Opinion

Alison Frankel

White-collar defense alert: Your interview notes may not be shielded

Alison Frankel
Nov 21, 2013 21:18 UTC

The basic scenario described by U.S. District Judge Paul Gardephe of Manhattan in an opinion made public on Wednesday should sound familiar to every white-collar defense lawyer out there. A company, in this case, the hedge fund D.B. Zwirn, falls under scrutiny, here for allegedly diverting investors’ money into boondoggles like a corporate jet. The company hires lawyers (Schulte Roth & Zabel and, later, Gibson, Dunn & Crutcher) to investigate the allegations. The lawyers prowl through documents and question internal witnesses. Eager to appear cooperative, the company volunteers to present its lawyers’ findings to regulators. And after the presentation, the Securities and Exchange Commission places blame squarely in the lap of a particular corporate official, here former Zwirn CFO Perry Gruss.

Happens all the time, right? Which is why you should all read Gardephe’s opinion carefully. The judge ruled that Gibson Dunn must produce its own notes on witness interviews the firm conducted during the Zwirn internal investigation – notes that the firm never even showed its client – for in camera inspection, after which he’ll turn over all factual work product to Gruss, who is suing Zwirn for defaming him. Gardephe’s new ruling refers back to his opinion from last July, in which he held that Zwirn had waived privilege over its lawyers’ work product when the hedge fund relied on some of the material in Gibson Dunn’s PowerPoint presentation to the SEC. Gibson Dunn had argued in a request of clarification of Gardephe’s July ruling that its own notes, which contain opinions and impressions of Gibson lawyers, are subject to an exception under New York state precedent. But Gardephe said the law firm has no independent expectation of privacy for notes on witness interviews conducted in connection with a client assignment.

Those notes aren’t “internal (law) firm documents,” the judge said, but are work Gibson Dunn produced for Zwirn. So under his previous ruling that Zwirn had waived privilege, Gardephe held, Gruss is entitled to see the Gibson Dunn notes. (Tip of the hat to the indispensable S.D.N.Y. Blog, which reported the opinion Wednesday.)

For Gruss, who is in the midst of discovery in the SEC case against him in Manhattan federal court, the ruling is a double-barreled win. His lawyer in the defamation suit, Blaine Bortnick of Liddle & Robinson, will be able to test Gruss’s theory that Zwirn scapegoated him, selectively disclosing incriminating information about him to the SEC while shielding information that might have incriminated other hedge fund officials. And perhaps even more significantly, Gruss’s counsel in the SEC case, Nick Akerman of Dorsey & Whitney, can shape his client’s defense based on what Zwirn witnesses told Gibson Dunn. Especially if the SEC case goes to trial, those Gibson notes give Akerman a preview of what witnesses will say and a record to confront them with if they tell a different story at trial.

Gibson Dunn, which was represented by partner Reed Brodsky (best known as the assistant U.S. Attorney who prosecuted Raj Rajaratnam and Rajat Gupta) in the Zwirn privilege briefing, had put forth a public policy argument for protecting its internal notes. “Presenting the results of an investigation to the government – even if the client were to disclose its work product – did not and cannot waive Gibson Dunn’s own rights over its own internal, preliminary work product,” the firm said. “Forcing a law firm to disclose associates’ notes that have never before been disclosed – not even to the client – to facilitate a civil plaintiff’s fishing expedition in a lawsuit brought against the firm’s former client inflicts serious harm on the client’s and the lawyers’ ability to effectively investigate allegations of wrongdoing and the public’s compelling interest in promoting prompt and helpful cooperation with the government.”

Lawyers’ nightmare: When 9th Circuit Chief Judge Kozinski is class objector

Alison Frankel
Nov 20, 2013 22:20 UTC

Alex Kozinski, Chief Judge of the 9th Circuit Court of Appeals is known for (among other things) his intellect, his libertarian leanings and his sharp writing style. I appeared last year on a panel with Kozinski and can attest to his charm and humor. But when Kozinski uses his wit against you, it stings. Just ask lawyers at Capstone Law and Sedgwick, who had the bad luck to negotiate the settlement of a class action in which Kozinski is a class member. That would have been fine if Kozinski were a satisfied client. He’s not, and as you can see from the brief he and his wife, Marcy Tiffany, filed last week in opposition to final approval of the settlement, Kozinski spares neither side.

