Alison Frankel

Over the summer, the justices of the U.S. Supreme Court made one of the most improbable grants of certiorari you will ever see.

The timing alone was unusual. The court granted cert in Standard Fire Insurance v. Knowles on Aug. 31, almost a month before the first conference of the new term on Sept. 24. But that’s just the beginning of this case’s oddities. There’s no split among the federal circuits on the issue presented in Standard Fire: whether a class action plaintiff can defeat removal to federal court under the Class Action Fairness Act by stipulating on behalf of the entire class to seek less than $5 million, the statutory cutoff for a state-court class action. In fact, there couldn’t possibly be a circuit split on that question because only one appellate court, the 8th Circuit Court of Appeals, has addressed it. And though Standard Fire comes out of 8th Circuit turf in Arkansas, it is not even the case in which the 8th Circuit opined on these class action damages stipulations, which have become an oft-used tactic of plaintiffs’ lawyers who want to keep their cases in state court.

Indeed, as name plaintiff Greg Knowles argued in his brief opposing cert, there is no appellate opinion at all in the Standard Fire case. After a federal court in Arkansas remanded Knowles’s class action to state court in Miller County, where it was filed, the 8th Circuit twice declined to review the district court’s remand opinion. Yet the Supreme Court nevertheless agreed to take the case. Standard Fire’s merits brief is due later this month, and oral arguments will take place later in the term.

That’s quite an extraordinary procedural history for a Supreme Court case, and Standard Fire’s new appellate counsel at Gibson, Dunn & Crutcher regard the high court’s eagerness to hear the case as a sign that the justices take very seriously Standard Fire’s allegations that the plaintiffs’ lawyers are using improper tactics to keep their case in the friendly confines of Miller County state court. So Standard was taken aback last month when class action lawyers at Keil & Goodson; Nix, Patterson & Roach; and Crowley Norman refused the insurer’s informal request to stay the litigation until the Supreme Court has decided whether the case belongs in state or federal court. Without an informal deal to defer to the high court, Standard’s class action defense lawyers at Mitchell, Williams, Selig, Gates & Woodward formally moved to stay the state court case in September.

The class action lawyers promptly opposed the motion. Even if the Supreme Court decided that the damages stipulation improperly bound absent class members under the court’s ruling last year in Smith v. Bayer — which class counsel emphatically believe it does not — the plaintiffs’ lawyers argued that their damages in the statewide class action would still be under $5 million, even without the stipulation. Whichever way the Supreme Court rules, they said, the case is staying in state court.

It would be so easy to be cynical about the suit New York Attorney General Eric Schneiderman brought Monday night against JPMorgan Chase, seeking to hold the bank liable for the alleged mortgage securitization fraud committed by Bear Stearns before JPMorgan acquired Bear in March 2008. I could start with the political expediency of the 31-page complaint, which, on the eve of the first presidential debate, provides the Obama administration with an answer to critics who have accused regulators of going easy on big banks. Indeed, the case is so politically charged that, according to Reuters, Schneiderman’s federal colleagues on the administration’s mortgage fraud task force were peeved that the New York AG filed the suit Monday, ahead of a joint federal-state press conference Tuesday.

Then, of course, there’s the content of the complaint. I’ve been carping for a long time that regulators were years behind lawyers representing bond insurers and private investors in mortgage-backed securities. Beginning in 2008 and 2009, private lawyers marshaled evidence from their own discovery and, later, from Congress’s Financial Crisis Inquiry Commission Report and the Levin-Coburn Report to produce damning, detailed complaints against JPMorgan and the other banks involved in securitization. The New York AG’s new complaint cited the FCIC report and the JPMorgan suit filed in August 2011 by the Federal Housing Finance Agency, but the AG really owes his biggest debt of gratitude to the monolines Ambac, Syncora and Assured Guaranty and their counsel at Patterson Belknap Webb & Tyler. Patterson has been relentless in its pursuit of Bear Stearns and, by extension, JPMorgan. Just look at the amended complaint Ambac filed in New York State Supreme Court in February 2011 against JPMorgan and the Bear mortgage arm, EMC. It’s 160 pages of brutal accusation, documenting the same theories put forth by the New York AG — but in much more detail.

