Opinion

Alison Frankel

Charlie Ergen’s master class in corporate governance bullying

Alison Frankel
Nov 18, 2013 20:38 UTC

Self-made corporate billionaires are a rare breed, and I think we can all agree that they deserve respect for their acumen and tenacity. What they don’t deserve, if they’ve accepted shareholder money through the capital markets, is unfettered control of their businesses. Public companies cannot treat corporate governance best practices as a nuisance, or worse, a hindrance – especially when the company’s interests may be at odds with those of its billionaire founder.

I bring you this public service announcement because I’m agog at newly emerged details of the goings-on at Dish Network, the publicly traded satellite television company whose shares and voting power remain firmly in the control of chairman and co-founder Charlie Ergen. I’ve written before about a shareholder derivative suit in Las Vegas state court that accuses Ergen and his friends on the Dish board of compromising the interests of minority shareholders in the company’s $2.2 billion stalking-horse bid for LightSquared, the bankrupt wireless communications company. Ergen is LightSquared’s biggest creditor; through personal investment vehicles, he acquired about $1 billion in LightSquared debt, unbeknownst to LightSquared, which on Friday sued him and Dish for secretly attempting to gain control of the bankrupt company. Dish minority shareholders in the Las Vegas suit contend that through his LightSquared investment, Ergen personally will reap windfall profits if Dish’s bid for LightSquared succeeds.

Last month, you may recall, Clark County judge Elizabeth Gonzalez granted expedited discovery to the Dish shareholders, who are trying to bar Ergen from any continuing role in Dish bidding for LightSquared. On Thursday, shareholder lawyers at Bernstein Litowitz Berger & Grossmann and Cotton, Driggs, Walch, Holley, Woloson & Thompson filed a public version of a supplemental brief disclosing what that discovery revealed.

If the brief is to be believed – and I should say here that a Dish representative says it is not, calling the filing “reckless” and “based upon numerous factual inaccuracies” – then the story of Dish’s bid for LightSquared is a rare tale of overt bullying by a controlling shareholder and abject acquiescence by his loyalists on the board of a public company. In that regard, Dish is a corporate governance failure, a company that has displayed what former Securities and Exchange Commission chair Harvey Pitt, in a declaration filed by Dish shareholders, called an “egregious…disdain” for corporate governance procedures. But at the same time the new brief documents how Dish’s two independent directors resisted pressure from Ergen and the rest of the board. One of them, former Liberty Media executive Gary Howard, eventually resigned, when it became clear that the rest of the board was not concerned about Ergen’s potential conflict. The other one, software developer and former Janus Capital CFO Steve Goodbarn, continues to sit on Dish’s board.

Ergen and Dish (and their lawyers at Willkie Farr & Gallagher and Sullivan & Cromwell) have argued since the beginning of this whole LightSquared ado that there is no conflict between Ergen’s interests and those of Dish’s minority shareholders, and it’s certainly true that all Dish shareholders will benefit if the company’s bid for LightSquared is successful. The new shareholder filing, however, shows that Dish’s independent directors had a more nuanced view than Ergen of the relationship between him and Dish’s other shareholders. That’s precisely why corporate governance conventions call for independent directors to evaluate transactions and stand up for the interests of minority shareholders. So, in a perverse way, the Dish story is also an affirmation of good corporate governance practices – a case study of an independent committee attempting to execute its duty to all shareholders.

What if SCOTUS does away with securities fraud class actions?

Alison Frankel
Nov 15, 2013 23:25 UTC

On Friday, as you’ve surely heard, the U.S. Supreme Court agreed to hear Halliburton v. Erica P. John Fund, which challenges an essential building block of securities fraud class actions. Halliburton’s cert petition presented the question of whether the Supreme Court should overrule its own 1988 decision in Basic v. Levinson, which held that investors in broadly traded stock presumptively relied on public misstatements. Basic’s fraud-on-the-market theory freed securities class action lawyers from having to show that individual shareholders made investment decisions based on fraudulent misrepresentations, permitting the certification of enormous classes of investors. If the justices decide to chuck Basic’s presumption of reliance, it’s hard to imagine how plaintiffs’ lawyers will be able to win certification of securities fraud class actions. As Max Berger of Bernstein Litowitz Berger & Grossmann said at a securities litigation conference on Tuesday, “I seldom lose sleep at night, but one of the things that keeps me up is what the Supreme Court is going to do in Halliburton. It’s a game changer.”

