Opinion

Alison Frankel

U.S. criminal laws don’t apply to conduct abroad: 2nd Circuit

Alison Frankel
Aug 30, 2013 19:11 UTC

Attention, American fraudsters! If you restrict your criminal activities to conduct outside of the United States, you’re safe from prosecution under U.S. laws.

That’s not exactly how a three-judge panel of the 2nd Circuit Court of Appeals worded its decision Friday in U.S. v. Alberto Vilar and Gary Tanaka, but it’s the effective result of the appellate court’s finding that criminal statutes – in particular, criminal securities fraud laws – don’t extend overseas. The opinion noted that the 2nd Circuit has long recognized a presumption against the extraterritorial application of U.S. criminal laws. But make no mistake, the Vilar ruling is a major interpretation of what the court acknowledged to be an open question after the U.S. Supreme Court’s 2010 admonition against overextending the scope of U.S. laws in Morrison v. National Australia Bank. Namely, does Morrison apply to criminal as well as civil laws? The 2nd Circuit panel – Judges Jon Newman, Jose Cabranes and Chester Straub – could not have answered the question more decisively. “The general rule,” wrote Cabranes, “is that the presumption against extraterritoriality applies to criminal statutes.”

That reasoning could result in the dismissal of some counts of the government’s indictment of onetime SAC Capital trader Mathew Martoma, whose lawyers at Goodwin Procter argued in a brief filed in June that Morrison precludes charges based on trading in the American Depository Receipts of Elan, a company whose stock trades on Irish and British exchanges. The intersection of Morrison and fraud prosecution is also at issue in a 2nd Circuit appeal by former Sky Capital executives Ross Mandell and Andrew Harrington, who were convicted of defrauding mostly British investors in London-traded securities.

Unfortunately for Vilar and Tanaka, who controlled U.S. and international investment advisory firms under the umbrella name Amerindo, the 2nd Circuit upheld their convictions for deceiving investors in two Amerindo vehicles. There was no question that the securities Vilar and Tanaka sold were not listed on any exchange in the United States, and that many foreign investors completed their purchases abroad. The appeals court found, however, that some of Amerindo’s alleged victims transacted in the United States to purchase the securities. Those purchases were domestic transactions under Morrison, the 2nd Circuit said, so they justified the 2010 jury verdicts against Vilar and Tanaka.

But that very limited affirmation has to be considered a blow to prosecutors from the Manhattan U.S. Attorney’s office, who had asked the 2nd Circuit for a much broader holding that would have insulated criminal cases from Morrison defenses. The government argued that the Supreme Court’s 1922 decision in United States v. Bowman holds that U.S. criminal laws apply to conduct outside our borders even if they do not specify extraterritoriality. (In Bowman, the court ruled that criminal charges could be brought against sailors who conspired while at sea to defraud a government-owned company.) Under the government’s reading, the 2010 Morrison decision applied only to civil statutes, not to criminal laws; even though Morrison specifically addressed a securities fraud class action, prosecutors said there’s a distinction between civil fraud suits and criminal prosecutions.

No circuit split on charity-only settlements: Facebook, Public Citizen

Alison Frankel
Aug 29, 2013 21:10 UTC

In 2011, after U.S. District Judge Richard Seeborg approved the $9.5 million settlement of a class action accusing Facebook of violating its users’ privacy through a since-dismantled program that disclosed their online purchases to their friends, the public interest group Public Citizen appealed Seeborg’s ruling to the 9th Circuit Court of Appeals. On behalf of an objecting class member, Public Citizen told the 9th Circuit that Facebook users were not slated to receive a penny in exchange for releasing claims that Facebook’s Beacon program violated their privacy rights. Instead, all of the money in the settlement that didn’t go to class counsel’s legal fees and expenses was to be directed to a new charity, the Digital Trust Foundation, with a two-person advisory board consisting of a Facebook representative and a plaintiffs lawyer from the case. Public Citizen took the position that charity-only payouts, otherwise known as cy pres settlements, are sometimes appropriate, but not when the lucky recipient of class members’ money doesn’t have the same interests as the class.

