Alison Frankel

Who qualifies as a Dodd-Frank whistle-blower?

Alison Frankel
Sep 28, 2012 16:39 UTC

When Congress passed the Dodd-Frank financial reform law in 2010, it provided broad protection for whistle-blowers. The law prohibited employers from retaliating against anyone who reported securities violations to the Securities and Exchange Commission, assisted in an SEC investigation or otherwise made disclosures required by the Sarbanes-Oxley Act of 2002 or any other securities law. Dodd-Frank also defined criteria for whistle-blowers: They are people who provide information about securities violations “in a manner established, by rule or regulation, by the Commission.” In August 2011, the SEC issued its final interpretation of Dodd-Frank’s provisions, requiring that whistle-blowers must have a reasonable belief that they’re reporting violations of securities laws and must follow specific procedures when giving that information to the commission.

If you think the SEC’s rule is an obvious construction of Dodd-Frank’s statutory language, think again. The confusion lies in the disparity between the whistle-blower provisions in Dodd-Frank and those in Sarbanes-Oxley, which is more concerned with internal reporting than blowing the whistle to the SEC. Both laws include reporting procedures and anti-retaliation protection, but the specific provisions are different. Sarbanes-Oxley, for instance, requires employees to exhaust administrative remedies before bringing a federal court action for retaliation. It also has a 180-day statute of limitations and restricts employees’ recovery to back pay, as opposed to Dodd-Frank, which has a six-year statute and allows double-pay claims. So, as Jackson Lewis noted last November in a motion to dismiss a Dodd-Frank whistle-blower retaliation suit against a company called Trans-Lux, if the SEC meant for everyone with a potential retaliation claim under Sarbanes-Oxley to sue instead under Dodd-Frank, it was impermissibly overriding SOX and congressional intent.

“It cannot have been Congress’ intent to protect internal complaints of retaliation under [Dodd-Frank]; otherwise SOX would be rendered obsolete,” the brief said. “If all SOX-protected activity were to fall within the scope of the [Dodd-Frank] whistleblower provisions, regardless of whether the employee provided information to the SEC, then all SOX claimants would arguably be able to file a whistleblower retaliation claim under [Dodd-Frank] instead of SOX.”

Trans-Lux argued that its onetime pension executive Richard Kramer simply wasn’t a Dodd-Frank whistle-blower. In early 2011, Kramer reported concerns about the administration of the company’s pension plan to corporate officials, and then, when he failed to provoke a response, to the audit committee of the company’s board. Shortly after informing the board of his concerns, he sent a letter to the SEC about the company’s failure to notify either its board or the commission of a 2009 amendment to the pension plan. Two months later he and several others in his department were fired. But according to Trans-Lux, Kramer did not submit his complaint to the SEC “in the manner established by the SEC.” His internal communications aren’t protected under Dodd-Frank, the company argued, and his letter to the SEC wasn’t in the form prescribed by the agency’s own rule.

But in an opinion Wednesday, U.S. District Judge Stefan Underhill of Bridgeport, Connecticut, said Trans-Lux was misinterpreting Congress’s intent. “The Dodd-Frank Act appears to have been intended to expand upon the protections of Sarbanes-Oxley, and thus the claimed problem is no problem at all,” Underhill said, citing a similar decision by U.S. District Judge Leonard Sand of Manhattan, ruling on an issue of first impression last May in Egan v. Tradingscreen. “Disclosures that are protected under Sarbanes-Oxley’s whistle-blower provisions are also protected under the Dodd-Frank Act’s whistle-blower provisions.” Kramer, Underhill ruled, qualifies as a Dodd-Frank whistle-blower. Underhill’s decision is in conflict with a ruling in June by U.S. District Judge Nancy Atlas of Houston, who ruled that a GE whistle-blower’s internal complaints did not qualify him for protection from retaliation under Dodd-Frank.

