Alison Frankel

Last month, when plaintiffs’ lawyers filed their amended class action complaints against a bevy of banks accused of manipulating the London interbank offered rate (or Libor), I noted that the antitrust complaints were long on wonky economic analysis but short on juicy conspiracy evidence, mostly because U.S. District Judge Naomi Reice Buchwald had denied motions to grant the private antitrust plaintiffs access to materials the banks turned over to regulators. I asked whether there was enough billowy black smoke in the class complaints to withstand the banks’ motions to dismiss.

I don’t think that’s going to be a problem anymore.

On Wednesday, Barclays won the race to reach a deal with U.S. and British regulators, beating UBS, which was reportedly the first bank to begin cooperating with international antitrust authorities. Barclays agreed to pay at least $450 million to resolve government investigations of manipulation of Libor and the Euro interbank offered rate (or Euribor): $200 million to the U.S. Commodity Futures Trading Commission, $160 million to the criminal division of the U.S. Department of Justice and $92.8 million to Britain’s Financial Services Authority. What’s more, the CFTC and DOJ filings on the deal feature more smoking guns than a Martin Scorsese movie.

The CFTC’s Order Instituting Proceedings and the Justice Department’s Statement of Facts cite truly eye-popping emails, instant messages and other evidence indicating that between 2005 and 2008 Barclays employees agreed to manipulate the rates they submitted to the banking authority that oversees the daily Libor report for seemingly anyone who asked them to monkey with it: senior Barclays officials concerned that the bank would look weak if it reported too high a borrowing rate; interest rate swap traders trying to improve Barclays’ derivatives trading position; even former Barclays traders begging for favors. We’re talking naked, blatant manipulation. Here’s one exchange cited in the DOJ filing:

Trader: “Can you pls continue to go in for 3m Libor at 5.365 or lower, we are all very long cash here in ny.”

Libor rate submitter: “How long?”

Trader: “Until the effective date goes over year end (i.e. turn drops out) if possible.”

Usually when I write about the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, it’s to tell you about yet another successful defense effort to dismiss claims involving the overseas application of U.S. laws, whether in trade secrets litigation, bankruptcy clawback actions or lots of other arenas that have nothing to do with Morrison‘s securities-law roots. In April, the Securities and Exchange Commission needed a full 106 pages to analyze Morrison‘s background and impact (before declining to answer the question of whether Congress should reform securities laws to restore a cause of action for U.S. investors against foreign-listed defendants). Across a wide plain of civil litigation, foreign defendants have wielded Morrison as a case-crushing bludgeon, with federal judges bowing to its power.

But in some recent rulings the judiciary is beginning to define limits to Morrison‘s sweep, suggesting that the ruling demands a more nuanced, fact-based inquiry than earlier decisions suggested. I’ve previously talked about U.S. District Judge Lewis Kaplan‘s survey last month of Morrison‘s impact on racketeering cases and his conclusion that as long as there’s “a domestic pattern of racketeering activity aimed at or causing injury to a domestic plaintiff,” RICO claims can survive against foreign defendants. Last week Kaplan once again homed in on Morrison and domestic conduct, this time in the securities context. The judge refused to dismiss any of the SEC’s claims against the New York investment adviser ICP, which allegedly defrauded investors in the Triaxx mortgage-backed collateralized debt obligations.

ICP and the individual defendants, represented by Williams & Connolly and Miller & Wrubel, had argued that the SEC cannot show the Triaxx CDOs were traded domestically. Morrison holds that there’s only a cause of action in the United States for “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” The Triaxx CDOs were not listed, and ICP’s lawyers said the investment vehicles in the case were all foreign, so, according to ICP, Morrison bars the SEC’s claims.

There is no federal judge more economically outspoken than Richard Posner of the 7th Circuit Court of Appeals, who in his scant spare time co-authors a provocative blog with the Nobel Prize-winning University of Chicago economist Gary Becker. With a high-pitched querulous voice and no tolerance for obfuscation, Posner can demolish lawyers he considers economics slackers. If you’ve got a dubious theory of damages, you’d better hope you don’t end up arguing it before him.

