Alison Frankel

Kneecapping the banks in remaining FHFA MBS suits

Alison Frankel
Nov 13, 2013 21:07 UTC

I suspect that the American public doesn’t have much sympathy to spare for the big-time lawyers whose firms have reaped untold millions of dollars defending Too Big to Fail institutions against accusations that they caused the Great Recession. But those lawyers sure cast themselves and their clients in a pitiable light at a securities conference at the New York Bar Association on Tuesday. Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison, best known for representing Citigroup, said he was “relentlessly pessimistic” about the near-term litigation prospects for banks, given the de facto impossibility of standing up to threats from government enforcers. Scott Musoff of Skadden, Arps, Slate, Meagher & Flom, who defended UBS (and is still defending Societe Generale) against securities fraud claims by the Federal Housing Finance Agency, noted that FHFA’s wards, Fannie Mae and Freddie Mac, were quasi-private concerns when they took on risk from securitized subprime mortgages, yet claims by FHFA are treated as though they’re asserted by a government regulator. And Julie North of Cravath, Swaine & Moore questioned whether it’s fair to preclude banks from attributing investor losses in mortgage-backed securities to the broad economic downturn and not to bank misrepresentations.

If you’re not a bank lawyer, you’re probably more inclined to agree with the underlying sentiment of the keynote address, delivered by U.S. District Judge Jed Rakoff, who dismantled the Justice Department’s “excuses” (his word) for failing to prosecute top corporate officials for causing the economic crisis. Though Rakoff swaddled the speech in caveats, it seemed clear that in his view bank officials merited scrutiny they apparently didn’t receive from prosecutors. So at least when it comes to accountability for criminal fraud, individual bank executives (if not their institutions) should perhaps consider themselves lucky rather than beset.

Nonetheless, North’s discussion of loss causation – shorthand for the banks’ argument that the economic downturn is as least partly to blame for investors’ MBS losses – as well as Musoff’s point about FHFA’s potentially undeserved recovery sent me to the docket for the FHFA cases proceeding before U.S. District Judge Denise Cote of Manhattan. As you know, FHFA has recently settled with JPMorgan Chase for $5.1 billion, with Ally Financial for an undisclosed amount and with Wells Fargo for a reported $335 million. That’s on top of the conservator’s previous settlements with UBS for $885 million and with Citigroup and General Electric for undisclosed amounts. Eleven banks are still facing claims that their misrepresentations about mortgage-backed securities led to billions of dollars of losses for Fannie Mae and Freddie Mac. (I’m counting FHFA’s claims against BofA, Merrill Lynch and Countrywide as one case even though they’re sued separately.)

FHFA has asserted state-law securities claims against 10 of the banks, under so-called “blue sky” laws of Virginia, where Freddie Mac is based, and the District of Columbia, the headquarters of Fannie Mae. If there could possibly be any reason to question whether banks face undue punishment for their securitization practices, FHFA’s motion for partial summary judgment on bank defenses under those blue sky laws might be it.

The conservator’s motion, which was filed at the end of September by FHFA’s lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman, argues that Virginia and D.C. blue sky laws require issuers to compensate investors in full for securities sold via materially deceptive offering materials. There’s no language in the statutes that would permit the banks to limit FHFA’s recovery to losses tied to specific misrepresentations, FHFA asserts, nor any public policy justification for such limits. The only defense to the Virginia and D.C. statutes, according to FHFA, is that the banks didn’t know and couldn’t have known of misrepresentations in the offering materials. FHFA argues that unless the banks can show that reasonable due diligence would not have revealed flaws in the offering materials, then they’re on the hook for the full purchase price Fannie and Freddie paid (less income they received) for deficient MBS, plus 6 percent statutory interest and attorneys fees.

