Alison Frankel

Why securities lawyers should give thanks to Native Americans

Alison Frankel
Nov 27, 2013 19:16 UTC

On this Thanksgiving Eve, as we recall the generosity of the Wampanoags who helped early Bay Colony settlers learn how to survive in the New World, securities class action lawyers may want to spare a thanks or two for 12 members of the Ute tribe as well. Why? Because if the U.S. Supreme Court ends up eliminating fraud-on-the-market reliance in the Halliburton case to be heard later this term, one of the few remaining avenues for securities class actions is open because of a case those Utes brought to the Supreme Court back in 1971.

The court’s 1972 ruling in Affiliated Ute v. United States established that securities fraud plaintiffs do not have to prove reliance to sustain claims based on a defendant’s failure to disclose material information. The 12 so-called “mixed-blood” Utes who brought the suit alleged that two officials at First Security Bank of Utah deceived them about the true value of their shares in a corporation established to manage tribal assets. The bank was serving as transfer agent for the corporation, and two of its officials had the good fortune to work at a branch office in a Utah town with a large population of Utes. Without telling the sellers about hot demand for the restricted shares in the secondary market, the two bankers snapped up stock for between $300 and $700 (sometimes not even paid for in cash but in goods such as used cars). When they resold the shares to white people, they realized tidy profits. The Utes accused the bankers of defrauding them about the true value of their stock, filing a suit under the fraud provisions of the Exchange Act of 1934.

The 10th Circuit Court of Appeals rejected the Utes’ claims, ruling that they couldn’t show they relied upon the bankers’ misrepresentations when they made decisions to sell their shares. But the Supreme Court, in an opinion by Justice Harry Blackmun, found that no showing of reliance was necessary because the bankers failed in their duty to disclose the vigorous outside market for the Utes’ shares. “It is no answer to urge that, as to some of the petitioners, these defendants may have made no positive representation or recommendation,” the opinion said. “Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.”

The Affiliated Ute precedent thus draws a line between securities fraud claims involving misrepresentations and those involving omissions. After the Supreme Court’s 1988 decision in Basic v. Levinson, the distinction didn’t matter much. Basic meant that proving reliance wasn’t a problem for investors in misrepresentation class actions; under its fraud-on-the-market framework, they simply had to show that shares were traded on an efficient market. Most securities class actions nowadays are framed as misrepresentation cases, with investors alleging that shareholders were deceived by false public statements, as demonstrated by the market’s reaction when the truth was revealed. Look at the numbers: According to Westlaw, Basic v. Levinson has been cited almost 17,000 times and Affiliated Ute (which preceded Basic by 16 years) only 6,852.

It’s widely accepted that if the Supreme Court reverses Basic and does away with fraud-on-the-market reliance, class actions based on misrepresentations will be decimated. But not cases based on omissions, thanks to Affiliated Ute.

D.C. Circuit knows satire when it sees it, tosses ‘birther’ case vs Esquire

Alison Frankel
Nov 26, 2013 21:40 UTC

Satire, according to an opinion Tuesday by the D.C. Circuit Court of Appeals in a defamation suit against Esquire magazine, is hard to define. But like U.S. Supreme Court Justice Potter Stewart contemplating hard-core pornography (in his oft-quoted concurrence in the 1964 case Jacobellis v. State of Ohio), the appeals court knows it when it sees it. A three-judge appellate panel upheld the dismissal of claims by two prominent members of the ‘birther’ movement, ruling that an Esquire blog post reporting the withdrawal of a book purporting to expose the falsity of President Obama’s birth certificate satisfied the elusive criteria for satire, even if some of the blog post’s readers didn’t get the joke.

In fact, according to Judge Judith Rogers, who wrote the court’s opinion, and Senior Judge Stephen Williams, who joined it, one hallmark of satire is that it takes a while to sink in. (The third judge on the panel, Janice Rogers Brown, concurred in the judgment but did not join the opinion.) “Satire is effective as social commentary precisely because it is often grounded in truth,” Rogers wrote. “Esquire’s story conveyed its message by layering fiction upon fact. The test, however, is not whether some actual readers were misled, but whether the hypothetical reasonable reader could be (after time for reflection).” In this case, the court concluded, Esquire’s blog post contained enough satiric clues to warrant First Amendment protection.