Samsung goes after jury foreman in bid to reverse Apple verdict

Alison Frankel
Sep 27, 2012 04:02 UTC

By Alison Frankel and Dan Levine

Samsung doesn’t want you to know why it believes juror misconduct tainted the $1.05 billion verdict that a San Jose federal court jury delivered to Apple in August. Its lawyers at Quinn Emanuel Urquhart & Sullivan redacted that entire section of the motion for judgment as a matter of law that they filed Friday with U.S. District Judge Lucy Koh in San Jose, California. But from a close examination of the statute and cases Samsung cited in the redacted section, we’ve discerned Samsung’s two-pronged argument for juror misconduct: The nine-person jury improperly considered extraneous evidence during deliberations and jury foreman Velvin Hogan failed to disclose in voir dire that he was involved in 1993 litigation with a former employer that led him and his wife to declare personal bankruptcy.

In an exclusive interview Tuesday about Samsung’s secret new allegations, Hogan, an engineer, confirmed that he was a party in two cases cited in Samsung’s brief, a 1993 case from municipal court in Santa Cruz titled Seagate Technology v. Hogan and a 1993 federal bankruptcy case titled In re Velvin R. Hogan. According to Hogan, when Seagate hired him in the 1980s and he moved from Colorado to California, his new employer agreed to split the cost of paying off the mortgage on his Colorado home. But after Hogan was laid off in the early 1990s, he told us, Seagate claimed he owed the company that money. Hogan said he sued Seagate for fraud, Seagate countersued, and he ultimately declared personal bankruptcy to protect his house.

Can Quinn Emanuel credibly argue that Koh needs to hold a hearing to determine whether Hogan’s failure to disclose the 1993 litigation is grounds to throw out an unrelated patent infringement verdict for Apple? Again, we don’t know precisely what Samsung’s argument is, but several of the cases it cited in the new brief’s table of authorities concern juror bias and the failure to disclose relevant information in the jury selection process. In U.S. v. Perkins, for instance, the 11th Circuit Court of Appeals ruled in 1984 that the defendant in a criminal obstruction of justice case was entitled to a new trial because a juror didn’t reveal that he had previously been both a defendant in a civil case over stolen union funds and a witness in a criminal case involving the firebombing of a union hall. In a 1989 2nd Circuit ruling called U.S. v. Colombo, the court called for an evidentiary hearing on whether a juror deliberately failed to disclose that her brother-in-law was a government prosecutor in order to get on the jury, and held that if she hid her ties to the government, convictions in a huge Mafia racketeering case must be vacated.

18 years after end of client relationship, Latham is disqualified

Alison Frankel
Sep 24, 2012 22:40 UTC

Disqualifying defense counsel two years into a case is a rare and drastic step, but on Monday that’s what U.S. District Judge Richard Andrews of Wilmington, Delaware, did to a company called MobiTV and its lawyers at Latham & Watkins. Andrews tossed Latham because it formerly represented the parent of the company suing MobiTV (and many, many others) for patent infringement — even though the client relationship ended in 1995, two years before the patent at issue in the case was even awarded and eight years before any alleged infringement by MobiTV began.

Latham’s onetime client, a company once called TV Answer and now known as EON Corp, claimed in a disqualification motion filed almost a year ago that the firm had become privy to proprietary information about interactive video data service technology, which underlies the patent EON is asserting against MobiTV. The firm worked closely with the inventor of the technology and represented EON’s predecessor company before the Federal Communications Commission. A total of 34 Latham lawyers worked on EON matters, including one who became the company’s general counsel and another who sat on EON’s board. “The potential harm and detriment to EON are obvious,” wrote EON’s lawyers at Reed & Scardino and Fox Rothschild. “Latham is seeking to discredit EON’s attempt to protect the same … technology that formed the basis of Latham’s prior relationship with EON Corp and that Latham previously lauded and advocated on EON Corp’s behalf.”

In its response, Latham pointed out that of those 34 lawyers, only 7 are still practicing at the firm, and the two partners leading the MobiTV case, Bob Steinberg and Ryan Hatch, weren’t even at Latham during the long-ago representation of EON. No Latham lawyers, moreover, had anything to do with obtaining EON’s patent, according to the firm, since Latham doesn’t do patent prosecution. And besides, the Latham brief said, EON’s supposedly private information entered the public domain when its patent was issued. EON, the brief argued, “does not identify any specific item of information that Latham allegedly has that would benefit MobiTV in this case.”

