Opinion

Alison Frankel

FHFA’s $5.1 bln JPMorgan deal boosts FDIC – but not noteholders

Alison Frankel
Oct 28, 2013 19:59 UTC

The Federal Housing Finance Agency, the Congress-created conservator of Fannie Mae and Freddie Mac, operates independently of the U.S. Justice Department, which is why FHFA was able to announce its $5.1 billion settlement of securities fraud and breach-of-contract claims against JPMorgan Chase on Friday evening, before the much-ballyhooed but as yet unsigned $13 billion global deal between the bank and the government. As you know, FHFA and its lead counsel at Quinn Emanuel Urquhart & Sullivan have been whipping JPMorgan and its fellow bank defendants for as long as the conservator’s cases have been before U.S. District Judge Denise Cote in Manhattan. Facing a June 2014 trial date, and with no higher-court relief from Cote’s rulings in sight, JPMorgan had little choice but to settle FHFA’s claims that the bank and its predecessors Bear Stearns and Washington Mutual duped Fannie and Freddie about the mortgage-backed securities they were peddling. FHFA had all the leverage here.

That’s what makes one provision of the settlement so intriguing. In what I’ve heard was one of the hardest-fought sentences in the agreement, FHFA insisted that JPMorgan waive its right to seek indemnification from the Federal Deposit Insurance Corporation, which sold Washington Mutual Bank to JPMorgan in September 2008, for the $1.153 billion WaMu piece of FHFA’s $5.1 billion deal. The FDIC and JPMorgan have been fighting for years in federal court in Washington about whether the bank or the deposit insurance corporation is liable for claims based on WaMu’s deficient mortgage-backed securities, most notably in litigation in which Deutsche Bank, as the trustee of about 100 WaMu MBS trusts, has asserted a whopping $6 billion to $10 billion in put-backs. JPMorgan’s counsel at Sullivan & Cromwell, meanwhile, have sued in a related case for a sweeping declaration that the FDIC, and not the bank, is liable for all WaMu MBS claims because they weren’t on WaMu’s books when JPMorgan bought the failed bank. U.S. District Judge Rosemary Collyer of Washington has said she’ll decide in the Deutsche Bank trustee case whether JPMorgan or the FDIC is stuck with responsibility for deficient WaMu mortgage-backed securities. Discovery is under way in her court on the terms of the 2008 agreement under which JPMorgan acquired WaMu.

In Friday’s deal, FHFA could easily have ignored any potential exposure for the FDIC. Its settlement, after all, is with JPMorgan, and if the bank subsequently sued the FDIC to get back the WaMu piece of the deal, FHFA wouldn’t be affected. But instead, FHFA insisted that the bank expressly give up indemnification claims from the deposit insurance corporation for what it is paying out to Fannie and Freddie for WaMu’s toxic MBS. For the sake of appearances, if nothing else, that’s an important concession from JPMorgan.

There is, however, a very big loophole in the FHFA settlement that will permit the bank to attempt to recoup its entire WaMu payout. The FDIC provision of the FHFA agreement bars JPMorgan from seeking indemnification from the corporation – but not from the FDIC’s separate $2.7 billion WaMu receivership, which consists (roughly) of the $1.9 billion JPMorgan paid for WaMu in 2008 plus another $800 million that the fund recovered through the Chapter 11 bankruptcy of WaMu’s holding company. In the FHFA deal, the conservator agreed to a steeper discount on Fannie and Freddie’s WaMu claims than those against JPMorgan and Bear Stearns. I suspect that’s no coincidence: The allocation of FHFA’s total recovery permits JPMorgan to attempt to get all of its $1.153 billion WaMu payout from the FDIC’s WaMu receivership.

In other words, the FHFA walled off FDIC’s corporate exposure to JPMorgan indemnification claim, but it left the $2.7 billion receivership exposed to the tune of $1.153 billion.

Former QB fights ex-lawyer to control likeness class action vs EA

Alison Frankel
Oct 23, 2013 22:24 UTC

A class action involving the supposed misappropriation of images of college athletes by the videogame maker Electronic Arts has provoked a thorny question about who truly represents the interests of absent class members. Is it the name plaintiff who filed the case on behalf of everyone who allegedly suffered the same injury as him? Or is it the lawyer who has been acting on the class’s behalf – even if he’s been fired by the name plaintiff?