Delaware judge: Don’t sue in Delaware to enforce forum clauses

Alison Frankel
Nov 12, 2013 23:06 UTC

Davis Polk & Wardwell had an interesting post last week at the Harvard Law School Forum on Corporate Governance. As the post noted, shareholder lawyers recently dropped their appeal of a ruling in June by Chancellor Leo Strine of Delaware Chancery Court that upheld the validity of corporate bylaws requiring shareholders to litigate in Delaware. With Strine’s ruling in Boilermakers v. Chevron entrenched, at least for now, as Delaware precedent, Davis Polk asked, is there any reason why businesses shouldn’t rush to adopt forum selection provisions? According to the firm, about 120 corporations, mostly in Delaware, have done just that. But Davis Polk also said there are a couple of reasons to wait. For one thing, shareholders may look askance at forum selection provisions, and could even try to extract revenge against board members who push for them. And for another, it’s not clear that judges in jurisdictions outside of Delaware will obey the law according to Leo Strine.

“The non-Delaware judge considering the motion may be influenced, but will not be bound, by the Chevron decision,” the Davis Polk post said. “We may imagine, and some have confidently predicted, that over time a body of law will develop upholding these provisions under the internal affairs doctrine. But that day has not yet arrived, and in the meantime companies will have to fund some level of litigation to defend their position. These companies may, like Chevron and FedEx, have the satisfaction of having moved the law in a positive direction, but others may be happy to have the trailblazers reap the honor.”

Vice-Chancellor Travis Laster of Delaware Chancery Court raised an obstacles for forum selection trailblazers in a ruling from the bench last Tuesday in Edgen Group v. Genoud, a case in which Edgen was trying to enforce a provision in its corporate charter that requires shareholders to litigate claims in Delaware. According to Laster, companies with forum selection clauses shouldn’t expect Delaware judges to block their colleagues in other states from hearing shareholder cases, at least until the corporations have asked judges outside of Delaware to enforce the provisions and dismiss shareholder suits. “When I review the Chevron decision,” Laster wrote, “it is seemingly apparent on the face of that decision that Chancellor Strine contemplated, at least for purposes of his ruling in that case, that the forum selection provision would be considered in the first instance by the other court.”

Dueling cert petitions give SCOTUS choice on software patent review

Alison Frankel
Nov 8, 2013 19:26 UTC

On Wednesday, CLS Bank filed a brief opposing U.S. Supreme Court review of a spectacularly controversial en banc decision from the Federal Circuit Court of Appeals. You probably remember the Federal Circuit ruling from last May in the CLS case: The en banc court held that Alice Corp’s computer-implemented escrow system is not eligible for patents, but couldn’t muster a majority to explain why. The 10 appellate judges ended up writing six different opinions, none of which attracted enough co-signers to provide long-sought clarity on a standard for the patent-eligibility of abstract ideas that are implemented via computers. As Alice’s lawyers at Sidley Austin explained in their certiorari petition in May, “The legal standards that govern whether computer-implemented inventions are eligible for patent protection … remain entirely unclear and utterly panel dependent.”

CLS’s counsel at Gibson, Dunn & Crutcher didn’t contest that assertion – the precedential muddle isn’t really debatable – but argued that the Federal Circuit reached the right conclusion when it found Alice’s escrow system ineligible for patenting. With three new judges on the Federal Circuit, CLS said, it makes more sense to give the new judges – Richard Taranto, a former senior partner at Farr & Taranto; Raymond Chen, the onetime solicitor general of the U.S. Patent and Trademark Office; and Todd Hughes, who most recently served in the Justice Department’s civil division – a chance to consider computer-implemented patent eligibility. “The reconstituted court is capable of settling its own internal divisions,” CLS’s brief said. Gibson Dunn actually uses seemingly irreconcilable post-CLS Federal Circuit panel decisions in Bancorp v. Sun Life and Accenture v. Guidewire to underscore its argument that the discussion of software patent eligibility is still percolating healthily in the Federal Circuit so the Supreme Court needn’t get involved.

If, however, the court does decide to take up the issue, CLS wants the justices to use Alice’s case as their vehicle. And here’s where things get interesting in the great debate over whether otherwise-unpatentable abstract ideas become eligible for patents when they’re implemented via computers. Alice isn’t the only party with a pending cert petition on software patent eligibility. The online game company WildTangent is asking for Supreme Court review of a Federal Circuit panel decision that, according to WildTangent’s counsel at Latham & Watkins, sets so low a bar for patent eligibility that just about every computer-implemented abstract idea would survive. The Alice and WildTangent cases really pose the exact same question for the Supreme Court. So which should the justices take?

