Alison Frankel

Here’s a prediction: When historians look back at the legacy of U.S. Supreme Court Justice Antonin Scalia and his conservative colleagues, they will pay close attention to the justices’ reluctance to extend the dominion of U.S. courts beyond our country’s borders. Scalia made that sentiment clear in his 2010 opinion in Morrison v. National Australia Bank, and the court is right now considering the reach of a U.S. law that provides a cause of action for human rights victims in Kiobel v. Royal Dutch Petroleum (Shell). Scalia, who has spoken about the danger of applying rulings from international courts to cases in the United States, believes that the same holds true in reverse: The laws of the United States govern only the United States.

But in a ruling Friday in Argentina’s long-running dispute with vulture funds that hold defaulted Argentine bonds, the 2nd Circuit Court of Appeals drew a line in the sand. The appeals court held that Argentina cannot submit to the jurisdiction of U.S. courts when it issues sovereign debt, then defy the power of our courts to interpret the governing contracts with bondholders. The 2nd Circuit reached that conclusion despite Argentina’s invocation of the Foreign Sovereign Immunities Act — and despite our own government’s dire warning of a public policy disaster if the court sided against Argentina. The opinion, by Judge Barrington Parker for a panel that also included Judges Rosemary Pooler and Reena Raggi, is notably devoid of fiery pronouncements from a court that has repeatedly (if reluctantly) agreed with Argentina that the FSIA precludes bondholders from snatching the sovereign’s assets in the United States. But make no mistake. The 2nd Circuit is defending the power of U.S. courts in the face of a defendant that has so far refused to submit to their authority.

As Jon Stempel explained in a wonderfully lucid Reuters piece Friday, the 2nd Circuit’s opinion came in a fight over $100 billion in sovereign debt that Argentina issued in the 1990s and restructured in 2005 and 2010. The issue is whether Argentina can continue to make payments to bondholders who participated in the restructurings even as it refuses to pay vulture funds that refused to participate in the restructurings. More than 90 percent of Argentina’s bondholders took the exchange offer (which gave them between 25 and 29 cents on the dollar) after Argentina explicitly warned that those who did not participate would not receive payment on their defaulted notes. Distressed debt funds including NML Capital and Aurelius Capital nevertheless opted to hold onto their bonds. They’ve since obtained billions of dollars in judgments against Argentina.

Argentina and its lawyers at Cleary Gottlieb Steen & Hamilton have been extremely successful in thwarting execution of those judgments, as the 2nd Circuit mentioned in a footnote to Friday’s ruling. So the hedge funds took a different tack in the case that led to that decision. Argentina’s 1994 Fiscal Agency Agreement bonds included a so-called pari passu, or equal footing, clause, which said that the sovereign’s obligation to bondholders “shall at all times rank at least equally with all its other present and future unsecured and unsubordinated external indebtedness.” In 2011 NML, Aurelius and other vulture funds that claim they’re owed $1.4 billion in unpaid principal and interest on those 1994 bonds argued that Argentina was violating the pari passu clause by paying bondholders who participated in the restructuring before it paid them. The Argentine bonds were issued under New York law, so U.S. District Judge Thomas Griesa of Manhattan has presided over the litigation between Argentina and its bondholders. In a series of rulings in early 2012, he agreed to enjoin Argentina from paying the exchange bondholders before paying the hedge funds.

Griesa, who has seen Argentina refuse to pay up despite his previous rulings in the hedge fund bond litigation, expressed his frustration in the injunction rulings, in words the 2nd Circuit quoted in Friday’s decision. “The Republic has made clear — indeed, it has codified (in a 2005 law) — its intention to defy any money judgment issued by this court,” Griesa wrote. “If there was any belief that the Republic would honestly pay its obligations, there wouldn’t be any need for these (injunctions).”

