Opinion

Alison Frankel

Suit reveals new details of Paulson’s role in Goldman Abacus CDO

Alison Frankel
Jan 31, 2013 23:26 UTC

Ever since Goldman Sachs agreed to pay $550 million to resolve claims by the Securities and Exchange Commission that it deceived investors in the Abacus collateralized debt obligation, there’s been a giant question mark hovering over the hedge fund Paulson & Co. Paulson worked with Goldman Sachs to select the CDO’s reference portfolio of mortgage-backed securities, then reaped the profits from a short position when the instrument failed. The implication was that Paulson picked securities that doomed Abacus, but the SEC never brought a case against the hedge fund. And when the bond insurer ACA Financial Guaranty, which was nominally the portfolio selection agent on the CDO, sued in 2011 to recover the $30 million it lost (plus punitive damages), it named only Goldman as a defendant.

But on Wednesday, New York State Supreme Court Justice Barbara Kapnick of Manhattan ruled from the bench that ACA can file an amended complaint – and this one names Paulson & Co and the Paulson Credit Opportunities fund as defendants. The 49-page suit, which was attached as an exhibit to ACA’s motion to file, adds layers of detail to what was previously known about Paulson’s involvement with the Abacus CDO, based on discovery not only from ACA’s suit but also from the SEC’s ongoing case against former Goldman vice president Fabrice Tourre. There aren’t huge surprises in the new evidence, but the disclosure of a side agreement between Goldman and Paulson and of a phone conversation in which Goldman assures ACA that Paulson has a long position appear to bolster ACA’s assertion that it was the dupe of a secret deal between the investment bank and the hedge fund.

“This is a very significant event,” said ACA counsel Marc Kasowitz of Kasowitz, Benson, Torres & Friedman. “It’s the first time Paulson has been fronted for having a share of the responsibility in Abacus.”

According to the new complaint, Paulson talked about shorting MBS-referenced CDOs with three banks besides Goldman: Bear Stearns, Morgan Stanley and Deutsche Bank. Bear and Morgan Stanley both balked; ACA alleges that the Morgan Stanley deal fell through after the collateral manager, Trust Company of the West, expressed concern about the arrangement. Deutsche Bank, however, supposedly had Paulson interview potential collateral managers for a 2007 CDO. According to the complaint, emails show that the hedge fund agreed both to “play the role” of an equity investor when the fund met with candidates and to “stick to the script.”

Those allegations are tantalizing, but they’re really not central to ACA’s case. More significant for the purposes of establishing liability to ACA are the insurer’s new allegations about behind-the-scenes negotiations between Paulson and Goldman. According to the complaint, Paulson was concerned that if Goldman Sachs, as the initial protection buyer of the credit default swap piece of Abacus, defaulted on the CDS, then the hedge fund wouldn’t be able to reap the benefit of its short, which was structured as a separate CDS with Goldman. Paulson wanted the Abacus deal to permit the fund to step into Goldman’s place as initial protection buyer in the event of default. But according to the complaint, Goldman was worried that if the indenture documents specified Paulson as a replacement counterparty, the hedge fund’s overall role in Abacus would have to be disclosed. So instead, ACA asserts, the indenture documents gave Goldman the right to appoint a successor – and an undisclosed side agreement between Goldman and Paulson, executed in April 2007, said that Paulson would be that successor (if the fund wanted to be). The complaint also alleges that Goldman was so eager to serve Paulson, which paid the bank $15 million to put the Abacus deal together, that it agreed to take on an additional $100 million of risk on the CDO so the hedge fund could take a bigger short position.

Who are Justice Department’s ‘outside experts’ on prosecuting banks?

Alison Frankel
Jan 30, 2013 23:56 UTC

Lanny Breuer made the formal announcement Wednesday that he is stepping down as head of the Justice Department’s criminal division, after a week that he surely won’t remember as his favorite in public service. Last Tuesday, PBS’s Frontline made Breuer seem insincere and evasive about Justice’s failure to prosecute bankers involved in mortgage securitization. Then yesterday, a pair of U.S. senators, Chuck Grassley (R-Iowa) and Sherrod Brown (D-Ohio), sent a follow-up letter to Attorney General Eric Holder, demanding information about the Justice Department’s settlements with big banks. In particular, the letter quoted comments by both Holder and Breuer about receiving advice from “experts” on the dire economic consequences of indicting financial institutions. Brown and Grassley asked the Justice Department to disclose the identity (and compensation) of all outside experts who opined on prosecuting banks with more than $1 billion in assets and to explain how it vetted the experts to ensure that they “provided unconflicted and unbiased advice to DOJ.”

