Opinion

Alison Frankel

Law profs, ex-SEC chair protest CommonWealth arbitration bylaw

Alison Frankel
Jun 12, 2013 20:27 UTC

Remember the fight over a mandatory shareholder arbitration bylaw adopted by the board of CommonWealth, an embattled $8 billion real estate investment trust? As I told you last month, when a couple of activist hedge funds sued in Maryland state court to invalidate the 2009 bylaw as part of their hostile takeover bid for the REIT, Baltimore Circuit Court Judge Audrey Carrionruled that CommonWealth’s mandatory shareholder arbitration clause is enforceable. The hedge funds, which had acquired their shares after the bylaw was enacted, subsequently dropped the suit and agreed to arbitrate their claims that CommonWealth’s board had breached its fiduciary duty. But in the meantime, shareholders whose ownership predated enactment of the mandatory arbitration bylaw picked up the fight to invalidate the provision.

On Monday, after Judge Carrion granted their emergency motion to stay arbitration, lawyers for the Central Laborers’ Pension Fund and two individual CommonWealth shareholders filed their opposition to CommonWealth’s motion to compel arbitration. The brief – submitted by Bernstein Litowitz Berger & Grossmann, Saxena White, Berger & Montague, and Tydings & Rosenberg - repeats many of the arguments shareholders made in their emergency stay papers, citing a 2011 San Francisco federal court decision inGalaviz v. Berg that denied Oracle’s motion to dismiss a shareholder derivative suit because the company’s forum selection bylaw was imposed without the consent of shareholders who purchased stock before its enactment. Even though two of the plaintiffs in the CommonWealth derivative suit purchased additional shares after the 2009 mandatory arbitration bylaw took effect, the brief said, the third plaintiff did not. And in any event, according to the brief, shareholders never received adequate notice of a bylaw that impermissibly extinguishes their property rights and violates federal securities laws.

Shareholders have amassed some impressive support for their argument that, as a matter of policy, CommonWealth’s mandatory arbitration bylaw must be ruled invalid. A group of 11 securities law professors, including Bernard Black of Northwestern, John Coates of Harvard and James Cox of Duke (the first three signatories), assert in a joint affidavit that mandatory arbitration of shareholder disputes would undermine U.S. capital markets. “Absent the transparency and visibility provided by legal proceedings in an open courtroom, and the possibility of a rebuke by a judge, fiduciaries would be much less deterred from violating their duties to shareholders,” the joint filing said. “Thus, it is critically important that public shareholders be permitted to vindicate their rights in court.” In particular, the law professors took issue with a provision in the CommonWealth bylaw that bars the award of fees to plaintiffs’ lawyers, even if they prevail in the arbitration. That clause, the professors said, makes it too expensive for shareholders to bring breach-of-duty claims, thus insulating the board from accountability.

Harvard Law professor Jesse Fried filed a separate affidavit because the other law professors distinguished the rights of shareholders who bought CommonWealth stock prior to the bylaw’s enactment from those who acquired shares with knowledge of the mandatory arbitration provision. Fried said the REIT’s bylaw was “so pernicious” that, as a matter of corporate governance policy, it should be held invalid even with regard to large and sophisticated shareholders like activist hedge funds.

Finally, former Securities and Exchange Commission chairman Harvey Pitt submitted an affidavit discussing the SEC’s dim view of mandatory arbitration provisions barring shareholders from litigating claims. (The shareholders’ brief pointed out that CommonWealth had to remove such a provision to satisfy the SEC when it registered an initial public offering of a REIT spin-off in 2012.) “The U.S. Securities and Exchange Commission has, as a matter of policy, refused to allow public companies unilaterally to divest shareholders of their ability to enforce state or federal rights,” Pitt’s affidavit said. “In this matter, CommonWealth provided no notice to any shareholder that it was about to adopt the arbitration bylaw, and most assuredly did not seek shareholder approval before doing so…. If the court were to enforce the arbitration bylaw against all CommonWealth shareholders, some shareholders would be deprived of rights upon with they relied (or upon which they should be deemed to have relied) when they purchased their CommonWealth securities, without even the semblance of notice and a right to be heard. Equally troublesome, if the arbitration bylaw is enforced against all CommonWealth shareholders, important fiduciary obligations of corporate insiders would effectively be negated or diminished.”

