Opinion

Alison Frankel

Can BofA and SocGen undo MBIA’s restructuring?

Alison Frankel
May 11, 2012 22:19 UTC

Of the 18 banks that challenged MBIA’s restructuring in 2009, only two – Bank of America and Société Générale – remain. On Monday, unless there’s a last-minute settlement this weekend, they will finally go to trial in New York State Supreme Court to argue that New York state insurance regulators should not have approved MBIA’s split, which stripped $5 billion in capital from MBIA’s crippled structured-finance insurance business.

But exactly what shape the trial will take – and what relief BofA and SocGen can ultimately obtain – remains unclear. Bank lawyers from Sullivan & Cromwell, MBIA counsel from Kasowitz Benson Torres & Friedman, and state lawyers from the office of New York Attorney General Eric Schneiderman are all preparing for a proceeding whose parameters have not been set. The banks call it a trial and continue to insist they are entitled to call expert witnesses such as former state insurance officials, who would opine on the adequacy of former Insurance Superintendent Eric Dinallo’s vetting of MBIA’s restructuring. MBIA and the state say the proceeding, brought under an expedited process known as Article 78, should be limited to a few witnesses with direct knowledge of the regulatory investigation. Justice Barbara Kapnick, who is overseeing the case, has called the trial “a glorified oral argument, with some testimony, the crucial testimony, to support it.”

Kapnick agreed at a hearing on Apr. 20 to permit witness testimony at the trial, but she didn’t specify who could be called as a witness. Nor did she set firm rules when she held a conference call this week with all of the parties. So the first order of business Monday will almost certainly be argument on motions to define the trial, though it’s just as likely that the lawyers will end up fighting over the witnesses one by one, as they are proposed. Kapnick has set aside 16 trial days over four weeks for the proceeding.

MBIA has spent more than $1 billion to settle with the 16 other banks that were part of the original coalition challenging its restructuring, including, most recently, Natixis, UBS, Morgan Stanley and Royal Bank of Scotland. According to MBIA’s quarterly filing with the Securities and Exchange Commission on May 10, the insurer has shed tens of billions of dollars of exposure through those deals. In just the first five months of 2012, MBIA commuted $11.5 billion of exposure.

But the insurer’s structured-finance arm, MBIA Insurance, has had to borrow from its better-capitalized municipal bond division, MBIA National, to fund those settlements. Last fall MBIA Insurance took out a $1.1 billion secured loan from MBIA National, at the time it announced a settlement with Morgan Stanley. According to its May 10 filing, MBIA Insurance has borrowed an additional $443 million from MBIA National in the last two months.

Perfect 10 CEO: Porno troll or copyright crusader (or both)?

Alison Frankel
May 11, 2012 01:53 UTC

I was planning to write a sober analysis of a new copyright infringement complaint filed in Manhattan by the adult entertainment (read: naked pics of beautiful women) site Perfect 10. I figured I would examine whether the recent 2nd Circuit Court of Appeals ruling in Viacom’s case against YouTube and Google would help Perfect 10′s claims that the hipster blog site Tumblr consistently refused to take down unauthorized uploads of Perfect 10 photos, even after receiving infringement notices. Then I got a call from Perfect 10 CEO Norman Zada, responding to a message I left with his lawyers at Cowan, DeBaets, Abrahams & Sheppard. Zada convinced me that a straight story wouldn’t adequately capture Perfect 10′s copyright campaign.

Zada isn’t a lawyer but he said he might as well be, considering that Perfect 10′s main business these days is litigating to enforce its copyrights. There was once a Perfect 10 magazine and a startup video operation, but now there’s just a subscription-based website that, by Zada’s admission, isn’t doing very well. “Perfect 10 is a shell,” he said. “We have died.”

Blame, he said, lies mostly with the Internet sites he has spent the last eight years litigating against – including Google, Amazon, Microsoft, RapidShare, Megaupload and the Russian site Yandex – and the companies that he believes facilitate Internet copyright theft. “There is a massive attack on copyrights in this country,” Zada said. “Over $1 trillion of copyrighted materials are being stolen on the Internet” by sites that “have an incentive to use stolen materials uploaded by anonymous users,” he said. Zada placed some additional responsibility on federal judges who don’t regard the Internet copyright crisis to be as dire as he does, but he said they’re overworked. “We need twice as many judges. We need Internet police,” he said. “I am so pro-copyright, and I’m just so amazed at what is going on.”