Based on a speech Breuer gave to the New York City Bar Association last September, some of the experts who spoke with the Justice Department about what would happen if global corporations faced criminal charges were certainly not unbiased: They were economists brought in by targets to dissuade the department from indicting their clients. Let’s be clear: Listening to arguments from potential defendants is an entirely appropriate exercise of prosecutorial discretion; as Breuer said in his speech, responsible law enforcement demands that prosecutors consider the consequences of their actions. But with Grassley and Brown now pressing the Justice Department on who advised Holder and Breuer to protect jobs and markets by deferring prosecution of big banks, Justice critics could try to turn Breuer’s words against him and his office.

The senators’ letter cites Breuer’s remarks to Frontline, which helpfully posted a transcript of its interview with the assistant AG. “In any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect, it affects the economy,” Breuer told Frontline. “At the Department of Justice, we’re being aggressive, but we should in fact take into consideration what the experts tell us. That doesn’t mean we won’t go forward, but it has to be a factor.”

Truth and justice are elusive in Chevron Ecuador case

Alison Frankel
Jan 29, 2013 21:32 UTC

On Monday, Chevron filed a new motion for summary judgment in its fraud and racketeering case against the lawyers and expert witnesses who helped 47 Ecuadoreans from the Lago Agrio region of the rainforest obtain an $18 billion judgment against the oil company from an Ecuadorean court in 2011. The motion discloses what seems to be incredibly powerful evidence that the Ecuadorean judgment was illegitimate: A onetime presiding judge on the Ecuadorean case, Alberto Guerra, submitted a declaration asserting that he acted as the middleman in setting up a $500,000 bribe from plaintiffs’ lawyers to the Ecuadorean judge who entered the judgment against Chevron. Guerra claimed that the plaintiffs actually drafted the 2011 judgment and that he, as a behind-the-scenes ghostwriter, worked with plaintiffs’ lawyers to make it seem more like a court ruling. According to his declaration, filed before U.S. District Judge Lewis Kaplan of Manhattan, Guerra had previously received regular payments from the plaintiffs in the Chevron case to ghostwrite other rulings subsequently issued by the presiding judge. And, to boot, Guerra asserted that Chevron — unlike the plaintiffs — didn’t respond to his solicitation of bribes.

Chevron filed additional new evidence to back Guerra’s declaration, including draft versions of the 2011 judgment found on the former judge’s computer, mail and bank records showing his contacts with the plaintiffs and sworn statements by other witnesses supposedly involved in the bribery scheme. “Guerra’s testimony and corroborating evidence confirm what the extensive overlap between the (plaintiffs’) internal files and the judgment already prove: that the (plaintiffs) corrupted the Ecuadorean court and wrote the $18 billion judgment against Chevron,” wrote the oil company’s lawyers at Gibson, Dunn & Crutcher.

Guerra has some credibility issues, since, by his own admission, he was dismissed from the Ecuadorean court and has been in financial straits. His declaration disclosed a payment of $38,000 from Chevron to compensate him for his time and expenses, including the surrender of his computer, flash drives and cell phones. The Lago Agrio plaintiffs and their allies claimed that isn’t all the former judge received. In a statement, Ecuadorean plaintiffs’ lawyer Pablo Fajardo said that Guerra previously offered to sell his testimony to his clients but they refused to pay. “It always was obvious that Guerra wished to sell himself to the highest bidder, a fact which undermined his credibility and made him a profoundly unreliable witness,” Fajardo’s statement said. The Ecuadoreans also claim (without supporting evidence, from what I can tell) that Chevron is using Guerra’s testimony to cajole and intimidate other former judges in Ecuador.

Inside ‘unseemly’ lead counsel fight in Nexium antitrust class action

Alison Frankel
Jan 29, 2013 15:47 UTC

The Federal Judicial Center says that the preferred way to determine lead counsel in a complex multidistrict litigation is for plaintiffs’ lawyers to meet and reach a consensus on which firms should direct the case. But that’s not always the way things work out. Just ask Linda Nussbaum at Grant & Eisenhofer, who lost a bid last week to lead an antitrust class action by drug wholesalers accusing AstraZeneca and three generic drugmakers of conspiring to keep AZ’s blockbuster heartburn drug Nexium off of the market. Nussbaum accused three other big pharmaceutical antitrust players – Hagens Berman Sobol Shapiro, Garwin Gerstein & Fisher and Berger & Montague – of plotting to exclude her and then misrepresenting her stellar record. In the end, Nussbaum’s rivals won the battle for lead counsel, but not without also incurring the disgust of the judge overseeing the case.

