Opinion

Alison Frankel

BlackRock: MBS market won’t revive until litigation is resolved

Alison Frankel
Jun 13, 2012 22:29 UTC

No major investor in private-label mortgage-backed securities has been more stalwart about standing up for its contractual rights than the asset manager BlackRock. Along with Pimco, BlackRock has been the backbone of the MBS investor coalition that reached the proposed $8.5 billion breach-of-contract (or put-back) settlement with Bank of America last year and the $8.7 billion allowed-claim deal with Residential Capital last month. The coalition, represented by the law firm Gibbs & Bruns, has also served put-back demands on trustees for more than $100 billion in mortgage-backed offerings by JPMorgan, Morgan Stanley and Wells Fargo. So there’s no one better qualified than BlackRock Managing Director Randy Robertson, who heads the firm’s securitized asset investment team, to judge the impact of put-back litigation on the future of residential mortgage-backed securitizations.

His view: Litigation – or, more precisely, the conflict that leads to litigation – stands in the way of an MBS revival because investors don’t believe issuers will live up to contract terms. “A preponderance [of the pending litigation] would have to be resolved,” Robertson said Wednesday at a briefing on the BlackRock Investment Institute’s new report, “In the Home Stretch: The U.S. Housing Market Recovery.” I asked Robertson how long that might take. “I wish I had a crystal ball,” he replied. I also asked whether there were any more big settlements in the offing; Robertson declined to say.

Until investors’ put-back claims are resolved, Robertson said, any MBS issuer (or the government) will have to provide enough subordination to account for the extra risk investors believe they bear. Robertson estimated it would take 20 percent government backing, for instance, to reassure the MBS market about any new offering. He also said pooling and servicing agreements will have to be, in his word, “tweaked” to reflect investor concerns. Going forward, Robertson said, pooling and servicing agreements will have to distinguish between issuers and servicers to remove a potential conflict of interest, offer investors more access to information about the performance of underlying assets and include additional specificity about the fiduciary responsibilities of MBS trustees.

Mostly banks have to win back the trust of investors, who, according to Robertson and BlackRock Vice-Chairman Barbara Novick, feel that the five-bank, $25 billion nationwide mortgage settlement shifts an unfair share of the burden for the banks’ servicing failures onto MBS noteholders. Investors simply don’t believe that MBS issuers have complied with contractual commitments. “Does a contract mean what a contract says?” Robertson said. “If you change the rules on me and I can’t rely on a private contract, how do I invest?”

BlackRock’s new report hypothesizes that the housing market is at or near bottom, but the firm doesn’t foresee a quick recovery. Novick emphasized the need for a holistic government policy, encompassing overarching principal modification (as opposed to principal reduction), better definition of the role of the government-sponsored enterprises Fannie Mae and Freddie Mac and increased transparency in securitization. “You have to figure out what’s the mission,” she said.

In Allergan opinion, Delaware judge blasts first-to-file firms

Alison Frankel
Jun 13, 2012 15:28 UTC

It’s no secret that the judges of Delaware Chancery Court don’t much like the forum fights that have become an inevitable blight on shareholder derivative and M&A litigation. In those cases, unlike federal securities fraud class actions, there’s no formal mechanism for picking lead counsel. So, as Vice-Chancellor Travis Laster wrote Monday in a monumental and must-read ruling in the Allergan derivative litigation, shareholder firms – or, as Laster calls them, “rational economic actors” – have a powerful incentive to stake a claim to a promising derivative case by rushing to court with a bare-bones complaint. And given the low cost of bringing a suit without conducting any independent investigation, there’s every reason for plaintiffs’ firms to file outside of Delaware, hoping for a piece of the lead counsel action wherever the case proceeds.