In Gupta case, new filings crystallize prosecution’s challenge

Alison Frankel
May 10, 2012 00:01 UTC

From the beginning of the criminal prosecution of Rajat Gupta, it was clear that the government didn’t have the sort of evidence usually at the heart of insider-trading cases. Gupta didn’t profit directly from the tips he allegedly passed to Raj Rajaratnam, who has since been convicted of insider trading. In fact, as his lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel has said repeatedly, Gupta lost millions in his investment with Galleon, Rajaratnam’s hedge fund. That evidentiary gap has left space for Naftalis to argue that the government unfairly targeted his client because of Gupta’s high profile as a former head of McKinsey and director at Goldman Sachs. It also puts pressure on prosecutors to link Gupta directly to Rajaratnam’s tainted trades, since nothing else shows he was part of the conspiracy.

As Gupta’s May 21 trial date fast approaches, the latest filings from both sides disclose exactly how the government intends to establish that link, using phone records and wiretap evidence to show that Rajaratnam traded specifically because of tips he received from Gupta. But the new briefs also spotlight the inferences prosecutors will have to ask jurors to draw. The government’s case leans heavily on wiretapped conversations in which Rajaratnam tells associates at Galleon what he found out in alleged phone conversations with Gupta that were not taped by the government. Prosecutors argued in a motion in limine last week that Rajaratnam’s taped calls with Galleon conspirators fall under an exception to the rule barring hearsay evidence. If U.S. Senior District Judge Jed Rakoff disagrees, the government will have a much tougher time convincing jurors that Rajaratnam’s inside information came from Gupta.

The prosecution’s latest bill of particulars against Gupta includes allegations that Gupta tipped off Rajaratnam about Procter & Gamble news (Gupta was also a director there). But the government’s strongest evidence appears to involve two alleged Goldman tips. The first alleged tip came on the day in September 2008 that Goldman Sachs directors learned of Warren Buffett’s $5 billion investment in the bank. Moments after Gupta disconnected from the board’s conference call, his assistant placed a call to Rajaratnam, according to phone records. After that very brief call, which concluded only minutes before the end of the trading day, Rajaratnam placed orders to buy as much Goldman Sachs stock as he could snap up. He ended up paying about $25 million for more than 200,000 shares. The next day, according to wiretap evidence, Rajaratnam told his personal Galleon trader, an unindicted co-conspirator named Ian Horowitz, that he rushed to order hundreds of thousands of Goldman shares because he “got a call at 3:58 … saying something good might happen to Goldman.”

In securities suits, is D&O coverage pot of gold – or brick wall?

Alison Frankel
May 9, 2012 05:21 UTC

In an ideal world, the value of a shareholder securities claim rests entirely on its merits. And now that you’ve stopped snickering, let’s talk about the real world, where two disputed settlements test the de facto assumption that securities claims are worth what a company’s directors and officers insurance carriers are willing to pay to resolve them.

In Bank of America’s proposed $20 million settlement in Manhattan federal court of a derivative suit based on its 2008 acquisition of Merrill Lynch, a group of plaintiffs’ firms with a parallel case in Delaware Chancery Court argue that the settlement is insufficient because $20 million is only a tiny fraction of BofA’s $500 million in D&O coverage. Last week Delaware Chancellor Leo Strine refused to enjoin the New York deal, leaving it up to U.S. District Judge P. Kevin Castel to decide whether the derivative shareholders are getting enough money. That’s a sensible result: Castel, after all, is overseeing consolidated Merrill-related securities litigation against BofA, so he’ll evaluate the proposed derivative settlement with the understanding that there are lots of other claimants waiting in line for a chunk of that $500 million in D&O insurance, even as it’s whittled down by defense fees.

