had exceeded the statutory limit for lead counsel appointments.

“The [Mississippi] Attorney General’s office has managed numerous securities class actions, and such experience will improve representation of the class,” the judge wrote. “And considering its loss is seven times greater than New England Carpenter’s … the statutory purpose is served by appointing Mississippi PERS as lead plaintiff.”

But for securities lawyers, Alsup’s ruling is probably more interesting for what it doesn’t do. Since the Diamond Foods accounting scandal broke and securities fraud complaints began to be filed last November, MissPERS has been represented by Grant & Eisenhofer and Chitwood Harley Harnes, with Lieff Cabraser Heimann & Bernstein as California counsel. At the March 1 lead plaintiff hearing, James Sabella of G&E argued for the appointment of MissPERS.

Can MBS investors block national mortgage deal via litigation?

Alison Frankel
Mar 21, 2012 14:45 UTC

Mortgage-backed securities investors who are convinced that banks intend to shift the cost of the $25 billion national mortgage settlement onto their shoulders are “evaluating their legal options,” according to Chris Katopis, executive director of the Association of Mortgage Investors (and a former clerk on the Federal Circuit Court of Appeals). The private investors, as I’ve reported, are outraged at the terms of the settlement, which sets no limit on the percentage of securitized mortgages the settling banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial — are permitted to modify to reach their $17 billion target for reducing the principal balance owed by struggling borrowers. Mortgage-backed noteholders believe the deal terms encourage banks to write down investor-owned first liens, rather than second lien mortgages in bank-owned portfolios. That incentive, they say, shifts the cost of the deal from the banks to mortgage-backed bondholders.

Their argument is gaining traction. The New York Times editorialized Sunday on the bank-friendly details of the national settlement, and both Zero Hedge and American Banker have picked up on the MBS investors’ cost-shifting theme. The U.S. Department of Housing and Urban Development, which has denied assertions that Secretary Shaun Donovan promised MBS investors a cap on modification of securitized mortgages, has been put on the defensive, issuing a “Myth vs. Fact” blog post to present its case for the settlement. The bond investors are doing a great job of whipping up outrage about the deal, which must be approved by a U.S. District Judge in federal court in Washington.

Unfortunately for the bond investors, outrage is not a cause of action.

Katopis told me he doesn’t want to give away any clues about the strategy MBS investors may pursue. There are certainly some very smart, creative lawyers who’ve counseled mortgage-backed noteholders over the last three years, including David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who represents the National Credit Union Administration in MBS securities suits and also happens to be one of the most prominent U.S. Supreme Court litigators around. (I tried to reach Frederick but he was arguing a case in Chicago and unavailable.)

In powerful Citi ruling, 2nd Circuit stresses deference to SEC

Alison Frankel
Mar 16, 2012 14:17 UTC

When U.S. Senior District Judge Jed Rakoff rejected a $285 million settlement between Citigroup and the Securities and Exchange Commission last fall, he offered a stern rebuke to SEC lawyers who’d suggested his role was not to protect the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote in his oft-quoted ruling. “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.”

In the months since, at least three other federal judges have cited Rakoff in questioning whether settlements proposed by federal agencies serve the public interest, two in SEC cases and one in a Federal Trade Commission case. The SEC adopted a minor, mostly cosmetic revision in the policy that so provoked Rakoff — in which defendants are permitted to settle without admitting liability — but otherwise insisted that such compromises are the very foundation of federal enforcement efforts.

On Thursday, the agency’s position received a very powerful endorsement from the 2nd Circuit Court of Appeals. A three-judge panel ruled that the SEC’s case should be stayed pending a joint appeal of Rakoff’s ruling by the agency and Citigroup, overturning a Rakoff order that the case proceed. The extraordinary 17-page appellate ruling concludes that Citi and the SEC are likely to succeed in their argument that Rakoff was wrong to reject the settlement.

Deposing CEOs: BofA, MBIA, and a tale of two hearings

Alison Frankel
Mar 15, 2012 15:49 UTC

Bank of America really, really does not want CEO Brian Moynihan to sit for a deposition in bond insurer MBIA’s breach-of-contract case against Countrywide and BofA.

According to the transcript of a hearing on the issue last Friday morning before Manhattan State Supreme Court Justice Eileen Bransten, the bank’s lawyers at O’Melveny & Myers said that under the so-called Apex rule — which essentially says that high-ranking executives shouldn’t have to waste their time responding to deposition questions that lesser-ranking officials can answer just as well — Moynihan should be shielded from testifying because he doesn’t have unique personal knowledge of the disputed facts in the case. He’s also a very busy man, said Jonathan Rosenberg of O’Melveny. Rosenberg displayed a slide that showed all of BofA’s “enormous operations,” which he said demanded “24/7 work from senior executives, especially the CEO.” MBIA’s insistence on taking testimony from Moynihan, when BofA has already offered up for deposition several senior bank executives with the same knowledge as the CEO, amounts to harassment, according to BofA.

“There’s no basis to say they have to have Brian Moynihan when they have access to all these other people,” including former BofA CEO Ken Lewis, Rosenberg said. “This effort to depose Brian Moynihan is for harassment purposes.” If Bransten allowed the deposition in MBIA’s case, other bond insurers suing Countrywide would “seek their own shot,” the O’Melveny lawyer said, which “would clearly be disruptive to the business of Bank of America to lose their CEO to substantial time in prepping for and taking depositions.”

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