Alison Frankel

More than four years after the Financial Accounting Standards Board first proposed a stringent new standard for corporate disclosure of litigation loss contingencies, it voted Monday to drop the effort, citing increased scrutiny of litigation exposure by the Securities and Exchange Commission and the Public Company Accounting Oversight Board. The accounting rulemaker’s decision has to be considered a relief for public corporations, many of which have bitterly opposed the FASB’s litigation disclosure proposals as a gift to plaintiffs’ lawyers.

The controversy over exactly what corporations must say in their financial statements about potential litigation losses actually dates back to the 1970s, when accountants and defense lawyers compromised on a standard mandating the disclosure of a litigation contingency when there’s a “reasonable possibility” of a loss. The FASB – which is responsible for setting generally accepted accounting principles – eventually decided that there was too much wiggle room in the “reasonable possibility” standard. In 2008, the accounting board proposed new rules that called for corporations to disclose virtually all litigation exposure, including the company’s assessment of its maximum exposure. Defense lawyers, according to Eric Roth of Wachtell, Lipton, Rosen & Katz, read the proposal as a dangerous encroachment on privileged communications about litigation prospects. “You can’t adopt a rule that strips companies of attorney-client privilege,” Roth said. “That was seen as an attack on the adversary system.”

Michael Young of Willkie Farr & Gallagher, who has been talking to FASB board members about litigation contingency disclosure for years, said that if the 2008 proposal had been adopted, plaintiffs’ lawyers arguing for damages could simply have shown juries excerpts on maximum exposure from a defendant’s own financial statements. “To the FASB’s credit, it took the board about two minutes to understand the problem,” Young said.

In 2010 the FASB revised the proposal to eliminate the maximum-exposure requirement, but the raised bar for disclosure still prompted an outcry of opposition from corporations. Of the 339 comments the FASB received in response to the 2010 proposal, 289 opposed it. (And of the 46 commenters who supported the proposal, 19 were plaintiffs’ lawyers, according to the FASB.)

Meanwhile, as the accounting board considered responses to the 2010 proposal, the SEC’s corporate finance division began to crack the whip on compliance with the existing disclosure standard for litigation loss contingencies. As Reuters reported in February 2011, the financial crisis apparently prompted the agency to send hundreds of companies letters questioning litigation disclosures. Banks, in particular, were informed in a “Dear CFO” letter in October 2010 that they’d better disclose exposure to mortgage-related litigation; the SEC’s chief accountant warned securities lawyers in 2011 that they needed to “take a fresh look” at disclosure – “Carefully, carefully comply with the standard,” he said.

The New York Times had a great front-page story on Sunday about corporations contributing to politically active non-profits in order to shield their campaign contributions from public view. That’s not a revelatory thesis – I’ve written about a suit by campaign-spending reformers to force such non-profits as Karl Rove’s Crossroads GPS to disclose corporate donors – but the Times dug deep for examples of specific corporate contributions, such as the $3 million that Aetna gave to the U.S. Chamber of Commerce, which was initially described in a regulatory filing as a “lobbying expense.”

Bruce Freed of the Center for Political Accountability read about Aetna’s donation to the Chamber with great interest. Aetna, you see, is one of more than 100 large public companies that have agreed in the last several years to disclose their political spending. Most of those disclosure agreements have come under pressure from shareholders, who (often with CPA’s help) have demanded proxy votes on resolutions calling for corporations not only to disclose their policies and procedures for political spending but also to itemize all contributions, direct or indirect, that are intended to influence an election or referendum.

These shareholder demands for disclosure have become increasingly common, thanks to the U.S. Supreme Court’s 2010 holding in Citizens United v. Federal Election Commission, which said indirect corporate political spending is protected by the First Amendment. (Direct spending, as we’ve reported, may be another story.) Forcing companies to own up to their political involvement “has become even more critical,” the CPA website says, because Citizens United means “companies face greater pressure to spend corporate dollars either directly or indirectly through conduits such as trade associations and [non-profits].”

Jennifer Barker of Louisville, Kentucky, insists she has never downloaded a pornographic movie from the Internet and has certainly never infringed anyone’s copyright through illegal porn downloading. So you can imagine her dismay when, according to a complaint filed Thursday by her lawyers at Henry & Associates, Barker was contacted in May by a woman asking her to settle an illegal porn-downloading claim that had been asserted against her in Florida. Barker was told that Internet records indicated she had downloaded several titles from the website X-Art, and that if she didn’t pay up she’d be subject to hundreds of thousands of dollars in judgments and would be publicly revealed as a porn downloader. When Barker refused, according to the complaint, she was harassed about the supposed claim, with messages left on her personal and work phones.