Meanwhile, Castel’s Manhattan federal court colleague, U.S. District Judge Lewis Kaplan, last week expressed reservations about a $90 million settlement of securities class action claims against Lehman’s former officers and directors, including former CEO Richard Fuld. Kaplan said in a May 3 order that he understood $90 million was all that remained of Lehman’s $250 million D&O policy, but wanted to satisfy himself that shareholders wouldn’t be better off if their counsel at Bernstein Litowitz Berger & Grossmann pressed on and obtained judgments against individual defendants. To that end, he ordered five former Lehman officers to turn over to him the financial records they’d already produced to a settlement magistrate, retired U.S. District Judge John Martin.

Martin Marietta CEO’s ambition doomed policy argument in Vulcan case

Alison Frankel
May 7, 2012 22:29 UTC

Sometimes it seems as though Chancellor Leo Strine of Delaware Chancery Court is more excited about analyzing the exercise of corporate power than he is about the fine points of Delaware law. It’s not that Strine isn’t committed to the business litigation regime for which he is cheerleader-in-chief. But in some recent major rulings, including his 2010 decision upholding Barnes & Noble’s poison pill, his award of about $3 billion to Southern Peru Copper shareholders last October, and his ruminations on Kinder Morgan’s acquisition of El Paso Corp in March, Strine lets loose the rhetorical reins when he discusses power: who has it, who wants it, and how it influences corporate dealmaking.

We can now add Strine’s 139-page decision enjoining Martin Marietta Materials’ hostile bid for its rival Vulcan Materials to that list. Friday’s ruling appears to be the first time in a quarter century that a Delaware judge has barred a hostile takeover; Strine said that when Martin Marietta launched its tender offer for Vulcan shares last December, it breached a pair of 2010 confidentiality agreements the two companies entered into when they were contemplating a friendly deal. He extended the 2010 agreements, which expired early this month, by four months to punish Martin Marietta for its breach. Martin Marietta announced Monday that it will ask the Delaware Supreme Court to stay Strine’s ruling and expedite its appeal. But, unless the state high court agrees to do so, Strine’s decision will effectively end Martin Marietta’s exchange offer for Vulcan shares and its proxy war for seats on the Vulcan board, since Vulcan’s annual shareholder meeting takes place in June.

The most powerful argument Martin Marietta and its lawyers at Skadden, Arps, Slate, Meagher & Flom made in defense of the Vulcan takeover bid was a matter of policy. The 2010 agreements between Vulcan and Martin Marietta – a non-disclosure agreement and a joint defense agreement that addressed some of the antitrust concerns that might arise in a merger – did not contain standstill provisions explicitly precluding either of the companies from making an uninvited bid for the other. Martin Marietta said that Strine could not impose such a reading on the 2010 confidentiality contracts, and if he did, he’d chill M&A activity by assuming a standstill where none was agreed to. As Strine explained: “In its starkest form, Martin Marietta’s argument is that a loss for Martin Marietta in this litigation will turn every confidentiality agreement into a standstill, even though standstills are a common contractual provision.” (According to Vulcan, between one-quarter and one-third of M&A-related confidentiality agreements do not contain standstills.)

Up Monday: Crucial hearing in Microsoft v. Motorola RAND case

Alison Frankel
May 4, 2012 22:00 UTC

For Microsoft, the last two weeks have brought bad news in its patent war with Motorola Mobility. On Apr. 24, an administrative law judge at the U.S. International Trade Commission issued an initial determination that Microsoft’s Xbox infringes four Motorola patents – rejecting Microsoft’s defense that three of the patents were essential to standard wireless device technology and that Motorola had breached an agreement to license the IP on reasonable terms. Then, on Wednesday, a judge in Mannheim, Germany ruled that the Xbox and certain versions of Windows infringe Motorola patents. He ordered the products removed from sale in Germany.

But Microsoft believes that if it wins its breach-of-contract case against Motorola in federal district court in Seattle, neither the ITC nor Mannheim rulings will have much significance. That’s why Monday’s hearing before U.S. District Judge James Robart is so critical. Robart will hear arguments on two summary judgment motions by Microsoft and one by Motorola. If he ends up agreeing with Microsoft that Motorola was obligated under its contracts with standard-setting bodies to license essential patents to Microsoft on fair and reasonable terms – and that Motorola breached its obligation by demanding unreasonable fees of $4 billion a year from Microsoft – the practical effect will be that Motorola must license the patents to Microsoft. That would spell the end of Motorola’s ITC and German infringement claims on standard-essential patents. (One of the patents in the ITC case isn’t in that category.)