This sticky wicket comes courtesy of Ryan Hart, who played quarterback for Rutgers between 2002 and 2005. Back in 2009, Hart and his lawyers at the firm then known as McKenna McIlwain filed a class action in state court in New Jersey, asserting that Electronic Arts had violated Hart’s privacy rights when it made use of his image in the NCAA Football videogame series. EA removed the case to federal court in New Jersey, where it argued that it has a First Amendment right to transform the images of college athletes like Hart into virtual players for its videogames. U.S. District Judge Freda Wolfson agreed. She granted summary judgment to EA in September 2011.

Hart and his lawyers appealed to the 3rd Circuit. Last May, a split appellate panel vacated Wolfson’s judgment for EA. The two judges in the majority held that EA had not sufficiently transformed Hart’s image to trigger its First Amendment protection against his privacy rights. The blockbuster ruling, which was followed in July by a 9th Circuit decision that applied similar reasoning to reinstate other class action litigation by college athletes against EA, reopened the prospect of the videogame maker’s enormous potential liability to thousands of former college athletes.

BP oil spill class deal faces constitutional challenge – from BP

Alison Frankel
Oct 22, 2013 21:18 UTC

Everyone with an interest in the future of class action settlements ought to be paying close attention to arguments slated to take place at the 5th Circuit Court of Appeals on Nov. 4. Objectors to BP’s multibillion-dollar settlement with victims of the 2010 Deepwater Horizon oil spill will tell a three-judge appellate panel why, in their view, U.S. District Judge Carl Barbier improperly approved a class settlement in which similarly situated claimants are treated differently. The plaintiffs steering committee that reached the agreement with BP will argue that the intricate 1,000-page settlement, painstakingly negotiated over several months, meets all of the requirements for class certification. And BP? Well, that’s where this appeal gets complicated – and fascinating.

You probably remember that last month BP won a big ruling from a different 5th Circuit panel in a separate, but related, appeal. In that case, BP challenged Barbier’s order interpreting the settlement agreement’s provisions for calculating business and economic losses. The trial judge had held that claimants could establish losses based on “cash in, cash out” records. BP argued that Barbier’s approved methodology had resulted in billions of dollars of claims by uninjured businesses that just happened to fit the accounting criteria. A split 5th Circuit panel agreed with BP that the settlement agreement cannot be interpreted to define monthly revenue as cash received and variable expenses as cash paid out, and the majority ordered Judge Barbier to reconsider his approval of those definitions.

The panel judges – Edith Clement, Leslie Southwick and James Dennis – also engaged in a very unusual intra-opinion debate about the use of class action settlements to achieve global resolutions of sweeping claims. Judge Clement took a hard line, asserting that judges may not approve class action settlements that permit recoveries by uninjured claimants. If the BP class includes members who haven’t sustained losses attributable to the oil spill, she said, “The settlement is unlawful.”

Where’s accountability to MBS investors in $13 bln JPMorgan deal?

Alison Frankel
Oct 21, 2013 19:47 UTC

By all accounts, JPMorgan Chase is on the verge of a record-setting $13 billion settlement with the Justice Department and other state and federal regulators that will resolve the bank’s civil liability to the government for the sale of mortgage-backed securities, by JPMorgan itself and by Bear Stearns and Washington Mutual. We still don’t know precisely what admission JPMorgan will make as part of the deal, and based on the bank’s shrewd blame-taking in its London Whale trade losses settlement with the Securities and Exchange Commission, we can assume any admissions will be tailored to limit collateral damage in private litigation. Nonetheless, regardless of how JPMorgan phrases its acceptance of responsibility, the bank’s $13 billion settlement is an acknowledgment of the obvious: The mortgage-backed securities market was infested at its foundation, like a house gnawed away by termites.

So why are investors in private-label MBS still standing in the rubble of collapsed mortgage-backed trusts? We haven’t seen a final allocation plan for the $13 billion settlement, but I haven’t seen any indication that money has been set aside for private investors in JPMorgan, Bear or WaMu MBS offerings. To the contrary: Certificate holders are already asking whether the bank intends to shift the cost of the settlement’s reported relief to underwater homeowners on to MBS trusts.

Investors in private-label MBS have experienced hundreds of billions of dollars in losses. Let’s look, for instance, at JPMorgan’s description of the fate of mortgage-backed securities sold by the bank and its predecessors Bear and WaMu. According to JPMorgan’s 2012 annual report, the three entities sold a combined $450 billion in MBS to private investors (as opposed to Fannie Mae and Freddie Mac) between 2005 and 2008. More than a quarter of the original face value of the securities, or $118 billion of that $450 billion, has been liquidated, with investors suffering average losses of more than 60 percent on liquidated underlying loans. By my math, that’s about $71 billion in losses for private-label JPM, Bear and WaMu MBS trusts as of the filing of the bank’s annual report last December – with more likely, since the report also disclosed that $39 billion in underlying mortgage loans were at least 60 days overdue.

