Opinion

Alison Frankel

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.

Wettick, after all, has already ordered the draft complaint to be turned over to the FHLB once. In early October, when JPMorgan’s settlement with Justice was still just a rumor, Robins Kaplan moved to compel JPMorgan to turn over whatever documents it had disclosed to the Justice Department, in case any of that material shed light on FHLB’s allegations that it was duped into buying JPMorgan mortgage-backed securities. (You may remember the litigation because FHLB successfully deployed the same tactic of moving for Justice documents against Standard & Poor’s, which is also a defendant in the case.) At the time, JPMorgan’s counsel in the FHLB case in Pittsburgh said he didn’t know for sure whether Justice had prepared a complaint against the bank, despite press reports that the complaint existed. At a hearing on Oct. 17, Judge Wettick ordered JPMorgan lawyer Robert Pietrzak of Sidley to find out if the government had shown a draft complaint to JPMorgan, and “to the extent that you have it, (to) turn it over.”

According to an affidavit from FHLB’s general counsel, Dana Yealey, the existence of a draft complaint was confirmed soon thereafter when Justice Department lawyers contacted him to ask if FHLB would agree to extend the deadline on Judge Wettick’s order so that Justice could wind up its negotiations with JPMorgan. Yealey said that he asked if Justice would intervene in his case to oppose production of the draft complaint and received a promise that it would not. “(The Justice lawyer) said he was very close to a final deal with JPMorgan and that after one more week, he would not care about the draft complaint,” Yealey’s affidavit said. FHLB agreed to hold off until the Justice settlement was finalized.

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.”

Board independence is just cheap way to appease Congress: new paper

Alison Frankel
Dec 5, 2013 21:28 UTC

If there’s one assumption that underlies the shareholder litigation I’ve covered over the years, it’s that truly independent boards serve shareholder interests. Plaintiffs lawyers often don’t agree with defendants about whether particular directors are actually independent, but the corporate governance ideal of a disinterested board is rarely questioned by either side. Changes in the composition of corporate boards seem to reflect that assumption. In 1998, according to a forthcoming article by Emory University School of Law professor Urska Velikonja for the North Carolina Law Review, S&P 500 companies reported that 78 percent of their board members were independent. By 2012 the number was up to 84 percent. Even more dramatic, according to Velikonja, has been the rise of boards with only one insider – the CEO – on the board. As recently as 2000, Velikonja found, these so-called supermajority independent boards represented only 20 percent of public companies. In 2012, by contrast, 59 percent of public company boards had only one non-independent director.

But are supermajority independent boards actually good for shareholders? That turns out to be a complicated question, teased out in Velikonja’s paper. She concludes, as a threshold matter, that it is shareholders who have driven the trend toward increasingly independent boards. “That is what investors want, encouraged by proxy advisors and unopposed by managers resigned to more vigilant shareholders,” the professor writes. Yet her survey of the literature on board independence and shareholder value showed “substantial academic backlash against increasingly independent boards.” As Velikonja explains, once the majority of directors on a board is independent, shareholders experience diminishing marginal returns from replacing insiders with outsiders, and increasing marginal costs because the board receives less inside information about the company. “Empirical studies seem to support the theoretical intuition that majority independent boards are a good development, but supermajority independent ones are not,” Velikonja writes.

So why, she asks, do shareholders – largely through institutional investors – continue to press for increasingly independent boards? As she notes, two theories for the phenomenon have previously been suggested. Sanjai Bhagat of the University of Colorado and Bernard Black of Northwestern hypothesized back in 1999 that unfounded conventional wisdom about a correlation between board independence and corporate performance was driving the move against inside directors. Several years later, Jeffrey Gordon of Columbia argued that board independence is (in Velikonja’s description) “a positive development made possible by better securities disclosure and the rise of shareholder primacy as the goal of corporate governance.”