Motorola, meanwhile, has moved for a summary judgment that Microsoft repudiated its licensing rights when it sued Motorola in Seattle in 2010. If Motorola wins, that’s the end of Microsoft’s case. If it loses, however, Robart’s prior rulings would likely lead him to conclude, as a matter of law, that Microsoft is entitled to license the Motorola technology.

To silence critics, SEC should use Option One MBS case as template

Alison Frankel
May 3, 2012 22:12 UTC

If you haven’t already, read Jesse Eisinger’s piece for ProPublica and the New York Times on the Securities and Exchange Commission’s case against the upstart credit-rating agency Egan-Jones. The SEC sued Egan-Jones – which challenged the traditional business model for rating agencies by charging users, not issuers, to opine on the riskiness of securities – for exaggerating its bona fides in a 2008 filing. Eisinger questioned the wisdom of sending Egan-Jones “to the guillotine” while letting bigger players, with business models that are susceptible to corruption, off the hook for their patently ridiculous ratings of toxic mortgage-backed securities. “This is your S.E.C., folks,” Eisinger wrote. “It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it’s because it has found a box unchecked, rather than any kind of deep, systemic rot.”

Inspired by the piece, I went back to take another look at the SEC’s Apr. 12 complaint against Option One, a relative small-timer in the mortgage-backed securities market. Could Eisinger’s criticism of the SEC’s credit-rating enforcement – that the agency is netting minnows while the sharks swim away – apply just as well to MBS issuers?

Well, yes. But I’m getting tired of asking why the SEC has been so slow to enforce accountability for banks that packaged and sold securities backed by subprime mortgages that didn’t meet even the lax underwriting standards they warranted. So instead, I’m choosing to regard the Option One case as a model for the kinds of actions the already much-maligned mortgage fraud task force keeps promising to bring. From my reading, there’s no reason other MBS defendants can’t be held liable for the same disclosure problems that Option One agreed to settle for $28.2 million.

New LIBOR antitrust complaints: Lots of charts, few juicy specifics

Alison Frankel
May 3, 2012 14:02 UTC

It takes serious economics chops to be a big-time antitrust lawyer. If you want proof, read through the amended complaints filed in federal court in Manhattan this week in the consolidated litigation over the London Interbank Offered Rate, or LIBOR. Three different sets of plaintiffs contend that banks around the world colluded to misreport interbank borrowing rates, which are averaged to produce the LIBOR every day. In turn, LIBOR rates (which are currently determined for 10 currencies) are used as the primary benchmark for short-term interest rates worldwide. As Susman Godfrey and Hausfeld noted in their 103-page amended complaint on behalf of a class of investors in LIBOR-based swaps, options, and CDOs, “LIBOR thus affects the pricing of trillions of dollars’ worth of financial transactions.”

Their complaint, like the amended LIBOR complaints also filed Monday night by a class of investors in exchange-traded, LIBOR-based securities and by Charles Schwab, is filled with charts and economic analysis purporting to show that the LIBOR panel banks deliberately reported lower borrowing rates than they were actually charged, with the apparent motive of making themselves look healthier than they were and of setting artificially low interest rates on LIBOR-based securities. (Here’s the 107-page filing by the exchange-traded securities class, which is represented by Kirby McInerney and Lovell Stewart Halebian Jacobson; here’s the 103-page Schwab complaint, filed by Lieff Cabraser Heimann & Bernstein.) The complaints track LIBOR rates against other metrics, like the banks’ probability of default, Eurodollar deposit rates, and credit default swap spreads, to conclude that the rates banks reported every day to the unregulated LIBOR-setting body couldn’t be truthful.

Regulators around the world suspect the same thing, as the amended complaints point out. No fewer than nine enforcement and criminal agencies are investigating alleged LIBOR manipulation, including the U.S. Department of Justice, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. All of the new filings cite juicy disclosures in the Singapore and Canada proceedings. In Canada, affidavits from an official in the criminal antitrust department revealed that one bank – later reported to be UBS – is actively cooperating with investigators and has provided records and testimony in the conspiracy probe. The Canadian affidavits include some of the detailed allegations of collusion between traders at different banks that can make or break an antitrust case. Similarly, in the Singapore wrongful termination case, a former Royal Bank of Scotland trader claims that he was scapegoated for manipulating LIBOR rates, when the bank itself condoned and encouraged the practice. The complaints also point to news stories about investigations of LIBOR collusion by officials in Japan and the European Union, among other places.