How to end pointless class actions, redux

Alison Frankel
Nov 7, 2013 21:13 UTC

In April 2012, a California shampoo purchaser named Nancie Ligon filed a class action in federal court in San Francisco on behalf of all buyers of certain L’Oreal products that are labeled “salon-only.” Ligon’s counsel at The Mehdi Firm and Halunen & Associates claimed that L’Oreal products’ labels were misleading because they were actually sold not just at salons but also at mass-market retailers such as Target and K-Mart.

Early meetings between Ligon’s lawyers and L’Oreal’s defense counsel at Patterson Belknap Webb & Tyler revealed some big problems with the theory of the class action. L’Oreal, for one thing, doesn’t actually sell any of the supposedly offending products directly to mass market retailers. In fact, it doesn’t want anyone except for salons to sell its pricey lines, and it has an entire corporate division dedicated to stopping distributors from diverting salon-only products to other sorts of stores. And though L’Oreal suggests retail prices for its hair-care products, stores are free to set their own prices. It turned out that prices for the “salon-only” shampoos and conditioners ranged all over the place, without a clear pattern distinguishing salon prices from mass-market prices. That meant class counsel couldn’t come up with a legitimate formula for evaluating the harm to consumers from the supposedly misleading labeling. By their own admission, class lawyers determined after their meetings with L’Oreal that “it would be challenging, if not impossible, to determine classwide monetary damages.”

So did Ligon’s lawyers dismiss the case and write off their time and expenses as a lesson learned? They did not. Instead, with their classwide monetary damages theory demolished, they engaged in mediation with L’Oreal last December. In just one day, they and L’Oreal reached an agreement to settle the case as an injunction-only class. L’Oreal said it would remove the supposedly misleading “salon-only” language from product labels in exchange for a release of all classwide monetary damages claims. It took the plaintiffs’ lawyers and L’Oreal longer to negotiate fees, but eventually L’Oreal agreed that if the class counsel requested $950,000 in fees and expenses, it would not oppose the request.

Debate sharpens on proposed changes to federal rules on discovery

Alison Frankel
Nov 6, 2013 21:55 UTC

Last August, the rules committee of the Judicial Conference of the United States published its long-awaited proposed changes to the Federal Rules of Civil Procedure. The advisory committee on civil rules – which included private lawyers John Barkett of Shook, Hardy & Bacon, Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein, Parker Folse of Susman Godfrey and Peter Keisler of Sidley Austin as well as federal judges, law professors and a Justice Department representative – suggested amendments to 10 rules, all with the goal of speeding up the pretrial litigation process. You’re forgiven if you didn’t dive right into the document. It’s more than 350 pages long, and you have to thumb past more than 200 pages of proposed changes to federal bankruptcy rules before you even get to the section on proposed civil rules amendments. But every civil practitioner will be affected by these changes, which are open for public comment until Feb. 15. So it’s probably time to start paying attention.

Happily, the Senate Judiciary Committee’s Subcommittee on Banking and the Courts has done a lot of your work for you. On Tuesday, the subcommittee held a hearing entitled “Changing the Rules: Will Limiting the Scope of Civil Discovery Diminish Accountability and Leave Americans Without Access to Justice?” (The title of the hearing gives you a pretty good idea of where subcommittee chair Chris Coons, a Delaware Democrat, stands on the proposed changes.) The two-hour hearing featured some pontification by Senator Sheldon Whitehouse, a Rhode Island Democrat and former trial lawyer who blamed defendants for outsized litigation costs, and by Senator Jeff Sessions, an Alabama Republican who fretted about defendants being forced to settle frivolous suits to avoid the cost of litigation. But ideological musings aside, the session and accompanying written testimony – from Arthur Miller, the New York University professor and civil procedure guru; Sherrilyn Ifill, the president of the NAACP Legal Defense and Education Fund; and Supreme Court advocate Andrew Pincus of Mayer Brown – highlight the three most controversial proposed changes: presumptive limits on depositions and interrogatories; a sanctions standard for e-discovery violations; and a new emphasis on the “proportionality” of discovery demands.

