Opinion

Alison Frankel

How Facebook IPO class action lawyers changed judge’s mind

Alison Frankel
Dec 20, 2013 20:37 UTC

The first paragraph of Facebook’s motion to dismiss a securities class action that raised allegations about disclosures in its initial public offering was a no-brainer. Last February, U.S. District Judge Robert Sweet of Manhattan tossed four shareholder derivative suits based on the same underlying facts, concluding in a voluminous opinion that Facebook had “repeatedly made express and extensive warnings” about potential weaknesses in its revenue model as users shifted from desktop computers to mobile devices. So in May, when Facebook’s lawyers at Kirkland & Ellis and Willkie Farr & Gallagher moved to dismiss the parallel securities class action, which is also before Judge Sweet, they quoted the judge’s own words right back to him, not just in the first paragraph but seven more times in the dismissal brief.

To no avail, as it happened.

Sweet ruled earlier this week that Facebook IPO investors may proceed with their class action, holding that their consolidated complaint made out a sufficient case that the company failed to disclose material information about the impact of mobile usage on Facebook revenues and that the company materially misrepresented its knowledge of that impact. The judge noted twice – once in a footnote and once deep in the ruling in his discussion of materiality – that his new decision might seem to be at odds with his dismissal of the derivative suits. But after a long quote from the previous ruling that included his prior words about Facebook’s “express and extensive warnings,” Sweet called the language “dicta (that) does not change the analysis here.”

So how does a judge move from his finding that a company has told investors all they need to know in advance of its IPO to a holding that (based on untested shareholder allegations, to be sure) those same disclosures and representations are materially deficient? Sweet gave two explanations: The derivative claims were based on an alleged breach of duty, which has a higher evidentiary standard, and class counsel from Bernstein Litowitz Berger & Grossmann and Labaton Sucharow managed to tweak shareholders’ allegations to distinguish their arguments from those in the derivative suit.

In the class action ruling, Sweet looked separately at Facebook’s alleged disclosure failures and misrepresentations, though they’re really intertwined. At the heart of the shareholder claims is Facebook users’ increasing reliance on mobile devices and the impact of that change on the company’s advertising revenue. As you may recall, Facebook was concerned enough about losing ad revenue as users migrated to mobile devices to revise its projected quarterly revenue down during the IPO roadshow – a decision it communicated to selected analysts but not the investing public. Facebook argued in its motion to dismiss shareholder claims that it provided plenty of warnings about the loss of revenue, and that even the Securities and Exchange Commission does not require companies to disclose financial projections and internal valuations, so it committed no wrongs.

In the derivative litigation, Sweet agreed with Facebook. But in the securities case, shareholder lawyers asked him to look not just at the warnings Facebook did include in its offering documents but also at how those warnings lined up with what the company actually knew. As Sweet explained: “Plaintiffs contend that the company’s registration statements used language that only suggested there was a possibility that Facebook would have difficulty in the mobile market and that Facebook’s mobile user base was growing faster than its desktop user base when, in reality, these two trends were occurring and affecting Facebook’s advertising revenues,” he wrote. “Plaintiffs posit that the loss of revenues caused by the increasing mobile usage was a trend known by Facebook that the company had a duty to disclose.”

Wachtell: ‘Bully’ Icahn tried to shake us down with ‘malicious’ lies

Alison Frankel
Dec 19, 2013 23:38 UTC

In October, when I told you about a malpractice suit against Wachtell, Lipton, Rosen & Katz by Carl Icahn’s CVR Energy, I pointed out the undertone of devilish glee that ran through the Kansas federal court complaint. Icahn is the ultimate activist investor, a perennial foe of corporate board defender and long-term value guru Martin Lipton. Icahn beat Wachtell when he succeeded in acquiring CVR last year, despite CVR’s anti-takeover advice from the firm and Goldman Sachs and Deutsche Bank. His suit accusing Wachtell of malpractice – for supposedly failing to warn CVR’s board about the fees the company would have to pay Goldman and Deutsche Bank if Icahn prevailed – seemed to be icing on Icahn’s already tasty cake.

