Opinion

Alison Frankel

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.

Steele, Hansmeier, Duffy and the other folks smacked by Wright have all appealed the sanctions order. Hansmeier and Duffy didn’t return my phone messages, but Steele told me in a phone interview that Wright should never have issued sanctions against him, since he’s never appeared before the judge or even practiced in California. He also claimed Wright based his ruling on a 12-minute hearing. “There was no evidence introduced, no testimony offered, nothing,” said Steele, who told me he was never a partner in Prenda Law but was merely “helping on an ad hoc basis” with some oral arguments. Steele said he’s licensed only in Illinois and hasn’t really practiced law in more than a year. “I’m not interested in litigation,” he said. “This is a controversial area of the law.”

Steele told me that what has been lost in the extensive coverage of Wright’s decision is that copyright owners have legitimate claims against downloaders who steal their content. “The only racket going on is the widespread use of BitTorrent,” he said. “The image is of out-of-control lawyers, but you have to remember: The vast majority of cases wind up in our favor.”

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.

The 6th Circuit splits with 2nd and 9th, lowers bar for securities claims

Alison Frankel
May 24, 2013 18:53 UTC

Federal courts in Kentucky, Ohio, Tennessee and Michigan may soon be seeing an influx of securities class actions claiming strict liability under Section 11 of the Securities Act of 1933, thanks to a ruling Thursday by the 6th Circuit Court of Appeals in Indiana State District Council of Laborers v. Omnicare. Judge Guy Cole, writing for a panel that also included Judge Richard Griffin and U.S. District Judge James Gwin of Cleveland, found that shareholders asserting Section 11 claims for misrepresentations in offering documents need not show that defendants knew the statements to be false.

“Under Section 11,” Cole wrote, “if the defendant discloses information that includes a material misstatement, that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.” The panel explicitly noted that its reasoning is at odds with the 9th Circuit’s ruling in the 2009 case Rubke v. Capitol Bancorp and the 2nd Circuit’s oft-cited 2011 decision in Fait v. Regions Financial.

But the court said it is bound only by the U.S. Supreme Court and insisted that high court precedent in the 1991 case Virginia Bankshares v. Sandberg is consistent with its Omnicare holding. “In the instant case, the plaintiffs have pleaded objective falsity,” Cole wrote. “The Virginia Bankshares court was not faced with and did not address whether a plaintiff must additionally plead knowledge of falsity in order to state a claim. It therefore does not impact our decision today.”

MBS investors and the ResCap deal: making the best of a bad situation

Alison Frankel
May 23, 2013 21:31 UTC

A little more than a year ago, when the mortgage lender and onetime Ally Financial subsidiary Residential Capital entered Chapter 11, investors in 392 ResCap mortgage-backed securities trusts announced that they’d reached a pre-bankruptcy deal permitting them an allowed claim of $8.7 billion for ResCap’s breaches of representations and warranties. The deal didn’t promise that investors would end up with $8.7 billion, since they’d be in line behind secured creditors and would have to share with other unsecured creditors in whatever meat remained on ResCap’s carcass. But as I reported at the time, the allowed claim deal did appear to make MBS investors represented by Gibbs & Bruns, Ropes & Gray and Talcott Franklin the biggest unsecured creditors in the bankruptcy.

So why, in the ResCap global plan disclosed Thursday, are the MBS trusts projected to recover just $672.3 million of the $2.53 billion that’s expected to be paid out of the estate? Their 28.4 percent recovery is less than the 33.6 percent of the estate (or $796.3 million) that’s projected to go just to the bond insurer MBIA and far less than the total 43 percent ($1.099 billion) of ResCap’s remains that are slated to be paid to monoline insurers.

There’s been tremendous controversy in the bankruptcy about the original $8.7 billion MBS allowed claim deal. Other ResCap unsecured creditors, including junior and senior unsecured noteholders, have asserted that the MBS investors made a backroom deal with Ally, garnering its support for their allowed claim in return for a pledge of support for Ally’s $750 million settlement with its former subsidiary. Creditors subsequently torpedoed that $750 million Ally deal, forcing the multiparty negotiations that produced the global resolution revealed Thursday, which includes a $2.1 billion payout from Ally, almost triple its original settlement. In the new plan, the allowed put-back claim for MBS investors is $7.3 billion, which means that their projected recovery of $672.3 million gives them about nine cents on the dollar.

