Alison Frankel

In politically charged terror finance case, Israeli bank ducks testimony

Alison Frankel
Oct 17, 2013 20:10 UTC

A young Floridian named Daniel Wultz died tragically in 2006 when he was fatally wounded in a suicide bombing at a bus stop in Tel Aviv. Wultz’s parents believe that among those responsible for their son’s death is Bank of China, which they accuse of facilitating payments to Palestine Islamic Jihad, the group said to be responsible for the attack. The Wultzes and their lawyers at Boies, Schiller & Flexner contend that Israeli counterterrorism officials warned the Chinese government at meetings in China in April 2005 that an alleged Islamic Jihad leader, Said al-Shurafa, was financing the group’s operations through his Bank of China accounts. The Wultzes’ Antiterrorism Act suit, filed in federal court in Washington but later transferred to Manhattan federal court, alleges that Chinese officials passed those warnings on to the bank.

The politically explosive case has already occasioned a diplomatic crisis for Israeli Prime Minister Benjamin Netanyahu, whose government at first encouraged the Wultzes to sue Bank of China and agreed to permit testimony about the 2005 meeting in China from a former member of the counterterrorism staff of Israel’s national security council. Netanyahu’s government has since backed away from the Wultzes’ case, reportedly under pressure from China, which has strong economic ties to Israel. The former Israeli counterterrorism official, Uzi Say, has nonetheless indicated that he is inclined to testify for the Wultzes and other bombing victims suing Bank of China, even without clearance from his government.

In that context, a dispute over Bank of China’s subpoena for third-party testimony from a corporate official of Israel’s Bank Hapoalim is definitely a tangential matter, without the emotional or geopolitical resonance of the Wultzes’ underlying claim. But the fight between Bank of China and Bank Hapoalim raises some interesting questions about the reach of a subpoena for expert corporate testimony under the Federal Rules of Civil Procedure. And a decision Tuesday by U.S. Magistrate Judge Gabriel Gorenstein that Bank Hapoalim does not have to produce a witness from Israel could severely impair Bank of China’s defense in this most sensitive of cases.

Bank of China’s lawyers at Patton Boggs wanted testimony from Bank Hapoalim to bolster the bank’s argument that it never received any Israeli warnings about a Bank of China account holder named Said al-Shurafa. As the Chinese bank explained in its opposition to Bank Hapoalim’s motion to quash the subpoena, it doesn’t believe Israel even regarded Shurafa – whom it claims lived in China in order to supply Chinese-made clothing to his father’s store in Gaza – as a terrorism financier. Bank of China has evidence that Bank Hapoalim, which is regulated by the central Bank of Israel, initiated wire transfers to Shurafa’s accounts in China. The Chinese bank said it doesn’t make sense that Israeli officials would have traveled to China in 2005 to demand that China block money from flowing into Shurafa’s accounts in China if the Israeli government was at the same time permitting a bank it regulated to send the money out from Israel.

“Hapoalim is uniquely positioned to provide testimony that will be critical in demonstrating whether the Israeli government took steps to stop wire transfers to Shurafa’s BOC accounts,” the Bank of China brief said. “Testimony confirming the absence of Israeli government efforts, at home in Israel, to block Hapoalim’s origination of transfers to Shurafa would make it unreasonable to infer that the Israeli government at the same time traveled thousands of miles to China in an effort to block Shurafa’s receipt of such transfers.” The Chinese bank said it wanted Hapoalim to designate an official to testify under Rule 30(b)(6) of the Federal Rules of Civil Procedure on a wide range of topics, including specifics of the Shurafa wire transfers and communications between Hapoalim and the Israeli government about Shurafa, as well as, more broadly, Hapoalim’s compliance procedures and policies on interactions with the government about alleged terrorist organizations.

Labeling genetically modified food: regulation via litigation is back

Alison Frankel
Oct 16, 2013 20:18 UTC

Fifteen years ago, when trial lawyers were flush with cash from representing state attorneys general in their global $365 billion settlement with the tobacco industry, the phrase “regulation through litigation” was much in vogue. On the plaintiffs’ side, it was a rallying cry, a call for lawyers to use the tactics of the tobacco litigation – including their partnership with state regulators – to accomplish societal goals, such as reducing gun violence or cutting carbon emissions. Tort reformers, meanwhile, sounded alarms about ceding policy-making to unelected lawyers driven by their own potential profits. Despite the fervor on both sides, regulation through litigation turned out to be more of a slogan than a reality as ambitious cases against, for instance, gun- and lead- paint makers faltered.

