Alison Frankel

NY appeals court: Bond insurers have right to jury in MBS cases

Alison Frankel
Jan 15, 2013 23:29 UTC

Back in October 2011, New York State Supreme Court Justice Shirley Kornreich issued a pair of strange decisions in parallel cases against Credit Suisse by the bond insurers MBIA and Ambac. The monolines, both represented by Patterson Belknap Webb & Tyler, had sued the bank in 2010, asserting claims for both fraud and breach of contract in connection with Credit Suisse mortgage-backed securities they agreed to insure. Kornreich had previously dismissed the fraud counts, holding that they merely duplicated the monolines’ contract claims. But that ruling put her at odds with at least six other state and federal judges, and when the New York Appellate Division, First Department, affirmed the consensus view in a different case, Kornreich had little choice but to reinstate the Ambac and MBIA fraud claims. As expected, she did so in those October 2011 decisions.

But what Kornreich gave the bond insurers with one hand, she took away with the other. In the same 2011 decisions, the judge ruled that Ambac and MBIA had waived their rights to a jury trial in the contracts they signed with Credit Suisse. That meant that she, rather than a jury, would decide the merits of those newly reinstated fraud allegations — and she didn’t think there was much merit to them. Kornreich’s decisions said that Ambac and MBIA couldn’t just point to the MBS offering materials and claim they were duped. Credit Suisse, she said, had offered ample notice of potential weaknesses in the underlying loan pool. To prove fraudulent inducement, she ruled, Ambac and MBIA would have to show that the bank engaged in outright deception.

The judge did order discovery on the bond insurers’ fraud claims, though not much has taken place. In the meantime, Ambac and MBIA appealed Kornreich’s holding that they’d waived their right to a jury trial. They argued that the waiver should not apply, since it was part of a contract they claimed they’d been fraudulently induced to enter. Credit Suisse, represented in both cases by Orrick, Herrington & Sutcliffe, countered that although New York law does hold that contract waivers are not enforceable when a plaintiff is suing to invalidate the contract, Ambac and MBIA are not asking for rescission of the contract, but only for money damages. In that circumstance, Credit Suisse said, Kornreich correctly ruled that the bond insurers don’t have the right to trial by jury.

The appeals court thoroughly disagreed with the bank. In one-paragraph rulings, a five-judge panel of the Appellate Division, First Department said that it is not of consequence that Ambac and MBIA aren’t expressly challenging the terms of the insurance agreements. “The complaint alleges repeatedly that the insurance agreement was obtained through various types of fraud, making it clear that fraudulent inducement is plaintiff’s primary claim,” the court said, citing its 2005 holding in Wells Fargo v. Stargate Films. “Thus, the provision of the agreement that waives the right to trial by jury does not apply.” (I’ve just quoted pretty much the entire ruling.)

The appellate ruling is certainly good news for the monolines, but it’s not a certainty that Ambac and MBIA will actually get to try their case to a jury any time soon, if at all. Discovery has barely even begun — and Credit Suisse will still have a shot to eliminate the bond insurers’ cases via summary judgment motions. Those motions, by the way, will be decided by none other than Kornreich.

Who owns AIG’s MBS fraud claims? Billions ride on the answer

Alison Frankel
Jan 14, 2013 23:13 UTC

Amid the furor last week over whether AIG would thumb its nose at its federal rescuers and join former chairman Hank Greenberg’s $25 billion constitutional case against the United States, a curious side deal by AIG and Greenberg’s Starr International was mostly overlooked. Last year, as government lawyers prepared motions to dismiss Starr’s suits against both the United States and the Federal Reserve Bank of New York, AIG signed an agreement with Starr that kept the insurer out of the fray — even though one of the most powerful defenses against the claims Starr was asserting on behalf of AIG was that Greenberg’s lawyers had served the requisite presuit demand on the corporation’s board.