So what was the post? Back in May 2011 – about three weeks after President Obama released the long-form version of his American birth certificate – WND Books, a subsidiary of WorldNetDaily.com, published a book called “Where’s the Birth Certificate: The Case that Barack Obama Is Not Eligible to be President,” by Jerome Corsi. Esquire’s Political Blog greeted the release of Corsi’s book with an online post by Mark Warren that was titled, “BREAKING: Jerome Corsi’s Birther Book Pulled from Shelves!” In Drudge Report style, the post was accompanied by an image of a siren. Its first paragraph read, “In a stunning development one day after the release of Where’s the Birth Certificate … World Net Daily Editor and Chief Executive Officer Joseph Farah has announced plans to recall and pulp the entire 200,000 first printing run of the book, as well as announcing an offer to refund the purchase price to anyone who has already bought either a hard copy or electronic download of the book.” The post went on to quote Farah’s comments from “an exclusive interview” in which he renounced the book as factually inaccurate in light of Obama’s release of his birth certificate. It also quoted an anonymous source at WND who said, “We don’t want to look like fucking idiots, you know?”

N.Y. appeals court to decide time limits on MBS put-back claims

Alison Frankel
Nov 25, 2013 21:41 UTC

On Wednesday, when most people are calculating how early they can slip out of work and begin their Thanksgiving festivities, an awful lot of high-priced New York lawyers will be fighting for seats at 27 Madison Avenue, where the New York Appellate Division, First Department, hears appeals. Billions of dollars of claims for breaches of representations and warranties on mortgage-backed securities hang on what the state appeals court decides about the time limits for these suits. Does the clock start ticking when the securities are issued and representations about underlying mortgage loans take effect? Or does New York’s six-year statute of limitations begin running only when the MBS seller refuses to repurchase loans that breach its contractual assurances? A five-judge appellate panel will confront the issue Wednesday in a case called Ace Securities v. Deutsche Bank Structured Products. The courtroom should be packed with lawyers and clients on both sides of New York’s sprawling MBS put-back litigation docket, who are hoping for clues about what the appeals court will decide.

Marc Kasowitz of Kasowitz, Benson, Torres & Friedman will argue (as he does in Ace’s appellate brief) that New York State Supreme Court Justice Shirley Kornreich of Manhattan got it right when she ruled last May that because certificate holders cannot direct an MBS trustee to sue for breach of contract until the MBS seller has refused to buy back deficient loans, time limits date from that refusal. Deutsche Bank’s lawyer, David Woll of Simpson Thacher & Bartlett, will argue, per the bank’s appeals brief, that under well-established New York law, claims for breaches of representations and warranties accrue on the date the representations are made, not when breaches are discovered or demands for a cure are refused. You may recall that one of Kornreich’s colleagues in the Manhattan commercial division, Justice Peter Sherwood, agreed with the bank-advocated interpretation when he dismissed MBS put-back claims against Nomura in a decision that came out only a few days before the Kornreich decision now before the First Department. (Kasowitz Benson, which was on the losing side of Sherwood’s Nomura ruling, filed its notice of appeal in that case after Simpson Thacher had already appealed Kornreich’s Deutsche Bank decision, which is why the appeal of the later ruling will be heard first.)

The start date for MBS put-back claims is an issue of first impression for New York appellate courts, though there’s plenty of case law on the statute of limitations in the context of other sorts of contracts. Both sides in the Deutsche Bank appeal seem to agree that the most important precedent from New York’s highest court is a 2012 ruling in Hahn Automotive v. American Zurich, which held that the six-year statute can’t be extended unless the contract clearly conditions the right to a claim, and the 1979 opinion in Bulova Watch v. Celotex, in which the Court of Appeals said that the statute of limitations resets for distinct breaches within a contract.

Dish board: Plaintiffs’ lawyers are true villains of governance saga

Alison Frankel
Nov 22, 2013 23:33 UTC

Oh, those greedy contingency-fee lawyers. Is there nothing they won’t do to wring a few million bucks in fees from corporate defendants blamelessly and selflessly going about their business? Dish Network’s majority shareholder, Charles Ergen, and his friends and colleagues on the board performed a great service for the company’s minority shareholders when they secured Dish’s spot as the stalking-horse bidder for LightSquared spectrum licenses. Sure, Ergen had his own personal interest in the LightSquared deal because he’s the biggest creditor of the bankruptcy company. But Dish’s board went above and beyond Nevada’s statutory requirements for transactions in which a director has a conflicting financial interest. It appointed a special transaction committee of independent directors, who hired their own lawyers and financial advisors. With help from Ergen, his personal lawyers and Dish managers, the independent committee came up with a $2.2 billion bid, which the board voted to approve and the bankruptcy judge overseeing LightSquared’s Chapter 11 subsequently deemed the leading offer in the LightSquared auction process.