MBIA loses $100 million case vs flamboyant distressed debt investor

Alison Frankel
Jun 11, 2013 22:38 UTC

Is there any private equity investor with a more flamboyant personal style than Lynn Tilton, CEO of the distressed debt private equity firm Patriarch Partners? Tilton is Yale- and Columbia-educated and Wall Street-trained, but here’s the first impression she made in a 2011 interview with New York magazine: “Tilton’s lipstick is frosty pink, her eyelashes are long and inky black, her hair is Barbie-doll blonde, with curls spilling over cleavage that is invariably visible, invariably tan, invariably accentuated by a diamond necklace, and invariably supported by a tight-fitting garment made by one of her favorite designers. Today she has chosen a Roberto Cavalli miniskirt accessorized with spike-heeled suede boots and a fur-trimmed cape.”

Not your typical vulture fund investor, though Tilton did say, “There’s never been a carcass I wouldn’t put on my back.” (Patriarch’s current portfolio of 39 companies includes the Rand McNally map business, several cosmetics companies and a bevy of industrial concerns.) Forbes investigated whether Tilton should be included on its billionaires’ list in 2011 and ended up deciding that she’s probably worth at least $830 million, although the magazine found her so confounding a character that it produced an indelible week-long series of articlesabout (among other things) Patriarch’s predilection for extremely complex transactions and Tilton’s brassy, sex-tinged antics.

You might not think that a woman like Lynn Tilton would play well before a judge like U.S. Senior District JudgeRobert Sweet, who was appointed to the bench in 1978 and turned 90 years old last October. But it would be a mistake to underestimate either of them. In a 155-page decision issued late Monday in the bond insurer MBIA’s $100 million breach-of-contract suit against Patriarch, Judge Sweet found Tilton to be “vigorous, authoritative, informed and almost entirely supported by documentary evidence,” with a “clear and unshaken” recollection of her interactions with MBIA. “She was an effective witness and in the main entirely credible,” Sweet wrote. The judge even cited, in a footnote, an ABC News feature that called Tilton a “stylish job saver.”

The Wall Street Journal wins a round against Sheldon Adelson

Alison Frankel
Jun 5, 2013 22:40 UTC

Sheldon Adelson, the billionaire atop the Las Vegas Sands casino empire, must surely hold the unofficial U.S. record for appearances as a libel and defamation plaintiff. I’ve written before about Adelson’s quick trigger for libel claims, but he outdid himself this February when he sued Kate O’Keefe, a reporter for The Wall Street Journal in Hong Kong, over a December 2012 piece in which she and a co-author referred to him as “a scrappy, foul-mouthed billionaire from working-class Dorchester, Mass.” Adelson took exception to being described as “foul-mouthed,” but his underlying objection may have been to the premise of the article, which drew a contrast between Adelson and the equally abrasive but more polished former Sands China CEO Steven Jacobs, with whom Adelson has been engaged in litigation over the company’s casino operations in Macau. The Journal reporter whom Adelson sued in Hong Kong had previously written stories about Jacobs’s claim – asserted in legal filings in his Nevada wrongful termination action against the Sands – that Adelson had condoned a “prostitution strategy” at the Macau casino. Adelson, who subsequently sued Jacobs for defamation in Miami-Dade Circuit Court, seems to have regarded The Wall Street Journal as a favored recipient of leaks from his archenemy Jacobs.

But the casino magnate cannot pierce New York’s shield law for journalists in order to confirm those suspicions, according to a ruling last Friday by New York State Supreme Court Justice Donna Mills. Mills sued Kate O’Keefe, a reporter for The Wall Street Journalgranted a motion by the Journal’s lawyers at Davis Wright Tremaine to quash a third-party subpoena and deposition demand by Adelson in the Florida defamation litigation against Jacobs, finding that Adelson didn’t satisfy any of the three prongs of the test for overcoming the qualified reporters’ privilege. And according to the judge, even if Adelson were able to show that emails and phone records documenting contacts between Jacobs and the Journal were highly material and critical to his Florida case – the first two prongs of the test – he wouldn’t be able to show that there’s no alternative source for the information, since Adelson can get the material from Jacobs himself.