In a Jan. 24 order appointing the Hagens group to lead the case, U.S. District Judge William Young of Boston meted out blame for the “unseemly squabble” among plaintiffs’ firms. “This squabble reflects most poorly on all counsel involved since it appears driven more by a desire to participate to a greater degree in a potential award of attorneys’ fees than by any nuanced professional judgment concerning how to assemble the strongest possible team of counsel,” he wrote. Young also said he planned to make sure that the cost of “this sad and unprofessional quarrel” is not passed along to the firms’ clients.

But even the strong words in Young’s order don’t convey how truly nasty the showdown between Nussbaum and Bruce Gerstein of Garwin Gerstein became, with these two leaders of the plaintiffs’ antitrust bar flinging accusations of borderline ethics back and forth for a month. Lead counsel jostling in mega-antitrust and product liability litigation is the rule, not the exception, as indicated by the briefs debating leadership of the Nexium indirect purchasers’ case, also before Judge Young. Plaintiffs’ lawyers, however, usually realize after a round or two of briefing that they’re better off reaching an agreement than parading dirty laundry before the court and the defendants; that’s what happened in the indirect purchasers’ wing of the Nexium case. This story is for anyone who doubts the wisdom of finding consensus.

Why U.S. is forgoing appeal of landmark 2nd Circuit off-label ruling

Alison Frankel
Jan 24, 2013 22:35 UTC

On Wednesday, the Food and Drug Administration announced that the government has decided not to seek review of a landmark 2012 ruling by the 2nd Circuit Court of Appeals in U.S. v. Caronia. As you probably recall, a split 2nd Circuit panel held in December that the First Amendment protects truthful speech about the off-label use of FDA-approved products, finding that the misbranding provisions of the Food, Drug and Cosmetic Act do not prohibit off-label marketing, as long as it’s not misleading. Wednesday’s announcement by the FDA means that in New York, Connecticut and Vermont, pharmaceutical and medical device makers can give physicians information about their products that they can’t discuss in other states without risking prosecution.

That disparity would have been a good reason for the government to seek en banc or U.S. Supreme Court review of the 2nd Circuit panel’s Caronia ruling, said Jeffrey Senger of Sidley Austin, a former deputy chief counsel of the FDA. Senger told me Thursday that the Justice Department, which litigates on behalf of the FDA, undoubtedly considered whether it had a responsibility to ask the entire 2nd Circuit or the Supreme Court to clarify what pharma companies can and cannot say about their products. (Former healthcare fraud prosecutor Michael Loucks, now at Skadden, Arps, Slate, Meagher & Flom, told me the same thing when the Caronia ruling came down last month. “There’s a downside to the pharmaceutical industry and to society if the Justice Department shies away from further review,” Loucks said. “It’s not helpful to drug or device companies to have a lack of clarity. It’s also not helpful to the Justice Department.”)

But there was also a downside for the government in pursuing the Caronia appeal — especially because the Supreme Court made it clear in a 2010 case called Sorrell v. IMS Health that pharma marketing is “a form of expression protected by the Free Speech Clause of the First Amendment.” Sorrell involved a Vermont law restricting the sale of pharmacy prescription records, not off-label marketing. Nevertheless, the ruling is considered a good indicator of the justices’ likely view of the issues in Caronia. And losing at the Supreme Court would extend Caronia’s reasoning beyond the confines of the 2nd Circuit, which is just what the Justice Department doesn’t want. “I think the government had a very substantial risk of losing at the Supreme Court if they had appealed,” said Senger, who added that the decision to forgo an appeal did not surprise him.

Avandia case: the new normal for plaintiffs’ fees in mass torts?

