Opinion

Alison Frankel

Can Strine and Castel resolve forum fight in BofA derivative deal?

Alison Frankel
Apr 30, 2012 14:48 UTC

According to Bank of America’s board, if three Delaware plaintiffs’ firms wanted to settle their shareholder derivative suit accusing the board of breaching its duty when it acquired Merrill Lynch, they should have asked. Instead, the Delaware firms bickered amongst themselves and refused to participate meaningfully in settlement talks, board members’ counsel at Davis Polk & Wardwell and Richards, Layton & Finger wrote in a brief filed in Delaware Chancery Court on Wednesday.

The BofA brief, which offers a rare behind-the-scenes account of the shuttle diplomacy the bank’s lawyers engaged in as they tried to get rid of parallel derivative suits in Delaware and New York, said that the board would have been perfectly willing to reach a deal with either set of plaintiffs’ firms, and actually reached out first to Delaware counsel from Chimicles & Tikellis; Horwitz, Horwitz & Paradis; and Wolf Haldenstein Adler Freeman & Herz. BofA said it was “rebuffed” by those firms, so when shareholders’ counsel in the New York federal court case, Kahn Swick & Foti and Saxena White, approached the board with a settlement offer, the bank began the talks that resulted in a $20 million proposed settlement earlier this month.

Even in the midst of those negotiations, the bank brief said, Davis Polk partner Lawrence Portnoy took a call from a Wolf Haldenstein partner who said the Delaware firms were finally ready to talk about a deal within the limits of BofA’s directors and officers insurance coverage. But before Portnoy could bring his clients into the loop, the other two Delaware shareholder firms informed him that Wolf Haldenstein had spoken out of turn and Delaware wouldn’t settle within the D&O policy limits. (That figure hasn’t been publicly disclosed in either derivative case, but my Reuters colleague Jon Stempel calculated it to be $500 million, based on Delaware plaintiffs’ filings.)

In other words, according to Bank of America, the Delaware firms have only themselves to blame for the mess that the BofA derivative litigation has become.

That’s quite a different story from the one the Delaware firms told in an Apr. 13 preliminary injunction motion in Chancery Court and a simultaneous petition for an order to show cause in Manhattan federal court. (The petition and accompanying affidavits are, unfortunately, under seal.) The Delaware firms, as Gretchen Morgenson reported in the New York Times, accused BofA of settling on the cheap with the firms in the New York case, which hadn’t put anywhere near as much work into the litigation as they had. The bank deliberately excluded them from talks, the Delaware firms said, so it could collude with firms that had ridden sidecar in discovery in the consolidated federal-court securities litigation in New York.

Is Dewey partner Henry Bunsow the Angel of Death?

Alison Frankel
Apr 30, 2012 12:42 UTC

Last month, a prominent intellectual property partner at Dewey & LeBoeuf told Casey Sullivan at the Los Angeles Daily Journal that Dewey was indeed putting off partner shares, but he said it wasn’t a big deal. Such deferred payments, said Henry Bunsow, are common. “I have confidence that (partners) will be treated fairly within the parameters of what the firm is dealing with,” he said. (The Daily Journal story is behind a paywall, but Above the Law has generous excerpts.)

How does Bunsow — who has an enviable client list and an impressive trial record — happen to know so much about troubled firms and deferred partner payments? Because before he joined Dewey in 2011, he was vice chairman of Howrey. And before that, in the early 1990s, Bunsow was a partner at Brobeck, Phleger & Harrison. In case you’re not a student of the history of defunct law firms, Brobeck shut down in January 2003 after failed merger talks with Morgan, Lewis & Bockius. Howrey imploded last March following a stream of partner defections. And we all know that Dewey has lost scores of partners and (as Reuters has reported) hired bankruptcy counsel this year. That’s quite a tough history: one partner, two failed law firms and a third in deep trouble.

Bunsow certainly wasn’t responsible for the collapse of Brobeck or Howrey, and not all of his former firms have met such unfortunate ends. Before Brobeck, he was a partner at Townsend and Townsend and Crew, which merged with Kilpatrick Stockton last year. And between Brobeck and Howrey he did a stint at Keker & Van Nest, which remains a preeminent litigation boutique.

