Alison Frankel

If you’re the Securities and Exchange Commission, it’s tough to find a silver lining in Tuesday’s jury verdict for Brian Stoker, a onetime midlevel banker at Citigroup. Not only did the eight jurors in federal court in Manhattan determine that Stoker was not liable for misleading investors in a $1 billion collateralized debt obligation, they also offered a backhanded slap at the SEC. “This verdict should not deter the SEC from continuing to investigate the financial industry, to review current regulations, and modify existing regulations as necessary,” the jury said in a highly unusual note accompanying the verdict. For the SEC, which has been roundly criticized for its failure to bring civil charges against executives implicated in the financial crisis, the jury’s note has to read like one more reminder that the public is still waiting for corporate accountability.

But, ironically, the verdict could improve the odds of a 2nd Circuit Court of Appeals ruling that U.S. Senior District Judge Jed Rakoff improperly rejected the SEC’s $285 million settlement with Citi in the agency’s parallel suit against the bank.

As you probably recall, the appeals court has already expressed considerable skepticism about Rakoff’s decision last November to reject the settlement. At the time, Rakoff said he had the right to determine whether the deal was in the public interest. And it wasn’t, he said, because Citi hadn’t acknowledged wrongdoing and was paying what amounted to “pocket change” to make the SEC case go away. The truth matters, Rakoff said in his opinion, and for all he and the public knew, the truth of this case could be that Citi hadn’t actually done anything wrong. For good measure, Rakoff ruled in December that the SEC must proceed with its case even though the agency and Citi filed a joint appeal of his November ruling to the 2nd Circuit.

In March a three-judge panel of the 2nd Circuit reversed Rakoff on the issue of a stay, in a ruling that sent a strong message that he’s wrong on the merits as well. The appellate court said that the SEC – and not a federal judge – has the right to determine whether its settlements serve the public interest. Unless the deal is demonstrably an abuse of the SEC’s discretion, the panel said, the agency is owed deference by the courts. The opinion also quibbled with Rakoff’s call for an end to the SEC’s policy of permitting settlements without requiring an admission from defendants and said he was plain wrong to worry that the deal somehow victimized Citi. The appeals panel concluded that when a separate panel considers the merits of the joint appeal, the SEC and Citi are likely to prevail.

That underlying appeal will be heard at the end of September, with John “Rusty” Wing of Lankler Siffert & Wohl representing Rakoff, who also presided over Stoker’s trial. It’s not clear whether the SEC or Citi will discuss the Stoker verdict at the 2nd Circuit argument. SEC enforcement director Robert Khuzami and Citi lead counsel Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison both declined to comment.

We all know that the foreclosure crisis has been a disaster for state and county governments. When homeowners lose their houses, they stop paying property taxes, which is one of the reasons why municipal governments have been driven to consider ideas like seizing underwater mortgages through the use of eminent domain. We’ve also seen state and local officials file lawsuits against the Mortgage Electronic Registration Systems, claiming that MERS and its member banks have cheated governments out of mortgage recording fees in the securitization process. MERS has had mixed results in shutting down those cases but so far hasn’t been found liable.

There’s another tranche of litigation that’s gotten much less attention but could result in billions of dollars for state and county governments, courtesy of Fannie Mae and Freddie Mac, the government-sponsored mortgage guarantors that have taken ownership of thousands and thousands of foreclosed homes. The Judicial Panel on Multidistrict Litigation is weighing a motion to consolidate 23 suits from around the country that claim Fannie and Freddie owe real estate transfer taxes on foreclosed homes they resold. The total exposure for Fannie and Freddie, which are now in federal conservatorship, hasn’t been publicly tabulated, but in the two cases that sparked the MDL motion, the Michigan attorney general and the county government of Oakland, Michigan, claimed that Fannie and Freddie owe millions in transfer taxes just to Oakland County. Class actions already on the dockets have asserted claims on behalf of 13 states, but according to a consolidation motion filed by Genesee County, Michigan, 35 states have real estate transfer tax statutes that could be asserted against Fannie and Freddie. I’d be surprised if most of them (including California and Nevada, which haven’t yet brought cases) don’t end up filing claims.