But I’d bet neither Apple nor Motorola thought their damages theories were particularly unusual in the patent infringement cases Posner tossed Friday, sitting by designation in federal district court in Chicago. The lawyers on both sides (who didn’t return my calls seeking their comments) are, after all, veterans of the smartphone patent wars: Quinn Emanuel Urquhart & Sullivan for Motorola; Covington & Burling, Weil, Gotshal & Manges and Tensegrity Law Group (Matt Powers‘s new shop) for Apple. Motorola made basically the same damages argument against Apple that it has asserted in litigation with Microsoft in federal court in Seattle, claiming that it’s due more than 1 percent of iPhone sales for Apple’s infringement of a standard-essential Motorola patent on communications between cellphones and cellular towers. Apple, meanwhile, offered an economic consultant’s analysis of what it might have cost Motorola to license or work around its patents for digital signal processing and recognition of embedded phone numbers and Web addresses.

Nevertheless, according to Posner’s 38-page opinion, neither side made a legally sufficient case for damages. That, in turn, doomed both sides’ requests for injunctions. With neither an injunction nor money damages an option for Apple or Motorola, Posner said any judgment on the validity or infringement of the patents at issue “would have no practical effect” and dismissed both suits with prejudice.

The bond insurer Syncora got just about everything it wanted when U.S. District Judge Paul Crotty of Manhattan issued his long-awaited ruling on loss causation in Syncora’s breach-of-contract case against EMC, the erstwhile mortgage arm of Bear Stearns. Crotty’s analysis didn’t track the same way as that of New York State Supreme Court Justice Eileen Bransten in the Syncora and MBIA rulings against Countrywide, and, unlike Bransten, he did not grant Syncora summary judgment on its theory of rescissionary damages, which would have entitled the bond insurer, as a matter of law, to recover everything it has paid out in claims on the EMC mortgage-backed securities it insures, less premiums. Crotty said it’s too early to decide that fact-based question.

But on every other point, the federal judge sided with Syncora and its lawyers at Patterson Belknap Webb & Tyler, and in ways that may protect Syncora when the state appeals court reviews Bransten’s ruling in the Countrywide case. Bransten began her analysis with the insurance contracts between the monolines and Countrywide, concluding that under state insurance law the bond insurers simply had to show that Countrywide misstated the risk profile of the underlying mortgage pool when it induced MBIA and Syncora to insure the mortgage-backed notes. She declined, however, to grant summary judgment to Syncora and MBIA on the broader question of whether Countrywide breached MBS servicing agreements – as opposed to insurance contracts – merely by misrepresenting the quality of the underlying loans, or whether insurers (and, by extension, investors) could only assert put-back demands for defaulted loans.

Crotty, by contrast, said the contracts between Syncora and EMC are clear: EMC is liable for breaches in representations and warranties about the underlying home equity loans, regardless of whether those loans are in default. The insurance contract, he said, refers back to the loan servicing agreements, which, according to Crotty, “do not provide that breaches of representations or warranties must cause any … loan to default, before (Syncora) can enforce its remedies under the repurchase provision. Had the parties intended this requirement, they could have included such language. They did not.” In essence, Crotty conflated his analysis of the insurance and loan pooling contracts, unlike Bransten, who examined them separately. He concluded that the insurance contract incorporates the loan pooling contract, which does not require Syncora to show that breaches in EMC’s representations on the underlying loans led to their default in order to demand repurchase of deficient loans.

We now know exactly who caused the financial crisis.

Or, at least, whom U.S. District Judge Frederic Block of Brooklyn holds accountable. According to a 19-page opinion Block issued Monday in the Securities and Exchange Commission case against former Bear Stearns hedge fund executives Ralph Cioffi and Matthew Tannin, “many in the financial world” believe the economic catastrophe was triggered by the collapse of two funds Cioffi and Tannin ran. That’s a pretty heavy burden the judge has laid on the former Bears, who, after all, were acquitted in a 2009 criminal trial of lying to investors about the health of their funds.

Block, who had previously informed the SEC that he would not be a mere rubber stamp for what he called a “chump change” settlement, ended up approving a deal between the agency and the former Bear Stearns execs. (Neither of them admitted or denied the SEC’s allegations, but Cioffi agreed to cough up $800,000 in penalties and disgorgement; Tannin’s total is $250,000.) But the judge took the opportunity of a settlement in this widely followed case to write an opinion that seems directed at the peanut gallery, and not at the SEC, Cioffi, Tannin or their lawyers. His conclusion: “Wall Street predators” caused the economy to buckle, and Congress should think hard about empowering the SEC to recoup investor losses.