Bank of America and the standard of review: A tale of two cases

Alison Frankel
Apr 26, 2012 13:48 UTC

The most important woman in Bank of America’s life right now may well be New York State Supreme Court Justice Barbara Kapnick. In the last five days, Kapnick has presided over two critical hearings, one to determine whether the BofA-led group challenging MBIA’s $5 billion restructuring can put on live witnesses and the other to determine whether BofA’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities will remain a special proceeding under New York trust law.

Bank of America got good news at the end of both hearings. Kapnick agreed on Apr. 20 to hear live testimony in the MBIA regulatory case and ruled on Apr. 24 that objectors to the proposed MBS settlement can’t convert it to a more standard adversary case. But BofA didn’t get everything it wanted.

Kapnick was very clear about limiting the evidence the banks can put on in the MBIA case, which is being brought under a proceeding known as Article 78. “This case is really, really directed towards the actions of the Insurance Department in approving this transaction,” she told bank counsel from Sullivan & Cromwell, according to this transcript of the hearing. “It’s not a case about all the intentional and terrible things that you alleged.” Under Article 78, she said, her job is simply to decide whether the state insurance department (now the Department of Financial Services) made a reasonable determination to approve the MBIA restructuring, or whether its approval was “arbitrary and capricious.” Based on the transcript, Kapnick considers that a high bar for the banks to clear.

SCOTUS: Corporations are people, unless they torture other people

Alison Frankel
Apr 24, 2012 17:36 UTC

Corporations, as Mitt Romney famously reminded us this summer in Iowa, are people under the laws of the United States. Just take a look at the U.S. Supreme Court‘s 2010 ruling in Citizens United v. Federal Election Commission. The five justices in the majority (you know who they are) held that corporations are entitled to the same First Amendment right to free speech as regular old people, so Congress’ attempt to ban corporate electioneering was unconstitutional.

When are corporations not people in the eyes of the Supreme Court? When they’re accused of torturing or killing real live human beings. Last week, in Mohamad v. Palestinian Authority, all nine justices agreed that when Congress enacted the Torture Victim Protection Act in 1991, it restricted causes of action to those against “an individual” — and individuals aren’t organizations or corporations. The court looked at the dictionary definition of the word individual, as well as the legislative history of the anti-torture law, to conclude that Congress intended the law to apply only to “natural persons.” The opinion said it’s notable that lawmakers used the word “individual” instead of “person” in defining potential torture defendants because “‘person,’ as we have recognized, often has a broader meaning in the law than ‘individual.’”

Right. Corporate “persons” have First Amendment rights to unlimited Super PAC spending but corporate “individuals” don’t exist. I’m sure the relatives of Azzam Rahim, the naturalized U.S. citizen who was kidnapped, tortured, and killed by the Palestinian Authority in the case that gave rise to the Supreme Court’s ruling, were compelled by the high court’s parsing of the distinction between a “person” and an “individual.”

The Bentonville Black SOX? Wal-Mart’s Sarbanes-Oxley problem

Alison Frankel
Apr 23, 2012 20:16 UTC

The follow-up to the New York Times blockbuster scoop on Wal-Mart’s alleged cover-up of $24 million in Mexican bribes has, quite rightly, focused on the company’s potential Foreign Corrupt Practices Act exposure. But that’s not the only law Wal-Mart and its executives should be worrying about.

Good old Sarbanes-Oxley, passed in 2002 in the wake of accounting scandals at Enron, WorldCom, Tyco, Adelphia and other public companies, was intended to prevent exactly the kind of cover-up Wal-Mart allegedly engaged in, according to the Times report. The 10-year-old law imposed gatekeeper duties on corporate lawyers, who are supposed to report material violations of the securities laws up the chain of command, all the way to the audit committee of the board, if necessary. SOX also requires corporations and their auditors to report on the company’s internal controls for financial reporting – and requires that CEOs and CFOs certify the material accuracy of financial reports. According to securities-law experts, if the Times allegations are true, Wal-Mart may have run afoul of all these provisions.

The bribery allegations originated with a Wal-Mart lawyer in Mexico, who told Wal-Mart International’s general counsel, Maritza Munich, about the “irregularities.” She authorized a preliminary investigation by outside counsel in Mexico, then – quite appropriately – reported the findings to Wal-Mart’s then-General Counsel Thomas Mars, among other senior officials. Mars brought in Willkie Farr & Gallagher, which proposed that it conduct a far-reaching internal investigation. So far, so good.