Alison Frankel
Jan 23, 2013 22:20 UTC

Last week, the court-appointed mediator in the consolidated Avandia marketing and product liability litigation against GlaxoSmithKline informed U.S. District Judge Cynthia Rufe of Philadelphia that 58 plaintiffs’ firms in the case have agreed to an allocation plan for $143.75 million in common-fund fees. As mediator Bruce Merensteinof Schnader Harrison Segal & Lewis described the process, nine law firms objected to the initial allocation plan proposed by a Rufe-appointed fee committee. After a dozen phone calls and 15 in-person sessions over the last few months, members of the fee committee adjusted their own take to bring the objectors on board. In the final allocation outlined in Merenstein’s report, the biggest share of the common fees, $22.6 million, will go to Reilly PoznerWagstaff & Cartmell is in line for $17.2 million; Andrus Hood & Wagstaff for $14.7 million; and Miller & Associates and Heard Robins Cloud & Black for more than $10 million. The Miller firm was an objector to the original allocation plan, but all of the other firms looking at eight-figure awards from the common fund were on the fee committee.

Keep in mind that the common-fund fees are on top of whatever contingency fees the plaintiffs’ firms will receive as a share of their clients’ settlements with GSK over the diabetes drug. Rufe ordered last October that all of the plaintiffs in thousands of settled (and later-settled) cases must pay 6.25 percent of their settlements into a common fund to compensate the lawyers who worked on behalf of all Avandia plaintiffs in the consolidated litigation. If you do the math, that reflects a total of $2.3 billion in Avandia settlements by GSK (Rufe doesn’t cite the total but based her order on an aggregated estimate calculated by a plaintiffs’ expert.)

So what, you may be wondering, is the total percentage of that $2.3 billion that will go to plaintiffs’ lawyers? We don’t know. And that’s why the Avandia litigation model, which GSK previously employed in the Paxil litigation, could be a boon to plaintiffs lawyers.

New suit: Financial straits led to ethics infractions by Hausfeld

Alison Frankel
Jan 22, 2013 23:45 UTC

Jon King, a California lawyer who was a founding partner at Michael Hausfeld’s eponymous antitrust shop but was fired from the firm last October, spares no accusations in the 78-page wrongful termination complaint he filed last week in federal court in the Northern District of California. The suit is a compendium of supposed misbehavior by Hausfeld and some of his partners, allegedly committed under the pressure of financial straits. I’m not sure how much fire underlies the clouds of smoke from King’s red-hot complaint, but Hausfeld has made enough enemies and is leading enough big cases — including a potentially gargantuan investor class action against the banks that allegedly manipulated Libor rates — that the suit is going to be the talk of the antitrust bar.

I want to say up front that I emailed Hausfeld, asking him to address some of the specific accusations in King’s complaint. I did not receive a reply from him, but a representative sent an email statement: “This is an employment grievance from a former partner of Hausfeld LLP,” it said. “The firm separated with Mr. King for good reason, and the allegations made by him are baseless. We abide by the highest ethical standards and will defend our reputation vigorously.”

So keep Hausfeld’s denial in mind as you consider King’s allegations that the firm took financial advantage of co-counsel in litigation over the unauthorized use of likenesses of college athletes in videogames; courted Asian electronics companies to be plaintiffs in one antitrust case even as the firm litigated against them in another action; tried to undermine client development efforts by co-counsel; and signed the name of a famous client — NFL Hall of Famer Elvin Bethea — to a letter he did not write or support. Individually the accusations may not amount to much, and there’s a lot in King’s kitchen-sink complaint that, quite frankly, seems intended to tar the reputation of some Hausfeld partners rather than to bolster King’s argument that he was fired for blowing the whistle on the firm’s unethical practices. But the complaint includes enough details about the founding and operation of Hausfeld LLP to be a fascinating inside look at the firm.

In smartphone wars, Apple stalks the elusive injunction

Alison Frankel
Jan 18, 2013 23:33 UTC

If ownership of a valid patent can’t help you stop a competitor from selling products that incorporate your proprietary technology, then — according to an extraordinary new filing by Apple – there’s something seriously wrong with the patent system.

Apple has asked the Federal Circuit Court of Appeals to bypass standard operating procedures and commit the entire court, rather than a three-judge panel, to reviewing its bid for a post-trial injunction barring the sale of Samsung devices that have been found to infringe Apple patents. U.S. District Judge Lucy Koh of San Jose, California, who presided over the trial of Apple’s claims against Samsung last summer, refused last month to grant Apple a permanent injunction, citing the Federal Circuit’s October 2012 ruling in yet another Apple case against Samsung. Though Apple has already petitioned for en banc review of that ruling, which involved a pretrial injunction, its new motion argues that the standard for injunctions is even more important when a patent holder has already gone through trial and established the illegal conduct of its competitor. The entire Federal Circuit, Apple contends, must clarify whether the appeals court really intended to contradict its own and U.S. Supreme Court precedent and make it “all but impossible” to obtain a permanent injunction in a smart-device case.