Is long-running pollution ‘an event’? 3rd Circuit says yes in CAFA case

Alison Frankel
May 22, 2013 18:58 UTC

The doctrine of strict textualism – in which judicial decisions are compelled solely by statutory language – has always reminded me of what my father, an internist, used to say about overeager surgeons: When your only tool is a hammer, every problem is a nail. And when your only judicial philosophy is textualism, every case is a matter of words. Simple enough, right? Wrong. Consider a ruling Friday by a three-judge panel at the 3rd Circuit Court of Appeals that turned on the definition of “an event or occurrence.”

The issue for the 3rd Circuit was removal to federal court of a mass action under the Class Action Fairness Act. As you probably recall, Congress passed CAFA in 2005 with the express intention of steering most class actions out of state court and into the federal system. CAFA also mandated that mass actions involving parallel claims by 100 or more individual plaintiffs be litigated in federal court, with a couple of exceptions. One of the exceptions holds that strictly local controversies may remain in state court, even if more than 100 plaintiffs have sued. To meet CAFA’s criteria for that exception, cases must assert claims that all “arise from an event or occurrence in the state in which the action was filed, and that allegedly resulted in injuries in that state or in states contiguous to that state.”

There’s not much ambiguity in defining state borders, but what about in delineating the time frame of an event? Was, say, the Civil War a single event or a collection of battles and political actions that each represent a unique event? In the case before the 3rd Circuit, more than 400 current and former residents of St. Croix in the U.S. Virgin Islands claimed to have been injured by St. Croix Renaissance Group’s supposed failure to clean up toxic waste piles at a former alumina refinery SCRG purchased in 2002. St. Croix, which is in the business of redeveloping contaminated properties, never operated the refinery and has spent years in cleanup-cost litigation with a former owner of the site and others. But the plaintiffs said in filings in territorial court (the Virgin Islands equivalent of state court) that asbestos and other hazardous chemicals from the abandoned refinery were meanwhile swirling around St. Croix and damaging their health.

Shuttered FrontPoint hedge funds sue Libor banks for $250 mln fraud

Alison Frankel
May 21, 2013 21:45 UTC

Last month, right after U.S. District Judge Naomi Reice Buchwald of Manhattan dismissed class action antitrust and racketeering claims against the global banks that supposedly colluded to manipulate the benchmark London Interbank Offered Rate (Libor), Daniel Brockett of Quinn Emanuel Urquhart & Sullivan politely said, “I told you so.” Brockett had been pushing an alternate theory of liability against the Libor banks, focused on securities and common-law fraud, not on antitrust violations. And even in the Libor litigation wreckage that resulted from Buchwald’s ruling, he said, fraud claims like those filed in March by Freddie Mac’s conservator against a dozen Libor banks were still viable. The only catch was that plaintiffs would have to be able to show that they relied on misrepresentations by panel banks, so cases would probably have to be brought by individual investors with big enough losses in Libor-pegged financial instruments to justify the cost of solo litigation. Nevertheless, Brockett told me he believed those investors were out there.

On Tuesday, one of them surfaced. Brockett filed a 106-page complaint in New York State Supreme Court for Salix Capital, which owns claims belonging to several shuttered hedge funds that once operated under the FrontPoint umbrella. Salix alleges that in 2007 and 2008, the FrontPoint funds engaged in Libor-pegged interest rate swaps with Libor panel banks as part of complex, multi-security deals known as corporate bond basis packages. The swaps were supposed to be a hedge against a global banking crisis, since Libor should have increased as it became more expensive for banks to borrow from one another. Instead, the complaint alleges, the panel banks artificially suppressed Libor, undermining the trading strategy of the FrontPoint funds.