Let’s stipulate that shareholder lawyers aren’t the only folks who will be affected if the Supreme Court makes it impossible to certify securities fraud class actions. Their counterparts on the defense side will lose millions of dollars of billings in a very lucrative practice area. All of the economists and law professors who serve as experts on class certification and settlement approval motions will also be out millions of dollars in fees. Settlement administration firms that handle the back-end of class actions, sending notices to class members and distributing recovery, will have less work. Even the D&O industry will feel the impact, according to Kevin LaCroix of the D&O Diary, if the Supreme Court eliminates fraud class actions. Corporate risk simply won’t be as severe if investors can’t sue as a group over alleged misrepresentations. Law professors like to talk about the transaction costs of securities fraud class actions, in which an awful lot of lawyers and other professionals take a cut of the money that’s transferred from one group of shareholders to another via class action settlements. Those transaction costs amount to hundreds of millions, if not billions, of dollars a year – and they’re imperiled if the Supreme Court undoes Basic v. Levinson.

But undoing Basic won’t end shareholder litigation, or even shareholder class litigation. In fact, defendants who have hoped fervently for an end to fraud class actions that generated more than $73 billion in settlements between 1997 and 2012, including six of the 10 biggest settlements in class action history, may end up ruing that they got what they wished for, according to Stanford Law School professor Joseph Grundfest, the securities litigation guru whose working paper, Damages and Reliance Under Section 10(b) of the Exchange Act, supplied me with the statistics I just quoted.

Goldman wants to arbitrate – not litigate – credit union’s MBS claims

Alison Frankel
Nov 14, 2013 22:43 UTC

Remember the spate of fraud cases by the National Credit Union Administration in federal court in Manhattan earlier this fall? Perhaps emboldened by its quiet success in settling claims that failed credit unions were duped into buying fraudulently depicted mortgage-backed securities, NCUA filed complaints against nine banks that sold more than $2 billion of MBS to two credit unions that subsequently went under. The suits, which name Morgan Stanley, Barclays, JPMorgan Chase, Credit Suisse, RBS, UBS, Ally, Wachovia and Goldman Sachs, have all been transferred to U.S. District Judge Denise Cote, who has been notoriously tough on the same defendants (and others) in MBS fraud suits brought by the Federal Housing Finance Agency.

NCUA’s MBS litigation tends to be overshadowed by FHFA’s, given the much bigger losses suffered by FHFA’s wards, Fannie Mae and Freddie Mac, and the huge settlements FHFA has won from JPMorgan Chase and UBS. In the NCUA’s New York cases, in particular, bank defense counsel and the credit union group’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel; Patterson Belknap Webb & Tyler; and Korein Tillery will be making a lot of arguments Judge Cote has already heard in the FHFA suits. In MBS litigation – as you can see from the timeliness and risk disclosure defenses that Morgan Stanley’s lawyers from Davis Polk & Wardwell serve up in their new motion to dismiss the lead case in NCUA’s New York MBS campaign – there’s no longer much new under the sun.

That’s why I was tickled by a motion filed Wednesday by Sullivan & Cromwell, which is defending Goldman in NCUA’s case: Goldman wants to compel arbitration of claims stemming from Southwest Corporate’s purchase of $40 million of MBS. According to the motion, the failed credit union bought those mortgage-backed securities through its longstanding brokerage account with Goldman. And under the terms of Southwest’s umbrella account agreement with the bank, Goldman maintains, NCUA, as the credit union’s liquidating agent, is required to arbitrate any dispute over the investment.

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.)

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.

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