Public Citizen lost the appeal in September 2012. So you might think the public interest group would hop aboard a petition for Supreme Court review of the 9th Circuit ruling by class action watchdog Ted Frank of the Center for Class Action Fairness, who represents another objector. If so, you’d be wrong.

In a brief filed Thursday with the Supreme Court, Public Citizen said it was taking no position on whether the court should grant cert, though it said it agreed with the Center for Class Action Fairness that the Facebook Beacon settlement is fatally flawed. But the brief also undermined CCAF’s argument that there’s a split among the federal circuit on the standard for cy pres settlements. Public Citizen actually agreed with its former opponent Facebook, which filed its brief opposing cert on Tuesday: There is no meaningful difference, they both said, amongst the federal appeals courts that have issued recent rulings establishing standards for cy pres awards. So there is no reason for the Supreme Court to take up the issue.

How a contrarian appellate judge helped brokers in Merrill race case

Alison Frankel
Aug 28, 2013 21:05 UTC

In a historic decision in June 2011, the U.S. Supreme Court ruled that female employees of Wal-Mart could not sue the company for gender discrimination as a nationwide class. The court said in Wal-Mart v. Dukes that the women could not attribute any discrimination they’d supposedly suffered to corporate policies because those policies were implemented by local managers. I’m ignoring the subtleties of a long and complex decision, but, in essence, the Supreme Court concluded that Wal-Mart’s nationwide policies weren’t strong enough glue to bind together women with individual employment histories. A sweeping class action, the court said in a decision written by Justice Antonin Scalia, could not provide “a common answer to the crucial discrimination question.”

Dukes was widely viewed as a death knell for nationwide employment discrimination class actions (not to mention other broadly formulated class actions). So how is it that two years after the Supreme Court’s ruling, 700 African-American brokers who claim to have suffered race discrimination at Merrill Lynch have obtained a $160 million class action settlement from Bank of America, Merrill’s successor?

The answer lies in a bold reading of Dukes by the brokers’ lawyers at Stowell & Friedman – and a surprising endorsement of that interpretation by the 7th Circuit Court of Appeals, in an opinion written by a free-thinking judge who has shown no hesitation to tangle with Dukes author Scalia. Had it not been for Judge Richard Posner and his colleagues on the 7th Circuit panel that heard the Merrill brokers’ appeal, this case would not have resulted in what The New York Times reported to be the biggest-ever race discrimination payout by a U.S. employer. But don’t get too excited: According to the lawyer who won the Dukes case at the Supreme Court, Posner’s ruling in the Merrill class action isn’t going to help other employees who want to band together to bring discrimination claims.

Judge in Facebook class action: no fees for lawyers for non-cash relief

Alison Frankel
Aug 27, 2013 19:27 UTC

It’s a self-evident truth that if contingency fee lawyers don’t see value in a case, they won’t bring it. With that in mind, I’ve often wondered whether class action defendants should be more vociferous about big fee requests by class counsel. I know what you’re thinking: Plaintiffs lawyers won’t agree to settle unless defense counsel pledge not to oppose their fee request. And realistically, defendants’ main concern is making a case go away as cheaply as possible. How settlement money is divided between class members and their lawyers is, for defendants, a secondary issue, at best. If objecting to class counsel’s fee request will prevent a deal from going through, most defendants won’t object.

That’s short-term thinking, though. Contingency fee lawyers are perhaps the most rational economic actors in the legal business. The best way to curtail nuisance litigation is to make it economically unattractive. And one way to do that – even in cases in which the size of the class and the potential of statutory damages makes settlement unavoidable – is for defendants to argue for minimal class counsel fees.

