Alison Frankel

On Friday, the Wall Street Journal called Bank of America’s 2008 acquisition of the tottering mortgage giant Countrywide a $40 billion mistake. Sure, the bank only paid a total of $4.5 billion to pick up Countrywide, paying $2 billion for a minority stake in 2007 and an additional $2.5 billion for the rest of the company in 2008. BofA had its eye on Countrywide’s then-profitable mortgage servicing business, but since the acquisition Countrywide and its deficient mortgages have been pretty much nothing but trouble for Bank of America, which has seen its share price drop 68 percent and is still digesting what the Journal estimated to be at least $40 billion in “total real estate losses, settlements with government agencies and amounts pledged to investors who purchased poor-performing Countrywide mortgage-backed securities.” The Journal‘s Dan Fitzpatrick quoted a North Carolina banking professor who called BofA’s Countrywide acquisition “the worst deal in the history of American finance.”

Ouch. But thanks to a New York appeals court, BofA may have just put a fence around one big swath of Countrywide liability. On Thursday the Appellate Division, First Department, upheld Manhattan State Supreme Court Justice Barbara’s Kapnick‘s ruling that the mortgage-backed securities investor Walnut Place may not proceed with a breach of contract case against Countrywide. That ruling will severely limit the options for Walnut and the other investors who have objected to Bank of America’s proposed $8.5 billion global settlement with Countrywide MBS noteholders. It also puts the focus in the litigation over the global settlement on Bank of New York Mellon and its conduct as Countrywide’s MBS trustee, which Kapnick is also overseeing. My prediction: Unless Kapnick finds that BNY Mellon didn’t fulfill its duties as trustee in reaching that settlement, Countrywide MBS investors can’t sue outside of the deal.

And here’s why. MBS pooling and servicing contracts, you’ll recall, make it exceedingly difficult for noteholders to bring claims that underlying loans breached representations and warranties by mortgage issuers like Countrywide. Under standard PSA terms, investors can’t take any action unless they’ve amassed support from noteholders with 25 percent of the voting rights in a particular MBS trust. If they manage to get over that procedural hurdle, they must then demand an investigation of reps and warranties breaches from the MBS trustee and then wait months for the trustee to respond. Only if the MBS trustee fails to take action on their behalf can investors bring their own breach of contract or put-back suit.

Few private-label MBS investors have managed to run that obstacle course and file their own put-back claims. Walnut Place, a nom de litigation for the hedge fund Baupost, is in that small group. In April 2011, Walnut’s lawyers at Grais & Ellsworth sued Countrywide and MBS trustee Bank of New York Mellon in Manhattan State Supreme Court, claiming that they’d breached the PSAs governing two Countrywide MBS trusts.

Last July, after Bank of America announced that it had reached a global $8.5 billion put-back settlement with a group of 22 institutional investors in Countrywide mortgage-backed notes, BofA and Countrywide moved to dismiss the Walnut suit. They argued that Walnut didn’t have a cause of action under the pooling and servicing agreements because BNY Mellon had already taken action on its behalf: The trustee had entered into the negotiations that produced the $8.5 billion proposed settlement.

In March, at the end of his much-maligned oral argument on the constitutionality of the so-called individual mandate of the Affordable Care Act, Solicitor General Donald Verrilli threw a Hail Mary.

Verrilli had taken a beating on his argument that the mandate didn’t violate the Commerce Clause because Congress was only regulating an existing market, not forcing people who don’t want health insurance into the market for healthcare. Chief Justice John Roberts and justices Antonin Scalia, Samuel Alito and Anthony Kennedy pounded the solicitor general on whether his reading of the Commerce Clause would permit Congress to do pretty much whatever it wanted in the guise of regulating interstate commerce. In the midst of discussing broccoli, health clubs and auto emission regulation, Verrilli and his opponents spent very little time presenting arguments and answering questions on the government’s backup argument for the mandate’s constitutionality: that the penalty imposed on those who do not buy health insurance is actually a tax that Congress is empowered to impose. (Paul Clement of Bancroft argued on behalf of 26 states opposed to the Affordable Care Act, and Michael Carvin of Jones Day on behalf of the National Federation of Independent Businesses.)

Nevertheless, Verrilli devoted his very last moments before the justices to the tax issue. “If there is any doubt about [the mandate's constitutionality] under the Commerce Clause,” he said, “then I urge this court to uphold the minimum coverage provision as an exercise of the taxing power.”