SCOTUS and securities class actions: a love story

Alison Frankel
Sep 24, 2012 21:11 UTC

Weil, Gotshal & Manges has asked a great question in a new post at the Harvard Law School Forum on Corporate Governance: Why is the U.S. Supreme Court suddenly so passionate about federal securities litigation? According to Weil’s survey, the justices have generated more securities fraud precedent in the last two years than in the previous two decades: Merck v. Reynolds and the infamous Morrison v. National Australia Bank in 2010; Matrixx Initiatives v. SiricusanoErica P. John Fund v. HalliburtonJanus v. First Derivative Traders and (tangentially) Wal-Mart v. Dukes in 2011. The court has looked at when shareholders are on notice of fraud, how broadly U.S. securities law extends to foreign defendants, who can be sued for misstatements and when companies have a duty to inform shareholders of potential problems — in other words, a huge range of issues reflecting deep interest in shareholder rights (or lack thereof).

The Weil post says we’ll have to leave it to future historians of the Roberts Court to figure out exactly why these justices seem to be fascinated by securities class actions. In the meantime, though, we can study the briefs in the next big securities case up for Supreme Court consideration. On Thursday, Connecticut’s pension fund filed its 67-page brief in the case that will hereafter be known in SCOTUS jurisprudence as Amgen v. Connecticut Retirement Plans. Oral arguments will take place on Nov. 5 in the case, which presents the question of whether plaintiffs must provide evidence of materiality to win certification of a securities fraud class; or whether, under the Supreme Court’s 1988 fraud-on-the-market ruling in Basic v. Levinson, the class must only demonstrate an efficient market and allegedly public misstatements. Amgen also considers whether defendants have a right to rebut the fraud-on-the-market theory at the class certification stage.

It’s notable that the Connecticut fund opted to bring in David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel to argue its case at the Supreme Court. I had asked in a post in June whether the fund would stick with its lawyers at Labaton Sucharow or — like Amgen, which brought in Seth Waxman of Wilmer Cutler Pickering Hale and Dorr – go with an appellate specialist. Frederick was a smart choice. Justice Elena Kagan recently signaled the high court’s preference for arguments by members of the specialized Supreme Court bar, and no one has more recent success before the justices on behalf of shareholders than Frederick, who lost in Janus but won in Merck and Matrixx.

Why Apple is settling EC’s e-books antitrust case – but not DOJ’s

Alison Frankel
Sep 20, 2012 22:09 UTC

On Wednesday, Reuters confirmed what it first reported last month: Apple and four book publishers have offered to settle a European Commission investigation of price-fixing in the market for e-books. That’s particularly notable because Apple and two of those publishers – Macmillan and Viking – have refused to settle with the U.S. Justice Department’s antitrust division, which reached an agreement last April with three other publishers accused of conspiring with Apple to change the pricing model for e-books. Neither the DOJ settlement nor the proposed EC deal involve a financial penalty, so why would Apple, Viking and Macmillan agree to settle with antitrust regulators from the European Union but not their U.S. counterparts?

Two reasons: EC procedure and U.S. liability.

First, a caveat. I reached out to Macmillan’s lawyers at Sidley Austin, Penguin’s counsel at Akin, Gump, Strauss, Hauer & Feld and Apple’s lawyers at Gibson, Dunn & Crutcher, but none would comment, nor did Apple respond to a request for comment. In other words, I’m offering informed speculation rather than from-the-horse’s-mouth reporting.

That said, consider the way antitrust cases proceed at the EC, which is the trade section of the European Union. After regulators complete their investigation and conclude that defendants have engaged in anti-competitive behavior, they have the power to levy a fine before there’s any court ruling on liability. Those fines, moreover, can be huge. In 2008, the EC levied a $1.3 billion penalty against Microsoft for failing to comply with a previous EC directive to permit competitors to run programs on Windows. The following year European regulators set a new record with a $1.4 billion fine for the accused chip monopolist Intel.

NY judge: Shareholders can have two bites at News Corp board

Alison Frankel
Sep 20, 2012 11:39 UTC

Never underestimate the power of a lone Exchange Act claim in federal district court in Manhattan.