Fannie and Freddie, which are represented at the JPMDL by King & Spalding, Foley & Lardner and Arnold & Porter, argued in the Michigan litigation that they are exempt from all state taxes by the federal charters that created them. But in a summary judgment ruling in March, U.S. District Judge Victoria Roberts of Detroit said the transfer tax is an excise fee that’s not covered by the charter exemption. She also said Fannie and Freddie are not “federal instrumentalities,” so they’re not shielded by a Michigan law exempting government entities from taxation. The judge granted the county and state summary judgment on Fannie and Freddie’s excise tax liability. (Lawyers for Fannie and Freddie have asked the 6th Circuit Court of Appeals to take an interlocutory appeal of the ruling.)

On Friday, plaintiffs’ lawyers at Pomerantz Haudek Grossman & Gross filed the latest class action related to banks’ alleged manipulation of the London interbank offered rate, or Libor, an interest-rate benchmark that affects trillions of dollars of securities. The new complaint, filed in federal court in Manhattan on behalf of Berkshire Bank, asserts claims for all New York financial institutions that “originated, purchased outright or purchased a participation in” loans paying interest rates pegged to Libor.

Is that class different from all investors who purchased securities with Libor-pegged interest rates? Not according to Michael Hausfeld, whose eponymous firm is interim co-lead counsel in a Libor class action already under way before U.S. District Judge Naomi Reice Buchwald in Manhattan. Back in November, after a hard-fought lead counsel contest, Buchwald appointed Hausfeld and Susman Godfrey to head the Libor multidistrict litigation for over-the-counter investors. Kirby McInerney and Lovell Stewart Halebian Jacobson were appointed lead counsel in a separate class action for derivatives investors who traded on exchanges regulated by the Commodity Futures Trading Commission.

In a phone interview Monday, Hausfeld told me that the new Pomerantz Haudek suit is an attempt to peel off a piece of his case. I asked whether the two classes overlap. “Of course,” Hausfeld said. “They’re playing games.” The banks that made loans pegged to Libor didn’t set the benchmark rates themselves, he said, so the Pomerantz Haudek class only has claims that derive from the claims in his case. Hausfeld said he believes the Pomerantz case is poaching on his turf, and he intends to ask the judge to step in. “You have not seen the end of this,” he told me.

Karen Seymour had high hopes for Sarbanes-Oxley. Ten years ago, when the law was passed, Seymour was chief of the criminal division of the U.S. Attorney’s Office in Manhattan, which is regarded as the country’s most prolific prosecutor of financial crimes. When she read Sarbanes-Oxley’s certification provisions, which specify that CEOs and CFOs can be sent to prison for falsely certifying corporate financial reports and reports on internal controls, she thought she finally had a way of getting at wrongdoing by top officials. “I thought it was going to be a really good tool,” she said in an interview this week. “But it never really developed.”

As Sarbanes-Oxley marks its 10th anniversary on Monday, its promise of holding CEOs and CFOs criminally responsible remains unfulfilled. The law states that if top corporate executives knowingly sign off on a false financial report, they’re subject to a prison term of up to 10 years and a fine of up to $1 million, with penalties escalating to 20 years and $5 million if their misconduct is willful. After accounting scandals at Enron, WorldCom and a host of other public companies, SOX’s certification provisions, according to Seymour and other former prosecutors, seemed like a clean, simple way to tie CEOs and CFOs to corporate crimes.

But in practice, exceedingly few defendants have even been charged with false certification, and fewer still have been convicted. The most notorious SOX criminal case, against former HealthSouth CEO Richard Scrushy, ended in an acquittal in 2005. In 2007, the former CFO of a medical equipment financing company called DVI pleaded guilty to mail fraud and false certification and was sentenced to 30 months in prison. In a more recent case, a SOX false certification charge against former Vitesse CEO Louis Tomasetta was dismissed. (Tomasetta’s trial on other charges ended in a mistrial in April.) The Justice Department doesn’t directly track Sarbanes-Oxley prosecutions, so there may be another case here or there. Even four or five SOX criminal cases in 10 years, though, makes them as rare as a blue moon.

Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd are the most successful members of the securities class action bar. Check the ISS rankings for 2011: Bernstein Litowitz is in the top slot, with $1.37 billion in settlements last year; Robbins Geller is second, with $1.14 billion. Those total dollars, though, mask the very different business models of the two firms, which are reflected in two other numbers on the ISS chart. Bernstein Litowitz settled only 13 cases in 2011, for an average settlement of about $106 million. By contrast, Robbins Geller settled 28 – more than twice as many as Bernstein Litowitz and 12 more than any other leading class action firm. Robbins Geller’s average settlement was about $49 million, less than any firm in the top 10 except Milberg. Both models work, or you wouldn’t always see Bernstein Litowitz and Robbins Geller at the top of the ISS rankings, but the firms are the yin and yang of securities class action litigation.