Last month, when plaintiffs’ lawyers filed their amended class action complaints against a bevy of banks accused of manipulating the London interbank offered rate (or Libor), I noted that the antitrust complaints were long on wonky economic analysis but short on juicy conspiracy evidence, mostly because U.S. District Judge Naomi Reice Buchwald had denied motions to grant the private antitrust plaintiffs access to materials the banks turned over to regulators. I asked whether there was enough billowy black smoke in the class complaints to withstand the banks’ motions to dismiss.

I don’t think that’s going to be a problem anymore.

On Wednesday, Barclays won the race to reach a deal with U.S. and British regulators, beating UBS, which was reportedly the first bank to begin cooperating with international antitrust authorities. Barclays agreed to pay at least $450 million to resolve government investigations of manipulation of Libor and the Euro interbank offered rate (or Euribor): $200 million to the U.S. Commodity Futures Trading Commission, $160 million to the criminal division of the U.S. Department of Justice and $92.8 million to Britain’s Financial Services Authority. What’s more, the CFTC and DOJ filings on the deal feature more smoking guns than a Martin Scorsese movie.

The CFTC’s Order Instituting Proceedings and the Justice Department’s Statement of Facts cite truly eye-popping emails, instant messages and other evidence indicating that between 2005 and 2008 Barclays employees agreed to manipulate the rates they submitted to the banking authority that oversees the daily Libor report for seemingly anyone who asked them to monkey with it: senior Barclays officials concerned that the bank would look weak if it reported too high a borrowing rate; interest rate swap traders trying to improve Barclays’ derivatives trading position; even former Barclays traders begging for favors. We’re talking naked, blatant manipulation. Here’s one exchange cited in the DOJ filing:

Usually when I write about the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, it’s to tell you about yet another successful defense effort to dismiss claims involving the overseas application of U.S. laws, whether in trade secrets litigation, bankruptcy clawback actions or lots of other arenas that have nothing to do with Morrison‘s securities-law roots. In April, the Securities and Exchange Commission needed a full 106 pages to analyze Morrison‘s background and impact (before declining to answer the question of whether Congress should reform securities laws to restore a cause of action for U.S. investors against foreign-listed defendants). Across a wide plain of civil litigation, foreign defendants have wielded Morrison as a case-crushing bludgeon, with federal judges bowing to its power.

But in some recent rulings the judiciary is beginning to define limits to Morrison‘s sweep, suggesting that the ruling demands a more nuanced, fact-based inquiry than earlier decisions suggested. I’ve previously talked about U.S. District Judge Lewis Kaplan‘s survey last month of Morrison‘s impact on racketeering cases and his conclusion that as long as there’s “a domestic pattern of racketeering activity aimed at or causing injury to a domestic plaintiff,” RICO claims can survive against foreign defendants. Last week Kaplan once again homed in on Morrison and domestic conduct, this time in the securities context. The judge refused to dismiss any of the SEC’s claims against the New York investment adviser ICP, which allegedly defrauded investors in the Triaxx mortgage-backed collateralized debt obligations.

ICP and the individual defendants, represented by Williams & Connolly and Miller & Wrubel, had argued that the SEC cannot show the Triaxx CDOs were traded domestically. Morrison holds that there’s only a cause of action in the United States for “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” The Triaxx CDOs were not listed, and ICP’s lawyers said the investment vehicles in the case were all foreign, so, according to ICP, Morrison bars the SEC’s claims.

There is no federal judge more economically outspoken than Richard Posner of the 7th Circuit Court of Appeals, who in his scant spare time co-authors a provocative blog with the Nobel Prize-winning University of Chicago economist Gary Becker. With a high-pitched querulous voice and no tolerance for obfuscation, Posner can demolish lawyers he considers economics slackers. If you’ve got a dubious theory of damages, you’d better hope you don’t end up arguing it before him.

But I’d bet neither Apple nor Motorola thought their damages theories were particularly unusual in the patent infringement cases Posner tossed Friday, sitting by designation in federal district court in Chicago. The lawyers on both sides (who didn’t return my calls seeking their comments) are, after all, veterans of the smartphone patent wars: Quinn Emanuel Urquhart & Sullivan for Motorola; Covington & Burling, Weil, Gotshal & Manges and Tensegrity Law Group (Matt Powers‘s new shop) for Apple. Motorola made basically the same damages argument against Apple that it has asserted in litigation with Microsoft in federal court in Seattle, claiming that it’s due more than 1 percent of iPhone sales for Apple’s infringement of a standard-essential Motorola patent on communications between cellphones and cellular towers. Apple, meanwhile, offered an economic consultant’s analysis of what it might have cost Motorola to license or work around its patents for digital signal processing and recognition of embedded phone numbers and Web addresses.