Mills’s ruling is good news for reporters because it’s “a classic example of the proper application of the New York shield law,” said Wall Street Journal counsel Laura Handman of Davis Wright. But it’s not the end of the paper’s Adelson problems. As Davis Wright asserted in a reply brief filed on March 15 in the New York quash litigation, the mogul and his lawyers at Olasov + Hollander and Coffey Burlington seem to expect that information from the Journal will aid Las Vegas Sands in its defense against Jacobs’s wrongful termination case in Nevada. Discovery in that suit has been stayed for a resolution of jurisdictional issues. In the meantime, Davis Wright contends, Adelson is trying to use the Florida defamation action and his Hong Kong suit against Journal reporter O’Keefe to obtain discovery.

Accusations fly on Day 2 of hearing on BofA’s $8.5 bln put-back deal

Alison Frankel
Jun 5, 2013 00:17 UTC

The biggest news to come out of Tuesday’s ongoing hearing to evaluate Bank of America’s proposed $8.5 billion settlement with investors in 530 Countrywide mortgage-backed securities trusts is that the Office of the Comptroller of the Currency gave Bank of America clearance to put Countrywide into bankruptcy if Countrywide’s liabilities threatened BofA’s existence. Or at least that’s what Kathy Patrick of Gibbs & Bruns, who represents 22 institutional investors that negotiated the proposed deal with BofA and Countrywide MBS trustee Bank of New York Mellon, said her clients were told by BofA Chief Risk Officer Terry Laughlin in 2011 as they tried to come to terms on a settlement of investor claims that Countrywide breached representations and warranties about the underlying mortgage loans. To my knowledge, Patrick’s assertion – which was intended to support her argument that MBS investors risked getting much less than $8.5 billion for their put-back claims – is, if true, the first tangible indication that Bank of America ever did more than hypothesize bankruptcy for Countrywide.

Objectors to the proposed settlement, meanwhile, scored points with their argument that BNY Mellon had options aside from acquiescing to what AIG counsel Michael Rollin of Reilly Pozner called “a sweetheart deal for BofA.” Both Rollin and his partner Daniel Reilly, who occupied most of the three hours of opening arguments by objectors (including 22 AIG-related entities, several Federal Home Loan Banks, the investment manager Triaxx and a variety of pension funds and local banks), emphasized that after the Countrywide MBS trustee received a demand letter from Gibbs & Bruns on behalf of major institutional investors, the trustee could simply have begun requesting loan files from BofA as the servicer of Countrywide MBS trusts, evaluating those loan files for material breaches, and demanding that Bank of America repurchase defective loans.

Rollin played a deposition clip from a BofA servicing executive, who said it was the bank’s official policy to repurchase loans that breached representations and warranties. That statement alone, Rollin said, proved the fallacy of arguments that BNY Mellon and the Gibbs & Bruns investor group could not have pierced the corporate veil to tag Bank of America with successor liability for Countrywide’s breaches. The trustee could simply have asserted put-backs to BofA as the servicer, Rollin suggested, without ever getting into the quagmire of successor liability. After all, the Reilly Pozner lawyers argued, the $8.5 billion settlement amounts to the put-back of only 2.5 percent of the 1.6 million mortgages underlying 530 Countrywide MBS trusts covered by the deal. Had BNY Mellon taken the alternative route of demanding the put-back of defective loans, they said, the trustee could have forced BofA to buy back a higher percentage of loans.