The senators didn’t talk much about the new proposed standard for sanctions, which is intended to impose a clear, uniform standard for e-discovery obligations, replacing inconsistent judge-made law. The advisory committee has recommended that only willful or bad-faith destruction of evidence with a discernible impact on the underlying litigation should be sanctioned. That very high bar, said Ifill of the NAACP in written testimony, gives defendants an incentive to delete potentially damning information and just take its chances. “The moving party,” she said, “may be unable to demonstrate the degree of harm it has suffered since it will not fully know what the lost information would have revealed.” Pincus of Mayer Brown, who often represents the U.S. Chamber of Commerce and other big business interests, said, on the other hand, that the new sanctions standard will save defendants the cost of preserving terabytes of e-discovery because they’re afraid they’ll otherwise be sanctioned for inadvertently deleting something. Mere storage costs for e-discovery are so burdensome, Pincus said, that they’ve become a factor for defendants considering whether to settle cases.

In Viacom v. YouTube appeal, law profs duel over copyright cop duties

Alison Frankel
Nov 5, 2013 20:53 UTC

I’m pretty sure we can all agree that the Internet has wrought fundamental changes in our daily lives. Remember when you had to call friends with encyclopedic memories for pop-culture trivia to remind you of the name of the Brady Bunch’s dog or the lyrics to the second verse of the theme song of Gilligan’s Island? Okay, so maybe the world would keep spinning without instantaneous answers to those sorts of questions, but more seriously, can you recall (if you’re over 40 or so) or imagine (if you’re younger) the practice of law without e-filing? Voir dire without Google and Facebook? Networking without LinkedIn and Twitter?

The Internet is obviously a vastly more revolutionary development than, say, the photocopier. But is it so revolutionary that we should discard old common-law principles of liability to accommodate new technology? Or did Congress carefully incorporate those old legal doctrines when it updated copyright law to acknowledge new digital realities? Amicus briefs by dueling sets of law professors in Viacom’s copyright infringement case against YouTube at the 2nd Circuit Court of Appeals posit quite different answers to questions so unsettled that even the Internet can’t yet answer them.

Three wise men of copyright law – Boston University School of Law dean emeritus Ronald Cass, University of Houston professor Raymond Nimmer and Harvard Law School professor Stuart Brotman – argued in an amicus brief supporting Viacom that even though YouTube’s alleged contribution to infringement of Viacom copyrights took place on the Internet, the same old principles that impose copyright screening responsibility on YouTube still apply. Thirty-one other law professors, including digital cognoscenti Mark Lemley of Stanford, Eric Goldman of Santa Clara and Rebecca Tushnet of Georgetown, argued in an amicus brief filed Friday that Congress specifically limited the common-law liability of Internet service providers, in a legislative triumph that has permitted “extraordinary and unprecedented growth in innovative Internet services based entirely on user expression.”

The collateral class action consequences of SAC’s guilty plea

Alison Frankel
Nov 4, 2013 22:55 UTC

Last Friday, with rumors of SAC Capital’s imminent guilty plea as inescapable as stale candy corn on Halloween, class action lawyers from Wohl & Fruchter filed a first-of-its-kind letter with U.S. District Judge Laura Swain, the judge presiding over the Justice Department’s criminal case in Manhattan against Steven Cohen’s infamous hedge fund. The firm explained that it is co-lead counsel in a securities class action in federal court in Manhattan, alleging that SAC harmed investors in the Irish drug company Elan when the hedge fund dumped Elan shares based on inside information. Along with Wyeth investors, whose parallel class action has been consolidated with the Elan case, Elan shareholders claimed that they’re a victim of SAC’s crimes. And under the federal Crime Victims Rights Act of 2004, wrote Wohl & Fruchter, Elan and Wyeth shareholders have a right to present her with their view of SAC’s plea.