Everyone agrees Dish will be better off if it succeeds in acquiring the LightSquared licenses. Yet plaintiffs lawyers are trying to handcuff Dish as the auction process goes on, blocking Ergen – who knows the wireless business better than anyone, having built Dish from scratch into a $20 billion business – and nearly everyone else on the Dish board from staying involved. And Ergen isn’t even conflicted anymore! Dish’s stalking-horse bid will pay off all of the LightSquared debt Ergen holds, and then some. So why are these lawyers, who purport to represent the interests of Dish minority shareholders, meddling with the company’s prospects of winning the LightSquared licenses? For the money, of course. You know how this racket works. They file their shareholder derivative suit, litigate for long enough to make themselves a nuisance, then agree to settle for some paltry consideration and a nice chunk of dough.

Or so says Dish, in briefs filed Thursday night by Dish’s board, Ergen and a special litigation committee the board appointed right before a hearing last month in Las Vegas state court on the minority shareholders’ request for expedited discovery. If you’ve been following the Dish corporate governance saga – which I last wrote about on Monday – then you may have more than a few reservations about Dish’s spin on what are suprisingly undisputed facts, including the abrupt dissolution of the special transaction committee when its two members informed the board that they intended to continue to monitor the deal for Ergen conflicts.

White-collar defense alert: Your interview notes may not be shielded

Alison Frankel
Nov 21, 2013 21:18 UTC

The basic scenario described by U.S. District Judge Paul Gardephe of Manhattan in an opinion made public on Wednesday should sound familiar to every white-collar defense lawyer out there. A company, in this case, the hedge fund D.B. Zwirn, falls under scrutiny, here for allegedly diverting investors’ money into boondoggles like a corporate jet. The company hires lawyers (Schulte Roth & Zabel and, later, Gibson, Dunn & Crutcher) to investigate the allegations. The lawyers prowl through documents and question internal witnesses. Eager to appear cooperative, the company volunteers to present its lawyers’ findings to regulators. And after the presentation, the Securities and Exchange Commission places blame squarely in the lap of a particular corporate official, here former Zwirn CFO Perry Gruss.

Happens all the time, right? Which is why you should all read Gardephe’s opinion carefully. The judge ruled that Gibson Dunn must produce its own notes on witness interviews the firm conducted during the Zwirn internal investigation – notes that the firm never even showed its client – for in camera inspection, after which he’ll turn over all factual work product to Gruss, who is suing Zwirn for defaming him. Gardephe’s new ruling refers back to his opinion from last July, in which he held that Zwirn had waived privilege over its lawyers’ work product when the hedge fund relied on some of the material in Gibson Dunn’s PowerPoint presentation to the SEC. Gibson Dunn had argued in a request of clarification of Gardephe’s July ruling that its own notes, which contain opinions and impressions of Gibson lawyers, are subject to an exception under New York state precedent. But Gardephe said the law firm has no independent expectation of privacy for notes on witness interviews conducted in connection with a client assignment.

Those notes aren’t “internal (law) firm documents,” the judge said, but are work Gibson Dunn produced for Zwirn. So under his previous ruling that Zwirn had waived privilege, Gardephe held, Gruss is entitled to see the Gibson Dunn notes. (Tip of the hat to the indispensable S.D.N.Y. Blog, which reported the opinion Wednesday.)

Lawyers’ nightmare: When 9th Circuit Chief Judge Kozinski is class objector

Alison Frankel
Nov 20, 2013 22:20 UTC

Alex Kozinski, Chief Judge of the 9th Circuit Court of Appeals is known for (among other things) his intellect, his libertarian leanings and his sharp writing style. I appeared last year on a panel with Kozinski and can attest to his charm and humor. But when Kozinski uses his wit against you, it stings. Just ask lawyers at Capstone Law and Sedgwick, who had the bad luck to negotiate the settlement of a class action in which Kozinski is a class member. That would have been fine if Kozinski were a satisfied client. He’s not, and as you can see from the brief he and his wife, Marcy Tiffany, filed last week in opposition to final approval of the settlement, Kozinski spares neither side.

The case, filed in September 2012, involves claims that Nissan didn’t tell buyers and leasers of its electric car, the LEAF, that the car’s lithium battery would deteriorate if they clocked a lot of miles or regularly charged the battery to its full capacity. In December, class counsel at Capstone and Nissan lawyers at Sedgwick agreed to the terms of a settlement that requires Nissan to repair or replace batteries that cannot hold at least most of their charge. Capstone moved for preliminary approval of the settlement in July. Its valuation expert estimated the warranty relief the class had obtained was worth between $38 million and $200 million.