Detroit judge’s pension ruling is no panacea for beleaguered cities

Alison Frankel
Dec 4, 2013 21:41 UTC

In Tuesday’s ruling that Detroit is eligible for federal bankruptcy protection, U.S. bankruptcy judge Steven Rhodes set crucial precedent on a municipality’s right to cut pension benefits through the Chapter 9 process. Michigan’s state constitution, like those of many other states, specifically protects the pension rights of public employees. Before Detroit even filed for Chapter 9 in July, some of its pensioners went to state court to block the bankruptcy, arguing that it’s a violation of the state constitution to tamper with their benefits. Rhodes squelched that litigation and asserted his federal-court jurisdiction, but retirees and unions continued their challenge to the city’s right to meddle with their pensions, just as California’s vast public pension fund, Calpers, has relentlessly resisted any suggestion that the bankrupt cities of Stockton and San Bernardino might reduce their pension obligations. In a first-ever ruling on the impairment of pension obligations in a Chapter 9 proceeding, Judge Rhodes held Tuesday that neither the Contracts Clause nor the Tenth Amendment of the U.S. Constitution prohibits Detroit from cutting pension benefits, even if those benefits are protected in the state constitution.

“Municipal pension rights are contract rights, and…the impairment of such contract rights in a municipal bankruptcy case is a regular part of the process,” Rhodes concluded, according to a court-issued summary of his findings. “Because the State of Michigan authorized the filing of this case, municipal pension rights in Michigan can be impaired in this bankruptcy case, just like any other contract rights.” (Rhodes read his eligibility ruling from the bench; a written opinion is to follow.)

With that finding, Rhodes gave a definitive answer to a constitutional question that the judges overseeing the Stockton and San Bernardino Chapter 9 cases have skirted: Can insolvent cities legally reduce their pension obligations through the federal bankruptcy process? Rhodes has supplied critical precedent that changes the balance of power in municipal bankruptcies. “Pensions can no longer count on getting 100 cents on the dollar in every municipal bankruptcy due to their recognized super-senior status,” wrote analyst Mark Palmer in a blog post for BTIG. “Now, they may be subject to cuts or to being treated as unsecured creditors in the same claim pool as the bond insurers.”

5th Circuit gives state AGs a new way to evade federal court

Alison Frankel
Dec 3, 2013 19:29 UTC

Last month, the U.S. Supreme Court heard arguments in Hood v. AU Optronics, the case that will determine whether consumer suits by state attorneys general must be litigated in federal court under the Class Action Fairness Act or may be tried in the plaintiffs-friendly confines of state court. I’ve been harping on these AG cases, known as parens patriae suits, because they’re increasingly the most viable way to hold corporations accountable in court to consumers, thanks to the Supreme Court’s predilection for arbitration and skepticism about class actions. An array of pro-business groups seized the opportunity of the AU Optronics case – in which the 5th Circuit Court of Appeals split with several other federal circuits and held that parens patriae suits are removable to federal court under CAFA – to ask the Supreme Court to rein in state AGs, just as the justices last term curbed class action lawyers who tried to stipulate their way out of federal court.

The Supreme Court hasn’t yet decided the AU Optronics case, and the justices’ questions at oral argument didn’t offer a clear indication of which way most of them are leaning. But if the high court determines that AG suits based on alleged harm to state residents are class actions or mass actions in all but name, a new ruling by the 5th Circuit could undermine the significance of that decision. For parens patriae defendants, it turns out, the 5th Circuit giveth but it also taketh away.

Monday’s per curiam opinion, by Judges Priscilla Owen, Jennifer Elrod and Catharina Haynes, said that six parens patriae suits filed by Mississippi Attorney General Jim Hood must be remanded to state court, despite arguments by the bank defendants that under the 5th Circuit’s own AU Optronics precedent, the suits are class or mass actions under CAFA. The AU Optronics precedent, the new opinion said, is based on the premise that state AG suits are actually prosecuted on behalf of hundreds or thousands of consumers, even though the cases are brought in the name of the state. If that premise is correct, the 5th Circuit judges said (noting the Supreme Court will have to decide if it is), then in order to keep a parens patriae case in federal court under CAFA, defendants must satisfy two elements: They must be able to show that the case’s aggregated potential claims exceed $5 million and that at least one plaintiff’s individual claims exceed $75,000.

