Alison Frankel

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.

The next Dodd-Frank regulation to be scrutinized under that standard is likely to be the conflict minerals rule that the SEC adopted in August, six months late and after vocal opposition from industry groups. In a 3-to-2 vote, the commission enacted a rule requiring public companies whose products contain materials that originated in the Democratic Republic of the Congo or neighboring countries to submit annual reports describing their due diligence on “the conflict minerals’ source and chain of custody.” Opponents of the rule complained (among other things) that it places undue reporting burdens on small companies; the two dissenting commissioners (who are both Republican appointees) questioned whether the SEC should be straying from its core mission and venturing into foreign policy.

Though the SEC heeded the lesson of the proxy access litigation and took care to consider the market impact of the conflict minerals rule — it said the cost across the spectrum of companies affected by the regulation could be $3 billion to $4 billion initially and then about $200 million to $600 million a year – Steven Engel of Dechert told me that the SEC’s analysis can’t resolve a fundamental disconnect between the intent of the regulation and the SEC’s core interest in protecting capital markets. “This is a situation where the commission was charged with pursuing a rule that is arguably in conflict with its mission,” said Engel, who represented the Investment Company Institute and the Independent Directors Council as amici in the proxy access appeal at the D.C. Circuit. “Congress is requiring the SEC to regulate something it never regulated before.”

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.

If there’s one theme that ran through U.S. Supreme Court Justice Antonin Scalia’s interview Monday with Reuters Editor-in-Chief Stephen Adler, it’s that words matter. Time and time again, Scalia and Bryan Garner, the co-author with Scalia of the book Reading Law: The Interpretation of Legal Texts, endorsed originalism and textualism, doctrines that demand judges stick to interpreting the words in front of them rather than attempting to divine legislative intent or (heaven forbid!) imposing their own policy agendas. According to Garner and Scalia, textualism is a sure-footed guide, regardless of where it leads.

“A textualist will frequently end up with — an uncomfortable result. With a result that feels bad,” Garner said, according to a transcript of the interview, which he also participated in. “That’s the funny thing. The judges who are not textualists will essentially always do what they consider to be the better policy. But textualists will frequently decide cases that they think, ‘Wow, it’s a shame I have to do this.’”

If words alone must determine outcome, let’s take a look at what Scalia had to say when Adler asked a question posed by an audience member who wanted to hear the justice’s opinion on term limits for judges. Scalia called term limits “a solution without a problem,” arguing that, in his experience, William Douglas is the only justice who stayed on the Supreme Court too long. The question also led Scalia to muse, however, on how judicial salaries affect the composition of the federal judiciary. “The salaries of federal judges are so low that you’re not getting the best lawyers anyway,” Scalia said. “You’re [not] getting the, the best private lawyers. You may be getting good people, but they’re people who have been an assistant U.S. attorney, then they’re … you know, a minor state judge, then a bankruptcy judge, and then a magistrate judge. And, you know, they finally get appointed to a federal district court. A huge percentage of our federal judges now have never practiced law privately.”

Earlier this month, when the 2nd Circuit Court of Appeals issued a ruling in a Goldman Sachs case that redefined standing in class actions involving mortgage-backed securities, I questioned how much impact the opinion would have, given that we’re four years into MBS class litigation. Sure, the 2nd Circuit opened the door to much broader MBS classes when it held that name plaintiffs can pursue claims on behalf of all the trusts backed by mortgages originated by the same lenders as those they invested in. But I wondered, as a practical matter, whether the ruling was too late to help most MBS class claimants, since most of their cases have long since crossed the threshold of standing.

Now we know that for at least one defendant — JPMorgan Chase — the newly widened definition of standing came all too soon. On Friday, U.S. Senior District Judge Edward Korman of Brooklyn issued an order drastically expanding the claims for which the name plaintiff in an MBS case against JPMorgan, the Mississippi Public Employees’ Retirement System (MissPERS), has standing to sue.

In his previous decision on JPMorgan’s motion to dismiss, Korman had taken a hard line on MissPERS’s standing. He ruled in February that the Mississippi fund, represented by Bernstein Litowitz Berger & Grossmann and Wolf Popper, had only purchased certificates in eight of the 33 MBS trusts (with a face value of $36.8 billion) at issue in the class action. Korman said that MissPERS could only assert claims on behalf of certificate holders in five of those trusts — and, even more restrictively, that it could only represent investors in the same tranches it bought into. For JPMorgan’s lawyers at Sidley Austin, that February ruling was about as resounding a victory as the bank could have hoped for.