Laster offered a cynical but well-informed take on the shareholder securities bar (forgive the long quote; it’s worth it). “Motivated by first-to-file pressure, plaintiffs’ firms rationally eschew conducting investigations and making books and records demands, fearing that any delay would enable competitors to gain control of the litigation and freeze-out the diligent lawyer. No role, no result, no fee,” he wrote. “For fast-filing lawyers, the resulting action has the dynamics of a lottery ticket. In most cases, the fast-filing plaintiff will not have pled a derivative claim that can overcome [a defense motion to dismiss]. But in the rare case, fate may bless the fast-filer with something implicating the board, or a court might be offended by the magnitude of the corporate trauma and allow the derivative action to proceed … A fast-filer can readily build a portfolio of cases in the hope that one will hit.”

Targeted corporations have to expend time and money on lawyers as judges and plaintiffs’ lawyers figure out who’s in charge of derivative litigation, but the real victims of hurry-up filings, Laster explained, are the shareholders. Few of those scantily investigated derivative suits can meet the high bar for establishing a breach of duty by directors, so most of them end up being dismissed. That’s no big deal for plaintiffs’ firms that regard every case as just one line item in a portfolio, Laster suggested. And it’s actually a boon for defendants, who would just as soon move to dismiss a case with skimpy allegations. But shareholders suffer when their lawyers don’t investigate.

New SCOTUS brief: Keep international human rights cases in U.S. courts

Alison Frankel
Jun 11, 2012 22:55 UTC

Are the high seas the legal equivalent of foreign soil?

According to a new U.S. Supreme Court brief by the victims of alleged state-sponsored violence on an oil rig in Nigeria, they are indeed. The brief, filed in a case that will determine the role of the United States in international human rights litigation, argues that the very first Congress enacted the Alien Tort Statute in 1789 to establish federal-court jurisdiction over piracy cases. The sort of robbery on the high seas that Congress had in mind, the brief said, clearly took place off the shores of the United States. So it doesn’t make sense to presume, more than 200 years later, that Congress intended the Alien Tort Statute to apply only to alleged wrongdoing inside U.S. borders, especially because in all those intervening years Congress has never redefined the scope of the statute.

The brief, filed by Paul Hoffman of Schonbrun DeSimone Seplow Harris Hoffman & Harrison in the case known as Kiobel v. Royal Dutch Petroleum, is the opening salvo in the Supreme Court’s reshaping of the Kiobel case. As you may recall, the justices first heard oral argument in Kiobel in February, when lawyers on both sides addressed the issue of whether corporations can be held liable under the law. (The 2nd Circuit Court of Appeals had ruled in Kiobel that they can’t be, in a split with several other circuit courts.) Argument had hardly begun when Justice Anthony Kennedy asked a broader question prompted by Royal Dutch amici: Why was this case, which involved Shell’s alleged complicity with the Nigerian government in the torture and killing of Nigerian nationals, even in a U.S. court? In an extraordinary order issued days after the Kiobel oral argument, the Supreme Court essentially said it had been looking at the wrong question in the case. The justices called for all new briefing on “whether and under what circumstances the Alien Tort Statute allows courts to recognize a cause of action for violations of the law occurring within the territory of a sovereign other than the United States.”

Underlying that issue, of course, is the high court’s 2010 ruling in Morrison v. National Australia Bank, which held that U.S. laws should not be presumed to apply to conduct outside our borders. As I’ve reported, no federal appeals court has decided an ATS case based only on a Morrison analysis of extraterritoriality, though both the 9th Circuit and the District of Columbia Circuit have addressed whether the ATS applies overseas. (Majorities in both circuit court rulings concluded that it does, despite Morrison and dissenting opinions.)

DOMA is constitutionally doomed, but not for the reason you might think

Alison Frankel
Jun 11, 2012 19:53 UTC

When you hear the story of Edith Windsor, the constitutional consideration that comes to mind is the Equal Protection Clause of the 14th Amendment. Windsor, an IBM systems consultant, met Thea Spyer, a clinical psychologist, at a restaurant in New York in 1963. They fell in love and moved in together in New York City. In 1993, as soon as the city permitted it, they registered as domestic partners, and in 2007, as Spyer’s multiple sclerosis advanced, she and Windsor were married in Canada. Spyer died in 2009, leaving her entire estate to Windsor, who was recognized as her wife in New York. But because of the 1996 federal law known as the Defense of Marriage Act, Windsor was denied the unlimited marital tax deduction that she would have received had Spyer been a man. Instead, she was hit with a $363,000 tax bill on Spyer’s estate.