But suits over food companies’ labeling of genetically modified ingredients may prove to be a rare example of litigation forcing industrywide change, even as the federal government dithers on policy.

Last week, Frito-Lay’s lawyers at Gibson, Dunn & Crutcher filed an answer to a consolidated class action complaint in multidistrict litigation over Frito’s allegedly misleading use of “all natural” labeling on products that contain genetically modified corn. Like their defense counterparts in similar bioengineered food labeling litigation against Conagra Foods and Campbell Soup, the Gibson lawyers insisted that consumer claims should be barred by the “primary jurisdiction doctrine,” which says that courts must wait for federal agencies to apply their regulatory expertise before hearing claims in litigation. Food industry lawyers contend that it’s premature for judges to consider class actions over bioengineered food labeling because the Food and Drug Administration has not issued binding policy on whether genetically modified ingredients are “natural” (or, for that matter, on any definition of “natural” in food labels).

Thwarting Morrison, BP shareholders win right to proceed in Texas

Alison Frankel
Oct 15, 2013 21:08 UTC

When Matthew Mustokoff of Kessler Topaz Meltzer & Check walked out of oral arguments before U.S. District Judge Keith Ellison of Houston last November, he wasn’t at all sure that his case – a suit by individual pension funds claiming to have been duped by BP – would survive BP’s motion to dismiss. The judge had expressed sympathy for holders of London-listed BP common shares, whose federal securities claims are barred by the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank. Mustokoff and co-counsel from Jason Cowart of Pomerantz Hufford Dahlstrom & Gross were attempting to plead around Morrison by asserting fraud and misrepresentation claims under state and common law. But Judge Ellison seemed to be very interested in a novel constitutional argument BP’s lawyers at Sullivan & Cromwell had crafted in response to the pension funds’ Morrison-dodging. BP said that the funds’ case violated the dormant Commerce Clause as it applies to international commerce because state laws may not exceed the bounds of federal law. Funds couldn’t assert claims under state law, according to BP, when parallel federal-law claims were barred. Ellison was so intrigued by S&C’s Commerce Clause argument that at least half of the hearing on BP’s motion to dismiss the funds’ two related suits, Mustokoff told me, was dedicated to that defense.

But when Ellison entered his 97-page opinion on the docket of the BP multidistrict securities litigation last Thursday, his analysis of the Commerce Clause argument was reduced to a footnote. The judge entirely side-stepped the question of whether state or common law can give U.S. investors rights they don’t have under federal law by concluding that English law – and not American common law – applies to the pension funds’ claims. BP had asked the judge to choose English law, but it also wanted him to find that an English court is the preferable forum for a matter of English law. Instead, Ellison said that he’s perfectly capable of applying English law on fraud, which “shares so many strong similarities with U.S. law due to a common heritage.” And since the conduct at issue in the pension funds’ case involves BP’s U.S. operations – and since he’s already overseeing a class action by holders of BP American Depository Shares, who are raising arguments similar to those of the pension funds – Ellison said it makes sense for him to hear the funds’ suits.

Ellison’s ruling, as Kevin LaCroix at D&O Diary noted Tuesday, is an extremely rare example of shareholders of a foreign-listed stock finding a way around Morrison. But before the securities class action bar starts boning up on English law on fraud (or, as it’s known over the pond, “deceit,”), there are a couple things to keep in mind. First, this case isn’t a class action. It’s two suits by nine pension funds that had large enough BP holdings to make it worth their while to pursue individual actions. Second, Ellison based his decision to retain jurisdiction on some factors that might not figure in other investor fraud suits. And third, BP and Sullivan & Cromwell will get at least one more chance to present their dormant Commerce Clause argument, which could still erase investor claims.

Time to undo fraud-on-the-market presumption in securities class actions?

Alison Frankel
Oct 14, 2013 20:03 UTC

The U.S. Supreme Court created securities class actions as we now know them in 1987, when an unusual four-justice majority held in Basic v. Levinson that investors in securities fraud cases may be presumed to rely on public misrepresentations about stock trading in an efficient market. Basic’s fraud-on-the-market theory made it possible for shareholders to win class certification without proving that class members made investment decisions based on the defendants’ alleged misstatements – a momentum-shifting boon to shareholders. The ruling has become such an essential building block of securities fraud litigation that since 1987, according to Westlaw, Basic has been cited almost 17,000 times.

