Opinion

Alison Frankel

The other loser in Argentina debt saga: U.S. courts

Alison Frankel
Jul 31, 2014 20:49 UTC

There’s been a lot of talk in the Argentine debt crisis about whether U.S. courts have overstepped their bounds. At the end of 2011, you’ll recall, U.S. District Judge Thomas Griesa of Manhattan ruled that the pari passu, or equal treatment, clause of Argentina’s bond contracts entitles hedge fund holdouts that refused to participate in debt restructurings to payments alongside the more obliging exchange debtholders. Since then, Argentina and its allies, including the U.S. Justice Department, have argued that Griesa’s interpretation of the pari passu clause — which was subsequently affirmed by the 2nd U.S. Court of Appeals and left intact by the U.S. Supreme Court last month — gives too much power to creditors and undermines sovereigns.

On Wednesday, Argentine officials chose to default on exchange bonds rather than pay about $1.6 billion to, or otherwise reach a settlement with, the hedge fund holdouts. That decision exposed a stark truth: All the might of the U.S. judicial system cannot force a foreign nation to pay its debtors. U.S. judges can’t order the seizure of a foreign sovereign’s assets and they can’t throw foreign officials in jail for contempt. As Georgetown law professor Adam Levitin wrote in a very smart column in the Wall Street Journal, “There’s no way to bind a sovereign to its promise of complying with court orders any more than there is to its promise of payment.”

Griesa and the 2nd Circuit thought the pari passu injunctions were the club that would finally bludgeon Argentina into submission, after years of Argentine defiance of court-ordered judgments for NML Capital, Aurelius Capital and other holdout debt investors. The holdouts — many of which acquired defaulted Argentine debt on the cheap, gambling that they’d be able to recover from Argentina via litigation — tried all kinds of maneuvers to attach Argentine assets, only to run time and again into the country’s immunity as a foreign sovereign.

The pari passu injunctions, though, implicated not just Argentina but also the global banks that transfer money from Argentina to its exchange bondholders. Technically, the injunctions barred Argentina from making interest payments on its restructured debt without also paying the holdouts. Practically, the injunctions meant that financial institutions such as the bond trustee Bank of New York Mellon could not transfer interest payments from Argentina to exchange bondholders without violating U.S. court orders. Unlike Argentina, global banks that do business in the United States can’t simply ignore U.S. rulings they don’t like.

Those banks, as well as the exchange bondholders, protested to Griesa and to the 2nd Circuit that the pari passu injunctions turned them into hostages in the gunfight between Argentina and the holdouts. That’s a fair point, and they have eloquent sympathizers like Felix Salmon in Foreign Affairs. But it’s also true that Argentina’s exchange bondholders and payment agents subjected themselves to U.S. jurisdiction though their contracts with Argentina. (A caveat: As Floyd Norris pointed out in a New York Times column last week, Judge Griesa and the 2nd Circuit haven’t done a good enough job of distinguishing between Argentine bonds issued under New York law and those issued under the law of other jurisdictions, which has created considerable confusion about precisely which interest payments are covered by the pari passu injunctions.) If you agree to submit to a court’s jurisdiction, you’re stuck with the obligation of following its rulings.

The best way to punish companies that lie to consumers

Alison Frankel
Jul 30, 2014 19:59 UTC

The 2nd Circuit U.S. Court of Appeals really pummeled the pharmaceutical manufacturing company Gnosis in an opinion Tuesday. Judges Rosemary Pooler, Reena Raggi and Richard Wesley affirmed that Gnosis must pay Merck more than $2.5 million in damages and attorneys’ fees for violating the Lanham Act with deceptive marketing about its folic acid product Extrafolate.

That’s not a lot of money for a global corporation, but it’s much, much more than Gnosis made from selling Extrafolate under false pretenses. The 2nd Circuit ruled that the lower-court judge who ruled against Gnosis after a bench trial in 2012, U.S. District Judge Richard Sullivan, was within his rights to award Merck three times the profits Gnosis realized from Extrafolate, even though the Lanham Act doesn’t authorize punitive damages. Gnosis’s egregious conduct — suggesting in marketing materials that its product was a pure isomer when, in fact, it was a mixture — justified an enhanced damages award, according to the 2nd Circuit, as well as the corrective advertising Judge Sullivan ordered.

The appeals court also rejected Gnosis’s argument that Merck hadn’t proved it was harmed by the supposedly false ads. The 2nd Circuit requires different proof depending on whether competitors are directly disparaged in false ads or are just in the same market as the deceptive advertiser, and Gnosis’s lawyers at Husch Blackwell contended that the company’s allegedly deceptive materials didn’t name Merck so Judge Sullivan erred in presuming Merck was injured. The 2nd Circuit said, however, that since Merck was the only company competing with Gnosis at the time of the false ads — and Merck actually produced the pure isomer Gnosis purported to be selling — it follows that Merck was damaged.