Capstone touted the quick resolution of the case as a boon to the class, since the new warranty would restore lost battery capacity while LEAF drivers are still driving the cars. Drawn-out litigation, Capstone argued in its motion for $1.9 million in fees, would serve only to delay the objective of making the cars operational, and money damages to former LEAF owners would be eaten up by administrative costs. “Even if plaintiffs were to prevail at trial after years of litigation, it is difficult to see how that would result in relief more comprehensive than that provided by the settlement agreement,” the plaintiffs’ brief said.

Can JPM’s $4.5 bln deal with MBS investors avoid BofA’s pitfalls?

Alison Frankel
Nov 19, 2013 21:40 UTC

Is this timing merely a coincidence? On Friday, JPMorgan Chase and the Houston law firm Gibbs & Bruns announced that they had reached a $4.5 billion settlement to resolve allegations that the bank breached representations and warranties to private investors in 330 JPMorgan and Bear Stearns mortgage-backed securities trusts. Gibbs & Bruns negotiated the JPMorgan settlement on behalf of 21 major institutional investors, including BlackRock, Pimco, Goldman Sachs and MetLife. Two days after the JPMorgan announcement, Kathy Patrick of Gibbs appeared in New York State Supreme Court to make her closing argument in support of her clients’ previous deal, an $8.5 billion settlement with Bank of America that has been held up for 2-1/2 years by a small group of Countrywide MBS investors who object to the deal. Will Patrick be back in court in 2016 to defend the JPMorgan settlement?

She could well be, but there are important differences between the JPMorgan and BofA put-back settlements, some structural and some a matter of circumstance, that should reduce the friction for JPMorgan. Gibbs & Bruns, which is slated to receive $85 million , or 1 percent, in fees if the BofA settlement is approved, is in line for $66 million, or 1.47 percent, in fees from the JPMorgan deal, according to the JPMorgan settlement agreement. That extra share will be worth it to JPMorgan if Gibbs & Bruns used its bruising experience with Countrywide MBS objectors to improve the new deal.

Let’s look first at tweaks to the settlement structure. Bank of America’s settlement was actually filed by Bank of New York Mellon, the lone MBS trustee for all of the 430 Countrywide trusts whose breach-of-contract claims would be resolved in the proposed $8.5 billion deal. BNY Mellon asked for a judicial determination, through a special New York state-court trust proceeding known as Article 77, that it was acting within its discretion when it accepted BofA’s global settlement offer. BofA, BNY Mellon and the Gibbs & Bruns group believed that to obtain approval of the settlement under the broad latitude trustees enjoy under New York law, BNY Mellon would simply have to show that it did not abuse its power or act in conflict with the trusts’ interests. Objectors, led by AIG, have since howled that (among other things) BNY Mellon made no distinction between Countrywide MBS trusts when it agreed to a global settlement. As the lone trustee, it accepted BofA’s offer on behalf of all of the 430 Countrywide trusts in the deal. BofA, BNY Mellon and the investor group, meanwhile, have stood by the one-for-all nature of the global settlement. If the court finds that BNY Mellon did not properly execute its trustee duties, they contend, the entire $8.5 billion settlement collapses.

Charlie Ergen’s master class in corporate governance bullying

Alison Frankel
Nov 18, 2013 20:38 UTC

Self-made corporate billionaires are a rare breed, and I think we can all agree that they deserve respect for their acumen and tenacity. What they don’t deserve, if they’ve accepted shareholder money through the capital markets, is unfettered control of their businesses. Public companies cannot treat corporate governance best practices as a nuisance, or worse, a hindrance – especially when the company’s interests may be at odds with those of its billionaire founder.

I bring you this public service announcement because I’m agog at newly emerged details of the goings-on at Dish Network, the publicly traded satellite television company whose shares and voting power remain firmly in the control of chairman and co-founder Charlie Ergen. I’ve written before about a shareholder derivative suit in Las Vegas state court that accuses Ergen and his friends on the Dish board of compromising the interests of minority shareholders in the company’s $2.2 billion stalking-horse bid for LightSquared, the bankrupt wireless communications company. Ergen is LightSquared’s biggest creditor; through personal investment vehicles, he acquired about $1 billion in LightSquared debt, unbeknownst to LightSquared, which on Friday sued him and Dish for secretly attempting to gain control of the bankrupt company. Dish minority shareholders in the Las Vegas suit contend that through his LightSquared investment, Ergen personally will reap windfall profits if Dish’s bid for LightSquared succeeds.

Last month, you may recall, Clark County judge Elizabeth Gonzalez granted expedited discovery to the Dish shareholders, who are trying to bar Ergen from any continuing role in Dish bidding for LightSquared. On Thursday, shareholder lawyers at Bernstein Litowitz Berger & Grossmann and Cotton, Driggs, Walch, Holley, Woloson & Thompson filed a public version of a supplemental brief disclosing what that discovery revealed.