Never mind that the plea hadn’t actually been entered when the law firm sent the letter. The class action lawyers wanted to go on record with a demand that Swain reject any plea deal that did not require SAC to admit to insider trading in Elan and Wyeth shares. (The Wall Street Journal had reported Wednesday that prosecutors had agreed to that concession.) The $276 million Elan and Wyeth scheme, investors told Swain, was the core of the SAC indictment. She should not accept a guilty plea that would permit the hedge fund to skirt the most serious charges it faced.

Why were Elan and Wyeth investors so hot for prosecutors to wring an admission of illegal trading from SAC? Because it would save them an awful lot of trouble in their class actions. If SAC pleaded guilty to insider trading in Wyeth and Elan shares, they wouldn’t have to prove the hedge fund’s misconduct in their cases. As you know, the collateral consequences of defendants’ admissions to the Securities and Exchange Commission have been in the news since the agency changed its policy in June. JPMorgan Chase’s settlement in September with the SEC showed that artful crafting of regulatory admissions can limit the damage in related securities class actions. But a defendant can’t get around a guilty plea to fraud. That’s an admission that can’t subsequently be denied.

Scathing conflicts decision v. Boies Schiller: What’s enough checking?

Alison Frankel
Nov 1, 2013 22:07 UTC

Last January, Boies, Schiller & Flexner filed a complaint in federal court in Manhattan against the hotel management company Marriott International, the New York hotel workers’ union and the real estate investment trust Host Hotels & Resorts, which owns 118 hotels in the United States and abroad. The suit made quite stunning assertions. Boies’s client, Madison 92nd Street Associates, accused Marriott, Host and the union of engaging in a racketeering conspiracy in which Marriott agreed secretly to help the union organize workers at certain unlucky Marriott-managed hotels in New York City, while leaving key Host properties managed by Marriott, including the Marriott Marquis, ununionized. Madison, which owned a Marriott-run hotel on New York’s Upper East Side, claimed that as a victim of the three-way conspiracy, it was forced into bankruptcy by high labor costs after its workers joined the union.

As it happens, Boies Schiller had represented Host – one of the defendants it was now accusing of conspiracy – at the time the supposed plot was hatched in 2002. In fact, the firm was counsel to a special Host board committee that engaged in a two-year, all-encompassing review of Host’s relationship with Marriott, which culminated in a new agreement between the companies in 2002. Host’s counsel at Hogan Lovells drafted the new deal, but Boies Schiller advised behind the scenes. In all, Boies Schiller worked about 3,700 hours for Host between 2000 and 2005, billing the company about $1.25 million.

That timing alone, according to an unbelievably scathing opinion made public Thursday by U.S. District Judge Colleen McMahon, should have put Boies Schiller on high alert about a potential conflict. According to McMahon, ethics advisers from inside and outside Boies Schiller should have needed “but a moment” to realize that its position in the Madison suit was untenable. It was attempting to assert on Madison’s behalf that an agreement Boies Schiller actually advised upon in 2002 was a sham, McMahon said, which meant that Host might call Boies lawyers who advised on the Marriott agreement as witnesses to defend against Madison’s claims. “A clearer conflict of interest cannot be imagined,” McMahon said. “A first year law student on day one of an ethics course should be able to spot it. BSF, which holds itself out as one of the country’s preeminent law firms, did not.”

BofA, JPMorgan travel opposite roads to end MBS liability

Alison Frankel
Oct 31, 2013 19:46 UTC

For a change, JPMorgan’s rollercoaster negotiations with state and federal regulators to resolve the bank’s liability for rotten mortgage-backed securities did not make news Wednesday. Has there ever been more public dealmaking between the Justice Department and a target? It feels as though the public has been made privy to every settlement proposal and rejection, as if we’re all watching a soap operatic reality show. Will there be a reunion episode if the bank and the Justice Department end up finalizing the reported $13 billion global settlement, with Eric Holder and Jamie Dimon shouting imprecations at each other?

Bank of America filled the MBS news vacuum Wednesday. Its quarterly filing with the Securities and Exchange Commission disclosed that the bank – under Justice Department investigation for its securitization practices – has bumped up its estimate of litigation losses in excess of its reserves to $5.1 billion. The filing also said that staff lawyers from the New York attorney general’s office have recommended a civil suit based on Merrill Lynch’s mortgage-backed securities.