Those colorful quotes in the AG’s suit about Bear’s “sack of shit” and “shit breather” securitizations? They’re in the Ambac complaint. So are the AG’s allegations that PricewaterhouseCoopers, engaged in 2006 to offer an opinion of Bear’s put-back practices, told the bank to stop keeping the money it recovered from the originators of deficient mortgages for itself and to start passing on its put-back recoveries to MBS investors. The AG, in other words, did a lot of piggybacking on other people’s work. I didn’t see anything in Schneiderman’s complaint that I haven’t seen elsewhere in suits against Bear and JPMorgan.

On Friday, U.S. District Judge Robert Wilkins of Washington struck down the Commodity Futures Trading Commission’s 2011 rule setting position limits on derivatives tied to certain physical commodities. The judge found that the CFTC had misinterpreted the Dodd-Frank financial reform law of 2010 when it wrongly concluded that Dodd-Frank required it to impose position limits in order to curb speculative trading. Instead, according to Wilkins, the CFTC should have looked back to the Commodity Exchange Act of 1936 and determined whether such limits are necessary and appropriate before setting them. The judge sent the rule back to the CFTC for reconsideration.

Though CFTC Chairman Gary Gensler told Reuters in a statement issued Friday that he continues to believe position limits are not only necessary but mandated by Congress, Wilkins’s ruling marks the second time in 14 months that industry groups have succeeded in rolling back agency rules required by Dodd-Frank. In July 2011, a three-judge panel of the District of Columbia Circuit Court of Appeals found that the Securities and Exchange Commission had not properly considered the impact on capital markets when it promulgated the Dodd-Frank-mandated “proxy access” rule, which required public companies to provide shareholders with information about shareholder-nominated board candidates. The D.C. Circuit struck down the rule, and the SEC decided not to appeal. That case was brought by the Business Roundtable and the U.S. Chamber of Commerce. The challenge to the CFTC’s position limits rule was brought by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. The industry groups in both cases were represented by Eugene Scalia of Gibson, Dunn & Crutcher, who is certainly living up to his reputation as the scourge of federal agency rulemakers.

The specific flaws courts cited in the proxy access and swaps limit rules are different, but there’s a unifying sentiment behind the rulings that struck them down: Agencies cannot point to Dodd-Frank mandates, cite the financial crisis and impose new rules without exercising independent judgment about the need for and the impact of those rules.

Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison and Max Berger of Bernstein Litowitz Berger & Grossmann share an elevator bank at 1285 6th Avenue in New York City. Bernstein Litowitz, a 50-lawyer plaintiffs’ firm, has space on the 36th and 38th floors. Paul Weiss’s 750 lawyers occupy much of the rest of the office building. Karp and Berger are also old frenemies: In 2004, they negotiated Citigroup’s $2.65 billion settlement of shareholder claims in the WorldCom accounting fraud case. Over the last several months, with Karp representing Bank of America and Berger one of the lead counsel for shareholders suing over the bank’s acquisition of Merrill Lynch in 2008, the two have spent a lot of time riding the elevator between Berger’s office on the 36th floor and Karp’s on the 30th, discussing a resolution of the class action.

With an Oct. 22 trial date looming and no sign from U.S. District Judge Kevin Castel that he would end the case by granting summary judgment to either side, those elevator rides (and sessions with mediator Layn Phillips of Irell & Manella) led to the $2.43 billion settlement that Bank of America announced Friday. It’s the fourth-largest-ever securities class action settlement by a single defendant (behind Tyco’s $2.975 billion deal in 2007, Cendant’s $2.83 billion settlement in 1999, and the Citi agreement in 2004) and the largest in a case that involved no accounting fraud or criminal convictions. The settlement is vindication for Richard Cordray of the Consumer Financial Protection Bureau, who launched the litigation on behalf of two Ohio pension funds back in 2009, before he was voted out of office as Ohio’s attorney general, and for the three shareholders’ firms that litigated the case for almost four years: Bernstein Litowitz; Kessler Topaz Meltzer & Check; and Kaplan Fox & Kilsheimer.

