Alison Frankel

Can this brief save securities fraud class actions?

Alison Frankel
Jan 30, 2014 19:56 UTC

There is an awful lot of weight on David Boies‘s shoulders in the U.S. Supreme Court case known as Halliburton v. Erica P.John Fund. The renowned litigator and his partners at Boies, Schiller & Flexner represent the EPJ Fund, but in a larger sense, they represent everyone who invests in shares listed on U.S. exchanges. If Boies and his firm can’t persuade the justices of the Supreme Court to leave intact the court’s 1988 precedent in Basic v. Levinson, securities fraud class actions will be decimated. Small investors without the resources to bring their own fraud claims will be stranded – as will all of the lawyers, economists, academics and consultants who make a living in the multibillion-dollar securities class action industry.

So how does Boies Schiller intend to convince the Supreme Court not to meddle with private securities litigation? Based on the firm’s newly filed merits brief, by appealing to the court’s respect for its own precedent and deference to Congress and regulators.

As you would expect, Boies Schiller’s 85-page filing offers a long list of arguments to counter Halliburton and the many pro-business organizations urging the Supreme Court to overturn Basic’s holding that investors trading in an efficient market can be presumed to have relied on alleged corporate misstatements. (That presumption of reliance, as you know, is what permits investors to band together as a class to pursue securities fraud claims; without the presumption, individual investors would be forced to prove that they relied on misinformation when they made trading decisions.) Some of the new brief’s points are technical, such as its discussion of whether defendants should be permitted to rebut the presumption of reliance by offering evidence that the supposed misrepresentations had no impact on share price. Some are political, emphasizing defendants’ success in fending off unwarranted fraud class actions. Boies Schiller also dedicates several pages to defending what the brief calls “the simple economic truth” at the heart of Basic v. Levinson. Regardless of debate among economists about the mechanisms of market efficiency, the brief argues, there’s no controversy around “the proposition that developed markets generally respond to material information.”

The overarching theme of the brief, however, is that the presumption of investor reliance on market prices is rooted in the history of U.S. securities laws. Moreover, according to Boies Schiller, that presumption has become inextricably entwined with enforcement of those laws, as both Congress and the Executive Branch have acknowledged time and again in the 25 years since Basic v. Levinson came down. If the Supreme Court overturns Basic, the brief says, it will not only be reversing its own statutory precedent – an occurrence so rare, according to Boies Schiller, that it has been more than 50 years since the justice last repudiated a previous court’s statutory interpretation, in James v. United States – but will also implicitly override Congress, which has had several opportunities to undo Basic v. Levinson and has repeatedly declined to do so.

Halliburton and its supporters anticipated precisely these arguments in their merits briefs earlier this month. Those filings offered the Supreme Court a plethora of explanations for why the principle of stare decisis – or deference to the court’s precedent – should not apply to Basic, which Halliburton and its supporters portray as a fundamentally misguided decision that rested on a flawed economic theory, codified a right that doesn’t exist in the securities fraud statutes and was endorsed by only four justices. (Those four constituted a majority because only six justices heard Basic v. Levinson). Nor does Team Halliburton agree that Congress has implicitly approved Basic by failing to pass legislation overturning it. One of the briefs before the Supreme Court is from former Republican lawmakers who argue that political expedience, rather than philosophical agreement with Basic, explains Congress’s failure to overturn the presumption of classwide reliance.

Will old M&A class settlements tank private equity collusion case?

Alison Frankel
Jan 29, 2014 20:08 UTC

In his latest update on class actions filed in the wake of deal announcements, Dealbook’s Deal Professor Steven Davidoff (whose day job is teaching law at Ohio State) found that in 2013, shareholder suits followed almost all – 97.5 percent – deals of more $100 million. That’s not quite as inevitable as night following day but it’s getting there, especially when you consider that the rate of post-M&A class action filings is up from 91.7 percent in 2012 and 39.3 percent in 2005. Companies grumble all the time that these suits are nothing more than a “deal tax,” a sort of legal extortion racket by plaintiffs lawyers whose true motive is not enhancing shareholder value but skimming millions in fees for holding up transactions with silly claims.