The big surprise in bids to lead GM ignition switch litigation

Alison Frankel
Jul 29, 2014 20:36 UTC

David Boies of Boies, Schiller & Flexner — the superstar litigator best known as the defender of same-sex marriage, Al Gore, securities class actions and Napster — is ready for a different sort of a challenge: He wants to be a products liability class action lawyer.

Boies was among the 60 or so lawyers who submitted an application Monday with U.S. District Judge Jesse Furman of Manhattan for a leadership spot in the consolidated litigation over GM’s ignition switch defects. Boies, whose firm filed a class action earlier this month in federal court in Mississippi on behalf of owners of defective GM cars, wants to serve as one of the three co-lead counsel in the case, arguing that he has long “worked to ensure that the efforts of a few benefit the injuries of many.”

Boies’s application was the wild card among Monday’s filings; his firm appears regularly as lead counsel in antitrust class actions but isn’t known for products liability cases. The other big-name applicants — including Motley Rice; Susman Godfrey; Beasley, Allen, Crow, Methvin, Portis & Miles; Baron & Budd; Robbins Geller Rudman & Dowd and Cohen Milstein Sellers & Toll — are more familiar in personal injury litigation.

How a lone New York judge squeezed billions from banks in MBS cases

Alison Frankel
Jul 28, 2014 21:56 UTC

Asking a federal appeals court to step into the fray of an ongoing case to reverse a decision by a trial judge is extraordinary. Petitions for a writ of mandamus, as such requests are known, assert that trial judges have committed such egregious errors that their appellate overseers must undo the damage immediately, before the case gets to a final judgment. Mandamus petitions are a desperation move, a last resort when you’ve got nothing to lose from alienating a trial judge who’s already ruled against you.

Last Thursday, RBS filed not one but three mandamus petitions at the 2nd, 9th and 10th circuits — an apparently unprecedented response to what the bank claims is an unprecedented abdication of responsibility by trial judges presiding over cases brought by the National Credit Union Administration (NCUA).

The suits, which involve billions of dollars in mortgage-backed securities purchased by failed credit unions, were filed in different federal districts, and the Judicial Panel on Multidistrict Litigation denied requests by bank defendants to consolidate them. But according to RBS, the trial judges took it upon themselves to streamline discovery, agreeing to abide by the rulings of a single “coordination judge.”

As crisis litigation draws to close, lessons for investors

Alison Frankel
Jul 16, 2014 22:12 UTC

We’re near the end. With the news Wednesday that Bank of America will pay AIG $650 million to settle their long-running and many-tentacled litigation over mortgage backed securities –along with a report in The Wall Street Journal that the credit rating agency Standard & Poor’s is contemplating a $1 billion settlement with the Justice Department for its MBS rating failures — it’s time to declare the twilight of financial crisis litigation.

Yes, there’s still some big work to be done, including BofA’s anticipated multibillion-dollar settlement with the Justice Department; the resolution of the Federal Housing Finance Agency’s last few cases on behalf of Fannie Mae and Freddie Mac; and dozens of private-investor breach-of-contract suits against the banks. But that’s the denouement, the last act.

So what have we learned, after six years of intense and expensive litigation? To me, the clearest lesson from financial crisis litigation is that investors cannot rely on anyone else’s assurances about complex securities.

Kozinski amends opinion in 9th Circuit ‘Innocence’ case v. Google

Alison Frankel
Jul 15, 2014 19:46 UTC

Something strange happened Friday in the infamous case of Cindy Lee Garcia v. Google at the 9th U.S. Circuit Court of Appeals. Chief Judge Alex Kozinski, who wrote the opinion in February that enjoined Google from linking to the anti-Islam film “Innocence of Muslims,” filed an amended opinion, even as the entire 9th Circuit considers Google’s petition for en banc review of the controversial February ruling.

The amended opinion, in which Kozinski is joined by Judge Ronald Gould, left the injunction in place but walked back a step or two from the controversial holding that the actor Cindy Lee Garcia is likely to succeed on the merits of her claim that Google is infringing her copyrighted five-second performance in ‘Innocence.’ (Garcia, as you may recall, was deceived by the maker of the inflammatory film, who overdubbed her lines to make it appear as though her character was calling Mohammad a pedophile. The film led to riots in the Muslim world and death threats against Garcia.)

The panel’s original holding that actors may, in certain circumstances, have an independent copyright on their individual performances threw Hollywood, Internet companies and First Amendment fans into a tizzy; Google’s en banc petition attracted 10 amicus briefs from dozens of interested parties. The new opinion, which adds only a few paragraphs to the original, cautions that the 9th Circuit injunction does not dictate a finding that Garcia actually has a copyright on her performance nor that Google is not entitled to fair use of the copyrighted material.