Apple contests constitutionality of court-appointed monitors

Alison Frankel
Dec 2, 2013 20:37 UTC

Ever heard the old adage that when your only tool is a hammer, every problem looks like a nail? The law firm Gibson, Dunn & Crutcher has no shortage of tools, but among its most powerful is a premier appellate practice that in the last few years has won landmark rulings from the U.S. Supreme Court in Hollingsworth v. Perry, the California same-sex marriage case; Wal-Mart v. Dukes, which raised due process defenses against class certification; and Citizens United v. Federal Election Commission, the infamous corporate free speech case. When your litigators are expert at winning constitutionality arguments, an awful lot of problems seem to have constitutional dimensions.

That has certainly been true in Gibson Dunn’s representation of Apple in the e-books antitrust litigation. On Nov. 17, you may recall, Gibson filed a brief asserting that state attorneys general don’t have constitutional standing to bring claims for antitrust damages via parens patriae suits – an argument with potentially devastating consequences for state AG actions. A mere 10 days later Apple and Gibson Dunn once again hoisted the sledgehammer of constitutionality in the e-books litigation. In a brief filed late Wednesday, Apple objects to the mandate of the independent monitor appointed to police its antitrust compliance, arguing that court-appointed monitors violate the Due Process Clause and the doctrine of separation of powers.

Apple has some sharp differences with its new monitor, Michael Bromwich of The Bromwich Group and Goodwin Procter, and with the federal judge who appointed him, Denise Cote of Manhattan. (Cote, as you’ll recall, oversaw the trial of the Justice Department’s claims that Apple conspired with book publishers to raise e-book prices.) But why just complain about Bromwich’s $1,100-per-hour fees and insistence on purportedly intrusive interviews with Apple’s top officials and board members when you can mount a sweeping challenge the constitutional legitimacy of outside monitors? Apple’s argument is two-pronged: Its due process rights are violated because Bromwich has a financial interest in prolonging his investigation of the company; and Judge Cote’s definition of Bromwich’s mandate, which includes ex parte interviews with Apple witnesses and private reports to the judge, violates the separation of powers doctrine because it makes the monitor a special prosecutor, not a special master conducting court activities.

Why securities lawyers should give thanks to Native Americans

Alison Frankel
Nov 27, 2013 19:16 UTC

On this Thanksgiving Eve, as we recall the generosity of the Wampanoags who helped early Bay Colony settlers learn how to survive in the New World, securities class action lawyers may want to spare a thanks or two for 12 members of the Ute tribe as well. Why? Because if the U.S. Supreme Court ends up eliminating fraud-on-the-market reliance in the Halliburton case to be heard later this term, one of the few remaining avenues for securities class actions is open because of a case those Utes brought to the Supreme Court back in 1971.

The court’s 1972 ruling in Affiliated Ute v. United States established that securities fraud plaintiffs do not have to prove reliance to sustain claims based on a defendant’s failure to disclose material information. The 12 so-called “mixed-blood” Utes who brought the suit alleged that two officials at First Security Bank of Utah deceived them about the true value of their shares in a corporation established to manage tribal assets. The bank was serving as transfer agent for the corporation, and two of its officials had the good fortune to work at a branch office in a Utah town with a large population of Utes. Without telling the sellers about hot demand for the restricted shares in the secondary market, the two bankers snapped up stock for between $300 and $700 (sometimes not even paid for in cash but in goods such as used cars). When they resold the shares to white people, they realized tidy profits. The Utes accused the bankers of defrauding them about the true value of their stock, filing a suit under the fraud provisions of the Exchange Act of 1934.