But now it’s Wachtell’s turn to make accusations.

In a pair of filings in Icahn’s case in Kansas and its own new suit against CVR and Icahn in New York State Supreme Court, the law firm argues that Icahn and CVR are maneuvering for position in a fee dispute with Goldman and Deutsche Bank, after CVR’s Icahn-controlled board refused to pay the banks $18 million apiece. According to Wachtell, Icahn has violated confidentiality orders in the fee litigation, maliciously misrepresented the facts of Wachtell’s work for CVR, and used the threat of the malpractice suit in an unsuccessful attempt to shake down Wachtell for a return of the money the law firm received from CVR. (Oh, and by the way, Wachtell also argues that Icahn improperly sued the firm in Kansas, when the appropriate venue for his complaint is New York, where State Supreme Court Justice Peter Sherwood is already presiding over the Goldman and Deutsche Bank claims that CVR breached their contracts when new board members backed by Icahn refused to pay their fees.)

Wachtell thinks it knows exactly why Icahn is engaged in what it regards as naked chicanery: to bully his anti-takeover nemeses at the law firm. “The Icahn-sponsored CVR litigation amounts to a scare tactic to intimidate those lawyers willing and able to help clients faced with Icahn’s opportunistic attacks,” Wachtell said in its New York case, which seeks a declaratory judgment that Wachtell committed no malpractice and that Icahn and CVR breached confidentiality orders protecting discovery from the banks’ fee litigation. “In a number of high-profile situations, Wachtell Lipton has helped clients fend off Icahn, including assisting Clorox in defeating an Icahn takeover assault in 2012 and assisting Dell when Icahn unsuccessfully sought to break up a premium transaction in order to buy the company for himself in 2013,” the firm asserted. “Icahn resents any resistance and thus has for years attacked Wachtell Lipton in the press for its fierce commitment to its clients. With his new litigation campaign, Icahn takes his bullying campaign to a new level, seeking to intimidate lawyers who help clients resist his demands by making wild allegations and threatening liability.”

How to resolve Indian consul arrest flap: retroactive immunity

Alison Frankel
Dec 18, 2013 22:51 UTC

The Dec. 12 arrest of Devyani Khobragade, a deputy consul general at India’s consulate in Manhattan, has precipitated quite a diplomatic brouhaha. Khobragade, who is accused of underpaying her nanny and falsifying documents to get the nanny into the United States, was handcuffed by diplomatic security staff, turned over to U.S. Marshals and strip-searched before being released on $250,000 bail. As anger escalated in India on Tuesday, with reports that Khobragade was forced to undergo a cavity search, Indian authorities retaliated by removing protective concrete barriers in front of the U.S. embassy in New Delhi. (The Marshals Service has said there was no cavity search.) On Wednesday, Secretary of State John Kerry expressed “regret” and “concern” to his Indian counterpart, and the White House told reporters that it is looking into Khobragade’s arrest “to ensure that all standard procedures were followed and that every opportunity for courtesy was extended.”

It’s a big mess, but there could be a relatively easy way out for both Khobragade and the State Department: retroactive diplomatic immunity. It’s a rare but not unprecedented State Department device to grant foreign officials full immunity for their actions even if they weren’t entitled to such broad protection when they committed the supposed misconduct.

As a consular official, Khobragade has only limited immunity, unlike high-level embassy personnel and their families. Diplomats and consulate officials are actually covered by two different international treaties, the Vienna Convention on Diplomatic Relations of 1961 and the Vienna Convention on Consular Relations of 1963. And as the State Department explained in its guide for law enforcement on diplomatic and consular immunity, consulate personnel are protected just for actions connected to their official duties. If Khobragade had been an Indian diplomat, she could not have been arrested for mistreating household staff, but a deputy consul is not immune from those charges because they’re not related to consulate work.

