Opinion

Alison Frankel

Get ready for plaintiffs’ lawyer brawl over Libor class actions

Alison Frankel
Jul 30, 2012 23:29 UTC

On Friday, plaintiffs’ lawyers at Pomerantz Haudek Grossman & Gross filed the latest class action related to banks’ alleged manipulation of the London interbank offered rate, or Libor, an interest-rate benchmark that affects trillions of dollars of securities. The new complaint, filed in federal court in Manhattan on behalf of Berkshire Bank, asserts claims for all New York financial institutions that “originated, purchased outright or purchased a participation in” loans paying interest rates pegged to Libor.

Is that class different from all investors who purchased securities with Libor-pegged interest rates? Not according to Michael Hausfeld, whose eponymous firm is interim co-lead counsel in a Libor class action already under way before U.S. District Judge Naomi Reice Buchwald in Manhattan. Back in November, after a hard-fought lead counsel contest, Buchwald appointed Hausfeld and Susman Godfrey to head the Libor multidistrict litigation for over-the-counter investors. Kirby McInerney and Lovell Stewart Halebian Jacobson were appointed lead counsel in a separate class action for derivatives investors who traded on exchanges regulated by the Commodity Futures Trading Commission.

In a phone interview Monday, Hausfeld told me that the new Pomerantz Haudek suit is an attempt to peel off a piece of his case. I asked whether the two classes overlap. “Of course,” Hausfeld said. “They’re playing games.” The banks that made loans pegged to Libor didn’t set the benchmark rates themselves, he said, so the Pomerantz Haudek class only has claims that derive from the claims in his case. Hausfeld said he believes the Pomerantz case is poaching on his turf, and he intends to ask the judge to step in. “You have not seen the end of this,” he told me.

Jeremy Lieberman of Pomerantz, however, said his firm’s class action, on its face, is different from Hausfeld’s Libor case. The banks aren’t asserting claims based on securities they purchased from the members of the Libor panel, which is the class definition in Hausfeld’s amended complaint. “Our class is bankers who made loans,” Lieberman said. “We don’t believe our suit is covered by his suit.” Lieberman noted that Pomerantz Haudek filed the new class action as related to the ongoing Libor multidistrict class action, and said that, like Hausfeld, his firm wants Buchwald to decide whether claims by members of the new class are already covered in the Hausfeld case.

The Berkshire class action isn’t the only new suit to capitalize on the revelations in Barclays’ settlements with U.S. and British regulators. As I reported earlier this monthHagens Berman Sobol Shapiro filed a class action in federal court in Manhattan on behalf of investors in securities pegged to the European interbank offered rate, or Euribor. Hagens Berman’s Jason Zweig said at the time that the Euribor case is distinct from Hausfeld’s Libor class action because they involve different (albeit similarly calculated) benchmarks. Hausfeld told me he believes the Euribor class action is also stepping on his territory. “Our case, even as pled, is not so limited” that it doesn’t encompass Euribor, he said.

Sarbanes-Oxley’s lost promise: Why CEOs haven’t been prosecuted

Alison Frankel
Jul 27, 2012 21:42 UTC

Karen Seymour had high hopes for Sarbanes-Oxley. Ten years ago, when the law was passed, Seymour was chief of the criminal division of the U.S. Attorney’s Office in Manhattan, which is regarded as the country’s most prolific prosecutor of financial crimes. When she read Sarbanes-Oxley’s certification provisions, which specify that CEOs and CFOs can be sent to prison for falsely certifying corporate financial reports and reports on internal controls, she thought she finally had a way of getting at wrongdoing by top officials. “I thought it was going to be a really good tool,” she said in an interview this week. “But it never really developed.”

As Sarbanes-Oxley marks its 10th anniversary on Monday, its promise of holding CEOs and CFOs criminally responsible remains unfulfilled. The law states that if top corporate executives knowingly sign off on a false financial report, they’re subject to a prison term of up to 10 years and a fine of up to $1 million, with penalties escalating to 20 years and $5 million if their misconduct is willful. After accounting scandals at Enron, WorldCom and a host of other public companies, SOX’s certification provisions, according to Seymour and other former prosecutors, seemed like a clean, simple way to tie CEOs and CFOs to corporate crimes.

But in practice, exceedingly few defendants have even been charged with false certification, and fewer still have been convicted. The most notorious SOX criminal case, against former HealthSouth CEO Richard Scrushy, ended in an acquittal in 2005. In 2007, the former CFO of a medical equipment financing company called DVI pleaded guilty to mail fraud and false certification and was sentenced to 30 months in prison. In a more recent case, a SOX false certification charge against former Vitesse CEO Louis Tomasetta was dismissed. (Tomasetta’s trial on other charges ended in a mistrial in April.) The Justice Department doesn’t directly track Sarbanes-Oxley prosecutions, so there may be another case here or there. Even four or five SOX criminal cases in 10 years, though, makes them as rare as a blue moon.