That’s what Facebook and its lawyers at Cooley did in the Sponsored Stories class action that was approved Monday by U.S. District Judge Richard Seeborg of San Francisco. As you probably recall, this case, which involves Facebook’s supposed misappropriation of users’ names and profile photos in sponsored advertising, has something of a tortured history. Faced with the potential of $750 per class member in statutory damages to a class numbering as many as 100 million Facebook users, the company agreed to a $20 million cy pres settlement in 2012, of which $10 million was to go to class counsel from The Arns Law Firm and Jonathan Jaffe Law. Judge Seeborg rejected the deal, questioning why plaintiffs’ lawyers were slated to recover so much when class members were to receive no individual compensation.

WildTangent to SCOTUS: End the patent eligibility madness!

Alison Frankel
Aug 26, 2013 19:45 UTC

On Friday, the online game company WildTangent filed a petition asking the U.S. Supreme Court to decide, once and for all, whether computer-implemented abstract ideas are eligible for patents. According to the company’s lawyers at Latham & Watkins, a three-judge panel of the Federal Circuit Court of Appeals ran amok in June when it held that patent eligibility extends to the concept of permitting online access to copyrighted material in exchange for viewing an advertisement. Instead of seriously considering the Supreme Court’s previous admonition about patent eligibility in Mayo v. Prometheus Laboratories, the WildTangent brief said, the Federal Circuit opinion, written by Chief Judge Randall Rader, sets up an eligibility test so easy that just about every computer-implemented abstract idea can pass. WildTangent contends that the Federal Circuit has contradicted itself, defied the Supreme Court and rewritten the Patent Act to promulgate its own expansive doctrine of patent eligibility.

Considering that the Supreme Court has already signaled its concern with the patent eligibility of computer-implemented ideas – after its Mayo v. Prometheus ruling in 2012, it sent the WildTangent case back to the Federal Circuit for reconsideration – it’s a good bet that the justices will take up the issue. It’s become almost an annual rite, after all, for the Supreme Court to school the Federal Circuit on some aspect of patent eligibility: business method patents in Bilski v. Kappos in 2010, patents based on laws of nature in Mayo in 2012, and gene patents Association for Molecular Pathology v. Myriad last spring. But will the court grant certiorari to WildTangent or will it decide to review CLS Bank v. Alice Corporation, the Federal Circuit’s spectacular en banc failure to agree on when computer-implemented abstractions are eligible for patent protection? You remember the now-infamous May 2013 ruling in CLS: The appeals court spewed 135 pages of concurrences and dissents but set precedent only in one paragraph finding Alice’s computer-assisted escrow process to be ineligible for a patent.

The splintered CLS decision, which comes in for quite a bit of disdain in WildTangent’s cert petition, was issued about a month before the three-judge panel came down with a decision in the WildTangent case, so you might expect Alice Corp to have struck first with a request for Supreme Court review. According to WildTangent’s petition, Alice told the justices in July that it intends to seek certiorari but requested and was granted an extension until Sept. 6 to file its petition. (I called and emailed Alice’s lead Federal Circuit lawyer, Adam Perlman of Williams & Connolly, but didn’t hear back.)

Did banks jump too soon in opposing eminent domain mortgage seizures?

Alison Frankel
Aug 23, 2013 21:12 UTC

The first rule of litigation in federal court is that you can’t bring a suit unless it’s based on an actual controversy. U.S. courts do not issue advisory opinions. Federal judges only have jurisdiction to oversee disputes that present an issue ripe for decision. And according to a new brief by the city of Richmond, California, its plan to use eminent domain to take over mortgages from mortgage-backed securities trusts is not ripe under Article III of the U.S. Constitution and should not be tested in the suits that MBS trustees filed earlier this month in federal court in San Francisco. Counsel for the city and Mortgage Resolution Partners (the private company supplying the capital for Richmond’s contemplated mortgage takeover plan) contend that Wells Fargo and Deutsche Bank acted precipitately when they moved for a preliminary injunction to block the city from proceeding with eminent domain takeovers.