BofA also had some good news, though. Late Tuesday, U.S. District Judge Mariana Pfaelzer of Los Angeles granted tentative approval to the bank’s $500 million Countrywide MBS class action settlement, despite objections to the deal from the Federal Deposit Insurance Corporation (on behalf of 19 failed banks that owned Countrywide MBS) and several other institutions. Perhaps even more importantly, on Wednesday, two significant objectors to BofA’s proposed $8.5 billion put-back settlement with private Countrywide MBS investors dropped their challenges to the deal. In separate letters to New York State Supreme Court Justice Barbara Kapnick, who has presided over a sporadic but nearly concluded trial on the settlement, three Federal Home Loan Banks and two Cranberry Park investment vehicles asked to withdraw from the proceeding. The remaining objectors, led by AIG, Triaxx and the FHLB of Pittsburgh, filed a strong post-trial brief summarizing their evidence that the proposed settlement was obtained through a “conflicted, back-room, closed-door process” and “cannot be endorsed without running roughshod over the absent certificateholders’ interests.” But the objectors’ ranks are dwindling, and late withdrawals by MBS certificate holders that actually helped try the opposition case has to increase the pressure on Justice Kapnick to bless the deal.

How one N.Y. judge is quietly eroding securities class actions

Alison Frankel
Oct 30, 2013 19:47 UTC

Earlier this month I told you about a certiorari petition that has the potential to end securities class action litigation as we know it. Halliburton has asked the U.S. Supreme Court to dismantle the very foundation of modern shareholder fraud litigation: the court’s 1987 decision in Basic v. Levinson, which held that investors are presumed to have relied on public misrepresentations about stock trading in an efficient market. Basic preserved defendants’ opportunity to rebut that presumption of reliance, but as a group of eminent law professors and former officials of the Securities and Exchange Commission said in an Oct. 11 amicus brief supporting Halliburton’s petition, that’s more of a theoretical right than an actual one. “A quarter-century of experience with Basic has demonstrated that the fraud-on-the-market presumption is effectively not rebuttable, and that it essentially eradicates the element of reliance,” the brief said. “Time has borne out Justice (Byron) White’s concern that, ‘while, in theory, the court allows for rebuttal…such rebuttal is virtually impossible in all but the most extraordinary case.’ ” In fact, according to a working paper by Stanford law professor and former SEC Commissioner Joseph Grundfest, who signed on to the Halliburton amicus brief and is cited liberally within it, there have only been five – five! – cases in which securities fraud defendants actually succeeded in countering Basic’s presumption of reliance.

But a pair of recent rulings by U.S. District Judge Katherine Forrest of Manhattan – including her decision Tuesday to deny certification of a class of Deutsche Bank shareholders – shows that in some cases, defendants can altogether avoid Basic’s presumption of reliance by challenging the efficiency of the market in which their shares trade. In both the Deutsche Bank decision and Forrest’s opinion last July in George v. China Automotive Systems, the judge insisted on hearings to evaluate shareholders’ evidence of market efficiency – and ultimately concluded in both cases that shareholders hadn’t established the existence of an efficient market for the defendant’s stock. Basic’s fraud-on-the-market presumption, she ruled in both class actions, wasn’t even triggered because the China Automotive and Deutsche Bank shareholders hadn’t satisfied Basic’s condition that shares trade in an efficient market.

I should point out that Forrest had other big problems with the proposed China Automotive and Deutsche Bank classes. Lead plaintiffs in each of the class actions bought and sold shares during the class period, and the judge said that such in-and-out shareholders are inadequate class representatives because they’re subject to individual defenses. Forrest also ripped to shreds the expert witness for Deutsche Bank shareholders, whose main expertise, she said, was “being an expert in plaintiffs’ securities cases.” (Ouch.) Forrest disallowed his testimony on Daubert grounds, which made it impossible for shareholder lawyers from Robbins Geller Rudman & Dowd to establish market efficiency.