New ruling puts Fannie, Freddie in line for windfall MBS recovery

Alison Frankel
Dec 17, 2013 20:24 UTC

Has there ever been a more lopsided multibillion-dollar case than the Federal Housing Finance Agency’s fraud litigation against the banks that sold mortgage-backed securities to Fannie Mae and Freddie Mac? I don’t think U.S. District Judge Denise Cote of Manhattan, who is overseeing securities fraud suits against 11 banks that haven’t already settled with the conservator for Fannie and Freddie, has sided with the banks on any major issue, from the timeliness of FHFA’s suits to how deeply the defendants can probe Fannie and Freddie’s knowledge of MBS underwriting standards in the late stages of the housing bubble. But even in that context, Judge Cote’s summary judgment ruling Monday – gutting the banks’ defenses against FHFA’s state-law securities claims – is a doozy.

In effect, Cote’s decision will permit FHFA to recover more from MBS issuers than Fannie Mae and Freddie Mac would have made if their MBS investments had paid as promised. Of course, FHFA and its lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman still have to show that the banks knew or had reason to know that their offering documents misrepresented the mortgage-backed securities they were peddling to Fannie Mae and Freddie Mac. But if FHFA meets that burden, the banks can’t ward off claims under the state securities laws of Virginia and the District of Columbia by blaming Fannie and Freddie’s MBS losses on broad declines in the economy and the housing market.

What’s more, those state securities laws give FHFA the right to rescission – or restitution of the entire purchase price of the MBS Fannie and Freddie bought – plus fees, costs and, most importantly, interest. The Virginia statute mandates that securities fraudsters chip up 6 percent interest – more than the scheduled interest rate in many of the MBS trusts in which Fannie and Freddie invested. The banks, in other words, are now exposed to liability far beyond the actual losses Fannie Mae and Freddie Mac suffered – and even beyond what FHFA’s wards would have earned if the MBS trusts had performed exactly as the banks said they would at the time of sale. That extra interest would be a true windfall for FHFA.

Why shield corporations from disclosing political spending?

Alison Frankel
Dec 16, 2013 21:42 UTC

I’m going to confess right here that I don’t possess the requisite statistical skills to hazard an opinion on whether shareholders benefit when their corporation engages in lobbying and campaign expenditures. If you have a more powerful appetite for numbers than I do, John Coates of Harvard Law School offers a bibliography of academic studies that conclude corporate political spending is bad for shareholders at the Harvard Forum on Corporate Governance (including his own influential 2012 paper for the Journal of Empirical Legal Studies). Want a different view? A pair of economics consultants from Sonecon disputed Coates and those who think likewise in a 2012 paper for the Manhattan Institute that found corporate political spending has “a generally positive effect” on a company’s value, in terms of market returns. You can pick whichever analysis suits you because I’m not going to argue the merits of either. I do believe, however, that regardless of the benefits of lobbying and campaign contributions, shareholders have a right to know when and how their money is being spent on politics.

Coates does too, which prompted his post Friday at the Harvard corporate governance forum. Coates was reacting to the Securities and Exchange Commission’s decision in November to table consideration of rules that would require disclosure of corporate political spending; the Harvard prof called the SEC’s move “a policy and political mistake” that permits large corporations to lobby secretly against Dodd-Frank regulations, using other people’s money. As you probably know, corporate disclosure of political spending has been kicking around in shareholder proposals for about a decade, but the SEC was pushed into the debate in 2011, when a group of 10 law professors with varying views on the impact of such spending joined together to petition the SEC to develop disclosure rules.