The 10th Circuit Court of Appeals rejected the Utes’ claims, ruling that they couldn’t show they relied upon the bankers’ misrepresentations when they made decisions to sell their shares. But the Supreme Court, in an opinion by Justice Harry Blackmun, found that no showing of reliance was necessary because the bankers failed in their duty to disclose the vigorous outside market for the Utes’ shares. “It is no answer to urge that, as to some of the petitioners, these defendants may have made no positive representation or recommendation,” the opinion said. “Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.”

D.C. Circuit knows satire when it sees it, tosses ‘birther’ case vs Esquire

Alison Frankel
Nov 26, 2013 21:40 UTC

Satire, according to an opinion Tuesday by the D.C. Circuit Court of Appeals in a defamation suit against Esquire magazine, is hard to define. But like U.S. Supreme Court Justice Potter Stewart contemplating hard-core pornography (in his oft-quoted concurrence in the 1964 case Jacobellis v. State of Ohio), the appeals court knows it when it sees it. A three-judge appellate panel upheld the dismissal of claims by two prominent members of the ‘birther’ movement, ruling that an Esquire blog post reporting the withdrawal of a book purporting to expose the falsity of President Obama’s birth certificate satisfied the elusive criteria for satire, even if some of the blog post’s readers didn’t get the joke.

In fact, according to Judge Judith Rogers, who wrote the court’s opinion, and Senior Judge Stephen Williams, who joined it, one hallmark of satire is that it takes a while to sink in. (The third judge on the panel, Janice Rogers Brown, concurred in the judgment but did not join the opinion.) “Satire is effective as social commentary precisely because it is often grounded in truth,” Rogers wrote. “Esquire’s story conveyed its message by layering fiction upon fact. The test, however, is not whether some actual readers were misled, but whether the hypothetical reasonable reader could be (after time for reflection).” In this case, the court concluded, Esquire’s blog post contained enough satiric clues to warrant First Amendment protection.

So what was the post? Back in May 2011 – about three weeks after President Obama released the long-form version of his American birth certificate – WND Books, a subsidiary of WorldNetDaily.com, published a book called “Where’s the Birth Certificate: The Case that Barack Obama Is Not Eligible to be President,” by Jerome Corsi. Esquire’s Political Blog greeted the release of Corsi’s book with an online post by Mark Warren that was titled, “BREAKING: Jerome Corsi’s Birther Book Pulled from Shelves!” In Drudge Report style, the post was accompanied by an image of a siren. Its first paragraph read, “In a stunning development one day after the release of Where’s the Birth Certificate … World Net Daily Editor and Chief Executive Officer Joseph Farah has announced plans to recall and pulp the entire 200,000 first printing run of the book, as well as announcing an offer to refund the purchase price to anyone who has already bought either a hard copy or electronic download of the book.” The post went on to quote Farah’s comments from “an exclusive interview” in which he renounced the book as factually inaccurate in light of Obama’s release of his birth certificate. It also quoted an anonymous source at WND who said, “We don’t want to look like fucking idiots, you know?”

N.Y. appeals court to decide time limits on MBS put-back claims

Alison Frankel
Nov 25, 2013 21:41 UTC

On Wednesday, when most people are calculating how early they can slip out of work and begin their Thanksgiving festivities, an awful lot of high-priced New York lawyers will be fighting for seats at 27 Madison Avenue, where the New York Appellate Division, First Department, hears appeals. Billions of dollars of claims for breaches of representations and warranties on mortgage-backed securities hang on what the state appeals court decides about the time limits for these suits. Does the clock start ticking when the securities are issued and representations about underlying mortgage loans take effect? Or does New York’s six-year statute of limitations begin running only when the MBS seller refuses to repurchase loans that breach its contractual assurances? A five-judge appellate panel will confront the issue Wednesday in a case called Ace Securities v. Deutsche Bank Structured Products. The courtroom should be packed with lawyers and clients on both sides of New York’s sprawling MBS put-back litigation docket, who are hoping for clues about what the appeals court will decide.