We still don’t know exactly why AIG agreed to the side deal with Greenberg and we probably won’t ever get a direct answer now that AIG is out of the case. (AIG’s board voted Wednesday to stay out of Starr’s Fifth Amendment “takings” case and Starr lawyer David Boies of Boies, Schiller & Flexner subsequently said Greenberg won’t sue the board for breach of duty.) But a filing Friday by AIG shows that the insurer has its own megabucks dispute under way with the Federal Reserve. That could be one of the reasons AIG didn’t help the government defend against Starr’s suits — and, more importantly, at this point, it could affect AIG’s $10 billion claims against Bank of America, as well as BofA’s proposed $8.5 billion breach-of-contract settlement with holders of Countrywide mortgage-backed securities.

AIG’s new filing, styled as a New York State Supreme Court complaint against the New York Federal Reserve’s Maiden Lane special purpose vehicle, requests a declaration that in 2008, when the Fed paid $20.8 billion to acquire AIG’s mortgage-backed portfolio through the Maiden Lane vehicle, Maiden Lane did not acquire AIG’s rights to sue MBS issuers for securities fraud. (The Fed has since sold off the Maiden Lane MBS portfolio, at a profit of more than $2 billion.) The complaint explains that the suit is a response to recent declarations by Fed officials in AIG’s case against Countrywide, which (as I’ve told you) Bank of America has moved to dismiss on the grounds that the Fed, and not AIG, owns the fraud claims AIG has asserted.

Dela. high court to rule: Can derivative fraud suits outlive mergers?

Alison Frankel
Jan 11, 2013 23:07 UTC

If ever there was a corporate board that should have been worried about breach-of-duty accusations, it was the directors of Countrywide in 2007 and 2008, after the collapsing real estate market exposed fatal flaws in the mortgage lender’s business model. Shareholder lawyers, always quick to sense opportunity in corporate scandal, began to file derivative suits accusing Countrywide directors of countenancing fraud in the fall of 2007. By May 2008, the cases had been consolidated in federal court in Los Angeles, and lead counsel at Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer had successfully countered most of the defendants’ dismissal arguments. At that point, it appeared that the Countrywide case could turn out to be a true rarity: a derivative suit that actually generated money damages.

Then Bank of America rode in and bought Countrywide for $2.5 billion. Regardless of what you think of that acquisition, which has been dubbed the worst banking deal of all time, the merger offered at least one very distinct benefit for Countrywide board members. Because the deal was structured as a stock-for-stock transaction, the Countrywide shareholders who had brought derivative breach-of-duty claims against the board, and had survived a motion to dismiss most of those claims, no longer held Countrywide stock. That meant they no longer had standing to assert their case on behalf of Countrywide. After the merger was completed in July 2008, Bank of America, not the former Countrywide shareholders, owned claims against Countrywide board members — and BofA certainly wasn’t going to assert them, since the merger agreement specifically indemnified the board.

The merger, in other words, seemed to spell the end of the derivative suit. In December 2008, U.S. District Judge Mariana Pfaelzer of Los Angeles said as much when she dismissed the case. The judge quoted from the Delaware Supreme Court’s 1984 ruling in Lewis v. Anderson: “It is well established that a merger which eliminates a derivative plaintiff’s ownership of shares of the corporation for whose benefit she has sued terminates her standing to pursue those derivative claims.” Lewis included an exception for cases in which the entire merger is a fraud engineered to protect the board, but Pfaelzer said the fraud exception doesn’t encompass the BofA deal, in which the directors’ escape from liability was the side effect of a legitimate merger.

Latest in private Libor cases: California city, counties file suit

Alison Frankel
Jan 10, 2013 23:35 UTC

The first time I wrote about private antitrust claims against banks for rigging the London Interbank Offered Rate (or Libor), it was August 2011 and the judicial panel on multidistrict litigation had just consolidated 18 class actions alleging a conspiracy to manipulate the benchmark rates, which are used to set variable interest rates on all sorts of securities around the world. I titled the piece, “The megabillions litigation you’ve never heard of.”

How things have changed in the 17 months since then! The private Libor litigation still has megabillions potential, but thanks to the tsunami of Libor news in 2012, everyone knows it. The consolidated cases are proceeding in federal court in Manhattan before U.S. District Judge Naomi Reice Buchwald, who is considering fully briefed motions to dismiss by more than a dozen bank defendants. Meanwhile, new claimants have piled on. I’ve already told you about the class actions filed after the $450 million Barclays settlement last summer, which tried to distinguish themselves from the cases already under way. Now there’s another wrinkle in the private Libor litigation: On Wednesday, the counties of San Diego and San Mateo, the city of Riverside and the municipal utility district of Oakland filed simultaneous antitrust complaints in three different federal courts in their home state of California. And a lawyer from the firm that filed all of the new cases, Cotchett, Pitre & McCarthy, told me Thursday that he is hoping more California cities and counties will join in. “California public entities — that’s who we’re trying to gather up,” said Daniel Sterrett of Cotchett.