Regardless of the merits of that argument, I’m sure that when shareholders in seven companies acquired by private equity funds in the early 2000s settled M&A class actions, they never imagined that those settlements could come back and complicate a completely different case. Nor could the settling defendants have imagined that their deal-tax settlements could very well shield them from facing an antitrust collusion class action and its attendant treble damages.

That would be the unintended consequence of M&A shareholder settlements if U.S. District Judge William Young of Boston agrees with Bain Capital, Blackstone, KKR, Goldman Sachs and two other private equity firms that former shareholders in eight companies that changed hands in leveraged buyout deals cannot be certified as a class because of broad releases by shareholders in seven of the deals. In their recently filed brief opposing class certification, the private equity defendants assert that the previous judge in the case, now retired Edward Harrigan, already ruled that shareholders who sold stock in the various deals cannot introduce evidence from those transactions against defendants they released from liability in M&A settlements. As a result of that ruling, the private equity funds argue, the plaintiffs’ evidence of the funds’ alleged overarching collusion to suppress prices is a patchwork, with different plaintiffs permitted to make claims against different defendants in different deals, all depending on which plaintiff released which defendants in which LBO.

The novel legal issues in Tarantino’s copyright suit vs Gawker

Alison Frankel
Jan 28, 2014 20:40 UTC

I don’t usually cover the same cases as TMZ and Entertainment Weekly, but Quentin Tarantino’s copyright complaint against Gawker, filed Monday in federal court in Los Angeles, could well turn out to be one of those extremely rare celebrity suits that end up being more important for the legal principles they establish than for the name in the caption. Believe it or not, the prickly filmmaker’s suit against the snarky website raises apparently unprecedented questions about whether a news organization contributes to copyright infringement when it knowingly links, without elaboration, to copyrighted material.

In case you’ve somehow managed to avoid the case so far, here are the mostly undisputed facts. Tarantino is the author of a screenplay for a Western titled “The Hateful Eight.” Earlier this month, when Tarantino found out that a draft of the script had leaked, albeit narrowly, he abruptly stopped working on the film. The filmmaker told the website Deadline Hollywood that he was depressed by the unknown leaker’s betrayal, although he also said, according to Deadline, “I am not talking out of both sides of my mouth, because I do like the fact that everyone eventually posts it, gets it and reviews it on the net. Frankly, I wouldn’t want it any other way. I like the fact that people like my shit, and that they go out of their way to find it and read it.”

Gawker Media’s Defamer site reported the flap on Jan. 22, in a post that ended with a casual invitation: “If anyone would like to name names or leak the script to us, please do so at tips@defamer.com.” Someone took Defamer up on the offer and tipped the site that the script was posted at Anonfiles.com. On Jan. 23, Defamer published a post entitled, “Here Is the Leaked Quentin Tarantino Hateful Eight Script,” which provided a link to the purported screenplay at Anonfiles. (The post was later amended to add a second link at Scribd.com; both links are now disabled.) Defamer also quoted a summary of the script from Badass Digest, which had posted the first two pages of the screenplay. The Defamer post concluded, “For better or worse, the document is 146 pages of pure Tarantino. Enjoy!”

In Swatch copyright opinion, 2nd Circuit boosts financial news cos.

Alison Frankel
Jan 28, 2014 16:11 UTC

Can corporations use copyright laws to block news organizations from publishing their own information about themselves? Not according to a ruling Monday from the 2nd Circuit Court of Appeals in an intriguing case called Swatch v. Bloomberg. The appeals court said that Bloomberg was entitled to publish an audiotape of an invitation-only analyst call with Swatch officials, even though Swatch held a U.S. copyright on the recording and told analysts who participated in the call that the audio could not be published or broadcast. The 2nd Circuit’s extremely broad view of the media’s fair use of copyrighted corporate information – which gives primacy to the investing public’s interest in financial reports and data – is good news indeed for financial news reporters and their employers. In combination with the appeals court’s 2011 holding in Barclays v. Theflyonthewall, the Swatch opinion makes it clear that when a corporation’s statements constitute news, the corporation doesn’t have the right to control how that news gets out.