The District of Columbia Circuit Court of Appeals is right now receiving briefs on an interesting question: Does Washington’s 2010 law against so-called SLAPP suits (otherwise known as Strategic Lawsuits Against Public Participation) apply to libel and defamation claims in federal court or only to cases brought in Superior Court for the District of Columbia? Two U.S. district judges in Washington have denied defendants’ motions to assert the anti-SLAPP statute, which holds that in cases arising out of speech on matters of public interest, alleged victims must be able to show that they’re likely to succeed on the merits of their claim. The law, in effect, shifts the way courts decide motions to dismiss, doing away with the assumption that the plaintiffs’ allegations are true. It also restricts discovery, so plaintiffs usually have to show they’re likely to prevail without the benefit of depositions and documents from the other side.

Washington’s law is similar to those in more than two dozen other states, and the combined impact of the anti-SLAPP statutes, according to media lawyer Laura Handman of Davis Wright Tremaine, has been to reduce the burden of libel defense enormously. Amicus briefs at the District of Columbia Circuit by a group of media companies represented by Handman and by the American Civil Liberties Union and Public Citizen point out that e very other federal circuit that has considered whether state anti-SLAPP laws apply to cases removed to federal court under diversity jurisdiction has concluded that they do. Paul Alan Levy of Public Citizen, who defends bloggers accused of libel, told me that unless the District of Columbia Circuit rules that the same holds true for Washington’s anti-SLAPP law, libel plaintiffs will be able to forum-shop, adding out-of-town defendants to get to federal court and avoid anti-SLAPP defenses.

The anti-SLAPP issue at the District of Columbia Circuit was complicated this week when Washington lobbyist and lawyer Lanny Davis of Lanny J. Davis & Associates reached a settlement in his libel suit against 3M and 3M dropped its appeal of U.S. District Judge Robert Wilkins’s ruling that the anti-SLAPP rule doesn’t apply in federal court. But the appeals panel is also considering a case brought against the conservative writer Andrew Breitbart and his associate Larry O’Connor by former U.S. Department of Agriculture official Shirley Sherrod. Sherrod’s suit was filed before the Washington anti-SLAPP law took effect, so U.S. District Judge Richard Leondidn’t address the question of federal application as squarely as Wilkins when he denied motions to dismiss the case. Nevertheless, O’Connor’s lawyers at Baker & Hostetler and amici from the media, public interest groups and the District of Columbia Council have asked the appeals court to use the case as a vehicle to decide the question of the anti-SLAPP law’s applicability in federal court. (Breitbart died in March 2012.) The District of Columbia Circuit has just suspended the deadline for a response brief from Sherrod’s lawyers atKirkland & Ellis, presumably to give them time to address the recently filed amicus brief from Washington.

What a complaint U.S. Attorney Preet Bharara filed against Countrywide and Bank of America on Wednesday!

Earlier this month, when the New York Attorney General filed accusations of securitization fraud against JPMorgan Chase, I said we should put aside cynicism about the AG’s copycat allegations and be grateful that, at last, a government official was demanding accountability for systemic corruption in the mortgage-bundling business. The new complaint against BofA demands no such nose-holding: It asserts powerfully detailed — and original — accusations of billion-dollar fraud in the way Countrywide approved mortgages destined for purchase by Fannie Mae and Freddie Mac, and in Countrywide’s and BofA’s subsequent (alleged) refusal to repurchase defective loans.

To be sure, the U.S. Attorney had help from a whistle-blower, a former Countrywide Home Loans executive vice president named Edward O’Donnell. O’Donnell filed a relatively bare-bones False Claims Act complaint last February. As always in FCA cases, the complaint was sealed as the Justice Department checked out the allegations and deliberated whether to intervene in the case. Those deliberations can take years, but not in this case, when the government is under intense pressure to make good on promises of fighting mortgage fraudsters. Eight months after O’Donnell initiated his action in federal court in Manhattan, the U.S. Attorney’s office intervened, making the suit public.

Disgruntled investors, Commissioner Luis Aguilar of the Securities and Exchange Commission feels your pain. In a speech last week at the Securities Enforcement Forum, he acknowledged that he hears a lot of investors asking “why more individuals and entities have not been held accountable” in the five years since the financial crisis. To restore faith in the markets, the commissioner said, the SEC needs to show that it’s on the side of the investing public — and that means doing more “to prove that robust enforcement is the norm and investors and fraudsters should take notice.”