Lead counsel contests take shape in Facebook, JPMorgan cases

Alison Frankel
Jul 26, 2012 23:02 UTC

Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd are the most successful members of the securities class action bar. Check the ISS rankings for 2011: Bernstein Litowitz is in the top slot, with $1.37 billion in settlements last year; Robbins Geller is second, with $1.14 billion. Those total dollars, though, mask the very different business models of the two firms, which are reflected in two other numbers on the ISS chart. Bernstein Litowitz settled only 13 cases in 2011, for an average settlement of about $106 million. By contrast, Robbins Geller settled 28 – more than twice as many as Bernstein Litowitz and 12 more than any other leading class action firm. Robbins Geller’s average settlement was about $49 million, less than any firm in the top 10 except Milberg. Both models work, or you wouldn’t always see Bernstein Litowitz and Robbins Geller at the top of the ISS rankings, but the firms are the yin and yang of securities class action litigation.

That’s why it’s so interesting that they’re both angling for lead counsel appointments in the two hottest cases of the year. The deadlines for lead plaintiff briefs have come and gone in the JPMorgan “London Whale” and Facebook IPO cases. There’s plenty of competition in both – though, as I predicted, less in the JPMorgan case – but the strongest leadership bids come from clients represented by Robbins Geller or Bernstein Litowitz.

Let’s look first at the JPMorgan briefs, which came in earlier this month. JPMorgan lost more than $17 billion in market capitalization when it disclosed in May that its chief investment office had lost $2 billion as a result of risky credit default swap positions taken by the so-called London Whale, derivatives trader Bruno Iksil. Shareholders have offered different theories about when the bank’s alleged deception began, but they all point to CEO Jamie Dimon calling the CDS position “a tempest in a teapot” in an April call with analysts.

New brief heats up fight over $7 billion credit card settlement

Alison Frankel
Jul 25, 2012 22:08 UTC

Last Friday, when lawyers from three firms – Robins, Kaplan, Miller & Ciresi, Robbins Geller Rudman & Dowd and Berger & Montague – asked to withdraw as counsel to the National Association of Convenience Stores in the proposed $7 billion antitrust class action settlement with Visa and MasterCard, they said that they only learned of NACS’s opposition to the deal right before the settlement was filed with U.S. District Judge John Gleeson in Brooklyn. That’s not what NACS’s new lawyers at Constantine Cannon said in a brief filed Tuesday night. If there was any doubt that there’s going to be a battle royal over this settlement, the new brief should remove it.

Constantine Cannon asserted that the convenience store trade group – one of 19 name plaintiffs in the litigation over the swipe fees Visa and MasterCard charge merchants – has consistently agitated against the settlement. “Contrary to class counsel’s representation,” the new brief said, “NACS began expressing to class counsel its serious concerns about the proposed settlement long before the settlement was filed. Indeed, NACS expressed its concerns to class counsel repeatedly.” Constantine Cannon said that NACS formally asked to have its name removed from the settlement three days before it was filed, which is two days before the law firm showed up in the docket as NACS’s new counsel.

What’s particularly interesting about the brief is its reference to the rules imposed by the mediation process that helped produce the settlement. NACS said it intends to abide by those confidentiality rules, so Gleeson should permit it to continue as a class representative and order class counsel to continue to provide the trade group with work product. Mediation usually carries strict confidentiality rules, though. You can bet that Robins Kaplan, Robbins Geller and Berger & Montague are scrutinizing the Constantine Cannon filing to see if they can assert that NACS’s disclosure of its long-standing objection to the settlement is a breach of confidentiality. (Craig Wildfang of Robins Kaplan declined to comment; Constantine Cannon was very careful not to mention any specific details of the mediation in discussing NACS’s problems with the proposed settlement.)

11th Circuit: Stock drop doesn’t prove losses were tied to fraud

Alison Frankel
Jul 25, 2012 17:46 UTC

It is the rare securities fraud class action that goes to trial. Typically, once shareholders have survived a motion to dismiss and won certification of a class, defendants pull out their wallets. Settlements may not come until summary judgment motions are decided and a mediator has entered the case, but they are a near certainty for class actions that get past the preliminaries. Only a vanishingly small number of securities fraud cases go to trial.

So every time an appeals court considers a trial verdict in a class action, it’s news. On Monday, the 11th Circuit Court of Appeals ruled that a jury verdict against BankAtlantic cannot stand, but not because of the inconsistent verdict sheet responses that led U.S. District Judge Ursula Ungaro to grant the bank’s post-trial motion for judgment as a matter of law. Instead, the 11th Circuit panel offered a tutorial on how shareholders should link their losses to the defendants’ misstatements – and concluded that, in this case, plaintiffs’ counsel at Labaton Sucharow and Kessler Topaz Meltzer & Check failed to untangle losses due to the alleged fraud from losses attributable to Florida’s collapsing real estate market.