What if SCOTUS does away with securities fraud class actions?

Alison Frankel
Nov 15, 2013 23:25 UTC

On Friday, as you’ve surely heard, the U.S. Supreme Court agreed to hear Halliburton v. Erica P. John Fund, which challenges an essential building block of securities fraud class actions. Halliburton’s cert petition presented the question of whether the Supreme Court should overrule its own 1988 decision in Basic v. Levinson, which held that investors in broadly traded stock presumptively relied on public misstatements. Basic’s fraud-on-the-market theory freed securities class action lawyers from having to show that individual shareholders made investment decisions based on fraudulent misrepresentations, permitting the certification of enormous classes of investors. If the justices decide to chuck Basic’s presumption of reliance, it’s hard to imagine how plaintiffs’ lawyers will be able to win certification of securities fraud class actions. As Max Berger of Bernstein Litowitz Berger & Grossmann said at a securities litigation conference on Tuesday, “I seldom lose sleep at night, but one of the things that keeps me up is what the Supreme Court is going to do in Halliburton. It’s a game changer.”

Let’s stipulate that shareholder lawyers aren’t the only folks who will be affected if the Supreme Court makes it impossible to certify securities fraud class actions. Their counterparts on the defense side will lose millions of dollars of billings in a very lucrative practice area. All of the economists and law professors who serve as experts on class certification and settlement approval motions will also be out millions of dollars in fees. Settlement administration firms that handle the back-end of class actions, sending notices to class members and distributing recovery, will have less work. Even the D&O industry will feel the impact, according to Kevin LaCroix of the D&O Diary, if the Supreme Court eliminates fraud class actions. Corporate risk simply won’t be as severe if investors can’t sue as a group over alleged misrepresentations. Law professors like to talk about the transaction costs of securities fraud class actions, in which an awful lot of lawyers and other professionals take a cut of the money that’s transferred from one group of shareholders to another via class action settlements. Those transaction costs amount to hundreds of millions, if not billions, of dollars a year – and they’re imperiled if the Supreme Court undoes Basic v. Levinson.

But undoing Basic won’t end shareholder litigation, or even shareholder class litigation. In fact, defendants who have hoped fervently for an end to fraud class actions that generated more than $73 billion in settlements between 1997 and 2012, including six of the 10 biggest settlements in class action history, may end up ruing that they got what they wished for, according to Stanford Law School professor Joseph Grundfest, the securities litigation guru whose working paper, Damages and Reliance Under Section 10(b) of the Exchange Act, supplied me with the statistics I just quoted.

Goldman wants to arbitrate – not litigate – credit union’s MBS claims

Alison Frankel
Nov 14, 2013 22:43 UTC

Remember the spate of fraud cases by the National Credit Union Administration in federal court in Manhattan earlier this fall? Perhaps emboldened by its quiet success in settling claims that failed credit unions were duped into buying fraudulently depicted mortgage-backed securities, NCUA filed complaints against nine banks that sold more than $2 billion of MBS to two credit unions that subsequently went under. The suits, which name Morgan Stanley, Barclays, JPMorgan Chase, Credit Suisse, RBS, UBS, Ally, Wachovia and Goldman Sachs, have all been transferred to U.S. District Judge Denise Cote, who has been notoriously tough on the same defendants (and others) in MBS fraud suits brought by the Federal Housing Finance Agency.

NCUA’s MBS litigation tends to be overshadowed by FHFA’s, given the much bigger losses suffered by FHFA’s wards, Fannie Mae and Freddie Mac, and the huge settlements FHFA has won from JPMorgan Chase and UBS. In the NCUA’s New York cases, in particular, bank defense counsel and the credit union group’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel; Patterson Belknap Webb & Tyler; and Korein Tillery will be making a lot of arguments Judge Cote has already heard in the FHFA suits. In MBS litigation – as you can see from the timeliness and risk disclosure defenses that Morgan Stanley’s lawyers from Davis Polk & Wardwell serve up in their new motion to dismiss the lead case in NCUA’s New York MBS campaign – there’s no longer much new under the sun.

That’s why I was tickled by a motion filed Wednesday by Sullivan & Cromwell, which is defending Goldman in NCUA’s case: Goldman wants to compel arbitration of claims stemming from Southwest Corporate’s purchase of $40 million of MBS. According to the motion, the failed credit union bought those mortgage-backed securities through its longstanding brokerage account with Goldman. And under the terms of Southwest’s umbrella account agreement with the bank, Goldman maintains, NCUA, as the credit union’s liquidating agent, is required to arbitrate any dispute over the investment.