The plaintiffs in this case will be asking Castel to approve $150 million in fees, and they’ve earned them. Remember, the SEC was originally willing to settle allegations against BofA for disclosure failures in the Merrill acquisition for $33 million. This settlement reflects the nuanced understanding of Bank of America’s failure to disclose billions of dollars in escalating Merrill Lynch losses that shareholders’ counsel gained through dozens of depositions and millions of pages of discovery. The plaintiffs survived motions to dismiss by the bank and individual defendants, motions to reconsider the denial of their dismissal motions, and opposition to class certification. They clearly persuaded Castel of the value of their claims; his class certification ruling rejected defense arguments that shareholders weren’t injured by the alleged disclosure failures. Bank of America repeated those arguments in its motion for summary judgment, but there’s little chance the judge would have granted the motion. From all indications, Castel had cleared his calendar and planned to try this case, in what would surely have been one of the most celebrated trials stemming from the financial crisis.

When Congress passed the Dodd-Frank financial reform law in 2010, it provided broad protection for whistle-blowers. The law prohibited employers from retaliating against anyone who reported securities violations to the Securities and Exchange Commission, assisted in an SEC investigation or otherwise made disclosures required by the Sarbanes-Oxley Act of 2002 or any other securities law. Dodd-Frank also defined criteria for whistle-blowers: They are people who provide information about securities violations “in a manner established, by rule or regulation, by the Commission.” In August 2011, the SEC issued its final interpretation of Dodd-Frank’s provisions, requiring that whistle-blowers must have a reasonable belief that they’re reporting violations of securities laws and must follow specific procedures when giving that information to the commission.

If you think the SEC’s rule is an obvious construction of Dodd-Frank’s statutory language, think again. The confusion lies in the disparity between the whistle-blower provisions in Dodd-Frank and those in Sarbanes-Oxley, which is more concerned with internal reporting than blowing the whistle to the SEC. Both laws include reporting procedures and anti-retaliation protection, but the specific provisions are different. Sarbanes-Oxley, for instance, requires employees to exhaust administrative remedies before bringing a federal court action for retaliation. It also has a 180-day statute of limitations and restricts employees’ recovery to back pay, as opposed to Dodd-Frank, which has a six-year statute and allows double-pay claims. So, as Jackson Lewis noted last November in a motion to dismiss a Dodd-Frank whistle-blower retaliation suit against a company called Trans-Lux, if the SEC meant for everyone with a potential retaliation claim under Sarbanes-Oxley to sue instead under Dodd-Frank, it was impermissibly overriding SOX and congressional intent.

“It cannot have been Congress’ intent to protect internal complaints of retaliation under [Dodd-Frank]; otherwise SOX would be rendered obsolete,” the brief said. “If all SOX-protected activity were to fall within the scope of the [Dodd-Frank] whistleblower provisions, regardless of whether the employee provided information to the SEC, then all SOX claimants would arguably be able to file a whistleblower retaliation claim under [Dodd-Frank] instead of SOX.”

By Alison Frankel and Dan Levine

Samsung doesn’t want you to know why it believes juror misconduct tainted the $1.05 billion verdict that a San Jose federal court jury delivered to Apple in August. Its lawyers at Quinn Emanuel Urquhart & Sullivan redacted that entire section of the motion for judgment as a matter of law that they filed Friday with U.S. District Judge Lucy Koh in San Jose, California. But from a close examination of the statute and cases Samsung cited in the redacted section, we’ve discerned Samsung’s two-pronged argument for juror misconduct: The nine-person jury improperly considered extraneous evidence during deliberations and jury foreman Velvin Hogan failed to disclose in voir dire that he was involved in 1993 litigation with a former employer that led him and his wife to declare personal bankruptcy.

In an exclusive interview Tuesday about Samsung’s secret new allegations, Hogan, an engineer, confirmed that he was a party in two cases cited in Samsung’s brief, a 1993 case from municipal court in Santa Cruz titled Seagate Technology v. Hogan and a 1993 federal bankruptcy case titled In re Velvin R. Hogan. According to Hogan, when Seagate hired him in the 1980s and he moved from Colorado to California, his new employer agreed to split the cost of paying off the mortgage on his Colorado home. But after Hogan was laid off in the early 1990s, he told us, Seagate claimed he owed the company that money. Hogan said he sued Seagate for fraud, Seagate countersued, and he ultimately declared personal bankruptcy to protect his house.