But now the Supreme Court is being asked to topple its own creation. In a petition for certiorari last month, Halliburton’s lawyers at Baker Botts argued that Basic’s “naive” and “simplistic” efficient-market theory has been repudiated by economists and is inconsistent with the court’s recent precedent in other sorts of class actions. The Halliburton petition capitalized on dissents in the Supreme Court decision last term in Amgen v. Connecticut Retirement Plans, in which the three justices in the minority – Clarence Thomas, Antonin Scalia and Anthony Kennedy - noted the “questionable” premise of fraud-on-the-market theory. Justice Samuel Alito, in a concurrence, specifically asked whether the court’s ruling in Basic should be reconsidered; Halliburton’s petition takes him up on the offer.

On Friday, class counsel at Boies, Schiller & Flexner shot back at Halliburton and Basic’s critics. In a brief opposing cert, Halliburton shareholders argued that Congress and the Supreme Court have had plenty of opportunities over the last 25 years to dismantle Basic’s fraud-on-the-market framework yet they have consistently refused to do so. According to the opposition brief, Basic remains good law, and even if the Supreme Court wanted to revisit efficient-market theory, the Halliburton case isn’t the right vehicle.

Business groups to SCOTUS: Protect us from whistleblowers!

Alison Frankel
Oct 10, 2013 20:32 UTC

Sarbanes-Oxley was enacted as a response to the collapse of Enron, and one of its intentions was to encourage employees to keep their companies honest. SOX included specific provisions for whistleblower reporting, as well as prohibitions on corporate retaliation against employees who bring concerns to their supervisors. That’s all straightforward enough when the purported whistleblowers are employees of public companies. But what about employees of private businesses doing work for public companies – like, say, the audit firm Arthur Andersen in the Enron scandal? If an accountant or any other employee of a private business is fired after detecting and reporting supposed wrongdoing uncovered in the course of providing services to a public company, can the employee sue under SOX?

That question is now before the U.S. Supreme Court in Lawson v. FMR, which is scheduled for oral argument on Nov. 12. The case turns on a hypertechnical point of statutory interpretation: When Congress barred retaliation against “an employee of such company” did it mean just an employee of a public company, or did it intend the words also to encompass employees of contractors or subcontractors? The law clearly prohibits retaliation by private contractors and subcontractors working for public companies, but the dispute involves whether the private companies are barred only from acting against employees of the public companies or also against their own employees.

In a split decision in February 2012, the 1st Circuit Court of Appeals ruled SOX anti-retaliation protections apply only to employees of public companies, tossing whistleblower anti-retaliation suits by two former employees of private Fidelity investment advisory companies that provide services to Fidelity mutual funds. (Mutual funds are covered by SOX because they file reports to the Securities and Exchange Commission.) But the Department of Labor, in an Administrative Review Board ruling in May 2012, advised that SOX’s whistleblower protections apply broadly and cover private employees. The Supreme Court granted certiorari to the former Fidelity employees, Jackie Lawson and Jonathan Zang, last May.

If U.S. defaults, can debt holders sue for payment?

Alison Frankel
Oct 9, 2013 21:22 UTC

To the long list of dire consequences if the United States defaults on debt obligations, here’s an addition you probably haven’t considered: litigation against the U.S. government for missed payments.

Let’s establish at the outset that if American owners of Treasury bills or U.S. bonds are counting on a suit against the U.S. government to recover any losses stemming from a default, their faith is misplaced. Litigation takes a long time in this country, especially when you’re talking about completely unprecedented claims arising from unique, unforeseeable circumstances. It’s just about unfathomable that the United States will fail to meet its obligations to bondholders for as long as it would take them to obtain a judgment, even assuming that bondholders somehow defied all reasonable expectations and managed to win their case. For that hypothetical to be realized, our economy would have to be so devastated that bondholder litigation would be a relatively small worry.

But what about a suit by foreigners who own U.S. debt? Or even foreign sovereigns? I talked Wednesday with several foreign debt and constitutional experts, both in academia and private practice. They outlined a set of hypotheticals under which foreign owners of U.S. debt could sue the U.S. government in their own courts and even attempt to enforce judgment against the United States by seizing U.S. assets. Granted, the scenario is based on speculation that’s incredibly unlikely to come to pass. In these strange days, though, a little mind-bending is good exercise.