2nd Circuit delivers more bad news for sophisticated investors

Alison Frankel
Apr 23, 2012 11:56 UTC

Remember U.S. District Judge Victor Marrero‘s opus last month in a hedge fund case against Goldman Sachs? The Manhattan federal judge refused to dismiss claims that Goldman duped the fund, Dodona, into investing in doomed-to-fail Hudson collateralized debt obligations. In 64 vivid pages, Marrero detailed the fund’s allegations that Goldman engaged in a sweeping effort, initiated by CFO David Viniar, to shed its exposure to subprime mortgages — and simultaneously to take advantage of clients who were slower to perceive the looming collapse of the mortgage-backed securities market. Marrero described the alleged scheme as “not only reckless, but bordering on cynical.”

What a difference a judge makes. Last September, in a parallel case involving Goldman’s Davis Square CDOs, U.S. District Judge William Pauley, also of Manhattan, needed only 19 pages to dismiss fraud and negligent misrepresentation claims by Germany’s Landesbank Baden-Wuerttemberg. On Thursday, without even bothering to write a precedential opinion, a three-judge panel of the 2nd Circuit Court of Appeals upheld the dismissal. Chief Judge Dennis Jacobs and Judges Rosemary Pooler and Susan Carney agreed with Pauley that the German bank was a sophisticated investor and received plenty of warnings about the risk of investing in the Davis CDOs.

“The relationship between Landesbank and the defendants was that of buyer and seller in a standard arm’s length transaction; and by its own representations Landesbank possessed sufficient expertise to evaluate the risks of its investment,” the 2nd Circuit wrote in a summary order. “The complaint therefore fails to plead justifiable reliance.” Landesbank’s counsel at Motley Rice had notified the 2nd Circuit of Marrero’s ruling, in a letter spelling out the judge’s conclusion that even if Dodona was a sophisticated investor, its reasonable reliance on Goldman’s representations isn’t precluded as a matter of law. By giving Landesbank’s argument such short shrift, the federal appeals court clearly believes the contrary.

More Apple antitrust woes: CEO, directors at hub of poaching case

Alison Frankel
Apr 19, 2012 22:36 UTC

It’s not easy for antitrust plaintiffs to get past a defense motion to dismiss. Before the U.S. Supreme Court raised the pleading standard for everyone in Ashcroft v. Iqbal in 2009, it imposed that tough burden on antitrust claimants in Bell Atlantic v. Twombly, a 2007 opinion that held it’s not enough just to argue that alleged conspirators engaged in parallel price-fixing. Under Twombly, antitrust complaints have to offer detailed and specific facts to support a plausible argument that defendants colluded to restrict competition.

On Wednesday evening, U.S. District Judge Lucy Koh of San Francisco federal court ruled that software engineers in a putative class action against Apple, Google, Intel, Intuit, Lucasfilm, Adobe, and Pixar met that high standard. As the judge explained in her 29-page opinion, it certainly helped the plaintiffs that the defendants all entered consent decrees with the Justice Department in 2010, agreeing to end their practice of restricting cold calls to recruit one another’s engineers. But what really convinced the judge not to dismiss the engineers’ case was the “significant influence” of former Apple CEO Steve Jobs; Google chairman and Apple board member Eric Schmidt; and Apple and Google director Arthur Levinson.

At least one of those three men, Koh said, had a hand in each of the six bilateral anti-poaching agreements among the defendants. “Their overlapping board membership lends plausibility to plaintiffs’ allegations that each defendant entered into this conspiracy ‘with knowledge of the other defendants’ participation in the conspiracy, and with the intent of . . . reduc(ing) employee compensation and mobility through eliminating competition for skilled labor,’” the judge wrote.

Citi shareholders have slim chance of enforcing say-on-pay vote

Alison Frankel
Apr 19, 2012 13:57 UTC

As Reuters reported Tuesday in a piece on Citigroup shareholders voting against the $15 million board-approved pay package for CEO Vikram Pandit, investors appear to be increasingly skeptical of lavish pay for executives of corporations with underperforming stock. With companies entering the second proxy season in which shareholders can offer an advisory say on executive pay, compensation and proxy experts are predicting more votes against compensation packages than we saw in 2011, when 45 companies got a thumbs-down from shareholder in say-on-pay votes.