The allegations in the California suits will be familiar to anyone who has followed the burgeoning Libor scandal, in which banks supposedly falsified reports of interbank borrowing rates to a British banking authority in order to improve trading positions or avoid damaging their reputations. The new complaints aren’t even the first to mine documents released by British and U.S. regulators in connection with UBS’s $1.5 billion settlement in December. The Los Angeles County Employees Retirement Association, represented by Bernstein Litowitz Berger & Grossmann, filed a class action on Dec. 21 that included allegations based on the UBS materials. (The pension fund’s suit, interestingly, asserts only federal racketeering and California state-law claims that are not already in the ongoing class action, so at least as the original case is currently pleaded, the pension fund’s case doesn’t overlap it.)

Supreme Court declines to halt 2nd Circuit’s Twiqbal pushback

Alison Frankel
Jan 9, 2013 23:57 UTC

In litigation, as in life, there’s usually no better strategy for catching the attention of rulemakers than to tattle on subordinates for ignoring their directives. That was clearly the thinking of lawyers for a group of magazine publishers who wanted the U.S. Supreme Court to review a 2012 ruling by the 2nd Circuit Court of Appeals that revived an antitrust conspiracy case against them. The publishers’ petition for certiorari claimed that the 2nd Circuit opinion undermined the high court’s holdings in Bell Atlantic v. Twombly and Ashcroft v. Iqbal – the incredibly consequential recent Supreme Court decisions that made it easier for defendants to win the dismissal of plaintiffs’ complaints. The publishers called on the justices to use the opportunity of the 2nd Circuit decision, captioned Anderson News v. American Media, to reiterate their intentions in Twombly and Iqbal (known slangily as Twiqbal).

On Monday, the Supreme Court refused to take the bait and denied the cert petition. That leaves the publishers’ brief to serve the perverse purpose of explaining to antitrust plaintiffs (and, for that matter, plaintiffs in all sort of other cases) exactly how the 2nd Circuit’s Anderson decision permits them to get past dismissal motions premised on Twombly and Iqbal. (The brief even includes a handy rundown on trial judges outside of the 2nd Circuit who have cited the Anderson case when they refused to toss antitrust complaints.) The justices may, of course, decide later on to revisit circuit court interpretations of Twiqbal, but for now the cert denial is undoubtedly good news for plaintiffs.

In the underlying case, the magazine wholesaler Anderson News c laimed that it was driven out of business when publishers conspired to resist its attempt to impose new per-magazine and inventory surcharges on them. U.S. District Judge Paul Crotty tossed the complaint, finding that Anderson hadn’t met the Twombly standard of creating a plausible inference of collusion, since there were alternative and legitimate business reasons for each publisher independently to decide not to pay the new charges. But in April 2012, the 2nd Circuit vacated Crotty’s decision.

How AIG’s board ended up in the middle of Greenberg’s suit v. U.S.

Alison Frankel
Jan 9, 2013 00:10 UTC

On Wednesday, as Dealbook reported in a terrific story Monday night, AIG’s 12 board members will hear an extraordinary presentation. Starr International Company, which is controlled by former AIG chief Hank Greenberg, will ask the company to join a $25 billion case in federal claims court that accuses the United States of wrongfully seizing control of AIG from shareholders when the government took control of the teetering insurer in September 2008. Then, according to a court filing in which AIG described the process, the government and the Federal Reserve Bank of New York will counter Starr’s arguments and urge the board to forego litigating against its federal saviors (who have since been paid back in full). By the end of the month, the board will decide whether to take on Starr’s derivative claims against the government, risking accusations of ingratitude, or to vote against pursuing the litigation, risking possible shareholder derivative claims that it has breached its own fiduciary duties.