How the government has evaded constitutional test of secret wiretaps

Alison Frankel
Oct 18, 2013 22:12 UTC

If you haven’t already, please read Charlie Savage’s fascinating story, “Door May Open for Challenge to Secret Wiretaps,” in Thursday’s New York Times. Savage reported that the Justice Department is poised for the first time to notify a criminal defendant that evidence against him was obtained through the FISA Amendment Act of 2008 (FAA), which granted the Foreign Intelligence Surveillance Court the power to approve sweeping, warrantless wiretapping. The notification is significant because it will establish the defendant’s standing, under the U.S. Supreme Court’s ruling last February in Clapper v. Amnesty International, to challenge the constitutionality of warrantless wiretapping authorized under the FAA.

Savage’s story detailed the debate within the executive branch about whether the Justice Department is obligated to tell defendants about evidence obtained through warrantless surveillance. U.S. Solicitor General Donald Verrilli – who had assured the U.S. Supreme Court in the Clapper case that such disclosures would be made – was reportedly taken aback when he learned in June that prosecutors took a contrary position in opposing motions for disclosure by three defendants accused of terrorist acts. The defendants – two brothers charged in Ft. Lauderdale, Florida, federal court and one young suspect in a Chicago case – had asked the government to acknowledge its use of evidence from FAA-approved wiretaps, after Senator Dianne Feinstein (D-Calif) publicly cited their cases, among others, as justification for the broad data collection permitted under the FAA. Through the summer, according to Savage, the Justice Department discussed how to reconcile concerns about the national security implications of notifying defendants with defendants’ due process rights. The upcoming notification, in an unspecified case, reflects Justice’s determination that it is legally required to disclose to defendants that it has obtained evidence through warrantless wiretaps.

The Times story, as well as a Freedom of Information Act complaint filed Thursday afternoon by the American Civil Liberties Union against the Justice Department, prompted me to go back to the records in the Ft. Lauderdale and Chicago cases Savage cited, to see how the government has so far fended off notification demands. Defense lawyers in the cases deserve a lot of credit for their dedication and enterprise in making those demands. According to the ACLU complaint, 11 cases implicating FAA-derived evidence have been publicly cited in Congress. Senator Feinstein mentioned eight cases in an FAA reauthorization hearing before the Senate Select Committee on Intelligence in December, and in June FBI Deputy Director Sean Joyce mentioned three others in testimony before the House Permanent Select Committee on Intelligence. Defendants in many of the cases have already pleaded guilty, often, according to Patrick Toomey of the ACLU, before they ever knew the government was running the mass data collection operations revealed by Edward Snowden. Only Durkin & Roberts, for Chicago defendant Adel Daoud, and Ronald Chapman and Daniel Ecarius, for Ft. Lauderdale defendants Sheheryar Qazi and Raees Qazi, have demanded that government disclose whether any of its evidence is the fruit of warrantless wiretaps.

In politically charged terror finance case, Israeli bank ducks testimony

Alison Frankel
Oct 17, 2013 20:10 UTC

A young Floridian named Daniel Wultz died tragically in 2006 when he was fatally wounded in a suicide bombing at a bus stop in Tel Aviv. Wultz’s parents believe that among those responsible for their son’s death is Bank of China, which they accuse of facilitating payments to Palestine Islamic Jihad, the group said to be responsible for the attack. The Wultzes and their lawyers at Boies, Schiller & Flexner contend that Israeli counterterrorism officials warned the Chinese government at meetings in China in April 2005 that an alleged Islamic Jihad leader, Said al-Shurafa, was financing the group’s operations through his Bank of China accounts. The Wultzes’ Antiterrorism Act suit, filed in federal court in Washington but later transferred to Manhattan federal court, alleges that Chinese officials passed those warnings on to the bank.

The politically explosive case has already occasioned a diplomatic crisis for Israeli Prime Minister Benjamin Netanyahu, whose government at first encouraged the Wultzes to sue Bank of China and agreed to permit testimony about the 2005 meeting in China from a former member of the counterterrorism staff of Israel’s national security council. Netanyahu’s government has since backed away from the Wultzes’ case, reportedly under pressure from China, which has strong economic ties to Israel. The former Israeli counterterrorism official, Uzi Say, has nonetheless indicated that he is inclined to testify for the Wultzes and other bombing victims suing Bank of China, even without clearance from his government.