It’s (finally) time for objectors to BofA’s MBS deal to make their case

Alison Frankel
Jun 4, 2013 13:15 UTC

To say that the hearing to evaluate Bank of America’s proposed $8.5 billion breach of contract settlement with investors in Countrywide mortgage-backed securities got off to a slow start would be something of an understatement. In a courtroom so crowded that New York State Supreme Court Justice Barbara Kapnick repeatedly admonished observers to clear a path to the door, the judge heard hours of pretrial motions, many on issues she regarded as already settled. In particular, objectors to the settlement – led by AIG, several Federal Home Loan Banks and other assorted pension and investment funds – told Kapnick that they should not be forced to proceed with opening statements until they’ve had a chance to take depositions based on privileged communications between Bank of New York Mellon, the Countrywide MBS trustee, and its lawyers at Mayer Brown. Kapnick ordered the documents produced late last month, and AIG counsel Daniel Reilly of Reilly Pozner said it wouldn’t be fair to begin a hearing to determine whether BNY Mellon made a reasonable decision to agree to the $8.5 billion settlement – which resolves potential claims by 530 trusts that Countrywide breached representations and warranties about underlying mortgage loans – until objectors have quizzed witnesses on the confidential material.

Kathy Patrick of Gibbs & Bruns, who represents BlackRock, Pimco, MetLife and other major institutional investors that negotiated the deal with BofA and BNY Mellon, said the objectors just wanted to delay Kapnick’s final reckoning of the settlement, which is being evaluated in a special proceeding under New York trust law. Reilly, who argued unsuccessfully last week for a stay of the case while the state appeals court considers whether it should be heard by a jury, insisted that he just wants the proceeding to be fair. Judge Kapnick, meanwhile, seemed preoccupied with getting the actual hearing under way. “I am trying to make this go ahead,” she told the objectors at one stage. “I am not going to reopen a point we spent an inordinate amount of time arguing about,” she said at another. “At some point, you have to get going with this.”

The delay issue came to a head in the afternoon session, when yet more motions to limit testimony and evidence had to be resolved. Reilly asked the judge to restrict Patrick from asserting that 93 percent of Countrywide MBS investors support the settlement when, in fact, the majority of certificate holders haven’t opined one way or the other. Patrick stood up and promised that she’d henceforth say that 93 percent do not object to the deal.

Winston disqualification flap raises issue: What is direct conflict?

Alison Frankel
Jun 3, 2013 17:23 UTC

Remember the motion by California’s public employees’ retirement system to disqualify Winston & Strawn from representing the bond insurer National Public Finance (the muni bond wing of MBIA) in the Chapter 9 bankruptcies of two California cities, Stockton and San Bernardino? Calpers’s lawyers at K&L Gatesargued last month that under California law, Winston must automatically be disqualified from representing National because it hired a K&L partner who had represented the pension fund, which is in direct conflict with the bond insurer over priority of payouts by the bankrupt municipalities.

Winston & Strawn filed National’s response on Friday in the San Bernardino case. As you’d expect, the filing disputes many of the particulars of Calpers’s account of Winston’s hiring of Felton Parrish, a former K&L partner who billed more than 350 hours on Calpers matters. According to Winston & Strawn, no one at K&L Gates – including lead Calpers lawyer Michael Gearin - suggested that the pension fund would seek to disqualify Winston until weeks after Winston established an ethical wall and Parrish moved over to his new firm. Despite Calpers’s inflammatory hyperbole, Winston argued, there was nothing “secretive and misleading” about Parrish’s “routine lateral move.” Nor was Parrish doing anything wrong when he forwarded Calpers material to his personal account when he worked at K&L Gates; according to Winston & Strawn, he was just making it easier to work on documents from home. Winston and its client accuse Calpers of gaming the disqualification process to deprive National of its longtime lawyers at Winston & Strawn, who are among the most experience in the country in Chapter 9 cases.

It’s always juicy to dig into these disqualification disputes, but this case also raises an issue of much wider significance than whether Calpers mischaracterized Winston & Strawn’s hiring process and ethical wall. Under California precedent in the 2010 case of Kirk v. First American Title Insurance, a lateral partner’s knowledge is presumptively imputed to his or her new firm, but the firm can rebut that presumption by showing that it walled off confidential information. There’s one big exception, though. In the “extreme” circumstances in which a lawyer switches from one side to another while a case is under way, that direct conflict means the new firm is automatically disqualified regardless of any ethical walls or other protections it has erected.