Under Monday’s decision, that’s true even when a news organization uses the copyrighted material for commercial purposes – and even when the information isn’t transformed in any way before publication. The investing public’s right to know, according to the 2nd Circuit, can’t be trumped by corporate copyrights. “Whether one describes Bloomberg’s activities as ‘news reporting,’ ‘data delivery,’ or any other turn of phrase, there can be no doubt that Bloomberg’s purpose in obtaining and disseminating the recording at issue was to make important financial information about Swatch Group available to American investors and analysts,” wrote Chief Judge Robert Katzmann for a panel that also included Judges Amalya Kearse and Richard Wesley. “Bloomberg’s overriding purpose here was not to ‘scoop’ Swatch…but rather simply to deliver newsworthy financial information to American investors and analysts. That kind of activity, whose protection lies at the core of the First Amendment, would be crippled if the news media and similar organizations were limited to authorized sources of information.”

Pretty resounding language, and that’s despite good arguments by Swatch and its lawyers at Collen IP that Bloomberg’s publication of the audiotape didn’t amount to fair use. I’ve written before about the unusual facts of the case, but here’s a brief recap. Foreign-based companies like Swatch aren’t subject to the same disclosure requirements as U.S. corporations, so when Swatch released its 2010 earnings in February 2011, it organized an invitation-only call with analysts who track the stock. Reporters were not invited to participate, but very shortly after the conclusion of the 132-minute call, Bloomberg posted an audiotape and transcript to subscribers of its financial research service. When Swatch found out, it demanded that Bloomberg take down the materials; when the news organization refused, Swatch obtained a copyright on its executives’ statements during the earnings call and sued Bloomberg for infringement.

Dinesh D’Souza faces ‘surprisingly frequent’ campaign finance charges

Alison Frankel
Jan 24, 2014 23:07 UTC

After news broke Thursday that federal prosecutors had charged conservative commentator, author, film-maker and professional Obama-basher Dinesh D’Souza with violating campaign finance laws, Walter Olson at the Overlawyered blog posted on the relatively mild civil sanction meted out to a “big-league trial lawyer” who’d done pretty much the same thing D’Souza is accused of. D’Souza has been indicted for allegedly paying $20,000 to reimburse straw donors to the campaign of Republican Senate candidate Wendy Long, who lost a 2012 contest against incumbent Kirsten Gillibrand. Arkansas trial lawyer Tab Turner, as Overlawyered recounted in 2006, reimbursed donors of $8,000 to John Edwards’ 2004 presidential campaign and just had to cough up a $9,500 civil fine. By highlighting the contrast in his post Thursday, Olson seemed to be suggesting that D’Souza has been selectively targeted for prosecution because he’s so critical of the Obama administration.

Former acting U.S. attorney general George Terwilliger of Morgan, Lewis & Bockius raised the same suggestion in an interview Friday. Terwilliger, who served in the administration of two Republican presidents and later defended noted Los Angeles lawyer Pierce O’Donnell against campaign finance charges similar to those leveled against D’Souza, told me there are “legitimate questions that could be asked about the political motivation for bringing the case.” Want more conspiracy theorism? Dominic Gentile of Gordon Silver, who represented Nevada campaign finance defendant Harvey Whittemore, conducted exhaustive research on so-called conduit payments of the sort D’Souza is accused of making. In Whittemore’s sentencing memo, he documented civil and criminal penalties in “straw donor” cases. “Twenty thousand dollars?” Gentile told me. “I’ve never heard of a $20,000 criminal case” for campaign finance violations.” And at D’Souza’s arraignment Friday in Manhattan federal court, his own lawyer, Benjamin Brafman, told U.S. District Judge Richard Berman that whatever D’Souza did, his conduct wasn’t criminal.