According to Richmond’s lawyers at Altshuler Berzon, the eminent domain plan is still a hypothetical, not a reality, because the city council hasn’t yet voted on a resolution specifically approving the takeover of any loan, and it may reject such a resolution if one is proposed (despite a unanimous vote in April to launch the mortgage seizure program). Even if the council does vote to snatch some or all of the 624 mortgages that Richmond has offered to buy from MBS trusts (and that MBS trusts have refused to sell), the brief said that the proper time and place for the MBS trustees to raise their objections to the plan’s constitutionality is in an eminent domain proceeding in California state court, not a preliminary injunction case in federal court.

I predicted when the banks filed their suits that ripeness was going to be the threshold question in the battle over eminent domain mortgage seizures. The city’s brief shows how much Richmond and MRP would like to erase the trustees’ federal-court challenge without even litigating the merits of arguments that the plan, which the trustees claim will benefit MRP and selected homeowners at the expense of MBS investors and the broader housing market, violates the Takings, Commerce and Contracts clauses. Richmond’s new brief does address those arguments, asserting that a program intended to benefit strapped homeowners and ward of foreclosure blight easily satisfies the “public use” requirement of a government taking; that the plan doesn’t violate the Commerce Clause because it does not discriminate against investors outside of California; and that the Supreme Court held in the 1984 decision Hawaii Housing Authority v. Midkiff that the Contracts Clause doesn’t apply to eminent domain seizures. Richmond and MRP also make some constitutional arguments of their own, asserting that the city council has a First Amendment right to establish a record on the use of eminent domain to take over securitized mortgages. But the bulk of the new brief is dedicated to showing U.S. District Court Charles Breyer – who is overseeing the Wells Fargo and Deutsche Bank case – that he doesn’t have jurisdiction.

How SCOTUS’s Amex ruling may help businesses evade class actions

Alison Frankel
Aug 22, 2013 22:21 UTC

Now that the U.S. Supreme Court has pretty much knocked down all barriers to contracts prohibiting classwide arbitration, via 2011′s AT&T Mobility v. Concepcion and last term’s American Express v. Italian Colors, have businesses actually rushed to add mandatory individual arbitration clauses to their contracts? A new study of agreements between franchisors and franchisees finds that they have not, and theorizes that the side effects of arbitration, including the limited right to appeal, may deter some businesses from adopting mandatory arbitration clauses. What’s more, the study’s authors – two law professors with long expertise in arbitration – hypothesize that the Supreme Court’s Amex ruling may permit businesses to prohibit class litigation without the collateral consequences of arbitration agreements.

In “Sticky’ Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex,” Peter Rutledge of the University of Georgia and Christopher Drahozal of the University of Kansas look specifically at contracts in the franchise industry, which they say were predicted to be revamped after the court’s Concepcion ruling to include mandatory arbitration clauses. (Rutledge and Drahozal have previously studied mandatory arbitration clauses in credit card agreements, but Drahozal told me that his work as a special advisor to the Consumer Financial Protection Bureau precludes him from publishing on issues before the CFPB.) The empirical data they collected (from 68 franchisors listed as the top franchising opportunities in Entrepreneur Magazine and from a random sample of 239 franchise agreements filed with the Minnesota Department of Commerce) indicates that Concepcion did not actually have much of an impact on franchise contracts. The percentage of franchisors using arbitration clauses increased from 39.7 percent before the ruling to 44.1 percent in 2013, or 49.4 percent of franchises in 2011 to 50.6 percent in 2013. Not all of those clauses, moreover, include class arbitration waivers. In 2011, 77.8 percent of franchisors with arbitration clauses prohibited classwide actions; by 2013, after Concepcion, the percentage was up to 86.7 percent. Those numbers, write Rutledge and Drahozal, show “at most a slight shift to arbitration following Concepcion, and certainly not the ‘tsunami’ predicted by some commentators.” (Hat tip to Andrew Trask of McGuireWoods, author of the Class Action Countermeasures blog.)