Starr hasn’t made any threats of breach-of-duty claims against AIG’s board, and its lawyers at Boies, Schiller & Flexner declined comment through a firm representative. So far, AIG’s conduct in Starr’s litigation against the federal government has actually helped Greenberg’s company, as you’ll see below. But as the AIG board deliberates, directors will be wary of the former chairman’s well-exercised trigger finger for lawsuits.

Starr’s campaign against the feds began in November 2011 as two different cases: the federal claims court complaint against the United States (asserting both direct shareholder claims and derivative claims on behalf of AIG for the government’s supposedly unconstitutional conduct) and a shareholder derivative complaint in federal court in Manhattan against the Federal Reserve Bank of New York, which was the instrument of the $182 billion federal bailout of AIG. In a landmark (and cogently written) ruling last November, U.S. District JudgePaul Engelmayer dismissed the entire case in Manhattan federal court. The judge said (and here I’m summarizing an 89-page ruling) that Starr hadn’t adequately established the Federal Reserve’s fiduciary duty to AIG and its shareholders, and even if such a duty existed, AIG’s claims under Delaware law would be pre-empted by the federal government’s larger responsibility to stabilize the national economy.

In tax fraud case, sins of defense lawyers are visited on client

Alison Frankel
Jan 7, 2013 23:48 UTC

Should a law firm’s client suffer the consequences of a misstep by his lawyers?

That seems to be the fate of David Parse, a former Deutsche Bank accountant who was convicted of mail fraud and obstructing an investigation in 2011, as part of what’s been called the government’s biggest-ever tax fraud prosecution. Last week, U.S. District Judge William Pauley of Manhattan once again refused to grant Parse a new trial, even though the judge previously vacated the convictions of three of Parse’s co-defendants (including two former Jenkens & Gilchrist partners), after evidence surfaced that a juror lied during jury selection. Pauley’s latest ruling, which marks the second time the judge has refused to order a new trial for Parse, concludes that Parse’s former lawyers at Brune & Richard were not ineffective counsel, even though they made what turned out to be a disastrous decision not to inform the court of suspicions about the lying juror.

I’ve previously written about Brune & Richards’ bizarre ethics dilemma, but to recap quickly: During jury selection, the firm ran across evidence that suggested a juror in the Parse case had the same name as a New York lawyer suspended from practice for alcohol abuse. Because of inconsistencies in the juror’s responses in voir dire, Brune & Richard concluded that the names were a coincidence and said nothing to the court before the trial — or during jury deliberations, when the juror used legal jargon in a note to the judge and the firm’s suspicions were reawakened.

Monday at SCOTUS: revisiting the Class Action Fairness Act

Alison Frankel
Jan 4, 2013 23:23 UTC

One of the signal achievements of pro-business litigation reformers will come under the scrutiny of the U.S. Supreme Court on Monday, when the justices hear the case of Standard Fire v. Knowles.

Standard Fire, as I’ve previously reported, presents the question of whether class action plaintiffs can proceed in state court by stipulating to damages of less than $5 million — the threshold Congress specified for removal to federal court in 2005′s Class Action Fairness Act — or whether such stipulations improperly impinge on defendants’ due process rights. Depending on how broadly the justices interpret that issue and which way they rule, the case could be the Supreme Court’s opportunity to clamp down on the tactics of plaintiffs’ lawyers to evade CAFA — or a means of undermining tort reformers’ favorite federal law.

Here’s why. In the underlying case, the purported name plaintiff of a statewide class action claiming that Standard Fire underpaid policyholders in Arkansas signed a “sworn and binding” stipulation that he would not ask for damages of more than $5 million. That’s a magic number under CAFA. As you know, the law mandates that almost all class actions proceed in federal court, with an exception for cases involving statewide classes of fewer than 100 people or damages of less than $5 million. That might seem straightforward enough, but Standard Fire and a whole lot of other defendants claim that plaintiffs are abusing the exception, stipulating to damage claims and then, once they get classes certified in state court, extracting settlements of more than $5 million from companies worried about the risk and expense of class action litigation.