The ruling, written by 11th Circuit Judge Gerald Tjoflat for a panel that also included Judge William Pryor and Senior Judge Peter Fay, comes too late for all of the securities class action defendants that have tried and failed to blame the economic crisis for declines in their share price. But going forward, it’s sure to be cited whenever defendants argue that shareholders must be able to distinguish losses caused by a corporation’s misstatements from losses due to the economy’s decline. In that regard, the 11th Circuit has reinterpreted the U.S. Supreme Court’s landmark 2005 loss causation ruling, Dura Pharmaceuticals v. Broudo, for the post-recession age.

BofA catches big break: Walnut drops challenge to $8.5 bln MBS deal

Alison Frankel
Jul 24, 2012 15:52 UTC

Late last month, without any fanfare, a New York appeals court issued a terse, one-page ruling that upheld the dismissal of Walnut Place’s breach-of-contract suit against Countrywide, Bank of America and Countrywide’s mortgage-backed securitization trustee, Bank of New York Mellon. It was an abrupt end for what was once a promising attempt at vindication for an MBS investor. It was also a huge setback for Walnut, its lawyers at Grais & Ellsworth and all the other Countrywide MBS investors who were counting on litigation against BofA as an alternative to the bank’s proposed $8.5 billion global settlement of breach-of-contract, or put-back, claims.

That one-page appellate ruling reverberated powerfully on Monday, when Walnut – otherwise known as the Boston hedge fund Baupost – filed a request to withdraw from the special New York proceeding to evaluate BofA’s MBS settlement. Framed as a letter to New York State Supreme Court Justice Barbara Kapnick from Grais partner Owen Cyrulnik, the request offered no explanation for Walnut’s withdrawal; Cyrulnik and Baupost spokeswoman Elaine Mann declined to comment.

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York’s highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut’s suit makes it very difficult for the hedge fund – or any other MBS investor – to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn’t economically rational to continue its challenge to the $8.5 billion deal. (From what I’ve heard, Bank of America did not pay Walnut anything in exchange for the hedge fund’s withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

Why violence, but not sex, is protected by the First Amendment

Alison Frankel
Jul 23, 2012 04:02 UTC

In the mid-1950s, a small-time New York publisher named Samuel Roth was indicted for distributing books, magazines, photos and advertising circulars that were accused of being “obscene, lewd, lascivious, filthy and of an indecent character.” The precise content of Roth’s offensive mailings has been lost to history, although it’s probably tame by modern standards. Nevertheless, a federal jury in New York concluded that the publisher violated a law barring distribution of pornography, and the court sentenced Roth to five years in prison. The case eventually made its way to the U.S. Supreme Court. In 1957, the justices upheld Roth’s conviction, in a landmark ruling that obscenity is not entitled to First Amendment protection. The court said that the law had always assumed sexual material is not covered by the Constitution’s free speech provision, so its ruling merely codified that assumption. The Roth decision placed obscenity in the tiny category of exceptions to First Amendment freedom, along with incitement and fighting words.

Fifty-three years later, the Supreme Court was called upon to decide the constitutionality of another federal law, this one making it a criminal offense to create or possess depictions of cruelty to animals. In its 2010 opinion in United States v.  Stevens, the court reminded us that violence – unlike sex – is protected speech, despite Congress’s efforts in the animal-cruelty law to equate violence with obscenity. The justices struck down the law and vacated the conviction of Robert Stevens, a man who sold videos of pit bulls attacking and killing other animals. The government had argued that some speech, such as depiction of the brutal death of innocent animals, comes at too high a societal cost to deserve First Amendment protection. The Supreme Court called that argument “startling and dangerous.”

The issue of First Amendment protection for even the most blood-soaked materials is sure to become part of the discussion of why the alleged Batman killer, James Holmes, opened fire at a movie theater in Aurora, Colorado, killing 12 moviegoers and injuring dozens more. Whenever one of these horrific mass murders is perpetrated we ask the same questions. Why is it so easy for people with no legitimate purpose to get hold of assault weapons? And does increasingly violent, gruesome entertainment, especially in video and computer games, contribute to violence in real life?

Is S&P out of the woods in the SEC’s Delphinus investigation?

Alison Frankel
Jul 20, 2012 13:26 UTC

It was big news last September when Standard & Poor’s disclosed that it had received a Wells Notice in connection with the Securities and Exchange Commission’s investigation of the $1.6 billion Delphinus collateralized debt obligation. The SEC sends Wells Notices to potential targets, not mere witnesses, so there was a lot of speculation that the Delphinus investigation might be the government’s long-awaited attempt to hold a rating agency accountable for colluding with a bank to misrepresent the quality of a mortgage-backed instrument.