On Tuesday, U.S. District Judge Paul Gardephe refused to stay a consolidated derivative case claiming that the directors of News Corp breached their duty to shareholders in the phone-hacking scandal — even though a nearly identical case in Delaware Chancery Court is so much further along that Vice Chancellor John Noble heard arguments on the board’s motion to dismiss on Wednesday. Gardephe’s justification for allowing the New York federal case to proceed was that, in addition to their breach-of-duty claims under Delaware law, shareholders also asserted federal securities claims under the Exchange Act of 1934. “Because federal courts have exclusive jurisdiction over [those] claims,” the judge wrote, “they will not be resolved in the Delaware action. Staying this action in favor of the Delaware action is therefore improper.”

Gardephe shrugged off arguments by the board’s lawyers at Skadden, Arps, Slate, Meagher & Flom that the New York plaintiffs had tacked on the Exchange Act allegations simply to distinguish their case from the Delaware suit, which predated the New York litigation. According to the judge, the threshold issue under the U.S. Supreme Court’s 1976 ruling in Colorado River Water Conservation District v. U.S. was whether the New York and Delaware cases were parallel. He concluded they were not, because the Delaware case didn’t include a federal cause of action. So even though the New York case involves Delaware law questions about whether shareholders can establish the futility of demanding action from the News Corp board, Gardephe said, the Exchange Act claim cannot be resolved by the Delaware court.

Scalia: Judiciary suffers when private lawyers stay off the bench

Alison Frankel
Sep 19, 2012 16:09 UTC

If there’s one theme that ran through U.S. Supreme Court Justice Antonin Scalia’s interview Monday with Reuters Editor-in-Chief Stephen Adler, it’s that words matter. Time and time again, Scalia and Bryan Garner, the co-author with Scalia of the book Reading Law: The Interpretation of Legal Texts, endorsed originalism and textualism, doctrines that demand judges stick to interpreting the words in front of them rather than attempting to divine legislative intent or (heaven forbid!) imposing their own policy agendas. According to Garner and Scalia, textualism is a sure-footed guide, regardless of where it leads.

“A textualist will frequently end up with — an uncomfortable result. With a result that feels bad,” Garner said, according to a transcript of the interview, which he also participated in. “That’s the funny thing. The judges who are not textualists will essentially always do what they consider to be the better policy. But textualists will frequently decide cases that they think, ‘Wow, it’s a shame I have to do this.’”

If words alone must determine outcome, let’s take a look at what Scalia had to say when Adler asked a question posed by an audience member who wanted to hear the justice’s opinion on term limits for judges. Scalia called term limits “a solution without a problem,” arguing that, in his experience, William Douglas is the only justice who stayed on the Supreme Court too long. The question also led Scalia to muse, however, on how judicial salaries affect the composition of the federal judiciary. “The salaries of federal judges are so low that you’re not getting the best lawyers anyway,” Scalia said. “You’re [not] getting the, the best private lawyers. You may be getting good people, but they’re people who have been an assistant U.S. attorney, then they’re … you know, a minor state judge, then a bankruptcy judge, and then a magistrate judge. And, you know, they finally get appointed to a federal district court. A huge percentage of our federal judges now have never practiced law privately.”

First big victim of 2nd Circuit’s MBS standing opinion: JPMorgan

Alison Frankel
Sep 18, 2012 15:32 UTC

Earlier this month, when the 2nd Circuit Court of Appeals issued a ruling in a Goldman Sachs case that redefined standing in class actions involving mortgage-backed securities, I questioned how much impact the opinion would have, given that we’re four years into MBS class litigation. Sure, the 2nd Circuit opened the door to much broader MBS classes when it held that name plaintiffs can pursue claims on behalf of all the trusts backed by mortgages originated by the same lenders as those they invested in. But I wondered, as a practical matter, whether the ruling was too late to help most MBS class claimants, since most of their cases have long since crossed the threshold of standing.

Now we know that for at least one defendant — JPMorgan Chase — the newly widened definition of standing came all too soon. On Friday, U.S. Senior District Judge Edward Korman of Brooklyn issued an order drastically expanding the claims for which the name plaintiff in an MBS case against JPMorgan, the Mississippi Public Employees’ Retirement System (MissPERS), has standing to sue.