The professors, led by co-chairs Lucian Bebchuk of Harvard and Robert Jackson of Columbia, argued that the U.S. Supreme Court assumed when it expanded the First Amendment rights of corporations to engage in political speech in Citizens United v. Federal Election Commission that shareholders could monitor corporate expenditures to assure themselves that such spending was in their interests. But the Supreme Court’s assumption doesn’t work without mandatory disclosures, the professors said. Thanks to nudging from public interest groups, about 600,000 shareholders asked the SEC to take up the issue, which made it as far as the agency’s rulemaking agenda in November 2012 before falling off the SEC’s priority list for the upcoming year. SEC chair Mary Jo White told reporters earlier this month not to infer that the disclosure proposal is dead and buried forever. But SEC rulemaking is shelved for at least a year.

Lawyers can’t force unwitting clients into arbitration: 9th Circuit

Alison Frankel
Dec 13, 2013 21:59 UTC

In 2011, the U.S. Supreme Court schooled the 9th Circuit Court of Appeals on the primacy of arbitration clauses in AT&T Mobility v. Concepcion. The high court’s landmark ruling reversed a 9th Circuit holding that AT&T’s prohibition of classwide arbitration was unconscionable under California law, finding instead that the Federal Arbitration Act preempts state laws restricting the use of arbitration. In combination with the Supreme Court’s ruling last term in American Express v. Italian Colors, Concepcion pretty much wiped out any hope that consumers and employees can avoid mandatory arbitration if they’ve signed contracts with arbitration provisions.

But on Thursday a three-judge 9th Circuit panel found an exception. In an opinion by Judge William Fletcher (writing for a panel that also included 9th Circuit Judge Johnnie Rawlinson and 10th Circuit Senior Judge David Ebel, sitting by designation) the appeals court held that Concepcion does not preclude law firm clients who have signed retainer agreements with arbitration provisions from suing in court if the agreements violate state-law rules. The Supreme Court’s decision, according to the 9th Circuit, doesn’t mandate enforcement of an arbitration provision that is “procedurally unconscionable” under state contract law. (Gracias to the San Francisco legal newspaper The Recorder, which first reported on the decision.)

The 9th Circuit is notably judicious about the apparently now-defunct Illinois law firm at the heart of the dispute, Macey, Aleman, Hyslip & Searns. Through the name Legal Helpers, the firm was engaged in the debt-adjustment business, which seems to mean, based on the 9th Circuit opinion, that it teamed up with companies pitching debt relief services to struggling consumers in order to permit the companies to evade state restrictions on the fees they’re permitted to charge. (Law firms are sometimes allowed to charge more for their debt relief advice than non-legal outfits.) The 9th Circuit quoted a 2011 Illinois cease and desist order against Legal Helpers: “Despite the name ‘Legal Helpers,’ the company does not provide legal representation to consumers or otherwise act in an attorney capacity.”

Class actions deliver more money to more people than arbitration: CFPB

Alison Frankel
Dec 12, 2013 21:19 UTC

What a difference a day – and a data source – makes.

Yesterday I told you about a new study of class action outcomes that Mayer Brown conducted at the urging of clients like the U.S. Chamber of Commerce. The law firm looked at 148 consumer and employment class actions filed in federal court in 2009, and found evidence that a grand total of one case – a $1.2 billion settlement of ERISA claims rooted in Bernard Madoff’s Ponzi scheme – delivered meaningful recoveries to class members. Of the five other cases in which claims data was publicly disclosed, Mayer Brown found distressingly minimal participation in settlement funds by class members: 0.000006 percent, 0.33 percent, 1.5 percent, 9.66 percent and 12 percent.

Mayer Brown released its study in anticipation of a report by the Consumer Financial Protection Bureau, which Congress assigned in the Dodd-Frank Act to analyze the impact of mandatory arbitration clauses in consumer contracts for financial products and services like credit cards and checking accounts. Sure enough, CFPB disclosed preliminary findings from its year-long study on Thursday – and they indicate that the U.S. Chamber was right to worry. According to CFPB, exceedingly few consumers actually bring arbitration claims when they have a dispute with their credit card company, bank or payday lender. Tens of millions of consumers are subject to mandatory arbitration for disputes involving financial products and services, CFPB estimated, yet only 1,241 cases involving these products were filed with the American Arbitration Association between 2010 and 2012. Of those, according to CFPB chairman Richard Cordray, about 900 were filed by consumers. (The rest were initiated by banks and lenders.) CFPB offered some caveats, including the lack of data from JAMS Inc, which also hears consumer arbitrations, albeit far fewer than AAA. But the bureau isn’t exactly going out on a limb when it concludes that the evidence shows arbitration doesn’t provide any recovery to the overwhelming majority of consumers of financial products, especially those with small dollar claims. “Plainly, the number of arbitrations was low relative to the total populations using these products,” the report said, in a notable understatement.