Marc Kasowitz of Kasowitz, Benson, Torres & Friedman will argue (as he does in Ace’s appellate brief) that New York State Supreme Court Justice Shirley Kornreich of Manhattan got it right when she ruled last May that because certificate holders cannot direct an MBS trustee to sue for breach of contract until the MBS seller has refused to buy back deficient loans, time limits date from that refusal. Deutsche Bank’s lawyer, David Woll of Simpson Thacher & Bartlett, will argue, per the bank’s appeals brief, that under well-established New York law, claims for breaches of representations and warranties accrue on the date the representations are made, not when breaches are discovered or demands for a cure are refused. You may recall that one of Kornreich’s colleagues in the Manhattan commercial division, Justice Peter Sherwood, agreed with the bank-advocated interpretation when he dismissed MBS put-back claims against Nomura in a decision that came out only a few days before the Kornreich decision now before the First Department. (Kasowitz Benson, which was on the losing side of Sherwood’s Nomura ruling, filed its notice of appeal in that case after Simpson Thacher had already appealed Kornreich’s Deutsche Bank decision, which is why the appeal of the later ruling will be heard first.)

The start date for MBS put-back claims is an issue of first impression for New York appellate courts, though there’s plenty of case law on the statute of limitations in the context of other sorts of contracts. Both sides in the Deutsche Bank appeal seem to agree that the most important precedent from New York’s highest court is a 2012 ruling in Hahn Automotive v. American Zurich, which held that the six-year statute can’t be extended unless the contract clearly conditions the right to a claim, and the 1979 opinion in Bulova Watch v. Celotex, in which the Court of Appeals said that the statute of limitations resets for distinct breaches within a contract.

Dish board: Plaintiffs’ lawyers are true villains of governance saga

Alison Frankel
Nov 22, 2013 23:33 UTC

Oh, those greedy contingency-fee lawyers. Is there nothing they won’t do to wring a few million bucks in fees from corporate defendants blamelessly and selflessly going about their business? Dish Network’s majority shareholder, Charles Ergen, and his friends and colleagues on the board performed a great service for the company’s minority shareholders when they secured Dish’s spot as the stalking-horse bidder for LightSquared spectrum licenses. Sure, Ergen had his own personal interest in the LightSquared deal because he’s the biggest creditor of the bankruptcy company. But Dish’s board went above and beyond Nevada’s statutory requirements for transactions in which a director has a conflicting financial interest. It appointed a special transaction committee of independent directors, who hired their own lawyers and financial advisors. With help from Ergen, his personal lawyers and Dish managers, the independent committee came up with a $2.2 billion bid, which the board voted to approve and the bankruptcy judge overseeing LightSquared’s Chapter 11 subsequently deemed the leading offer in the LightSquared auction process.

Everyone agrees Dish will be better off if it succeeds in acquiring the LightSquared licenses. Yet plaintiffs lawyers are trying to handcuff Dish as the auction process goes on, blocking Ergen – who knows the wireless business better than anyone, having built Dish from scratch into a $20 billion business – and nearly everyone else on the Dish board from staying involved. And Ergen isn’t even conflicted anymore! Dish’s stalking-horse bid will pay off all of the LightSquared debt Ergen holds, and then some. So why are these lawyers, who purport to represent the interests of Dish minority shareholders, meddling with the company’s prospects of winning the LightSquared licenses? For the money, of course. You know how this racket works. They file their shareholder derivative suit, litigate for long enough to make themselves a nuisance, then agree to settle for some paltry consideration and a nice chunk of dough.

Or so says Dish, in briefs filed Thursday night by Dish’s board, Ergen and a special litigation committee the board appointed right before a hearing last month in Las Vegas state court on the minority shareholders’ request for expedited discovery. If you’ve been following the Dish corporate governance saga – which I last wrote about on Monday – then you may have more than a few reservations about Dish’s spin on what are suprisingly undisputed facts, including the abrupt dissolution of the special transaction committee when its two members informed the board that they intended to continue to monitor the deal for Ergen conflicts.

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