There’s certainly enough prosecutorial discretion in the enforcement of campaign finance laws to provoke suspicion about the D’Souza case, if you’re inclined to be suspicious of the Justice Department. As the Whittemore memo chronicles, most campaign finance cases are resolved civilly, through Federal Election Commission enforcement actions – and there’s sometimes no explanation for why one case ends up before the FEC and another with similar facts is prosecuted criminally. “It’s a purely political decision,” Gentile told me.

MBS investors bring in Paul Clement to appeal N.Y. timeliness opinion

Alison Frankel
Jan 23, 2014 20:34 UTC

There are probably fewer than 100 lawyers in America who argue regularly before the U.S. Supreme Court and the highest state courts of appeal. And of those, a scant handful argue against corporate interests. That is particularly true when banks are involved: Lawyers who practice at big firms that regularly represent (or hope to represent) financial institutions avoid cases that endanger those relationships, even when one bank is suing another. But the renowned former U.S. Solicitor General Paul Clement left behind those concerns in 2011 when he left King & Spalding and joined Bancroft, a tiny appellate startup. Last year, Clement took up the Supreme Court case of small merchants suing American Express for antitrust violations. (He lost.) Now he’s turned up to oppose banks in one of the biggest-dollar appeals in the courts. On Tuesday, as first reported by the New York Commercial Litigation Insider, Clement appeared as counsel of record in HSBC’s motion, as a mortgage-backed securities trustee, for the New York Appellate Division, First Department to reconsider its Dec. 19 ruling on the timeliness of MBS breach-of-contract claims or else let the case proceed to the state’s highest court.

The appellate opinion in Ace Securities v. DB Structured Products, as you probably recall, shut the door on N.Y. state-court mortgage-repurchase suits filed more than six years after the MBS sponsor closed on its agreement to acquire the underlying loans for securitization. That ruling, as Clement and HSBC co-counsel Kasowitz Benson Torres & Friedman explained in the reconsideration brief filed Tuesday, has the potential to wipe out hundreds of cases already brought by MBS trustees and certificate holders, implicating “hundreds of billions of dollars in losses,” according to the brief. Clement and Kasowitz argue that the Appellate Division’s skimpy three-page opinion on the timeliness of put-back suits “fails to grapple with…conflicting precedents in a meaningful way,” so HSBC should either have a chance to reargue before the intermediate appeals court or to take its case to New York’s Court of Appeals. (Quinn Emanuel Urquhart & Sullivan‘s name isn’t on the new filing, but I’ve been told the firm is involved in the appeal on behalf of the certificate holder that originally directed HSBC to sue over supposedly deficient underlying loans in the Deutsche Bank MBS offering.)

The brief also points out that courts around the country have reached conflicting conclusions about when, under New York law, the six-year statute of limitations begins to run on MBS mortgage repurchase claims. Even federal judges in Manhattan, ruling in the wake of the Appellate Division’s opinion last month, have split on the question (as I’ve reported). That muddle must be resolved, according to the new brief. “Analogous lawsuits ostensibly governed by the same New York laws now will be permitted to proceed in some courts but not others,” it says. “What is more, DB and other RMBS sponsors will be able to evade all liability for their actions under this court’s decision, even though other RMBS investors have already collected massive settlements in cases that include failure-to-repurchase claims nearly identical to those raised here. That untenable situation readily warrants the reconsideration of this court or, in the alternative, the immediate attention of the Court of Appeals.”