In his previous decision on JPMorgan’s motion to dismiss, Korman had taken a hard line on MissPERS’s standing. He ruled in February that the Mississippi fund, represented by Bernstein Litowitz Berger & Grossmann and Wolf Popper, had only purchased certificates in eight of the 33 MBS trusts (with a face value of $36.8 billion) at issue in the class action. Korman said that MissPERS could only assert claims on behalf of certificate holders in five of those trusts — and, even more restrictively, that it could only represent investors in the same tranches it bought into. For JPMorgan’s lawyers at Sidley Austin, that February ruling was about as resounding a victory as the bank could have hoped for.

5th Circuit: Claim for legal fees can keep antitrust case alive

Alison Frankel
Sep 15, 2012 16:06 UTC

The old proverb says that the only certainties in life are death and taxes. In the context of litigation, you can add one additional inevitability to that list: legal fees. In a ruling Thursday, the 5th Circuit Court of Appeals avoided the subject of taxes, but took the opportunity of a case about death to address the question of attorneys’ fees.

I’ve been writing a lot recently about courts rejecting outsize fees for plaintiffs’ lawyers whose clients received no (or minimal) monetary recovery. This 35-page decision involved a diametrical counterpoint to that scenario. The plaintiffs — 10 individual coffin purchasers and a group called the Funeral Consumers Alliance — originally filed a class action against the largest U.S. casket maker, Batesville, and the three biggest U.S. funeral home chains, claiming that they conspired to make it impossible for consumers to buy Batesville coffins directly from discount providers. After U.S. District Judge Kenneth Hoyt of Houston refused to certify a class, the plaintiffs reached a settlement with one of the funeral chains (Stewart Enterprises) that, according to the 5th Circuit, covered all of their compensatory damages, including the treble damages available under the Clayton Act. Hoyt then dismissed the case against the remaining defendants, ruling that the plaintiffs no longer had standing to sue because they couldn’t recover additional damages.

The plaintiffs, represented by lead counsel at Constantine Cannon and Gibbs & Brun (as well as a host of other firms on behalf of individual clients), appealed the dismissal to the 5th Circuit, arguing that the Clayton Act also provides for the recovery of legal fees and costs. Matthew Cantor of Constantine told me Friday that monetary damages available to antitrust plaintiffs — which consist of compensatory damages, legal fees and costs — have to be considered as a three-part whole. Cantor declined to discuss the specifics of the Stewart settlement, but said that “it did not satisfy all three buckets.”

In SEC enforcement, size matters

Alison Frankel
Sep 14, 2012 16:19 UTC

For good or ill, one of my themes over the last 18 months has been frustration with the Securities and Exchange Commission’s enforcement efforts. And according to a recently published study by Berkeley Law professor Stavros Gadinis, I’m not alone. Gadinis’s paper, posted Wednesday at the Harvard Law School Forum on Corporate Governance, said that it’s been three decades since any academic analysis of SEC enforcement actions against broker-dealers. In that time, Gadinis wrote, the information vacuum has been filled with complaints about the commission’s perceived foot-dragging and questions about the so-called revolving door between the SEC and private law firms. To add some substance to the discussion, Gadinis undertook what he said was the first systematic examination of SEC enforcement actions against broker-dealers — a category that includes major financial institutions — in 30 years, analyzing more than 400 cases finalized in 1998 and 2005-2007. (Gadinis added 1998 to the study so it would include cases brought in a Democratic administration.) His overall conclusion: Size matters, at least when you’re a broker-dealer facing off against the SEC. According to the prof’s data, firms with more than 1,000 employees fared much better than their smaller counterparts in terms of whether cases are brought against individual defendants; whether the SEC brought cases as administrative proceedings; and what kind of sanctions the SEC extracted.

“Big firms get different treatment,” Gadinis said in a phone interview Thursday. “That could be for many reasons (but) it’s not a nice result for the SEC, which is supposed to be a unbiased regulator of markets. Whatever the motivation, the results are not good.”

Gadinis said it’s too soon to opine on the SEC’s actions since the first four months of 2007, which is when his study ended. He also said that ideally, his data would have included SEC investigations that did not result in enforcement actions, but, as I’ve noted, those aren’t captured in publicly available materials. But with those caveats, Gadinis said his study indicates that, historically, the SEC “is reluctant to bring cases against individuals connected with big firms.”