That’s why it’s so interesting that they’re both angling for lead counsel appointments in the two hottest cases of the year. The deadlines for lead plaintiff briefs have come and gone in the JPMorgan “London Whale” and Facebook IPO cases. There’s plenty of competition in both – though, as I predicted, less in the JPMorgan case – but the strongest leadership bids come from clients represented by Robbins Geller or Bernstein Litowitz.

Let’s look first at the JPMorgan briefs, which came in earlier this month. JPMorgan lost more than $17 billion in market capitalization when it disclosed in May that its chief investment office had lost $2 billion as a result of risky credit default swap positions taken by the so-called London Whale, derivatives trader Bruno Iksil. Shareholders have offered different theories about when the bank’s alleged deception began, but they all point to CEO Jamie Dimon calling the CDS position “a tempest in a teapot” in an April call with analysts.

Last Friday, when lawyers from three firms – Robins, Kaplan, Miller & Ciresi, Robbins Geller Rudman & Dowd and Berger & Montague – asked to withdraw as counsel to the National Association of Convenience Stores in the proposed $7 billion antitrust class action settlement with Visa and MasterCard, they said that they only learned of NACS’s opposition to the deal right before the settlement was filed with U.S. District Judge John Gleeson in Brooklyn. That’s not what NACS’s new lawyers at Constantine Cannon said in a brief filed Tuesday night. If there was any doubt that there’s going to be a battle royal over this settlement, the new brief should remove it.

Constantine Cannon asserted that the convenience store trade group – one of 19 name plaintiffs in the litigation over the swipe fees Visa and MasterCard charge merchants – has consistently agitated against the settlement. “Contrary to class counsel’s representation,” the new brief said, “NACS began expressing to class counsel its serious concerns about the proposed settlement long before the settlement was filed. Indeed, NACS expressed its concerns to class counsel repeatedly.” Constantine Cannon said that NACS formally asked to have its name removed from the settlement three days before it was filed, which is two days before the law firm showed up in the docket as NACS’s new counsel.

What’s particularly interesting about the brief is its reference to the rules imposed by the mediation process that helped produce the settlement. NACS said it intends to abide by those confidentiality rules, so Gleeson should permit it to continue as a class representative and order class counsel to continue to provide the trade group with work product. Mediation usually carries strict confidentiality rules, though. You can bet that Robins Kaplan, Robbins Geller and Berger & Montague are scrutinizing the Constantine Cannon filing to see if they can assert that NACS’s disclosure of its long-standing objection to the settlement is a breach of confidentiality. (Craig Wildfang of Robins Kaplan declined to comment; Constantine Cannon was very careful not to mention any specific details of the mediation in discussing NACS’s problems with the proposed settlement.)

It is the rare securities fraud class action that goes to trial. Typically, once shareholders have survived a motion to dismiss and won certification of a class, defendants pull out their wallets. Settlements may not come until summary judgment motions are decided and a mediator has entered the case, but they are a near certainty for class actions that get past the preliminaries. Only a vanishingly small number of securities fraud cases go to trial.

So every time an appeals court considers a trial verdict in a class action, it’s news. On Monday, the 11th Circuit Court of Appeals ruled that a jury verdict against BankAtlantic cannot stand, but not because of the inconsistent verdict sheet responses that led U.S. District Judge Ursula Ungaro to grant the bank’s post-trial motion for judgment as a matter of law. Instead, the 11th Circuit panel offered a tutorial on how shareholders should link their losses to the defendants’ misstatements – and concluded that, in this case, plaintiffs’ counsel at Labaton Sucharow and Kessler Topaz Meltzer & Check failed to untangle losses due to the alleged fraud from losses attributable to Florida’s collapsing real estate market.

The ruling, written by 11th Circuit Judge Gerald Tjoflat for a panel that also included Judge William Pryor and Senior Judge Peter Fay, comes too late for all of the securities class action defendants that have tried and failed to blame the economic crisis for declines in their share price. But going forward, it’s sure to be cited whenever defendants argue that shareholders must be able to distinguish losses caused by a corporation’s misstatements from losses due to the economy’s decline. In that regard, the 11th Circuit has reinterpreted the U.S. Supreme Court’s landmark 2005 loss causation ruling, Dura Pharmaceuticals v. Broudo, for the post-recession age.