Specifically, Aguilar said that individuals need to answer for corporate wrongdoing. “The fact remains that corporations and other business are led by men and women who are ultimately responsible for their actions,” he said. “The investing public has a right to expect that government regulators will continue to hold accountable those individuals responsible for misconduct — and that includes those culpable at the top, not just the flunkies below.”

The commissioner also called for beefed-up sanctions: barring individual wrongdoers from serving as directors and officers of public companies and boosting the monetary penalties available to the SEC. Aguilar explained that the statutory limits on what the SEC can recover don’t always permit penalties that reflect the harm to investors. He pointed by way of example to the SEC’s case against Citigroup, which involved a collateralized debt obligation deal in which investors lost almost $700 million. The maximum sanction available to the SEC, Aguilar said, was $160 million, and the SEC ended up agreeing to a $95 million penalty as part of a $285 million settlement. (That settlement was rejected by U.S. Senior District Judge Jed Rakoff of Manhattan and is now on appeal to the 2nd Circuit Court of Appeals.) Aguilar called for Congress to pass legislation that would permit the agency to seek higher penalties that would “compensate investors for actual harm suffered, match the penalty amount to the severity of the alleged violation and enhance (the SEC’s) bargaining power in settlement negotiations.”

By all accounts, neither Michael Lewis nor Frank Serpico should be concerned about competition from Greg Smith, the erstwhile Goldman Sachs vice president whose supposed tell-all, “Why I Left Goldman Sachs,” was published Monday. I’ve only read the first chapter excerpt that’s been floating around the Internet since last week, but Smith clearly lacks Lewis’s humor and narrative verve, and reviewers who read advance copies of the entire book have said there’s not much substance to his assertions about Goldman’s culture. I suspect that Smith will have a short shelf life as a Wall Street chronicler and whistle-blower.

But in an interview Sunday night with Anderson Cooper on “60 Minutes,” Smith caught my attention when he echoed an accusation that’s become a meme of financial crisis litigation: Goldman abused the trust of unsuspecting clients when it offloaded its exposure to mortgage-backed securities via complex financial instruments. “These are very complicated derivative securities which (it) takes a PhD in physics or in engineering to understand,” Smith told Cooper, according to a transcript. “There are pension funds and mutual funds that represent people’s 401(k)s and retirement savings that are trading the most complex instruments out there without fully understanding them,” he said. “Getting an unsophisticated client was the golden prize. The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.”

In the law, as you know, an investor’s sophistication is not an incidental question. Courts expect that so-called sophisticated investors engage in their own due diligence and don’t rely entirely on what sellers tell them. Sophisticated investors have a higher bar for claims of fraud and negligent misrepresentation than ordinary people who buy and sell securities. So, as a matter of law, were the Goldman clients that bought the toxic CDOs Smith mentioned really unsophisticated? Or just less sophisticated than Goldman Sachs?

Last April, as a follow-up to revelations that Wal-Mart had allegedly covered up bribes paid by its Mexican subsidiary, the great Corporate Counsel reporter Sue Reisinger ran a very surprising piece. Despite the scandal engulfing Wal-Mart, defense lawyers told Reisinger that the company may have made a strategically smart decision not to disclose the matter to the government. Smart? Really? Would Wal-Mart’s alleged bribery have blown up into a public relations fiasco that cried out for governmental consequences if the company had quietly admitted the facts to the Securities and Exchange Commission or the Justice Department?

I figured Dodd-Frank’s whistle-blower provisions would make corporate self-reporting even more of a no-brainer, since insiders now have not only a moral and legal incentive but also a powerful financial motive to alert the SEC when they suspect wrongdoing. According to BuckleySandler partner Thomas Sporkin, who until last June was chief of the SEC’s Office of Market Intelligence, the commission receives 1.2 whistle-blower tips a day, on average. If I were a corporate official wondering whether to self-report, I’d assume that one of those tips was about my company and run to the feds before they came to me.