Nevertheless, according to Posner’s 38-page opinion, neither side made a legally sufficient case for damages. That, in turn, doomed both sides’ requests for injunctions. With neither an injunction nor money damages an option for Apple or Motorola, Posner said any judgment on the validity or infringement of the patents at issue “would have no practical effect” and dismissed both suits with prejudice.

The bond insurer Syncora got just about everything it wanted when U.S. District Judge Paul Crotty of Manhattan issued his long-awaited ruling on loss causation in Syncora’s breach-of-contract case against EMC, the erstwhile mortgage arm of Bear Stearns. Crotty’s analysis didn’t track the same way as that of New York State Supreme Court Justice Eileen Bransten in the Syncora and MBIA rulings against Countrywide, and, unlike Bransten, he did not grant Syncora summary judgment on its theory of rescissionary damages, which would have entitled the bond insurer, as a matter of law, to recover everything it has paid out in claims on the EMC mortgage-backed securities it insures, less premiums. Crotty said it’s too early to decide that fact-based question.

But on every other point, the federal judge sided with Syncora and its lawyers at Patterson Belknap Webb & Tyler, and in ways that may protect Syncora when the state appeals court reviews Bransten’s ruling in the Countrywide case. Bransten began her analysis with the insurance contracts between the monolines and Countrywide, concluding that under state insurance law the bond insurers simply had to show that Countrywide misstated the risk profile of the underlying mortgage pool when it induced MBIA and Syncora to insure the mortgage-backed notes. She declined, however, to grant summary judgment to Syncora and MBIA on the broader question of whether Countrywide breached MBS servicing agreements – as opposed to insurance contracts – merely by misrepresenting the quality of the underlying loans, or whether insurers (and, by extension, investors) could only assert put-back demands for defaulted loans.

Crotty, by contrast, said the contracts between Syncora and EMC are clear: EMC is liable for breaches in representations and warranties about the underlying home equity loans, regardless of whether those loans are in default. The insurance contract, he said, refers back to the loan servicing agreements, which, according to Crotty, “do not provide that breaches of representations or warranties must cause any … loan to default, before (Syncora) can enforce its remedies under the repurchase provision. Had the parties intended this requirement, they could have included such language. They did not.” In essence, Crotty conflated his analysis of the insurance and loan pooling contracts, unlike Bransten, who examined them separately. He concluded that the insurance contract incorporates the loan pooling contract, which does not require Syncora to show that breaches in EMC’s representations on the underlying loans led to their default in order to demand repurchase of deficient loans.

We now know exactly who caused the financial crisis.

Or, at least, whom U.S. District Judge Frederic Block of Brooklyn holds accountable. According to a 19-page opinion Block issued Monday in the Securities and Exchange Commission case against former Bear Stearns hedge fund executives Ralph Cioffi and Matthew Tannin, “many in the financial world” believe the economic catastrophe was triggered by the collapse of two funds Cioffi and Tannin ran. That’s a pretty heavy burden the judge has laid on the former Bears, who, after all, were acquitted in a 2009 criminal trial of lying to investors about the health of their funds.

Block, who had previously informed the SEC that he would not be a mere rubber stamp for what he called a “chump change” settlement, ended up approving a deal between the agency and the former Bear Stearns execs. (Neither of them admitted or denied the SEC’s allegations, but Cioffi agreed to cough up $800,000 in penalties and disgorgement; Tannin’s total is $250,000.) But the judge took the opportunity of a settlement in this widely followed case to write an opinion that seems directed at the peanut gallery, and not at the SEC, Cioffi, Tannin or their lawyers. His conclusion: “Wall Street predators” caused the economy to buckle, and Congress should think hard about empowering the SEC to recoup investor losses.

According to Block’s discussion of the SEC’s historical enforcement abilities, Congress has twice acted to expand the agency’s mandate. The SEC at first had only the ability to enjoin violations of securities laws. A 1971 ruling by the 2nd Circuit Court of Appeals, followed by similar rulings in other federal circuits, codified the agency’s power also to seek disgorgement of ill-gotten profits as a remedy. Then, in a pair of laws in 1984 and 1990, Congress gave the SEC the right to demand monetary penalties of up to $500,000, depending on the defendant and the alleged violation.