Represented by Paul, Weiss, Rifkind, Wharton & Garrison and the American Civil Liberties Union, Windsor sued the United States in federal court in Manhattan in 2010, claiming that the Defense of Marriage Act, or DOMA, violates her constitutional right to equal treatment under the law.

Windsor, who is now in her eighties, won her case Thursday, when U.S. District Judge Barbara Jones agreed that DOMA is unconstitutional. Jones’s ruling was the second in a week to conclude that the federal law cannot survive constitutional scrutiny. On May 31, a three-judge panel of the 1st Circuit Court of Appeals also found that DOMA breaches equal protection provisions.

Shareholder spring? Not so much, new study says

Alison Frankel
Jun 8, 2012 15:42 UTC

After Citigroup shareholders voted against a board-approved $15 million pay package for CEO Vikram Pandit in April, there was a lot of talk about a shareholder spring, with speculation that shareholders at a lot of other companies would seize the opportunity of advisory say-on-pay votes to express irritation with unresponsive boards. But according to a study by Davis Polk & Wardwell that was published on Thursday at the Harvard Corporate Governance and Financial Regulation Forum, shareholders have been slower to storm the barricades than the Citi vote suggested. “The proxy season,” said the study’s lead author, Richard Sandler, “hasn’t been as exciting as people thought it might be.”

According to Davis Polk, only about 2 percent of the 639 large companies to report proxy results as of May 18 failed say-on-pay votes, about the same percentage as in 2011. (A June 6 study by Semler Brossy of say-on-pay votes in the Russell 3000 found 40 of 1,594 corporations, or 2.5 percent, have failed so far this year.) Ninety percent of the large companies won at least 70 percent approval from shareholders in say-on-pay votes, according to the Davis Polk report. “The Citi rejection was embarrassing and awkward, but it hasn’t resulted in a large number of embarrassing outcomes for other companies,” Sandler said.

Nor have shareholders had much luck with proxy access proposals, according to Davis Polk. Only nine proposals made it to ballot this year. There have been three reported votes, and none of the proposals has garnered more than 33 percent approval. Where shareholders have succeeded, according to the Davis Polk report, is in forcing companies to offer shareholders a vote on getting rid of staggered boards or on auditor independence. And when shareholders vote on such proposals, the study found, they’re increasingly likely to support them.

No summary judgment for Microsoft or Motorola in Seattle case

Alison Frankel
Jun 7, 2012 17:27 UTC

If you stopped reading at page 21 of the 28-page summary judgment ruling that U.S. District Judge James Robart issued Wednesday in Microsoft’s contract case against Motorola, you’d figure Microsoft had won the all-important dispute over Motorola’s standard-essential patents. But this is an opinion you have to read all the way to the end.

Microsoft, as you probably recall, accused Motorola in federal court in Seattle of breaching its agreement with two standard-setting bodies to license essential wireless patents on reasonable terms. Microsoft and its lawyers at Danielson Harrigan Leyh & Tollefson and Sidley Austin contended that when Motorola contacted Microsoft about a licensing deal, it demanded unreasonable fees – more than $4 billion, according to Microsoft’s calculations. Microsoft asked Robart to rule that, as a matter of law, Motorola’s offer was so manifestly absurd that it amounted to a breach of those contracts.

At a May 7 summary judgment hearing, Motorola’s lead counsel, Jesse Jenner of Ropes & Gray, challenged two previous rulings by Robart that would have undone Microsoft’s argument. Motorola contended that its contracts with the standard-setting bodies didn’t require it to reach licensing agreements with third parties but merely to make an offer. Robart disagreed, upholding his own prior rulings that Motorola had promised to license its patents and that Microsoft was a third-party beneficiary of those contracts.