Barker is one of tens of thousands of people who’ve received settlement demands from porn movie producers and their lawyers in the last few years. As I’ve reported here, these piracy cases have become a flash point in copyright litigation. No one disputes the scourge of illegal downloading, but public interest advocates assert that piracy cases in which porn producers and their lawyers sue thousands of unknown downloaders at a time are more akin to extortion than litigation. The copyright holders aren’t really interested in protecting their rights, according to Public Citizen and the Electronic Frontier Foundation. They’re interested in scaring accused downloaders into forking over a couple thousand dollars apiece to make the accusations go away. The public interest groups assert that even people like Barker, who say they never downloaded illegal porn, often assume it’s cheaper and easier to pay the settlement than to hire a lawyer and defend the litigation.

Barker did better than that, however. With Thursday’s filing, she became one of a handful of accused porn downloaders to go on offense against her attackers. She brought class action fraud, defamation and racketeering claims in federal court in Louisville on behalf of everyone who has been “subjected to the unlawful extortion attempts” of the defendants – Patrick Collins, Inc, Malibu Media, Raw Films, K-Beech and Third Degree Films – since 2007.

Remember the vicious fight between plaintiffs’ lawyers in competing New York and Delaware derivative suits against Bank of America’s board? In April, plaintiffs in the federal case in New York reached a proposed $20 million settlement with the defendants, which prompted their Delaware Chancery Court rivals to scream that the New York lawyers were settling on the cheap after an inadequate investigation. They attempted in both Delaware and New York to block the deal, arguing that the derivative suit should be worth as much as $500 million, but failed to enjoin the settlement. On Thursday, plaintiffs’ lawyers in the New York case filed a motion for preliminary approval of the $20 million deal.

A whopping $13.6 million of the money, they said in the motion, should go to them for fees and expenses. That’s 68 percent of the entire settlement, which will be paid by one of BofA’s carriers of directors and officers insurance. This, folks, is what breeds skepticism about shareholder litigation.

Let me say upfront that it’s not completely outside the realm of possibility that the fee request is justified. Lead plaintiffs’ lawyers at Saxena White and Kahn Swick & Foti made what appears to be a tactical decision to divide the fee issue from the settlement approval process, so they’ll file a formal motion for approval of their request for $13 million in fees and $600,000 in expenses after the settlement itself gets a thumbs-up from U.S. District Judge Kevin Castel. Thursday’s filing said only that the plaintiffs’ lawyers have sunk 24,000 hours into the litigation, representing $10.4 million in time, and that they deserve a 25 percent enhancement of their hourly billings. (Just as an FYI, there are 8,760 hours in a 365-day year, and this case was filed in 2009.) I left phone messages with four partners at Saxena and Kahn Swick, as well as with liaison counsel Curtis Trinko of the Law Offices of Curtis V. Trinko, requesting more information on what they did in those 24,000 hours. None of them called me back.

Oh, the ironies of megabillion-dollar securities class action litigation!

Last Friday, shareholders filed their response to summary judgment motions by Bank of America and its executives in a class action claiming BofA failed to tell shareholders about Merrill Lynch’s escalating losses and sky-high executive bonuses before BofA bought Merrill in 2008. As you would expect, the shareholders and their lawyers at Bernstein Litowitz Berger & Grossmann, Kaplan Fox & Kilsheimer and Kessler Topaz Meltzer & Check spend considerable time rebutting defense arguments that, as a matter of law, shareholders weren’t injured by BofA’s alleged disclosure lapses. Those arguments, the plaintiffs’ lawyers said, have already been rejected in U.S. District Judge Kevin Castel‘s class certification decision in February.

But deep in the 115-page filing is a more intriguing discussion of the role BofA’s lawyers at Wachtell, Lipton, Rosen & Katz played in the bank’s disclosure decisions. You may recall that former CEO Kenneth Lewis said he is entitled to summary judgment in the case because he relied on his CFO’s assurances that he’d consulted BofA lawyers on disclosure, and they’d said shareholders didn’t need to be told of interim Merrill loss projections that dwarfed initial reports. Lewis’s lawyers at Debevoise & Plimpton implied that the former CEO was under the impression that his CFO, Joe Price, had spoken both to the bank’s then-GC, Timothy Mayopoulos, and to BofA’s deal counsel at Wachtell.

The shareholders’ opposition brief demolishes that implication. “The record … establishes that BoA excluded Wachtell from the disclosure analysis at the critical time in the weeks before the [shareholder] vote,” the brief said. “Wachtell’s senior partners have uniformly testified that they were not informed of Merrill’s key December 3 loss estimate prior to the vote, and that Wachtell was not consulted at all on the issue of disclosure after November 20. Indeed, Wachtell did not learn of the magnitude of Merrill’s losses until December 12, when BoA contacted Wachtell one week after the vote to terminate the transaction because of Merrill’s losses.”