The brief includes an unusually blunt discussion of how injunction motions shape patent litigation — and why they’re such a powerful weapon for patent holders. “The injunction standard defines a patentee’s rights as against a competitor and affects numerous strategic decisions in a patent case, including whether to file, what patents to assert, what discovery requests to make, what consumer survey questions to ask, what issues to put to a damages expert, what questions to ask at depositions, what patent claims to advance at trial, and whether and when to settle,” wrote Apple’s lawyers at Wilmer Cutler Pickering Hale and Dorr and Morrison & Foerster. If the Federal Circuit takes away the possibility of a permanent injunction, Apple argued, that leaves patent holders only with the chance to obtain money damages, which their competitors will come to consider just a cost of doing business. “If that is indeed the law,” Apple’s brief said, in language that sounds like an overt challenge to the Federal Circuit, “patent rights will be greatly diminished in value.”

Supreme Court conundrum: How far does a soybean seed patent go?

Alison Frankel
Jan 17, 2013 22:53 UTC

Vernon Hugh Bowman is the rare Indiana soybean farmer destined for immortality as a U.S. Supreme Court caption.

Bowman had the temerity to attempt to outwit Monsanto, the giant agriculture company that, as you surely know, invested hundreds of millions of dollars and years of research in the creation of soybean seeds that are genetically modified to withstand the herbicide glyphosate, which Monsanto markets as Roundup. The genetically modified seeds, according to the Supreme Court brief Monsanto filed Wednesday, have been such a hit with farmers that more than 90 percent of the U.S. soybean crop begins with Monsanto’s Roundup Ready seeds. Given that every soybean plant produces enough seeds to grow 80 more plants — and that soybeans grown from Roundup Ready seeds contain the genetic modification of glyphosate resistance — Monsanto has insisted that farmers sign licensing agreements with strict restrictions. Soybean producers are only supposed to use the Roundup Ready seeds they buy to grow crops in a single season, and they’re forbidden from planting second-generation seeds harvested from first-generation crops.

The licensing agreements do contain an exception, though: Farmers are allowed to sell the second-generation seeds to grain elevators, which, in turn, are permitted to sell a mixture of undifferentiated seeds as “commodity grain.” Monsanto contends that commodity grain should be used for feed, not cultivation. But Bowman figured that the mixture sold by grain elevators probably contained mostly Roundup Ready seeds, so for several years, after harvesting his first crop (planted with authorized, Monsanto-licensed seeds), he planted a second crop with commodity grain. When he treated the second crop with herbicide, he was proved right — most of the plants were resistant.

New paradigm for mortgage put-back claims?

Alison Frankel
Jan 16, 2013 22:22 UTC

I did a double take Wednesday, when I noticed a pair of new suits by Lehman Brothers Holdings in federal court in Colorado. The complaints, which are almost identical, claim that the mortgage originator Universal American Mortgage breached representations and warranties about loans it sold to Lehman, which subsequently suffered losses as a result of those breaches. But here’s the thing: Each suit addresses only one supposedly deficient loan! Lehman’s lawyers at Akerman Senterfitt allege that Lehman sustained about $100,000 in damages on one of the loans and $120,000 on the other — numbers that are light years apart from the multibillion-dollar claims we’ve seen from groups of mortgage-backed securities investors who band together to assert contract breaches in thousands of loans at a time.

The Lehman complaints each also contained a curious paragraph, noting that the claims at issue were previously asserted as counts in an eight-loan put-back case Lehman was litigating in federal court in Miami. The judge in that case, Lehman said, had decided after a pretrial conference last week that “each loan must be filed separately, rather than joined within one action.”

That notation sent me to the docket in the Florida case, and to the order entered by U.S. District Judge James King on Jan. 9. It’s true: King ruled that every allegedly deficient loan has to be addressed in its own suit, not in a block case. “The lack of commonality among the various factual circumstances pertinent to each of the eight individual loans makes them all but impossible to be adjudicated together,” King wrote. “That lack of commonality flows from, among other things, the facts that each of these loans was made at a different time, to different borrowers, in different locations involving different purchases of different real properties; most fundamentally, each loan requires separate proof as to whether a breach occurred, what damages, if any, flowed from any such breach, and what the amounts of any such damages are.”

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