The professors include the caveat that their data is only on franchise contracts, and they note that other businesses – particularly online consumer giants such as Sony, Netflix, eBay and Instagram – have inserted post-Concepcion mandatory arbitration clauses in their contracts. (Sony and Netflix switched over to arbitration after defending big data breach class actions, they point out.) The two years since Concepcion may also not have been enough time for a robust assessment of the ruling’s impact, Rutledge and Drahozal wrote. And in a phone interview, Drahozal emphasized that this study didn’t directly measure whether Concepcion has led to a decline in class action litigation.

Diamond, shareholders reach unusual deal: class to receive stock

Alison Frankel
Aug 21, 2013 22:20 UTC

On Wednesday, lawyers representing a certified class of shareholders who claim Diamond Foods deceived them about its payments to walnut growers in 2010 and 2011, notified U.S. District Judge William Alsup of San Francisco that they’ve reached a proposed settlement with the company. According to the memo in support of the deal, class counsel at Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein were confident that they’d be able to prove at least $270 million and as much as $430 million in damages against the company. Instead, they’re settling for about $107 million, $11 million in cash and the remaining $96 million in Diamond common shares. Yes, that’s right. The supposedly defrauded and disillusioned shareholders in the Diamond class action are being compensated with more stock in the offending company. It’s like that old joke: First prize is a week in Philadelphia; second prize is TWO weeks there.

Class counsel explain in their memo why they had little choice but to agree to the unusual structure of this proposed settlement, which must still be approved by Alsup. Diamond is on the brink of insolvency, with $579 million in debt and just $7.2 million in cash, according to its latest balance sheet. Its primary asset is goodwill and its core walnut business is in decline. Because of the overhang of the shareholder class action, the memo said, the company can’t attract new capital and may even run into problems refinancing its existing loans. There’s some insurance money, the memo said, but the cost of continuing to litigate the case is consuming those funds.

So, according to class counsel, shareholders’ only real shot at recovery was to agree to accept more Diamond equity, and sooner rather later. Otherwise, the class risks driving Diamond into bankruptcy. That would certainly be the outcome, the brief said, if the lead plaintiff, the Mississippi Public Employees’ Retirement System, insisted on trying the case and obtaining a judgment against Diamond. It’s in the best interests of class members, the brief said, not to bankrupt the company and become judgment debtors but to accept $11 million in cash (all that remains of Diamond’s insurance proceeds) and 4.45 million shares of Diamond common stock, the maximum the company can issue without triggering a shareholder vote.

How Harbinger admissions to SEC will impact investors’ class action

Alison Frankel
Aug 20, 2013 21:47 UTC

For the last, oh, 40 years or so, white-collar defense lawyers have been telling the Securities and Exchange Commission that their corporate clients would never agree to settlements that required them to admit wrongdoing because of the collateral effect of such admissions in private class action litigation with investors. Businesses can stomach paying millions of dollars in penalties and disgorgement to the SEC, the theory goes, but their gorge rises at the prospect of paying billions in damages to class action plaintiffs because they can’t contest liability. The SEC was content for decades to leave that assertion unchallenged, permitting defendants to resolve its allegations without admitting or denying their misconduct. That all changed in June, when, as you know, SEC Chair Mary Jo White announced a new policy: In the most egregious cases, the SEC would demand an admission as a condition of settlement.

The agency’s policy change occasioned a lot of speculation about how admissions to the SEC would impact investor class actions, and how defendants and their lawyers might try to mitigate the harm. Now, however, we’ll get some actual answers. SEC lawyers obtained their first admission under the agency’s new policy on Monday, when the hedge fund Harbinger Capital and its founder Philip Falcone not only agreed to pay $18 million in fines and penalties but also agreed to admit to the SEC’s recitation of misconduct. And now securities class action lawyers in a 2-year-old case brought by investors in Harbinger feeder funds are deliberating about the best way to use those SEC admissions in their suit, in which U.S. District Judge Alison Nathan of Manhattan is considering Harbinger’s motion to dismiss.