But based on the complaint the SEC filed Wednesday against the Delphinus sponsor, Mizuho Bank, it looks to me like S&P is off the hook.

Mizuho, which earned $10 million in fees on the Delphinus deal, agreed to pay $127.5 million to settle the SEC’s case, which claimed investors were deceived by the ratings S&P, Fitch and Moody’s gave to the CDO. Four Mizuho executives involved in Delphinus structuring and marketing also settled, via administrative proceedings that imposed sanctions and fines. The settlement documents make it clear that Delphinus investors were misled about the quality of the mortgage-backed securities that served as collateral for the CDO.

What does Syncora’s $375 million BofA deal mean for MBIA?

Alison Frankel
Jul 19, 2012 14:17 UTC

Reporting on the implications of the bond insurer Syncora’s $375 million settlement with Bank of America has been a Rashomon experience: Everyone I talked to had something different to say about what drove Tuesday’s settlement and what it means for MBIA, which has been litigating its own mortgage-backed securities breach-of-contract claims in parallel with Syncora. So if you were expecting a clear-cut answer on whether the Syncora settlement is good or bad for MBIA, you’re going to be disappointed. Syncora and MBIA were both litigating put-back claims against Countrywide and BofA before New York State Supreme Court Justice Eileen Bransten, who has delivered important simultaneous rulings for the bond insurers. But the similarities between Syncora and MBIA end in Bransten’s courtroom. When it comes to negotiations with BofA, they’re in very different postures.

The good news for MBIA: Bank of America’s settlement with Syncora shows that the bank remains willing and able to resolve claims that the mortgages underlying Countrywide-sponsored securities breached representations and warranties. In 2010 and 2011 Bank of America reached reps-and-warranties deals with the bond insurer Assured Guaranty; with the government-sponsored entities Fannie Mae and Freddie Mac; and with 22 institutional investors who backed a global $8.5 billion settlement of MBS investors’ put-back claims. Since then, the bank has been stuck in litigation with objectors to the proposed $8.5 billion global deal and in sniper fire with Fannie Mae. The Syncora settlement puts BofA back on the settlement track.

The settlement also shows that momentum from the litigation helps the monolines. My understanding is that Syncora and Bank of America have been in settlement talks for a long time, negotiating behind the curtain while the litigation plays out on a public stage. Specific events in the monoline cases against the banks – even developments as significant as Bransten’s loss-causation ruling or the battle over Bank of America’s successor liability for Countrywide’s wrongdoing – don’t have a direct impact on negotiations. That said, when U.S. District Judge Paul Crotty of Manhattan delivered a very insurer-friendly ruling on loss causation last month in Syncora’s case against JPMorgan, BofA took note. That’s also a positive for MBIA.

Del. judges mean it: Don’t file derivative suit pre-investigation

Alison Frankel
Jul 18, 2012 04:15 UTC

There’s an antitrust conspiracy in Delaware Chancery Court. Chancellor Leo Strine and Vice Chancellor Travis Laster are engaged in a cooperative effort to restrain the trade of shareholder lawyers who file derivative suits without obtaining books and records discovery. I’ve told you about Laster’s decision in the Allergan case, in which he found that shareholders who rushed to sue in California didn’t adequately represent the corporation (the nominal plaintiff in derivative litigation); and about Laster’s follow-up explanation that “diligent plaintiffs should get to litigate,” when he certified the case for appeal. On Monday, Strine echoed Laster when he refused to appoint a lead plaintiff in the derivative litigation over Wal-Mart’s alleged bribes in Mexico.

“More energy was spent by dueling plaintiffs over who gets to be lead counsel and lead plaintiff than was spent writing the complaints,” Strine said, according to my Reuters colleague Tom Hals. The chancellor chastised the two state pension fund giants vying to be named lead plaintiff for basing their complaints on the New York Times scoop on Wal-Mart’s alleged payments rather than on their own investigations, and said everyone should come back to court after the Indiana Electrical Workers Pension Trust Fund, IBEW, and its lawyers at Grant & Eisenhofer have obtained access to Wal-Mart’s books and records through the demand they have served on Wal-Mart’s board.

The California State Retirement System (CalSTRS) and the New York City Employees’ Retirement System had moved for appointments under what was previously considered the leading Delaware case on the standard for lead plaintiffs, Hirt v. U.S. Timberlands ServiceHirt laid out six factors the court should consider in choosing a lead in derivative litigation, including the quality of the complaint and the plaintiff’s economic stake in the outcome. (Remember, there’s no statutory framework for lead plaintiffs in derivative cases, as opposed to federal securities class actions.)

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