Caught in the middle: Wachtell and the BofA/Merrill merger mess

Alison Frankel
Jun 6, 2012 15:28 UTC

Former Bank of America CEO Kenneth Lewis has a simple argument for why he’s not liable to shareholders who claim they were defrauded into supporting BofA’s 2008 acquisition of Merrill Lynch: It’s the lawyers’ fault. In a summary judgment brief filed Sunday night in the shareholder class action, Lewis’s counsel at Debevoise & Plimpton asserted that as Merrill Lynch’s fourth-quarter projected losses ballooned from the $5 billion BofA had estimated in November to more than $10 billion by Dec. 3, Lewis asked BofA’s then-CFO, Joe Price, whether those losses had to be disclosed to shareholders. He was informed that the CFO had “consulted with legal counsel” and had concluded that interim projections didn’t need to be made public.

Lewis’s brief implies (but does not directly state) that Price had spoken not only to Bank of America’s general counsel at the time, Timothy Mayopoulos, but also to BofA’s outside lawyers at Wachtell, Lipton, Rosen & Katz. For Lewis, it doesn’t much matter who Price talked to — or even whether Price really received the legal advice he allegedly passed along to Lewis. What’s significant, according to the former CEO’s brief, is simply that Lewis had a good-faith reason to believe disclosure wasn’t warranted. Lewis didn’t even assert a formal advice-of-counsel defense but said his “understanding of what BAC’s CFO was told by counsel” is enough to rebut shareholder claims that he intended to mislead them.

But for Wachtell, professional integrity is at stake in the guidance it gave its longtime client in the run-up to the shareholder vote on the Merrill merger. Wachtell, after all, is one of the premier M&A law firms in the country. Its reputation would be sullied if it had offered the bank advice so misguided that BofA ended up the subject not only of regulatory inquiries by at least four state and federal agencies but also of a gargantuan shareholder suit.

New SJ motion in BofA/Merrill case: The boon of discovery

Alison Frankel
Jun 5, 2012 05:35 UTC

There’s a good reason the exchange of information in civil litigation is called discovery. If you want an example of the kind of powerful facts shareholders can obtain once they’re finally allowed to take depositions from securities class-action defendants – and remember, they only get there after surviving defense motions to dismiss – look no further than the motion for summary judgment that plaintiffs’ lawyers filed Sunday against Bank of America in the securities class action over the Merrill Lynch merger. There’s nothing like a former CEO’s admission that insiders withheld dire predictions from shareholders to boost the class’s case.

Shareholder lawyers always knew they’d have more information than usual in the securities litigation against BofA, which allegedly failed to warn investors about Merrill Lynch’s precarious finances before shareholders approved the Merrill merger in the fall of 2008. When plaintiffs’ lawyers first filed lead counsel motions in the spring of 2009, the Securities and Exchange Commission, the New York Attorney General, the North Carolina AG and even Congress were all already poking at the Merrill merger. They were focused on whether BofA adequately disclosed the billions of dollars it had agreed to set aside for bonuses to Merrill executives, in addition to the bank’s communications with shareholders about Merrill’s mounting losses in the last quarter of 2008.

Just weeks after Denny Chin (then a federal district judge in Manhattan, now on the 2nd Circuit Court of Appeals) appointed lead counsel – Bernstein Litowitz Berger & GrossmannKaplan Fox & Kilsheimer; and Kessler Topaz Meltzer & Check – the SEC announced a settlement with BofA for disclosure violations. And when U.S. Senior District Judge Jed Rakoff rejected the SEC’s initial settlement and demanded more information about BofA’s disclosure decisions, plaintiffs’ lawyers in the class action pounced. In October 2009, they asked Chin to order the defendants to give them whatever BofA, Merrill and bank officials were turning over to regulators and congressional investigators. In November 2009, Chin granted the motion. Whatever documents the defendants were producing to anyone else, he said, they also had to turn over to shareholders.

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