Stanford professor: State qui tam actions could be answer to Concepcion

Alison Frankel
May 31, 2013 19:13 UTC

Janet Cooper Alexander, a professor at Stanford Law and a scholar of civil procedure and class actions, is not a fan of the U.S. Supreme Court’s 2011 ruling in AT&T Mobility v. Concepcion. In an upcoming paper for the University of Michigan Journal of Law Reform, Alexander discusses why, in her view, the high court majority “fundamentally misread” legislative history and congressional intent when it used the Federal Arbitration Act “to advance an agenda that is hostile to consumer litigation and classwide procedures.” Alexander argues that Concepcion‘s overarching endorsement of mandatory arbitration clauses has had a dire impact on the ability of consumers and employees to litigate small claims, since they’re “subject to unilaterally imposed arbitration provisions that overwhelmingly contain class waivers.”

“(Concepcion) may lead to the virtual death of the class action in employment cases and consumer contracts involving the sale of goods and services – any small-dollar transaction that can be governed by shrinkwrap, clickwrap, claim check, or other form of contract,” Alexander wrote.

Like I said, not a fan of the ruling. The professor thinks it’s highly unlikely that the current Congress will pass federal legislation to roll back Concepcion, and though she believes executive-branch agencies have the power to issue regulations restricting mandatory arbitration clauses, “such regulations, of course, could only govern contracts within the agency’s sphere of authority and could not apply broadly to all consumer contracts,” she wrote. And since Concepcion dealt specifically with a state attempt to preclude a purportedly unconscionable arbitration clause, employees and consumers can’t rely on statewide regulation to reopen the courthouse doors for their claims.

Strine makes new law on going-private deals in Ron Perelman case

Alison Frankel
May 30, 2013 19:47 UTC

Deference to the decisions of corporate boards is a bedrock principle of Delaware law, embodied in the business judgment rule that guides most Chancery Court analysis. But there are exceptions. In particular, the Delaware Supreme Court has made clear that deals in which a controlling shareholder wants to buy out minority stock owners must be evaluated very carefully, lest the controlling shareholder unduly influence the going-private process. In the landmark 1994 case Kahn v. Lynch, the state high court said that the appropriate standard of review for going-private deals is not business judgment but the entire fairness of the transaction, which gives courts discretion to second-guess the board’s decisions.

The Supreme Court did say in Lynch that the burden of showing whether deals are fair to minority shareholders can swing between plaintiffs and defendants depending on whether the company built protections for minority shareholders into the sale process. (Pay attention to this quote; as you’ll see, it’s crucial.) “The initial burden of establishing entire fairness rests upon the party who stands on both sides of the transaction,” the court said. “However, an approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder plaintiff.”

Note the court’s use of the word “or” in describing the protections: Since Lynch, corporate directors and controlling shareholders have known that they could stick plaintiffs with the burden of establishing the unfairness of going-private deals either by vesting approval of the transaction with a legitimately independent committee or by winning the approval of minority shareholders. Their incentive, therefore, was to build in one of those safeguards – but not both. Why take the risk that the deal wouldn’t pass both tests if you only need to pass one?

Illegal download claims tarred by porn copyright troll brush

Alison Frankel
May 29, 2013 22:45 UTC

U.S. District Judge Otis Wright‘s May 6 ruling in Ingenuity 13 v. John Doe is one of those decisions every lawyer should read. It’s only six pages long and sprinkled with Star Trek references, but its value lies in the cautionary tale outlined by the San Francisco judge. Wright was presiding over one of the many, many cases filed in the last few years by copyright owners suing tens of thousands of defendants over the supposedly illegal downloading of their content via online file-sharing sites. The litigation, as you probably know, is a specialty of pornography producers, whose cases benefit significantly from defendants’ understandable reluctance to be outed (even falsely) as consumers of online pornography. Occasionally defendants or their Internet service providers have stood up to porn purveyors. More often, defendants identified through subpoenas of their ISPs chip up a few thousand bucks to make the whole nightmare go away, leading public interest groups such as Public Citizen and the Electronic Frontier Foundation to call these en masse illegal downloading cases a shakedown operation.