The case, filed in September 2012, involves claims that Nissan didn’t tell buyers and leasers of its electric car, the LEAF, that the car’s lithium battery would deteriorate if they clocked a lot of miles or regularly charged the battery to its full capacity. In December, class counsel at Capstone and Nissan lawyers at Sedgwick agreed to the terms of a settlement that requires Nissan to repair or replace batteries that cannot hold at least most of their charge. Capstone moved for preliminary approval of the settlement in July. Its valuation expert estimated the warranty relief the class had obtained was worth between $38 million and $200 million.

Capstone touted the quick resolution of the case as a boon to the class, since the new warranty would restore lost battery capacity while LEAF drivers are still driving the cars. Drawn-out litigation, Capstone argued in its motion for $1.9 million in fees, would serve only to delay the objective of making the cars operational, and money damages to former LEAF owners would be eaten up by administrative costs. “Even if plaintiffs were to prevail at trial after years of litigation, it is difficult to see how that would result in relief more comprehensive than that provided by the settlement agreement,” the plaintiffs’ brief said.

Can JPM’s $4.5 bln deal with MBS investors avoid BofA’s pitfalls?

Alison Frankel
Nov 19, 2013 21:40 UTC

Is this timing merely a coincidence? On Friday, JPMorgan Chase and the Houston law firm Gibbs & Bruns announced that they had reached a $4.5 billion settlement to resolve allegations that the bank breached representations and warranties to private investors in 330 JPMorgan and Bear Stearns mortgage-backed securities trusts. Gibbs & Bruns negotiated the JPMorgan settlement on behalf of 21 major institutional investors, including BlackRock, Pimco, Goldman Sachs and MetLife. Two days after the JPMorgan announcement, Kathy Patrick of Gibbs appeared in New York State Supreme Court to make her closing argument in support of her clients’ previous deal, an $8.5 billion settlement with Bank of America that has been held up for 2-1/2 years by a small group of Countrywide MBS investors who object to the deal. Will Patrick be back in court in 2016 to defend the JPMorgan settlement?

She could well be, but there are important differences between the JPMorgan and BofA put-back settlements, some structural and some a matter of circumstance, that should reduce the friction for JPMorgan. Gibbs & Bruns, which is slated to receive $85 million , or 1 percent, in fees if the BofA settlement is approved, is in line for $66 million, or 1.47 percent, in fees from the JPMorgan deal, according to the JPMorgan settlement agreement. That extra share will be worth it to JPMorgan if Gibbs & Bruns used its bruising experience with Countrywide MBS objectors to improve the new deal.

Let’s look first at tweaks to the settlement structure. Bank of America’s settlement was actually filed by Bank of New York Mellon, the lone MBS trustee for all of the 430 Countrywide trusts whose breach-of-contract claims would be resolved in the proposed $8.5 billion deal. BNY Mellon asked for a judicial determination, through a special New York state-court trust proceeding known as Article 77, that it was acting within its discretion when it accepted BofA’s global settlement offer. BofA, BNY Mellon and the Gibbs & Bruns group believed that to obtain approval of the settlement under the broad latitude trustees enjoy under New York law, BNY Mellon would simply have to show that it did not abuse its power or act in conflict with the trusts’ interests. Objectors, led by AIG, have since howled that (among other things) BNY Mellon made no distinction between Countrywide MBS trusts when it agreed to a global settlement. As the lone trustee, it accepted BofA’s offer on behalf of all of the 430 Countrywide trusts in the deal. BofA, BNY Mellon and the investor group, meanwhile, have stood by the one-for-all nature of the global settlement. If the court finds that BNY Mellon did not properly execute its trustee duties, they contend, the entire $8.5 billion settlement collapses.

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.

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.

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