Judges build on Supreme Court’s Windsor ruling to extend gay rights

Alison Frankel
Jan 22, 2014 21:49 UTC

Justice Antonin Scalia of the U.S. Supreme Court got at least one thing right in his controversial dissent last term in U.S. v. Windsor, the case that struck down federal prohibitions on same-sex marriage as an unconstitutional intrusion on the equal rights of gays and lesbians. In a 5-to-4 opinion by Justice Anthony Kennedy, the majority said its ruling addressed only the conflict between the federal Defense of Marriage Act and the laws of states that have approved same-sex marriage, not the right of a state to bar same-sex marriages. Chief Justice John Roberts’s dissent emphasized the limited scope of the ruling. But Justice Scalia predicted otherwise.

“By formally declaring anyone opposed to same-sex marriage an enemy of human decency, the majority arms well every challenger to a state law restricting marriage to its traditional definition,” he wrote, in one of his dissent’s many hectoring passages. “Henceforth those challengers will lead with this court’s declaration that there is ‘no legitimate purpose’ served by such a law, and will claim that the traditional definition has ‘the purpose and effect to disparage and to injure’ the ‘personhood and dignity’ of same-sex couples, The majority’s limiting assurance will be meaningless in the face of language like that, as the majority well knows.”

Unlike Scalia, I wouldn’t presume to discern any malicious intention in Justice Kennedy’s stirring language on the Fifth Amendment rights of same-sex spouses and their families. But Scalia was undeniably correct that Windsor would echo loudly in lower courts. In the 6-1/2 months since the ruling came down, judges in Ohio, New Mexico, Utah and Oklahoma have struck down laws barring same-sex marriage or restricting the rights of gay and lesbian married couples, citing Windsor’s equal rights reasoning (among other precedent) in every opinion. Though the Utah and Oklahoma rulings have been stayed for appeal and the Ohio injunction is also before a federal appellate court, these are hugely significant decisions.

With recovery imperiled, LightSquared creditors turn on Dish’s Ergen

Alison Frankel
Jan 21, 2014 21:18 UTC

You have to say this for Dish Network founder and corporate governance poster boy Charles Ergen: He has made corporate swashbuckling fun again. For reporters, at least. Less so for his onetime allies on the secured creditors committee of the bankrupt wireless satellite company LightSquared, whose prospects for a full recovery dimmed earlier this month when Dish officially pulled its $2.2 billion bid for LightSquared’s spectrum licenses. The creditors committee had previously supported Dish and Ergen when they were fending off a competing plan for LightSquared by Philip Falcone’s Harbinger Capital; after all, Ergen is one of their own, as the largest holder of LightSquared debt. But now they’ve had quite enough of the Dish founder. On Monday, the creditors’ lawyers at White & Case filed a brief asking U.S. Bankruptcy Judge Shelley Chapman of Manhattan to force Dish to follow through with its LightSquared bid – and to reserve their right to sue Dish for damages.

This latest shakeup in the LightSquared Chapter 11 aligns the senior creditors with the beleaguered company, which is in the midst of litigation to disallow Ergen’s billion-dollar claim against the LightSquared estate because he allegedly acquired the company’s debt illegally. Judge Chapman spent the last week hearing testimony about Ergen’s debt purchases from Ergen, Falcone and various henchmen on both sides. (A highlight: Ergen testified that Dish’s treasurer advised him on his LightSquared acquisitions not because the debt purchases by an Ergen personal investment vehicle would eventually help Dish get control of LightSquared assets but because the treasurer is Ergen’s protégé and welcomes any opportunity to learn from the boss.) On Wednesday, the secured creditors will get their turn to bash Ergen and Dish, at a hearing to determine whether Dish may withdraw its stalking horse bid for LightSquared spectrum assets. If Chapman rules that Dish is permitted to pull out, LightSquared will have no live bids for its assets.

The secured creditors – who would be paid in full under the $2.2 billion deal Dish had offered but has now withdrawn – argue in their new brief that when Dish induced the committee to support its request for bid protection, Dish agreed to make its offer irrevocable until Feb. 15. Debtholders assert that the Feb. 15 cutoff was codified in the bid procedures order Judge Chapman entered last Oct. 1, establishing Dish as the stalking horse bidder in the auction for LightSquared assets and providing a $51.8 million breakup fee if Dish were outbid. The committee’s brief accuses Dish of reneging on its promise in an attempt to sweeten deal terms, now that competing LightSquared bids have fallen through and the company is “essentially out of cash and teetering on the verge of administrative insolvency.”