According to Block’s discussion of the SEC’s historical enforcement abilities, Congress has twice acted to expand the agency’s mandate. The SEC at first had only the ability to enjoin violations of securities laws. A 1971 ruling by the 2nd Circuit Court of Appeals, followed by similar rulings in other federal circuits, codified the agency’s power also to seek disgorgement of ill-gotten profits as a remedy. Then, in a pair of laws in 1984 and 1990, Congress gave the SEC the right to demand monetary penalties of up to $500,000, depending on the defendant and the alleged violation.

The last time I wrote about the securities fraud class action claims against JPMorgan Chase for the losses it suffered in risky credit default swaps, I told you to pay attention to the unusually short class period alleged in the early complaints. The first couple of filings claimed the bank’s deception of investors began on April 13 – the day JPMorgan CEO Jamie Dimon told analysts that news reports about the dangerous trading position of its chief investment office were a “tempest in a teapot” – and ended on May 10, when the bank disclosed the initial $2 billion loss of the “London Whale.”

Two institutional investors joined the JPMorgan fray last week in federal court in Manhattan, and suddenly the class period has become a point of controversy. A pipefitters’ union trust fund represented by Labaton Sucharow claims that the bank’s fraud began not on April 13 but three months earlier, on Jan. 13. That was the date JPMorgan filed an annual report with the Securities and Exchange Commission that allegedly failed to warn investors about the looming CIO losses, “instead offering a false and misleading picture of stable and consistent operational strategy and risk exposure.”

The Louisiana Municipal Police Employees’ Retirement System, represented by Grant & Eisenhofer, put the beginning of the alleged fraud long before the 2012 annual report. According to the LAMPERS complaint, filed Friday, JPMorgan began deceiving shareholders about its exposure all the way back in February 2010, when it published a misleading description of the CIO in its annual report. From then on, LAMPERS claims, the bank ignored so-called red flag warnings and continued to mislead investors about its risky hedges.

Without former U.S. District Judge Richard Holwell, there probably would not have been any prosecution of Rajat Gupta, the former Goldman Sachs director and McKinsey chief convicted Friday of insider trading and conspiracy. In 2010, Holwell ruled that prosecutors could use wiretap evidence in their case against Galleon Group hedge fund founder Raj Rajaratnam, rejecting defense arguments that the government is not authorized to use wiretaps to investigate insider trading. If prosecutors hadn’t been able to use those Rajaratnam wiretaps – in which Rajaratnam obliquely referred to tips from a Goldman insider – it’s unlikely the government would have gone to trial against Gupta, since the tapes were the only link between Gupta’s alleged tips and Rajaratnam’s trades.

Holwell, who is now in private practice at Holwell, Shuster & Goldberg, told me Friday that wiretaps have forever changed the way the government investigates insider trading. “Prior to the Rajaratnam case, you look at insider trading rings, and they’re very small. Prosecutors would wind up getting one, two, three people.” The Rajaratnam case showed that with wiretaps, you can sweep in rings of tippers, leading to “a vast array of prosecutions,” Holwell said.

It’s also unlikely, he said, that prosecutors would have uncovered Gupta’s role in Rajaratnam’s insider trading ring if they had not been authorized to tape the Galleon founder. The classic evidence in insider trading prosecutions is trading and telephone records, but since Gupta didn’t profit directly from Rajaratnam’s trades, he probably wouldn’t have come to the government’s attention if it hadn’t been for those taped references.

When John Bellinger of Arnold & Porter was the legal adviser to the State Department in the administration of George W. Bush, the Justice Department filed about a dozen amicus briefs addressing the Alien Tort Statute, a 1789 law that has become a modern vehicle for international human rights litigation. Bellinger told me on Thursday that he signed every one. When foreign nationals use the ATS to bring cases in U.S. courts for conduct that took place overseas, foreign policy is implicated, and the State Department wants a voice. That’s why Bellinger believes it’s so significant that when the Justice Department filed its new amicus brief in the reformulated Kiobel v. Royal Dutch Petroleum case at the U.S. Supreme Court, State Department legal adviser Harold Koh did not sign it.

“That seemed to be a not-so-subtle message — more to the human rights community than the Supreme Court — that State did not agree with the Justice Department position,” said Bellinger, who blogged about the DOJ brief on Wednesday night at Lawfare. “The Obama administration was in a tight spot in this one.”