Wright is one of the first judges to agree wholeheartedly with that assessment and issue sanctions based on it. “Plaintiffs have outmaneuvered the legal system. They’ve discovered the nexus of antiquated copyright laws, paralyzing social stigma, and unaffordable defense costs,” he wrote. “Copyright laws originally designed to compensate starving artists allow starving attorneys in this electronic-media era to plunder the citizenry.” The judge went considerably further than mere rhetoric, though. In the course of hearing discovery motions by the plaintiff, a copyright holding company called Ingenuity 13, the judge found out a bit about Ingenuity’s counsel, a shadowy firm known as Prenda Law. When Wright’s preliminary inquiries about Prenda revealed what he called a “cloak of shell companies and fraud,” the judge “went to battle stations,” he said in his opinion. He ordered four lawyers associated with Prenda (but not in the Ingenuity case) and two purported principals in holding companies engaged in the business of asserting porn copyrights to appear at a series of hearings in March and April.

Based on testimony and filings, Wright said, he concluded that the lawyers John Steele, Paul Hansmeier andPaul Duffy, who had all previously experienced “shattered law practices,” began copyright trolling as a way to make “easy money.” According to the judge, the attorneys had forged the name of Steele’s former groundskeeper on a copyright assignment and had otherwise engaged in a pattern of deceit and subterfuge, involving shell companies and elusive law firms, to mask the reality that they were the only beneficiaries of the suits they brought. “The principals’ web of disinformation is so vast that the principals cannot keep track – their explanations of their operations, relationships, and financial interests constantly vary,” Wright wrote. “Though plaintiffs boldly probe the outskirts of law, the only enterprise they resemble is RICO.” The judge ordered sanctions of $81,320 against all of the lawyers and firms he found to be part of the copyright scheme. He also referred his ruling to the U.S. Attorney’s office, the Internal Revenue Service and relevant bar associations.

Judge: Kentucky AG can use contingency-fee lawyers in case vs Merck

Alison Frankel
May 28, 2013 20:48 UTC

U.S. District Judge Danny Reeves of Frankfort, Kentucky, has just contributed a new episode to the ongoing saga of whether state attorneys general may hire contingency-fee lawyers to prosecute cases on behalf of consumers. Last Thursday, in a thoughtful 33-page opinion, the judge ruled that Kentucky’s attorney general,Jack Conway, has not violated Merck’s constitutional due process rights by using the private firm Garmer & Prather to litigate consumer claims related to Merck’s marketing of the pain reliever Vioxx. Reeves rejected arguments by Merck’s counsel at Skadden, Arps, Slate, Meagher & Flom that contingency-fee lawyers should not be permitted to represent the AG in a quasi-enforcement action.

As you probably recall, AGs’ use of private law firms is a hot-button policy issue for the U.S. Chamber of Commerce and the American Tort Reform Association, which are generally opposed to the practice. They’ve lobbied hard for state legislatures to enact limits on the use of contingency-fee counsel or, at least, regulations to govern relationships between AGs and outside counsel. So far, according to ATRA president Tiger Joyce, 13 states have enacted such laws. But law professor Amy Widman of Northern Illinois University, who specializes in AGs’ enforcement of consumer protection laws, has testified before Congress that state lawyers need to be able to tap the resources of the private bar or else consumer laws will go unenforced by resource-strapped AGs.

That was the context for Reeves’s ruling, in what I’ve previously called the leading litigation challenge to state use of private lawyers. After Kentucky’s suit bounced between state and federal court, finally alighting in Franklin Circuit Court, Merck filed a declaratory judgment action in federal court, seeking a ruling that Kentucky’s use of contingency-fee lawyers was unconstitutional. The judge denied the pharmaceutical company’s motion for a preliminary injunction but also twice refused the AG’s motion to dismiss the suit. Last week’s ruling came on Merck’s motion for summary judgment.

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