Class action firm maligned by 7th Circuit wants its reputation back

Alison Frankel
Jan 17, 2014 23:02 UTC

There’s essentially no way to undo the reputational harm of a judicial opinion. If a federal judge – especially an appellate judge – has something bad to say about you in a published opinion, your permanent record (as we used to say in grade school) is forever besmirched even if it later turns out that the opinion was based on misinformation. You can’t sue a judge for libel for what’s said in an opinion, and judicial rulings live on forever.

You can’t even expect to win a suit against news organizations that reported accurately on the contents of the opinion, which means that you just have to grit your teeth and bear it when the Internet continues to echo your shame, however undeservedly.

It’s pretty small consolation, it seems to me, to sue those who have supposedly reported erroneously on your bench-slapping. You’re forced to endure a rehashing of the facts that led to the judicial opinion, as well as the opinion itself, which is a heavy counterbalance to the benefit of proving one detractor wrong. Nevertheless, the Chicago class action firm of Bock & Hatch, which was the subject of a brutal 2011 opinion from the 7th Circuit Court of Appeals, is reportedly willing to accept that downside. According to Law360, Bock & Hatch has filed a libel suit against McGuireWoods, whose Class Action Countermeasures Blog posted an item on the 7th Circuit’s decision back in November 2011.

N.Y. judge: Defendant can’t settle unless class can be certified

Alison Frankel
Jan 16, 2014 20:02 UTC

I’ve been writing a lot recently about the struggles of the 5th Circuit Court of Appeals to find consensus on the constitutionality of a settlement class that sweeps in uninjured claimants. Two different 5th Circuit panels have reached different conclusions on that issue in a pair of overlapping appeals in BP’s epic class action settlement of claims stemming from the 2010 Deepwater Horizon oil spill: Judge Edith Clement, in an opinion last October, said that trial judges may not approve certification of a class that includes members who lack constitutional standing; but last week, two judges on another 5th Circuit panel upheld certification of the BP class, with Judge Eugene Davis citing decisions by other federal circuits that acknowledged the reality of uninjured class members swept into global settlements. The 5th Circuit’s divide highlights the complexity of the underlying question, which is as important for defendants as it is for plaintiffs: Can a defendant buy global peace through a class action settlement when the class might not otherwise be certifiable?

A federal district judge in Manhattan who has been notably skeptical of class actions provided her answer to that question Wednesday: No. U.S. District Judge Katherine Forrest refused to approve a $1.7 million securities class action settlement between the audit firm Schwartz Levitsky Feldman and investors in China Automotive Systems, one of the many U.S.-listed Chinese companies accused of swindling investors through accounting fraud. Forrest had previously rejected a motion by class counsel at Pomerantz Grossman Hufford Dahlstrom & Gross to certify the investor class, finding both that the name plaintiffs weren’t typical investors because they bought and sold shares in the class period, and that shareholders hadn’t satisfied the Basic v. Levinson efficient-market test for classwide reliance. In Wednesday’s ruling, the judge said that shareholders hadn’t given her any reason to change her mind about class certification so her duty to absent investors with legitimate claims prevents her approval of the settlement.

“At no point during this litigation, including most significantly after the court’s ruling on class certification for litigation purposes, did plaintiffs sufficiently support predominance by showing that the question of reliance can be demonstrated on a representative (e.g. class) basis,” Forrest said. “If this court were to certify the proposed settlement class in light of the evidentiary findings it previously made and without anything more from plaintiffs, it would effectively allow plaintiffs who potentially did not rely on materials setting forth the alleged misstatements to collect from the settlement fund…. Doing so would prevent those plaintiffs with real claims from obtaining the maximum amount to which they may be entitled.”