The DOJ brief, signed by Solicitor General Donald Verrilli, argues, tepidly, against the application of the Alien Tort Statute against Shell by Nigerian nationals who claim the oil company was complicit in state-sponsored torture and murder in their country. That’s a switch in sides for the government, which had supported the Nigerians in Kiobel‘s first trip to the Supreme Court, when the issue was whether corporations could be liable under the Alien Tort Statute. The Justice Department said they could, in an amicus brief that State Department adviser Koh signed.

No major investor in private-label mortgage-backed securities has been more stalwart about standing up for its contractual rights than the asset manager BlackRock. Along with Pimco, BlackRock has been the backbone of the MBS investor coalition that reached the proposed $8.5 billion breach-of-contract (or put-back) settlement with Bank of America last year and the $8.7 billion allowed-claim deal with Residential Capital last month. The coalition, represented by the law firm Gibbs & Bruns, has also served put-back demands on trustees for more than $100 billion in mortgage-backed offerings by JPMorgan, Morgan Stanley and Wells Fargo. So there’s no one better qualified than BlackRock Managing Director Randy Robertson, who heads the firm’s securitized asset investment team, to judge the impact of put-back litigation on the future of residential mortgage-backed securitizations.

His view: Litigation – or, more precisely, the conflict that leads to litigation – stands in the way of an MBS revival because investors don’t believe issuers will live up to contract terms. “A preponderance [of the pending litigation] would have to be resolved,” Robertson said Wednesday at a briefing on the BlackRock Investment Institute’s new report, “In the Home Stretch: The U.S. Housing Market Recovery.” I asked Robertson how long that might take. “I wish I had a crystal ball,” he replied. I also asked whether there were any more big settlements in the offing; Robertson declined to say.

Until investors’ put-back claims are resolved, Robertson said, any MBS issuer (or the government) will have to provide enough subordination to account for the extra risk investors believe they bear. Robertson estimated it would take 20 percent government backing, for instance, to reassure the MBS market about any new offering. He also said pooling and servicing agreements will have to be, in his word, “tweaked” to reflect investor concerns. Going forward, Robertson said, pooling and servicing agreements will have to distinguish between issuers and servicers to remove a potential conflict of interest, offer investors more access to information about the performance of underlying assets and include additional specificity about the fiduciary responsibilities of MBS trustees.

It’s no secret that the judges of Delaware Chancery Court don’t much like the forum fights that have become an inevitable blight on shareholder derivative and M&A litigation. In those cases, unlike federal securities fraud class actions, there’s no formal mechanism for picking lead counsel. So, as Vice-Chancellor Travis Laster wrote Monday in a monumental and must-read ruling in the Allergan derivative litigation, shareholder firms – or, as Laster calls them, “rational economic actors” – have a powerful incentive to stake a claim to a promising derivative case by rushing to court with a bare-bones complaint. And given the low cost of bringing a suit without conducting any independent investigation, there’s every reason for plaintiffs’ firms to file outside of Delaware, hoping for a piece of the lead counsel action wherever the case proceeds.

Laster offered a cynical but well-informed take on the shareholder securities bar (forgive the long quote; it’s worth it). “Motivated by first-to-file pressure, plaintiffs’ firms rationally eschew conducting investigations and making books and records demands, fearing that any delay would enable competitors to gain control of the litigation and freeze-out the diligent lawyer. No role, no result, no fee,” he wrote. “For fast-filing lawyers, the resulting action has the dynamics of a lottery ticket. In most cases, the fast-filing plaintiff will not have pled a derivative claim that can overcome [a defense motion to dismiss]. But in the rare case, fate may bless the fast-filer with something implicating the board, or a court might be offended by the magnitude of the corporate trauma and allow the derivative action to proceed … A fast-filer can readily build a portfolio of cases in the hope that one will hit.”

Targeted corporations have to expend time and money on lawyers as judges and plaintiffs’ lawyers figure out who’s in charge of derivative litigation, but the real victims of hurry-up filings, Laster explained, are the shareholders. Few of those scantily investigated derivative suits can meet the high bar for establishing a breach of duty by directors, so most of them end up being dismissed. That’s no big deal for plaintiffs’ firms that regard every case as just one line item in a portfolio, Laster suggested. And it’s actually a boon for defendants, who would just as soon move to dismiss a case with skimpy allegations. But shareholders suffer when their lawyers don’t investigate.