The last time I wrote about the securities fraud class action claims against JPMorgan Chase for the losses it suffered in risky credit default swaps, I told you to pay attention to the unusually short class period alleged in the early complaints. The first couple of filings claimed the bank’s deception of investors began on April 13 – the day JPMorgan CEO Jamie Dimon told analysts that news reports about the dangerous trading position of its chief investment office were a “tempest in a teapot” – and ended on May 10, when the bank disclosed the initial $2 billion loss of the “London Whale.”

Two institutional investors joined the JPMorgan fray last week in federal court in Manhattan, and suddenly the class period has become a point of controversy. A pipefitters’ union trust fund represented by Labaton Sucharow claims that the bank’s fraud began not on April 13 but three months earlier, on Jan. 13. That was the date JPMorgan filed an annual report with the Securities and Exchange Commission that allegedly failed to warn investors about the looming CIO losses, “instead offering a false and misleading picture of stable and consistent operational strategy and risk exposure.”

The Louisiana Municipal Police Employees’ Retirement System, represented by Grant & Eisenhofer, put the beginning of the alleged fraud long before the 2012 annual report. According to the LAMPERS complaint, filed Friday, JPMorgan began deceiving shareholders about its exposure all the way back in February 2010, when it published a misleading description of the CIO in its annual report. From then on, LAMPERS claims, the bank ignored so-called red flag warnings and continued to mislead investors about its risky hedges.

Without former U.S. District Judge Richard Holwell, there probably would not have been any prosecution of Rajat Gupta, the former Goldman Sachs director and McKinsey chief convicted Friday of insider trading and conspiracy. In 2010, Holwell ruled that prosecutors could use wiretap evidence in their case against Galleon Group hedge fund founder Raj Rajaratnam, rejecting defense arguments that the government is not authorized to use wiretaps to investigate insider trading. If prosecutors hadn’t been able to use those Rajaratnam wiretaps – in which Rajaratnam obliquely referred to tips from a Goldman insider – it’s unlikely the government would have gone to trial against Gupta, since the tapes were the only link between Gupta’s alleged tips and Rajaratnam’s trades.

Holwell, who is now in private practice at Holwell, Shuster & Goldberg, told me Friday that wiretaps have forever changed the way the government investigates insider trading. “Prior to the Rajaratnam case, you look at insider trading rings, and they’re very small. Prosecutors would wind up getting one, two, three people.” The Rajaratnam case showed that with wiretaps, you can sweep in rings of tippers, leading to “a vast array of prosecutions,” Holwell said.

It’s also unlikely, he said, that prosecutors would have uncovered Gupta’s role in Rajaratnam’s insider trading ring if they had not been authorized to tape the Galleon founder. The classic evidence in insider trading prosecutions is trading and telephone records, but since Gupta didn’t profit directly from Rajaratnam’s trades, he probably wouldn’t have come to the government’s attention if it hadn’t been for those taped references.

When John Bellinger of Arnold & Porter was the legal adviser to the State Department in the administration of George W. Bush, the Justice Department filed about a dozen amicus briefs addressing the Alien Tort Statute, a 1789 law that has become a modern vehicle for international human rights litigation. Bellinger told me on Thursday that he signed every one. When foreign nationals use the ATS to bring cases in U.S. courts for conduct that took place overseas, foreign policy is implicated, and the State Department wants a voice. That’s why Bellinger believes it’s so significant that when the Justice Department filed its new amicus brief in the reformulated Kiobel v. Royal Dutch Petroleum case at the U.S. Supreme Court, State Department legal adviser Harold Koh did not sign it.

“That seemed to be a not-so-subtle message — more to the human rights community than the Supreme Court — that State did not agree with the Justice Department position,” said Bellinger, who blogged about the DOJ brief on Wednesday night at Lawfare. “The Obama administration was in a tight spot in this one.”

The DOJ brief, signed by Solicitor General Donald Verrilli, argues, tepidly, against the application of the Alien Tort Statute against Shell by Nigerian nationals who claim the oil company was complicit in state-sponsored torture and murder in their country. That’s a switch in sides for the government, which had supported the Nigerians in Kiobel‘s first trip to the Supreme Court, when the issue was whether corporations could be liable under the Alien Tort Statute. The Justice Department said they could, in an amicus brief that State Department adviser Koh signed.