Such votes are strictly advisory. Dodd-Frank mandated that shareholders have a say on pay, but it didn’t require boards to do anything in response to their votes. Some boards took 2011 votes against approved compensation packages to heart; according to a Feb. 21 Wall Street Journal story, a lot of the companies that failed say-on-pay votes hired new compensation advisers and improved communications with shareholders. The Journal also noted that a quarter of the companies that failed shareholder votes got new CEOs in 2011, a turnover rate that’s twice as high as overall corporate rates. (It’s not clear whether that’s because the execs figured they could do better elsewhere or boards interpreted say-on-pay rejections as a no-confidence vote on management.)

But what happens if corporate boards simply ignore shareholder say-on-pay votes? Based on the results of the first year of say-on-pay litigation, not much.

Sex tapers can thank 3rd Circuit for First Amendment protection

Alison Frankel
Apr 17, 2012 22:00 UTC

There’s no question what Congress intended when it passed a pair of laws requiring producers of sexually-explicit materials to keep records on the age of the people engaged in sex acts (or simulated sex acts): curb child pornography. Lawmakers had already banned commercial child porn, but producers hired actors who were of age but looked young, making it tough to enforce the ban. In frustration, Congress passed a 1988 law that imposed specific record-keeping demands on porn producers, who must verify that performers are of age, maintain records to back the verification, and provide the location of those records in labels affixed to the sexually-explicit products. The law said that producers must maintain age records at their “business premises,” and must make the records available for government inspection, or else face a stiff fine and a prison sentence. A 2006 amendment to the law set the same record-keeping, labeling, and inspection requirements when sex is only simulated (albeit with a carve-out demanded by non-porn movie studios).

Because much child porn trafficking takes place underground, via private channels, the Justice Department said it would enforce the laws broadly, targeting not just porn-movie makers, but non-commercial producers of sexually-explicit material as well. The government did promise, however, that it would only prosecute those who intended to sell or trade the material.

The porn industry, as is its wont, brought constitutional challenges to the record-keeping laws, claiming that they violated the First, Fourth, and Fifth Amendments (specifically, free speech, equal protection, self-incrimination, and search and seizure provisions). In 2009, the 6th Circuit Court of Appeals sided with the Justice Department on the First Amendment question, in an 11-to-6 en banc ruling that held the record-keeping laws don’t unconstitutionally target porn producers and have only a collateral effect on free speech that’s justified by the government’s interest in protecting children from exploitation.

Previewing e-books defense: No price-fixing, no harm to readers

Alison Frankel
Apr 16, 2012 21:35 UTC

Has there ever been a price-fixing case in which the alleged conspirators agreed to take less money for their product and simultaneously up their production and boost competition? The answer to that question may determine the success of the Justice Department‘s e-books antitrust suit against Apple and the two publishers that have not agreed to settle DOJ’s civil charges.

On Friday, Apple and three publishers filed reply briefs in their effort to win dismissal of the private antitrust class action that parallels the Antitrust Division’s case. Those filings, coming two days after the government brought suit, offer good hints at how defense lawyers for Apple and the publishers will counter the Justice Department’s allegations. (Interestingly, Hachette and Harper Collins — the two publishers that have reached a tentative $52 million settlement with 16 state Attorneys General — did not sign the joint publishers’ motion, which suggests that they may argue their AG deal resolves the class action plaintiffs’ damages claims.)

The essence of the government’s case (as well as the private class action) is that the publishers regarded Apple’s entry into the e-books market as a chance to break Amazon’s 90-percent monopoly. As part of that effort, the publishers allegedly conspired with Apple to change the e-books model from the wholesale pricing Amazon insisted upon to so-called “agency pricing,” in which publishers set prices and Apple received a commission for every e-book it sold. Both the class action and the government suit assert that Apple and the publishers engaged in what’s known as “per se” price-fixing, which means that plaintiffs must only prove there was a conspiracy to restrain competition and raise prices. The Justice Department and private plaintiffs claim the proof of the conspiracy is the rise in e-book prices after the publishers all signed agency-pricing deals with Apple, from $9.99 to $12.99 or $14.99 for new titles.

  •