In that context, a dispute over Bank of China’s subpoena for third-party testimony from a corporate official of Israel’s Bank Hapoalim is definitely a tangential matter, without the emotional or geopolitical resonance of the Wultzes’ underlying claim. But the fight between Bank of China and Bank Hapoalim raises some interesting questions about the reach of a subpoena for expert corporate testimony under the Federal Rules of Civil Procedure. And a decision Tuesday by U.S. Magistrate Judge Gabriel Gorenstein that Bank Hapoalim does not have to produce a witness from Israel could severely impair Bank of China’s defense in this most sensitive of cases.

Labeling genetically modified food: regulation via litigation is back

Alison Frankel
Oct 16, 2013 20:18 UTC

Fifteen years ago, when trial lawyers were flush with cash from representing state attorneys general in their global $365 billion settlement with the tobacco industry, the phrase “regulation through litigation” was much in vogue. On the plaintiffs’ side, it was a rallying cry, a call for lawyers to use the tactics of the tobacco litigation – including their partnership with state regulators – to accomplish societal goals, such as reducing gun violence or cutting carbon emissions. Tort reformers, meanwhile, sounded alarms about ceding policy-making to unelected lawyers driven by their own potential profits. Despite the fervor on both sides, regulation through litigation turned out to be more of a slogan than a reality as ambitious cases against, for instance, gun- and lead- paint makers faltered.

But suits over food companies’ labeling of genetically modified ingredients may prove to be a rare example of litigation forcing industrywide change, even as the federal government dithers on policy.

Last week, Frito-Lay’s lawyers at Gibson, Dunn & Crutcher filed an answer to a consolidated class action complaint in multidistrict litigation over Frito’s allegedly misleading use of “all natural” labeling on products that contain genetically modified corn. Like their defense counterparts in similar bioengineered food labeling litigation against Conagra Foods and Campbell Soup, the Gibson lawyers insisted that consumer claims should be barred by the “primary jurisdiction doctrine,” which says that courts must wait for federal agencies to apply their regulatory expertise before hearing claims in litigation. Food industry lawyers contend that it’s premature for judges to consider class actions over bioengineered food labeling because the Food and Drug Administration has not issued binding policy on whether genetically modified ingredients are “natural” (or, for that matter, on any definition of “natural” in food labels).

Thwarting Morrison, BP shareholders win right to proceed in Texas

Alison Frankel
Oct 15, 2013 21:08 UTC

When Matthew Mustokoff of Kessler Topaz Meltzer & Check walked out of oral arguments before U.S. District Judge Keith Ellison of Houston last November, he wasn’t at all sure that his case – a suit by individual pension funds claiming to have been duped by BP – would survive BP’s motion to dismiss. The judge had expressed sympathy for holders of London-listed BP common shares, whose federal securities claims are barred by the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank. Mustokoff and co-counsel from Jason Cowart of Pomerantz Hufford Dahlstrom & Gross were attempting to plead around Morrison by asserting fraud and misrepresentation claims under state and common law. But Judge Ellison seemed to be very interested in a novel constitutional argument BP’s lawyers at Sullivan & Cromwell had crafted in response to the pension funds’ Morrison-dodging. BP said that the funds’ case violated the dormant Commerce Clause as it applies to international commerce because state laws may not exceed the bounds of federal law. Funds couldn’t assert claims under state law, according to BP, when parallel federal-law claims were barred. Ellison was so intrigued by S&C’s Commerce Clause argument that at least half of the hearing on BP’s motion to dismiss the funds’ two related suits, Mustokoff told me, was dedicated to that defense.

But when Ellison entered his 97-page opinion on the docket of the BP multidistrict securities litigation last Thursday, his analysis of the Commerce Clause argument was reduced to a footnote. The judge entirely side-stepped the question of whether state or common law can give U.S. investors rights they don’t have under federal law by concluding that English law – and not American common law – applies to the pension funds’ claims. BP had asked the judge to choose English law, but it also wanted him to find that an English court is the preferable forum for a matter of English law. Instead, Ellison said that he’s perfectly capable of applying English law on fraud, which “shares so many strong similarities with U.S. law due to a common heritage.” And since the conduct at issue in the pension funds’ case involves BP’s U.S. operations – and since he’s already overseeing a class action by holders of BP American Depository Shares, who are raising arguments similar to those of the pension funds – Ellison said it makes sense for him to hear the funds’ suits.