3rd Circuit appeal throws light on shadowy class action claims process

Alison Frankel
Oct 8, 2013 20:15 UTC

In all my long years of reporting on class actions, I can’t remember ever writing a story about one of the handful of U.S. companies in the business of administering settlements. Sure, I’ve covered BP’s recent feud with court-appointed claims administrator Patrick Juneau and the alleged misconduct of some of Juneau’s staff. But not about Garden City Group, PricewaterhouseCoopers or Brown Greer, the companies that are actually processing claims from the Deepwater Horizon oil spill litigation, under both Juneau and his predecessor at the Gulf Coast Claims Facility, Kenneth Feinberg of Feinberg Rozen. I’ve written about U.S. District Judge William Pauley chastising the Securities and Exchange Commission for failing to exercise strict supervision over the investors’ compensation fund established in the SEC’s 2009 settlement with Zurich Financial, but not about the fees Garden City Group charged to administer the investor fund. Claims administrators are an essential part of the class action mechanism. They’re the businesses that help lawyers figure out how to inform potential class members that they may have claims and subsequently evaluate the claims that are submitted. Yet there’s scant scrutiny of the claims administration business by journalists, or, for that matter, judges.

For its part, the industry treasures its reputation for neutrality, according to Steven Weisbrot, an executive vice president at the recently-formed claims administration firm Angeion Group, which was founded by longtime executives from other firms in the business. “Both sides have to trust claims administrators,” Weisbrot said. “Trust allows the system to work.” So as a rule, he told me, businesses that make their money administering class actions prefer a low profile. Sometimes courts will ask a claims administrator to submit declarations explaining a class notice plan, Weisbrot said, and some judges insist on competitive bidding for settlement administration gigs. Generally, though, claims administrators would rather not attract attention.

That’s why I was surprised to see an amicus brief from Angeion in support of reconsideration of a ruling by the 3rd Circuit Court of Appeals that decertified a class of Florida purchasers of Bayer’s One-A-Day WeightSmart diet supplement. As I suspected it would, the reconsideration motion, filed by Deepak Gupta of Gupta Beck, has generated some impressive amicus support. Last week, Public Citizen and Public Justice both joined the Florida class in arguments that the 3rd Circuit panel set an impossible – and unnecessary – standard of ascertainability when it said that the class couldn’t be certified without a rock-solid plan to determine purchasers of the Bayer diet supplement. A group of 10 law professors specializing in civil procedure, led by Arthur Miller of Harvard Law School, asserted in another amicus brief advocating reconsideration that the appellate panel’s new ascertainability standard is “a notion entirely divorced from the text and purposes of Rule 23″ and a “doctrinal error (that) threatens to render the class action procedure unavailable in the very small-value consumer cases that necessitated Rule 23 in the first instance.”

Dish Network lesson: Risk lurks if majority shareholder grips power

Alison Frankel
Oct 7, 2013 20:38 UTC

In an order issued late Friday, Judge Elizabeth Gonzalez of Nevada state court in Las Vegas effectively informed Dish Network Chairman Charles Ergen and his fellow board members that Dish’s peculiar corporate governance practices pose real risks to them and the company.

Gonzalez, who is presiding over a shareholder derivative suit against Dish’s board, granted expedited discovery to minority shareholders who claim that Ergen is conflicted in Dish’s $2.2 billion stalking horse bid for spectrum licenses belonging to the bankrupt wireless communications company LightSquared. The judge also scheduled a Nov. 12 hearing on the shareholders’ motion for a preliminary injunction to bar Ergen – who is LightSquared’s largest creditor, holding $850 million in debt acquired through a personal investment vehicle – from participating in Dish’s attempt to acquire the LightSquared licenses.

Gonzalez’s order comes despite Dish’s 11th-hour attempt last month to forestall the minority shareholders’ suit by appointing a purportedly independent litigation committee, and despite arguments by the special committee’s counsel at Young Conaway Stargatt & Taylor and Holland & Hart that permitting the shareholders to proceed would interfere with Dish’s ability to acquire those strategically crucial LightSquared assets. It seems clear to me that after a scant two months of litigation in the derivative suit, the judge is skeptical that Dish can muster an independent board committee – or even that its directors are trying very hard to assure any such committee’s independence.