Can Quinn Emanuel credibly argue that Koh needs to hold a hearing to determine whether Hogan’s failure to disclose the 1993 litigation is grounds to throw out an unrelated patent infringement verdict for Apple? Again, we don’t know precisely what Samsung’s argument is, but several of the cases it cited in the new brief’s table of authorities concern juror bias and the failure to disclose relevant information in the jury selection process. In U.S. v. Perkins, for instance, the 11th Circuit Court of Appeals ruled in 1984 that the defendant in a criminal obstruction of justice case was entitled to a new trial because a juror didn’t reveal that he had previously been both a defendant in a civil case over stolen union funds and a witness in a criminal case involving the firebombing of a union hall. In a 1989 2nd Circuit ruling called U.S. v. Colombo, the court called for an evidentiary hearing on whether a juror deliberately failed to disclose that her brother-in-law was a government prosecutor in order to get on the jury, and held that if she hid her ties to the government, convictions in a huge Mafia racketeering case must be vacated.

Disqualifying defense counsel two years into a case is a rare and drastic step, but on Monday that’s what U.S. District Judge Richard Andrews of Wilmington, Delaware, did to a company called MobiTV and its lawyers at Latham & Watkins. Andrews tossed Latham because it formerly represented the parent of the company suing MobiTV (and many, many others) for patent infringement — even though the client relationship ended in 1995, two years before the patent at issue in the case was even awarded and eight years before any alleged infringement by MobiTV began.

Latham’s onetime client, a company once called TV Answer and now known as EON Corp, claimed in a disqualification motion filed almost a year ago that the firm had become privy to proprietary information about interactive video data service technology, which underlies the patent EON is asserting against MobiTV. The firm worked closely with the inventor of the technology and represented EON’s predecessor company before the Federal Communications Commission. A total of 34 Latham lawyers worked on EON matters, including one who became the company’s general counsel and another who sat on EON’s board. “The potential harm and detriment to EON are obvious,” wrote EON’s lawyers at Reed & Scardino and Fox Rothschild. “Latham is seeking to discredit EON’s attempt to protect the same … technology that formed the basis of Latham’s prior relationship with EON Corp and that Latham previously lauded and advocated on EON Corp’s behalf.”

In its response, Latham pointed out that of those 34 lawyers, only 7 are still practicing at the firm, and the two partners leading the MobiTV case, Bob Steinberg and Ryan Hatch, weren’t even at Latham during the long-ago representation of EON. No Latham lawyers, moreover, had anything to do with obtaining EON’s patent, according to the firm, since Latham doesn’t do patent prosecution. And besides, the Latham brief said, EON’s supposedly private information entered the public domain when its patent was issued. EON, the brief argued, “does not identify any specific item of information that Latham allegedly has that would benefit MobiTV in this case.”

Weil, Gotshal & Manges has asked a great question in a new post at the Harvard Law School Forum on Corporate Governance: Why is the U.S. Supreme Court suddenly so passionate about federal securities litigation? According to Weil’s survey, the justices have generated more securities fraud precedent in the last two years than in the previous two decades: Merck v. Reynolds and the infamous Morrison v. National Australia Bank in 2010; Matrixx Initiatives v. Siricusano, Erica P. John Fund v. Halliburton, Janus v. First Derivative Traders and (tangentially) Wal-Mart v. Dukes in 2011. The court has looked at when shareholders are on notice of fraud, how broadly U.S. securities law extends to foreign defendants, who can be sued for misstatements and when companies have a duty to inform shareholders of potential problems — in other words, a huge range of issues reflecting deep interest in shareholder rights (or lack thereof).