Ellison’s ruling, as Kevin LaCroix at D&O Diary noted Tuesday, is an extremely rare example of shareholders of a foreign-listed stock finding a way around Morrison. But before the securities class action bar starts boning up on English law on fraud (or, as it’s known over the pond, “deceit,”), there are a couple things to keep in mind. First, this case isn’t a class action. It’s two suits by nine pension funds that had large enough BP holdings to make it worth their while to pursue individual actions. Second, Ellison based his decision to retain jurisdiction on some factors that might not figure in other investor fraud suits. And third, BP and Sullivan & Cromwell will get at least one more chance to present their dormant Commerce Clause argument, which could still erase investor claims.

Time to undo fraud-on-the-market presumption in securities class actions?

Alison Frankel
Oct 14, 2013 20:03 UTC

The U.S. Supreme Court created securities class actions as we now know them in 1987, when an unusual four-justice majority held in Basic v. Levinson that investors in securities fraud cases may be presumed to rely on public misrepresentations about stock trading in an efficient market. Basic’s fraud-on-the-market theory made it possible for shareholders to win class certification without proving that class members made investment decisions based on the defendants’ alleged misstatements – a momentum-shifting boon to shareholders. The ruling has become such an essential building block of securities fraud litigation that since 1987, according to Westlaw, Basic has been cited almost 17,000 times.

But now the Supreme Court is being asked to topple its own creation. In a petition for certiorari last month, Halliburton’s lawyers at Baker Botts argued that Basic’s “naive” and “simplistic” efficient-market theory has been repudiated by economists and is inconsistent with the court’s recent precedent in other sorts of class actions. The Halliburton petition capitalized on dissents in the Supreme Court decision last term in Amgen v. Connecticut Retirement Plans, in which the three justices in the minority – Clarence Thomas, Antonin Scalia and Anthony Kennedy - noted the “questionable” premise of fraud-on-the-market theory. Justice Samuel Alito, in a concurrence, specifically asked whether the court’s ruling in Basic should be reconsidered; Halliburton’s petition takes him up on the offer.

On Friday, class counsel at Boies, Schiller & Flexner shot back at Halliburton and Basic’s critics. In a brief opposing cert, Halliburton shareholders argued that Congress and the Supreme Court have had plenty of opportunities over the last 25 years to dismantle Basic’s fraud-on-the-market framework yet they have consistently refused to do so. According to the opposition brief, Basic remains good law, and even if the Supreme Court wanted to revisit efficient-market theory, the Halliburton case isn’t the right vehicle.

Business groups to SCOTUS: Protect us from whistleblowers!

Alison Frankel
Oct 10, 2013 20:32 UTC

Sarbanes-Oxley was enacted as a response to the collapse of Enron, and one of its intentions was to encourage employees to keep their companies honest. SOX included specific provisions for whistleblower reporting, as well as prohibitions on corporate retaliation against employees who bring concerns to their supervisors. That’s all straightforward enough when the purported whistleblowers are employees of public companies. But what about employees of private businesses doing work for public companies – like, say, the audit firm Arthur Andersen in the Enron scandal? If an accountant or any other employee of a private business is fired after detecting and reporting supposed wrongdoing uncovered in the course of providing services to a public company, can the employee sue under SOX?

That question is now before the U.S. Supreme Court in Lawson v. FMR, which is scheduled for oral argument on Nov. 12. The case turns on a hypertechnical point of statutory interpretation: When Congress barred retaliation against “an employee of such company” did it mean just an employee of a public company, or did it intend the words also to encompass employees of contractors or subcontractors? The law clearly prohibits retaliation by private contractors and subcontractors working for public companies, but the dispute involves whether the private companies are barred only from acting against employees of the public companies or also against their own employees.

In a split decision in February 2012, the 1st Circuit Court of Appeals ruled SOX anti-retaliation protections apply only to employees of public companies, tossing whistleblower anti-retaliation suits by two former employees of private Fidelity investment advisory companies that provide services to Fidelity mutual funds. (Mutual funds are covered by SOX because they file reports to the Securities and Exchange Commission.) But the Department of Labor, in an Administrative Review Board ruling in May 2012, advised that SOX’s whistleblower protections apply broadly and cover private employees. The Supreme Court granted certiorari to the former Fidelity employees, Jackie Lawson and Jonathan Zang, last May.

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