But according to several of the most prominent SEC enforcement advisers in Washington, w ho were speaking Thursday at Securities Docket’s Securities Enforcement Forum, corporations should think hard about the decision to confess their sins or handle problems internally. “You have to decide whether the issue merits the government’s involvement,” said William McLucas of Wilmer Cutler Pickering Hale and Dorr in a follow-up phone conversation Friday. Even in an era in which “you have to assume there are no secrets,” McLucas said, problems that fall short of systemic wrongdoing call for judgment, not reflexive confession. “That’s why you have compliance systems and controls,” he said.

As I read the just-released third-quarter earnings statements of JPMorgan Chase and Wells Fargo, I felt as though I were living in a parallel universe to the banks. Looking for any mention of the New York attorney general’s encompassing $22 billion Martin Act suit against JPMorgan in the bank’s statement? You won’t find it. The only question on the AG’s case that JPMorgan CEO Jamie Dimon fielded in the Friday morning call with analysts was a softball asking whether, as a policy matter, it’s fair to hold the bank responsible for the alleged sins of Bear Stearns when the Fed pushed JPMorgan into the acquisition; Dimon, you will be shocked to hear, agreed that that’s not good policy. No one on the analyst call asked — and the bank didn’t say anything — about Libor liability or about the ongoing securities fraud class action stemming from JPMorgan’s nearly $6 billion chief investment office derivative hedge losses.

Wells Fargo made a fleeting reference in its call with analysts to a new suit by the Manhattan U.S. Attorney’s office, accusing the bank of defrauding the Federal Housing Administration about its mortgage underwriting practices, but didn’t happen to note that Bank of America settled a similar suit with Brooklyn federal prosecutors for $1 billion earlier this year. The U.S. Attorney’s suit was not mentioned in Wells Fargo’s earnings report. And neither Wells Fargo nor JPMorgan addressed the multibillion-dollar breach of contract (or put-back) claims they’ve received from a group of major institutional investors on allegedly deficient loans underlying mortgage-backed securities offerings. Wells Fargo has received formal notices of deficiency from noteholders with the requisite voting rights in trusts with a face value of $15 billion. JPMorgan is facing demands from noteholders in trusts with a face value of $95 billion.

But to hear the banks tell it, their litigation and put-back exposure is well under control. In Friday’s report, JPMorgan reported a $684 million expense for litigation reserves, which have historically included its reserves for put-back demands by private investors (as opposed to Fannie Mae and Freddie Mac). That seems to be up from the $323 million expense the bank reported in the second quarter, but it’s way down from $2.5 billion in the first quarter and $4.9 billion in 2011. (Those numbers come from a handy bank-by-bank report on litigation and put-back reserves that Natoma Partners put out last August.) On Friday, in response to a question about the litigation reserves, Dimon said they “would stay high for a while,” but also said that “on the private label stuff, we’re fairly well done.” Indeed, JPMorgan said that the additional $684 million in litigation reserves was “largely offset” by tax adjustments.

The next great turning point in the war for global device domination comes next month, when Motorola faces two trials – one against Apple, the other against Microsoft – that will determine its ability to use its portfolio of standard-essential patents as leverage in IP disputes with its competitors. I’ve been harping on this theme for a while, but trials have a way of sharpening the issues. Both of these cases will be tried to judges, not juries, so we won’t get immediate results. But when U.S. District Judge Barbara Crabb in Madison, Wisconsin, and U.S. District Judge James Robart in Seattle issue rulings, Motorola and its rivals should have a very clear understanding of how valuable Motorola’s patents on essential wireless technology are.

The Apple trial — which will decide whether Motorola breached its agreements with international standard-setting bodies by failing to license essential technology to Apple on fair and reasonable terms — is scheduled to begin in Wisconsin on Nov. 5, but the Microsoft case in Seattle, which begins on Nov. 13, could hold greater industrywide interest. When he denied summary judgment to both Microsoft and Motorola in June, Robart said he needed more information about what exactly constitutes a fair licensing deal on standard-essential technology before he could ask a jury to decide whether Motorola breached its obligation to license its IP to Microsoft. He called for a bench trial to determine a reasonable royalty rate — an exercise that will likely expose Motorola’s licensing agreements with other counterparties and will certainly give every other Motorola licensee a starting point in future negotiations.