So, a vanishingly small percentage of consumers who are bound by mandatory arbitration provisions win recovery from their banks and credit card companies, since hardly any of them arbitrate their claims. Would consumers obtain better results via classwide proceedings (which are explicitly barred in more than 90 percent of the arbitration agreements reviewed by CFPB)? If we were to rely exclusively on Mayer Brown’s report, we’d conclude that they would not. Mayer Brown found that consumer class actions filed in 2009 were either so flimsy that they were dismissed or that they resulted in settlements offering recoveries too small for most class members to even bother claiming.

Class action mystery: Where does the money go post-settlement?

Alison Frankel
Dec 11, 2013 22:00 UTC

I would have been shocked if Mayer Brown‘s new study of 148 federal-court class actions filed in 2009 concluded that the cases are of any real benefit to class members. Mayer Brown Supreme Court litigator Andrew Pincus, remember, is not only frequently counsel to the U.S. Chamber of Commerce, but was also the winner of the U.S. Supreme Court’s landmark 2011 endorsement of mandatory arbitration in AT&T Mobility v. Concepcion. Pincus told me that the firm decided to collect information on the outcome of consumer and employment class actions filed in 2009 at the behest of clients worried about the Consumer Financial Protection Bureau’s study of arbitration agreements. The Chamber and other clients, he said, have been frustrated at CFPB’s refusal to disclose exactly what it’s looking at. So, as the Chamber explained in a Dec. 11 letter to CFPB, Mayer Brown and its clients seized the initiative and compiled empirical evidence to show the agency what will happen if it precludes arbitration and forces consumers to litigate through class actions. “If you’re going to take away arbitration,” Pincus said, “you have to understand the alternative.”

According to the study, the alternative to arbitration is a system that is exceedingly bad at delivering recovery to class members, even as it amply rewards lawyers who bring claims on their behalf. (Like I said, no big surprise there.) Mayer Brown obtained its initial data set of 2009 class actions from case filings mentioned in the BNA Class Action Litigation Reporter and the Mealey’s Litigation Class Action Reporter. The firm screened out securities class actions and class actions asserting claims under the Fair Labor Standards Act, since both of those kinds of cases are litigated under their own unique rules. After accounting for consolidations, the study ended up analyzing outcomes in 148 consumer and employment class actions filed in or removed to federal court.

Only 21 cases (14 percent of the sample) remained unresolved when the study closed on Sept. 1. Of the 127 class actions that reached a resolution, Mayer Brown researchers found, 45 (or 35 percent) were dismissed voluntarily. (One-third of those voluntary dismissals included individual settlements for the name plaintiffs, according to the firm.) Another 41 cases (31 percent) were dismissed by the courts on motions to dismiss or summary judgment motions. Mayer Brown adds up those percentages and trumpets the conclusion that two-thirds of the resolved cases resulted in no relief whatsoever for class members.

FHLB demands DOJ draft complaint: ‘What is JPMorgan trying to hide?’