Unfortunately for the rest of the securities bar, the Harbinger class action isn’t a perfect vehicle to test the effect of SEC admissions. For one thing, the case involves hedge fund investors, not shareholders of a public company; so, as Evan Stewart of Zuckerman Spaeder told my Reuters colleague Emily Flitter, Falcone and his Harbinger have “a different magnitude of exposure” than a publicly traded corporation. Nor does the litigation assert classic federal securities fraud claims, but rather state-law fraud, negligence and breach-of-duty causes of action. As a result, the suit raises some unusual procedural issues, including defense arguments that the class action is precluded by the Securities Litigation Uniform Standards Act, as well as a conflation of direct claims that feeder fund investors were defrauded and indirect claims that Falcone breached his fiduciary duty to Harbinger. Moreover, many of the investors’ allegations involve Harbinger’s supposed misrepresentations about its investment in the now-bankrupt wireless broadband company LightSquared. The SEC’s settlement with Falcone and Harbinger does not even mention LightSquared, so investors certainly can’t argue that the defendants have admitted liability for statements related to that investment.

How long did JPMorgan (allegedly) deceive investors?

Alison Frankel
Aug 19, 2013 20:28 UTC

Last week’s criminal complaints against former JPMorgan Chase derivatives traders Javier Martin-Artajo and Julien Grout – who allegedly mismarked positions in the bank’s infamous synthetic credit derivatives portfolio to hide hundreds of millions of dollars of trading losses in early 2012 by the JPMorgan Chief Investment Office – does not directly impact the shareholder class action under way in federal court in Manhattan. But you can be sure that the plaintiffs firms leading the class action were gratified that the Manhattan U.S. Attorney has decided the so-called “London Whale” losses merit criminal charges. When U.S. District Judge George Daniels hears arguments next month on the bank’s motion to dismiss the class action, shareholder lawyers will absolutely remind him that prosecutors believe a criminal cover-up took place. JPMorgan’s lawyers at Sullivan & Cromwell moved in June to dismiss the entire shareholder class action, but as I’ve said before, I don’t think there’s much chance Judge Daniels will toss claims based on bank officials’ statements about the London Whale losses. The government’s new criminal charges make that prospect even more remote.

But what about shareholder allegations that JPMorgan lied to them and the Securities and Exchange Commission back in 2010 and 2011, when the bank touted its superior internal controls and risk management procedures? Those allegations would dramatically extend the time frame for class membership, opening the case up to claims by shareholders who traded JPMorgan shares beginning in February 2010, not just those who traded the stock in the first half of 2012, before the bank issued a restatement of its earnings to reflect London Whale losses in July 2012. The government hasn’t alleged misconduct in those 2010 and 2011 statements, though according to Dealbook, the bank and the SEC may be negotiating a deal based on internal control failures. If the SEC does, in fact, secure an admission from the bank that its internal controls were deficient, shareholders’ burden would be narrowed to establishing that JPMorgan officials knowingly misrepresented the bank’s ability to manage risk.

JPMorgan’s arguments for why shareholders can’t meet that burden should be required reading for every investor operating under the apparently mistaken belief that you can rely on what you read in SEC filings and what you hear from corporate officials. JPMorgan was supposed to be different than financial institutions that teetered or fell in the financial crisis, and as shareholders wrote last week in their opposition to the bank’s dismissal motion, investors paid a premium for its supposed commitment to discipline and risk management. Yet now JPMorgan says that even if its representations about internal controls were false – which, of course, it insists they were not – those statements are not actionable because no investor actually relied upon such immaterial puffery. As JPMorgan depicts things, you should no more believe an SEC filing than the patter of a carney trying to convince you to knock over the pyramid of milk bottles.

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