Over the summer, Motorola’s lawyers at Ropes & Gray and the Summit Law Group attempted to reshape the bench trial before Robart. In a motion for summary judgment they filed in July, the Motorola lawyers said that Robart’s proposed rate-setting exercise would improperly set the terms of a contract that does not exist between Microsoft and Motorola. “There is no existing licensing contract between Motorola and Microsoft,” they wrote. “Instead, Motorola submits that there is simply a right to a license. Thus, there is no existing contract for the court to interpret or in which the court can merely ‘fill in’ gaps.”

A few months ago, plaintiffs’ lawyers at Robbins Geller Rudman & Dowd created quite a stir when they filed thousands of pages of deposition transcripts and other juicy discovery in an investors’ fraud case against Morgan Stanley, Standard & Poor’s and Moody’s. The documents — exhibits to the investors’ summary judgment motion — included never-before-seen internal communications between Morgan Stanley and the rating agencies as they worked on a structured investment vehicle known as Cheyne, putting on public display the allegedly half-cocked evaluations that Moody’s and S&P performed in 2005, when they were swamped with subprime mortgage-backed financial instruments to rate.

On Wednesday, the Robbins Geller team, led by Daniel Drosman and Luke Brooks, filed a new brief in a parallel case accusing Morgan Stanley, S&P, Moody’s and Fitch of defrauding two pension funds that invested in an SIV called Rhinebridge, which, in contrast to the Cheyne SIV, was sold in July 2007, as the housing bubble was already collapsing. It’s another must-read for students of the financial crisis.

The Rhinebridge brief, which also references all kinds of evidence from inside the bank and the rating agencies, doesn’t have as many notable quotables as the Cheyne filing. But its allegations are, in a way, even grimmer. According to the brief, which opposes motions for summary judgment by Morgan Stanley and the rating agencies, the defendants all knew the end was near for mortgage-backed securities. Yet (again, according to the brief) Morgan Stanley pushed the agencies to deliver high ratings on the Rhinebridge SIV, even as S&P and Moody’s supposedly questioned the percentage of shaky mortgage loans packed into it. Then, despite internal fears that Rhinebridge was too risky to survive, Morgan Stanley allegedly marketed the SIV to Robbins Geller’s clients, mentioning nothing about its concerns the investment would collapse. Just four months after Rhinebridge launched, and two months after the pension funds bought in, the SIV defaulted, en route to being auctioned off at steep losses for investors.

The Founding Fathers spent quite a lot of time thinking about how, and how much, federal judges should be paid. In fact, according to Chief Judge Randall Rader of the Federal Circuit Court of Appeals, writing Friday for a majority of the en banc appeals court in Beer v. United States, the men who wrote the Constitution considered judicial pay to be almost as important to the independence of the judiciary as lifetime tenure. This was no incidental matter either; among the grievances the colonists listed in the Declaration of Independence was King George III’s rein on the judiciary, which he controlled through pay and job security.

At the constitutional convention in 1787, James Madison proposed pegging judges’ pay to the price of a commodity like wheat. That was considered too volatile a standard. Instead, Rader wrote, the framers adopted the Compensation Clause, which holds that Congress has the power to increase judicial compensation but not to cut judges’ pay. The Federalist Papers explained that the clause assures every federal judge “of the ground upon which he stands” so that he might “never be deterred from his duty by the apprehension of being placed in a less eligible situation.”

If the framers were alive today, they’d ruefully acknowledge their powers of prophecy. The gap between what good lawyers can make in private practice and what they’d earn on the bench has never been wider, with the consequence that some wise and well-qualified candidates can’t afford to become federal judges and some judges can’t afford to stay in office. Chief Justice John Roberts of the U.S. Supreme Court has made judicial pay a dominant theme of his administration, warning that when trial courts are paid less than first-year associates in private practice, the federal judiciary is in crisis.