NY pension fund’s bold tactic to force campaign spending disclosure

Alison Frankel
Jan 3, 2013 23:44 UTC

Since 2010, when the U.S. Supreme Court unleashed corporate political spending in Citizens United v. Federal Election Commission, shareholder advocates have been warning of the dire consequences of secret campaign contributions and demanding that corporations reveal their political spending. The Coalition for Accountability in Political Spending, among other groups, called upon the Securities and Exchange Commission to mandate the disclosure of corporate campaign spending, but the SEC has so far sidestepped the issue. Activists working with groups such as the Center for Political Accountability have used the threat (and occasionally the fact) of proxy votes on disclosure to pressure more than 100 large public companies to pledge to report their campaign spending. But, as The New York Times reported this summer, it’s all too easy for corporations to evade their own promises by masking political contributions as lobbying expenses. With limited means of compelling public companies to agree to reveal political contributions — and no means of enforcing voluntary disclosure — shareholders are at the mercy of the companies they supposedly own.

A new suit by the New York State Common Retirement Fund could change that balance of power. Thecomplaint, filed Thursday in Delaware Chancery Court by the pension fund’s lawyers at Bernstein Litowitz Berger & Grossmann and Bouchard Margules & Friedlander, seeks to compel the chipmaker Qualcomm to turn over its books and records so shareholders can see all of the company’s political contributions. This suit marks the first attempt to use Delaware’s books and records law, known as Section 220, to obtain information about corporate campaign spending. If it’s successful, other shareholders will surely follow the New York pension fund’s lead.

That’s a big if, though. If you follow Delaware litigation, you’re probably aware that Chancery Court judges have lately been insisting that plaintiffs’ lawyers take advantage of shareholders’ books-and-records rights to investigate potential breach-of-duty claims before they file derivative suits against corporate directors. That would seem to augur well for the New York pension fund. So does its compliance with Delaware procedures. The $150 billion fund, which is headed by New York Comptroller Thomas DiNapoli and owns more than $380 million in Qualcomm shares, sent Qualcomm a letter in August, demanding to inspect its records on political spending to assure that the contributions were in shareholders’ interests. Qualcomm refused, according to the complaint. The company and the fund then spent six weeks negotiating the terms of a discussion of Qualcomm’s disclosures, which finally took place in October. Qualcomm agreed to some prospective disclosures in that conversation but has since failed to implement the promised reforms, according to the complaint. Shareholders only sued, the complaint said, when it became clear that litigation was the only way to get the information they wanted.

Judge in gargantuan Google privacy class action: No harm, no case

Alison Frankel
Jan 2, 2013 23:13 UTC

Last June, while the country was transfixed by the U.S. Supreme Court’s ruling on the constitutionality of Obamacare, the justices quietly ducked an issue that has bedeviled Silicon Valley for more than a decade. The court issued a ruling that it had “improvidently” granted certiorari in a case called First American Financial v. Edwards, which presented the question of whether plaintiffs have standing to sue if they cannot demonstrate an injury. The Supreme Court’s decision to pass left in place a 9th Circuit Court of Appeals finding that plaintiffs can establish standing through a statutory claim even if they weren’t harmed by the defendant’s conduct.

Tech companies had been hoping for a different result, since plaintiffs in class actions claiming violations of their privacy often can’t show that they suffered any actual injury from the use of their personal information. Defendants have been fairly successful with arguments that class members in privacy cases can’t establish standing through an injury-in-fact, but plaintiffs can still survive dismissal motions by citing violations of laws that carry statutory damages. That’s why cases such as the class action involving Facebook’s “Sponsored Stories” advertising result in multimillion-dollar settlements: Defendants face statutory claims by legions of class members.

Last Friday, Google avoided a similar fate, at least for the time being. U.S. Magistrate Judge Paul Grewal of San Jose, California, dismissed a class action asserting that the universal terms of service Google imposed in March 2012 violated users’ privacy rights, as well as the federal Wiretap Act and California state consumer laws. The magistrate said that the class, represented by Gardy & Notis, Grant & Eisenhofer and Bursor & Fisher, can file an amended complaint based on the state Right to Publicity Act but said that plaintiffs will have to show specifically that Google used their voice or likeness without their consent, which they so far haven’t been able to do. (Plaintiffs’ lawyer Kelly Noto didn’t return my call for comment.)