Here’s what the government and judiciary think of serial whistleblowers

Alison Frankel
Oct 4, 2013 19:55 UTC

In a post earlier this week, I wrote about whistleblower lawyers’ concerns that unsuspecting tipsters will be misled into signing up with one of the many non-lawyer groups advertising on the Internet for Dodd-Frank whistleblowers. Unlike lawyers’ websites, ads by non-lawyers aren’t subject to state bar regulations. Nor are fee agreements between whistleblowers and non-lawyer agents. Lawyers who regularly represent tipsters told me that a proliferation of supposedly deceptive ads after the Securities and Exchange Commission implemented its whistleblower bounty program is one of the biggest problems in their business.

Repeat False Claims Act plaintiff Joseph Piacentile’s group, Whistleblowers Against Fraud, long predates the SEC program and is certainly not deceptive in representing its legal expertise online. WAF’s website says very clearly that the organization is composed not of lawyers but of former whistleblowers who want to “partner with our clients to develop the strongest case possible, recommend the right attorney for their case, and guide them through each phase of their case.” (As for fees, WAF says it takes a percentage of the whistleblower’s recovery but makes individual arrangements with each client.) Instead of legal advice, WAF sells its “experience and relationships,” which it says “are invaluable in developing large, successful whistleblower actions.” Government lawyers, the website says, have come to know and trust the (unidentified) principals of WAF, who have assisted the federal government and state authorities in recovering billions of dollars.

But relations between Piacentile and at least some of those government lawyers are decidedly frayed. On Sept. 30, U.S. District Judge Sterling Johnson of Brooklyn dismissed a False Claims Act case that Piacentile and a former Amgen sales representative brought against the pharma company, granting a motion by the U.S. Attorney’s office that claimed the whistleblowers’ information added little or nothing to the government’s $780 million settlement in 2011 of civil and criminal allegations against Amgen. Johnson’s opinion picked up the skeptical undertones of the government’s motion to dismiss. Like government lawyers in the U.S. Attorney’s dismissal brief, the judge cited Piacentile’s 1991 conviction for income tax evasion and conspiracy to make false Medicare claims, and said that after his conviction the former physician “gained notoriety as a repeat whistleblower.” Johnson’s dismissal of the suit effectively shuts Piacentile and his fellow Amgen whistleblower, Kevin Kilcoyne, out of any recovery because they previously rejected the government’s offer of a $1.8 million bounty from its 2011 settlement with Amgen.

5th Circuit’s BP opinion adds to hot debate on use of class actions

Alison Frankel
Oct 3, 2013 23:15 UTC

Can a defendant buy global peace in sprawling litigation through a class action settlement that benefits people who haven’t suffered any harm? Should courts permit class settlements that might sweep in uninjured claimants? And if not, what obligation do judges have to assure that settlements compensate only class members who meet the constitutional threshold to assert a claim?

In a remarkable dialogue in Wednesday’s ruling by the 5th Circuit Court of Appeals in BP’s challenge to the interpretation of some terms in its multibillion-dollar class action settlement with victims of the 2010 Deepwater Horizon oil spill, Judges Edith Clement and James Dennis expressed quite different answers to these questions. And though their discussion did not directly impact the majority holding that U.S. District Judge Carl Barbier must reconsider his interpretation of the settlement agreement’s definition of accounting terms for businesses that operate on a cash basis, the back-and-forth between Clement and Dennis raises important questions about the class action vehicle. We don’t often see appellate courts delve deeply into class action settlements (except those involving payments to charities in lieu of class members) because such agreements are rarely challenged. So the 5th Circuit’s clash of views on class membership and constitutional standing is noteworthy, especially in the context of the intensifying nationwide judicial reconsideration of class actions.

First, the 5th Circuit’s holding: Two members of the appellate panel, Judge Clement and Judge Leslie Southwick, agreed with BP and its lawyers at Gibson, Dunn & Crutcher that the settlement agreement cannot be interpreted to define monthly revenue as cash received and variable expenses as cash paid out. The majority ordered Judge Barbier to reconsider his approval of those definitions for business and economic loss claims by businesses purporting to have been affected by the Deepwater Horizon spill. Judges Clement and Southwick rejected arguments by class counsel, represented on appeal by New York University law professor Samuel Issacharoff, that BP agreed to terms that were open to the interpretation Judge Barbier gave them, so the company must be bound by the deal it signed. BP, as you probably recall, had run an intense public relations campaign claiming that it was being robbed of billions of dollar by uninjured claimants taking advantage of Barbier’s misinterpretation. I’m sure the majority holding will assuage concerns that BP’s experience will dissuade future mass tort defendants from agreeing to class action settlements. (I didn’t buy those concerns, but greater minds – including some terrific mass tort defense lawyers – were convinced.)