Alison Frankel
Dec 10, 2013 19:23 UTC

If JPMorgan Chase and the Justice Department thought that all the zeroes at the end of the bank’s multibillion-dollar settlement for mortgage securitization failures would foreclose questions about the bank’s actual wrongdoing, clearly they thought wrong. Days after the much-leaked-about $13 billion deal was finally announced, New York Times columnist Gretchen Morgenson looked at the admissions accompanying the settlement and wondered why it had taken the federal government so long to hold the bank accountable for conduct that’s been in the public domain for years. Morgenson’s column echoed posts at Bloomberg and Slate that also scoffed at JPMorgan “admissions.” On Monday, even a commissioner of the Securities and Exchange Commission piled on. Dan Gallagher, a Republican, criticized the settlement as a penalty on the bank’s current shareholders that’s not justified by JPMorgan’s admitted conduct. “It is not rational,” Gallagher told an audience in Frankfurt at an event organized by the American Chamber of Commerce in Germany.

At the heart of all of this criticism is a nagging suspicion that we don’t really know what the Justice Department had – or didn’t have – on JPMorgan, that the $13 billion settlement was not pegged to the bank’s actual misconduct but to the public relations benefits to both sides from a supposedly record-setting deal. Attorney General Eric Holder has called the size of the settlement a proportionate response to JPMorgan’s wrongdoing, but it’s tough to take that assertion on faith when the statement of facts that accompanied the settlement revealed so little about the government’s evidence.

The Federal Home Loan Bank of Pittsburgh believes that the government knows a lot more about JPMorgan’s securitization practices than it disclosed in the settlement agreement – and the FHLB’s lawyers at Robins, Kaplan, Miller & Ciresi are pretty sure those additional details are contained in a civil complaint against the bank that was drafted by the U.S. Attorney in Sacramento, California. At a closed-door hearing last Friday, Judge Stanton Wettick of the Allegheny County Court of Common Pleas heard Robins Kaplan argue that release of this “rich source of detailed facts about JPMorgan’s conduct” would serve the public’s interest in understanding the basis of the $13 billion settlement. JPMorgan’s lawyers at Sidley Austin, meanwhile, contend that the Justice Department never intended the complaint to be public but used it only as leverage in negotiations with the bank. Turning the document over to FHLB and the public, the bank asserts, would be contrary to Pennsylvania’s interest in promoting settlements, would violate attorney-client privilege and would accomplish nothing because Justice’s allegations are not related to claims by the FHLB. Judge Wettick did not issue a public ruling from the bench Friday and lawyers for JPMorgan and FHLB didn’t respond to my emails requesting comment. But if we’re ever going to find out more about the government’s dirt on JPMorgan, there’s a good chance it will be in the FHLB litigation.

The Supreme Court, moldy washers and the future of consumer class actions

Alison Frankel
Dec 6, 2013 23:11 UTC

Are Sears and Whirlpool trying to hoodwink the justices of the U.S. Supreme Court about cases that could devastate consumer class action litigation?

That’s what purchasers of front-loading Whirlpool washing machines with an (allegedly) unfortunate propensity to develop a musty odor assert in a new brief opposing petitions for certiorari that were filed by Sears and Whirlpool in October. Members of separate class actions certified by the 6th and 7th Circuit Courts of Appeal argue in a brief filed Friday that Sears, Whirlpool and their 12 pro-business friends urging Supreme Court review have engaged in a “fundamental mischaracterization” of the cases. The defendants “totemically” represent the moldy washer classes to be an untenable mishmash of consumers, some of whom own machines supposedly developed the moldy smell and others who have no problems with their machines and have – according to the defendants – suffered no injury. The cases are no such thing, according to the classes’ Supreme Court counsel, New York University professor Samuel Issacharoff.

Instead, the new brief argues, the moldy washer class actions are “hornbook” warranty suits that allege the same cause of action for every member of the classes. When defendants and their amici harp on uninjured claimants, the brief contends, they’re attacking a strawman: Everyone in the certified classes claims the same injury. “These cases allege only a single, uniform defect causing a uniform harm, in which a seller delivered a substandard product that does not perform as warranted and is not fit for its ordinary purpose, and thereby does not satisfy the terms of the bargain,” the brief said. “That is the only liability theory presented, and it applies to all class members.”

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