If you’re reasonably literate about the financial crisis, you probably know that the credit rating agencies have slipped through the carnage like a cat walking away from a knocked-over vase. With their opinions on publicly offered mortgage-backed securities protected by the First Amendment, Standard & Poor’s and Moody’s have won dismissals of the vast majority of MBS investor claims against them in state and federal court, despite powerful evidence from congressional investigations that they worked with underwriters to confer investment-grade ratings on securities backed by dreck. With one possible exception, the only surviving cases against rating agencies involve claims by investors in private placements, who have successfully argued that private ratings aren’t protected free speech.

The near-spotless litigation record of the rating agencies means we’ve seen very little internal evidence, in the form of emails between rating execs, emails between the agencies and underwriters and deposition testimony from credit rating agency insiders. The only hard evidence on the agency’s role in the economy’s collapse came from a Senate report.

Until Monday.

In a series of filings in federal court in Manhattan, Abu Dhabi Commercial Bank and its lawyers at Robbins Geller Rudman & Dowd disclosed thousands of pages of internal communications and deposition transcripts to back their claims that S&P and Moody’s are liable for fraud and negligent misrepresentation in connection with their rating of a structured investment vehicle underwritten by Morgan Stanley. Based on a declaration by plaintiffs that accompanied the documents, a huge percentage of the newly disclosed material has never previously been seen by the public – and a good many of the documents deal not just with the Morgan Stanley SIV but more broadly with the rating process inside S&P and Moody’s at a time when the two leading agencies were swamped with mortgage-backed securities to rate.

On Friday, the Wall Street Journal called Bank of America’s 2008 acquisition of the tottering mortgage giant Countrywide a $40 billion mistake. Sure, the bank only paid a total of $4.5 billion to pick up Countrywide, paying $2 billion for a minority stake in 2007 and an additional $2.5 billion for the rest of the company in 2008. BofA had its eye on Countrywide’s then-profitable mortgage servicing business, but since the acquisition Countrywide and its deficient mortgages have been pretty much nothing but trouble for Bank of America, which has seen its share price drop 68 percent and is still digesting what the Journal estimated to be at least $40 billion in “total real estate losses, settlements with government agencies and amounts pledged to investors who purchased poor-performing Countrywide mortgage-backed securities.” The Journal‘s Dan Fitzpatrick quoted a North Carolina banking professor who called BofA’s Countrywide acquisition “the worst deal in the history of American finance.”

Ouch. But thanks to a New York appeals court, BofA may have just put a fence around one big swath of Countrywide liability. On Thursday the Appellate Division, First Department, upheld Manhattan State Supreme Court Justice Barbara’s Kapnick‘s ruling that the mortgage-backed securities investor Walnut Place may not proceed with a breach of contract case against Countrywide. That ruling will severely limit the options for Walnut and the other investors who have objected to Bank of America’s proposed $8.5 billion global settlement with Countrywide MBS noteholders. It also puts the focus in the litigation over the global settlement on Bank of New York Mellon and its conduct as Countrywide’s MBS trustee, which Kapnick is also overseeing. My prediction: Unless Kapnick finds that BNY Mellon didn’t fulfill its duties as trustee in reaching that settlement, Countrywide MBS investors can’t sue outside of the deal.

And here’s why. MBS pooling and servicing contracts, you’ll recall, make it exceedingly difficult for noteholders to bring claims that underlying loans breached representations and warranties by mortgage issuers like Countrywide. Under standard PSA terms, investors can’t take any action unless they’ve amassed support from noteholders with 25 percent of the voting rights in a particular MBS trust. If they manage to get over that procedural hurdle, they must then demand an investigation of reps and warranties breaches from the MBS trustee and then wait months for the trustee to respond. Only if the MBS trustee fails to take action on their behalf can investors bring their own breach of contract or put-back suit.

In March, at the end of his much-maligned oral argument on the constitutionality of the so-called individual mandate of the Affordable Care Act, Solicitor General Donald Verrilli threw a Hail Mary.

Verrilli had taken a beating on his argument that the mandate didn’t violate the Commerce Clause because Congress was only regulating an existing market, not forcing people who don’t want health insurance into the market for healthcare. Chief Justice John Roberts and justices Antonin Scalia, Samuel Alito and Anthony Kennedy pounded the solicitor general on whether his reading of the Commerce Clause would permit Congress to do pretty much whatever it wanted in the guise of regulating interstate commerce. In the midst of discussing broccoli, health clubs and auto emission regulation, Verrilli and his opponents spent very little time presenting arguments and answering questions on the government’s backup argument for the mandate’s constitutionality: that the penalty imposed on those who do not buy health insurance is actually a tax that Congress is empowered to impose. (Paul Clement of Bancroft argued on behalf of 26 states opposed to the Affordable Care Act, and Michael Carvin of Jones Day on behalf of the National Federation of Independent Businesses.)

Nevertheless, Verrilli devoted his very last moments before the justices to the tax issue. “If there is any doubt about [the mandate's constitutionality] under the Commerce Clause,” he said, “then I urge this court to uphold the minimum coverage provision as an exercise of the taxing power.”

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:

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.