Moral of ‘Three Cups’ dismissal: Don’t believe everything you read

Alison Frankel
May 2, 2012 15:35 UTC

On Apr. 5, Greg Mortenson, the author of the blockbuster bestseller Three Cups of Tea, agreed to pay $1 million to resolve the Montana attorney general’s claims that he misused money from the charity he founded to establish schools in Pakistan and Afghanistan. Mortenson had attracted tens of millions of dollars for the charity through his memoir, Three Cups, and its sequel, Stones into Schools, before a 60 Minutes report in April 2011 cast doubt on some key points in Mortenson’s story and asserted he was diverting money from the charity to fund personal travel. A yearlong investigation by the Montana AG found the charity spent nearly $10 million to promote or buy his books.

Those are serious lapses, and everyone who contributed to Mortenson’s charity should be relieved that Mortenson has repaid what the Montana AG said he owed. But does he – or his Three Cups co-author, his charity, and the publisher of both Mortenson books – owe anything to book buyers who claim they were defrauded into purchasing a book they believed was entirely true?

Not according to U.S. District Judge Sam Haddon of Missoula, Montana, who tossed a class action asserting racketeering, fraud, and breach of contract claims (among others) on Monday. Haddon said in a 24-page opinion that plaintiffs’ lawyers Alexander Blewett of Hoyt & Blewett, Larry Drury, and Robert Langendorf simply hadn’t shown in four amended complaints that the alleged misrepresentations in Mortenson’s books added up to a fraudulent scheme. They hadn’t even properly alleged that class members bought the books because they thought everything in them was true, Haddon found.

Who won Microsoft v. Barnes & Noble patent litigation?

Alison Frankel
May 1, 2012 00:19 UTC

Thanks to Monday’s joint announcement of Microsoft’s $300 million investment in a new Barnes & Noble’s digital and college textbook subsidiary, we will never know who actually won the patent showdown between the software and bookselling giants. An administrative law judge at the U.S. International Trade Commission last week put off an initial determination in Microsoft’s patent infringement case against B&N, which was tried in February. Now that the two are partners in the e-book business, the patent litigation will end without a ruling on the merits from the ITC or from the U.S. district judge overseeing Microsoft’s parallel infringement suit in Seattle federal court.

But that doesn’t mean we can’t talk about which side won the case.

It’s easier to argue that Barnes & Noble (and its vast army of lawyers from Cravath, Swaine & Moore, Kenyon & Kenyon, Quinn Emanuel Urquhart & Sullivan, and Boies, Schiller & Flexner) came out ahead. The dispute began, you’re recall, when Microsoft tried to get Barnes & Noble to license its IP for use in the bookseller’s Android-powered e-reader, the Nook. After Barnes & Noble balked at Microsoft’s fee demands, Microsoft sued B&N in Seattle and at the ITC. Barnes & Noble countered with a defense that Microsoft was misusing its patent portfolio to demand unconscionable fees from Android users, even taking its antitrust allegation to the Justice Department. But B&N’s patent misuse defense was knocked out in the ITC case — making it all the more (apparently) remarkable that in Monday’s deal, Microsoft paid B&N, the patent defendant, a sum of money that exceeded the marketplace value of its investment. How often does a patent plaintiff pay the defendant in a settlement? Especially when that defendant is on the ropes and urgently searching for a strategic investor?

Barnes & Noble’s shareholders clearly regarded the deal as a huge victory for the company. B&N stock nearly doubled before settling back in a down market. So if you’re another Android user thinking about saying no to Microsoft when it comes around with a licensing demand, you have to be emboldened by the B&N story: After enduring a year under scrutiny as a defendant, Barnes & Noble ends up with $300 million and drastically improved business prospects. That’s not the scorched-earth result you might fear from taking on Microsoft and its lawyers. (In this case, Sidley Austin; Orrick, Herrington & Sutcliffe; Woodcock Washburn; and Adduci, Mastriani and Schaumberg.)

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