Late last month, without any fanfare, a New York appeals court issued a terse, one-page ruling that upheld the dismissal of Walnut Place’s breach-of-contract suit against Countrywide, Bank of America and Countrywide’s mortgage-backed securitization trustee, Bank of New York Mellon. It was an abrupt end for what was once a promising attempt at vindication for an MBS investor. It was also a huge setback for Walnut, its lawyers at Grais & Ellsworth and all the other Countrywide MBS investors who were counting on litigation against BofA as an alternative to the bank’s proposed $8.5 billion global settlement of breach-of-contract, or put-back, claims.

That one-page appellate ruling reverberated powerfully on Monday, when Walnut – otherwise known as the Boston hedge fund Baupost – filed a request to withdraw from the special New York proceeding to evaluate BofA’s MBS settlement. Framed as a letter to New York State Supreme Court Justice Barbara Kapnick from Grais partner Owen Cyrulnik, the request offered no explanation for Walnut’s withdrawal; Cyrulnik and Baupost spokeswoman Elaine Mann declined to comment.

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York’s highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut’s suit makes it very difficult for the hedge fund – or any other MBS investor – to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn’t economically rational to continue its challenge to the $8.5 billion deal. (From what I’ve heard, Bank of America did not pay Walnut anything in exchange for the hedge fund’s withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

In the mid-1950s, a small-time New York publisher named Samuel Roth was indicted for distributing books, magazines, photos and advertising circulars that were accused of being “obscene, lewd, lascivious, filthy and of an indecent character.” The precise content of Roth’s offensive mailings has been lost to history, although it’s probably tame by modern standards. Nevertheless, a federal jury in New York concluded that the publisher violated a law barring distribution of pornography, and the court sentenced Roth to five years in prison. The case eventually made its way to the U.S. Supreme Court. In 1957, the justices upheld Roth’s conviction, in a landmark ruling that obscenity is not entitled to First Amendment protection. The court said that the law had always assumed sexual material is not covered by the Constitution’s free speech provision, so its ruling merely codified that assumption. The Roth decision placed obscenity in the tiny category of exceptions to First Amendment freedom, along with incitement and fighting words.

Fifty-three years later, the Supreme Court was called upon to decide the constitutionality of another federal law, this one making it a criminal offense to create or possess depictions of cruelty to animals. In its 2010 opinion in United States v.  Stevens, the court reminded us that violence – unlike sex – is protected speech, despite Congress’s efforts in the animal-cruelty law to equate violence with obscenity. The justices struck down the law and vacated the conviction of Robert Stevens, a man who sold videos of pit bulls attacking and killing other animals. The government had argued that some speech, such as depiction of the brutal death of innocent animals, comes at too high a societal cost to deserve First Amendment protection. The Supreme Court called that argument “startling and dangerous.”

The issue of First Amendment protection for even the most blood-soaked materials is sure to become part of the discussion of why the alleged Batman killer, James Holmes, opened fire at a movie theater in Aurora, Colorado, killing 12 moviegoers and injuring dozens more. Whenever one of these horrific mass murders is perpetrated we ask the same questions. Why is it so easy for people with no legitimate purpose to get hold of assault weapons? And does increasingly violent, gruesome entertainment, especially in video and computer games, contribute to violence in real life?

It was big news last September when Standard & Poor’s disclosed that it had received a Wells Notice in connection with the Securities and Exchange Commission’s investigation of the $1.6 billion Delphinus collateralized debt obligation. The SEC sends Wells Notices to potential targets, not mere witnesses, so there was a lot of speculation that the Delphinus investigation might be the government’s long-awaited attempt to hold a rating agency accountable for colluding with a bank to misrepresent the quality of a mortgage-backed instrument.

But based on the complaint the SEC filed Wednesday against the Delphinus sponsor, Mizuho Bank, it looks to me like S&P is off the hook.

Mizuho, which earned $10 million in fees on the Delphinus deal, agreed to pay $127.5 million to settle the SEC’s case, which claimed investors were deceived by the ratings S&P, Fitch and Moody’s gave to the CDO. Four Mizuho executives involved in Delphinus structuring and marketing also settled, via administrative proceedings that imposed sanctions and fines. The settlement documents make it clear that Delphinus investors were misled about the quality of the mortgage-backed securities that served as collateral for the CDO.