The Weil post says we’ll have to leave it to future historians of the Roberts Court to figure out exactly why these justices seem to be fascinated by securities class actions. In the meantime, though, we can study the briefs in the next big securities case up for Supreme Court consideration. On Thursday, Connecticut’s pension fund filed its 67-page brief in the case that will hereafter be known in SCOTUS jurisprudence as Amgen v. Connecticut Retirement Plans. Oral arguments will take place on Nov. 5 in the case, which presents the question of whether plaintiffs must provide evidence of materiality to win certification of a securities fraud class; or whether, under the Supreme Court’s 1988 fraud-on-the-market ruling in Basic v. Levinson, the class must only demonstrate an efficient market and allegedly public misstatements. Amgen also considers whether defendants have a right to rebut the fraud-on-the-market theory at the class certification stage.

It’s notable that the Connecticut fund opted to bring in David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel to argue its case at the Supreme Court. I had asked in a post in June whether the fund would stick with its lawyers at Labaton Sucharow or — like Amgen, which brought in Seth Waxman of Wilmer Cutler Pickering Hale and Dorr – go with an appellate specialist. Frederick was a smart choice. Justice Elena Kagan recently signaled the high court’s preference for arguments by members of the specialized Supreme Court bar, and no one has more recent success before the justices on behalf of shareholders than Frederick, who lost in Janus but won in Merck and Matrixx.

On Wednesday, Reuters confirmed what it first reported last month: Apple and four book publishers have offered to settle a European Commission investigation of price-fixing in the market for e-books. That’s particularly notable because Apple and two of those publishers – Macmillan and Viking – have refused to settle with the U.S. Justice Department’s antitrust division, which reached an agreement last April with three other publishers accused of conspiring with Apple to change the pricing model for e-books. Neither the DOJ settlement nor the proposed EC deal involve a financial penalty, so why would Apple, Viking and Macmillan agree to settle with antitrust regulators from the European Union but not their U.S. counterparts?

Two reasons: EC procedure and U.S. liability.

First, a caveat. I reached out to Macmillan’s lawyers at Sidley Austin, Penguin’s counsel at Akin, Gump, Strauss, Hauer & Feld and Apple’s lawyers at Gibson, Dunn & Crutcher, but none would comment, nor did Apple respond to a request for comment. In other words, I’m offering informed speculation rather than from-the-horse’s-mouth reporting.

That said, consider the way antitrust cases proceed at the EC, which is the trade section of the European Union. After regulators complete their investigation and conclude that defendants have engaged in anti-competitive behavior, they have the power to levy a fine before there’s any court ruling on liability. Those fines, moreover, can be huge. In 2008, the EC levied a $1.3 billion penalty against Microsoft for failing to comply with a previous EC directive to permit competitors to run programs on Windows. The following year European regulators set a new record with a $1.4 billion fine for the accused chip monopolist Intel.

Never underestimate the power of a lone Exchange Act claim in federal district court in Manhattan.

On Tuesday, U.S. District Judge Paul Gardephe refused to stay a consolidated derivative case claiming that the directors of News Corp breached their duty to shareholders in the phone-hacking scandal — even though a nearly identical case in Delaware Chancery Court is so much further along that Vice Chancellor John Noble heard arguments on the board’s motion to dismiss on Wednesday. Gardephe’s justification for allowing the New York federal case to proceed was that, in addition to their breach-of-duty claims under Delaware law, shareholders also asserted federal securities claims under the Exchange Act of 1934. “Because federal courts have exclusive jurisdiction over [those] claims,” the judge wrote, “they will not be resolved in the Delaware action. Staying this action in favor of the Delaware action is therefore improper.”

Gardephe shrugged off arguments by the board’s lawyers at Skadden, Arps, Slate, Meagher & Flom that the New York plaintiffs had tacked on the Exchange Act allegations simply to distinguish their case from the Delaware suit, which predated the New York litigation. According to the judge, the threshold issue under the U.S. Supreme Court’s 1976 ruling in Colorado River Water Conservation District v. U.S. was whether the New York and Delaware cases were parallel. He concluded they were not, because the Delaware case didn’t include a federal cause of action. So even though the New York case involves Delaware law questions about whether shareholders can establish the futility of demanding action from the News Corp board, Gardephe said, the Exchange Act claim cannot be resolved by the Delaware court.