DOJ should end secret selection process for corporate watchdogs

Alison Frankel
Jul 14, 2014 21:45 UTC

Thomas Perrelli just won quite a plum assignment. The former U.S. associate attorney general, who resumed his partnership at the law firm Jenner & Block in 2012, was appointed Monday to serve as Citigroup’s independent monitor as part of the bank’s $7 billion settlement with the Justice Department and five state attorneys.

Perrelli and the team of Jenner lawyers who will undoubtedly join him in watching over Citigroup will be paid by the bank, as is customary in corporate monitorships. The specifics on what Citi will pay him aren’t public, and, to be sure, Perrelli’s mandate under the settlement agreement is limited. But rest assured: He and his firm are going to earn a lot of money as Citi’s monitor. As a federal judge who has overseen a corporate monitor told my Reuters colleague Casey Sullivan, “It is a huge cash cow. These are very, very lucrative appointments.”

Perrelli also bears enormous responsibility. His charge, according to the Citi settlement agreement, is to make sure that the bank properly distributes $2.5 billion in mortgage relief to homeowners who were allegedly injured by Citi’s voracious appetite for loans to bundle into mortgage-backed securities. It’s up to Perrelli to verify that the bank follows through with promises to modify and refinance mortgages for borrowers struggling to make payments or paying mortgages on houses worth less than the loans.

Wal-Mart case in Delaware: How much discovery can shareholders get?

Alison Frankel
Jul 11, 2014 20:56 UTC

Shareholder lawyer Stuart Grant of Grant & Eisenhofer told me Friday that he was feeling pretty good about his oral argument at the Delaware Supreme Court the previous day, in a case that will determine how much discovery plaintiffs are permitted when they sue to see corporate books and records.

Grant said his opponent, Wal-Mart counsel Mark Perry of Gibson, Dunn & Crutcher, gave so smooth and polished a presentation that the state justices might easily have glided along with what, according to Grant, was Perry’s “radical rewriting” of Delaware law. Instead, Grant said, “the court was not buying into Wal-Mart’s extreme theory.”

Wal-Mart, you will not be surprised to hear, had a different view of the argument: “We think it went very well,” Perry told me Friday. “We presented strong arguments and look forward to the court’s decision.”
Both sides agree on one thing: If the Delaware Supreme Court affirms then-Chancellor Leo Strine’s 2013 discovery order in IBEW v. Wal-Mart, it’s great news for shareholders and a big reason for Delaware corporations to worry. (Strine, who is now Chief Justice of the Delaware Supreme Court, was recused from hearing Thursday’s argument.)

Motorola to 7th Circuit: Make Judge Posner follow the rules

Alison Frankel
Jul 10, 2014 22:23 UTC

I didn’t think Motorola’s antitrust appeal at the 7th U.S. Court of Appeals could get any stranger. This, after all, is the billion-dollar case that prompted a bizarre showdown over international antitrust policy between the U.S. solicitor general and a three-judge appellate panel led by Richard Posner.

Earlier this month, the panel backed down and vacated a highly controversial ruling that had effectively erased U.S. antitrust liability for foreign price-fixing cartels that sell component parts to foreign subsidiaries of U.S. companies. Posner and the other judges ordered Motorola and the liquid crystal display screen manufacturers it has accused of price-fixing to submit new briefs on the merits of their arguments, and I thought the case would return to something resembling normalcy.

Boy, was I wrong.

Motorola submitted a brief yesterday, meeting the incredibly tight deadline the Posner panel set. But instead of laying out for the panel the reasons why precedent and policy favor Motorola’s right to sue the alleged LCD cartel, Motorola’s lawyers at Goldstein & Russell asked the entire 7th Circuit to take the case en banc – not to hear the merits, but to reverse the “terrible judicial policy” that has divided the 7th Circuit from every other federal appeals court.

The last, best chance for besieged bank defendants

Alison Frankel
Jul 10, 2014 20:51 UTC

Goldman Sachs has a little more than two months for a miracle to happen.

Otherwise, on Sept. 29, the bank will go to trial in federal court in Manhattan against the Federal Housing Finance Agency to defend claims that Goldman deceived Fannie Mae and Freddie Mac about the quality of the mortgage-backed securities it was peddling before the financial crash.

For defendants in the FHFA litigation, trying to explain to jurors — and to a deeply skeptical judge — that you’re not responsible for woefully deficient securities is so unappealing a prospect that 15 other big banks have coughed up a collective $15 billion to Fannie and Freddie’s conservator. Only Goldman and three other banks have stuck out three years of lopsided litigation in which U.S. District Judge Denise Cote has consistently ruled against them on matters large and small.

These four holdouts have only one possible advantage over the defendants that have already capitulated: the U.S. Supreme Court’s ruling last month in an environmental case called CTS Corporation v. Waldburger.

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