The funds “relied on the integrity of how Libor was set and the truthfulness of defendants’ representations about how Libor was set in entering into these transactions,” the complaint said. “By suppressing Libor, defendants artificially lowered the amount they were contractually obligated to pay to the funds under the interest rate swaps, while still demanding that the funds make the contracted-for (comparatively high) fixed-rate payments. In marketing the basis packages, defendants misrepresented Libor and omitted to disclose their manipulation of Libor.”

Chutzpah redefined? Rating agencies want FHFA to share discovery costs

Alison Frankel
May 20, 2013 18:01 UTC

One of the most salient bits of information in the Justice Department’s civil complaint against Standard & Poor’s and its parent, McGraw-Hill - aside from the revelation that one S&P analyst devised a 2007 dance video riffing on the Talking Heads song “Burning Down the House” – is the amount S&P supposedly earned for rating mortgage-backed securities as banks rushed to squeeze every last dollar from the securitization boom. According to the government, the agency’s Global Asset-Backed Securities Unit was assessing MBS in such a hurry in 2006 and 2007 that S&P rating committees spent less than 15 minutes reviewing analyst evaluations. Yet the agency was rewarded munificently for its efforts. In 2006, S&P was supposedly paid $278 million in fees by the banks whose MBS deals it rated. In 2007 it was paid $243 million for rating MBS.

I’m resurrecting Justice’s report on those fees because last week, S&P’s lawyers at Cahill Gordon & Reindel informed U.S. District Judge Denise Cote of Manhattan that it should not have to bear the entire $180,000 cost of producing in electronic form about 400 MBS files to the Federal Housing Finance Agency, which has served third-party subpoenas on S&P, Moody’s and Fitch in 15 securities suits against MBS issuers and underwriters. Satterlee Stephens Burke & Burke filed a similar letter to Cote on behalf of Moody’s, which claims vendor costs of $46,000 to produce files on 470 MBS deals it rated. Fitch’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison  protested over the agency’s $50,000 in vendor costs on 150 securitizations.

FHFA, let’s remember, is basically bringing its MBS claims on behalf of taxpayers, since it’s the conservator of Fannie Mae and Freddie Mac, the government-sponsored mortgage funders that were the biggest MBS investors in the securitization market. So to reduce the dispute over who should bear the cost of the rating agencies’ compliance with FHFA’s subpoenas to its most basic terms, companies that earned hundreds of millions of dollars by conferring unwarranted blessings on suspect deals are balking at thousands of dollars in costs to help taxpayers determine if they were duped.

Wal-Mart’s whistle-blower problem: Public revelations trump privilege

Alison Frankel
May 17, 2013 20:31 UTC

Attorney-client privilege confers powerful protection over confidential corporate documents. But according to arulingThursday by Chancellor Leo Strine of Delaware Chancery Court, once documents have become public – even if by dubious means – they can be used in litigation.

In May of 2012, shareholder lawyer Stuart Grant of Grant & Eisenhofer opened a thick packet he’d received in the mail. On behalf of clients, Grant had recently sent a demand for information to Wal-Mart, following up on The New York Times’ stunning revelations about the company’s attempt to shut down an internal investigation of alleged bribery of Mexican officials. Wal-Mart lawyers had said they would respond to Grant’s books-and-records demand, and Grant told me in an interview that he at first thought the envelope contained that response. Grant quickly realized that the mailing was not, in fact, official corporate correspondence: He had been sent a 190-page trove of confidential Wal-Mart documents.

“Immediately our reaction was, ‘What are our obligations?’ We did research, we did everything we needed to do,” Grant said. After determining that the return address on the packet was a fake, Grant notified Wal-Mart that he’d received the documents on June 1, 2012.

‘Iqbal Effect’ on housing, employment cases skews Republican: new study

Alison Frankel
May 16, 2013 22:37 UTC

In 2007, the U.S. Supreme Court redefined the pleading standard for antitrust suits in Bell Atlantic v. Twombly. In 2009, it extended the new standard to all civil cases in Ashcroft v. Iqbal. Since then, according to Westlaw,Twombly has been cited as a reference 191,394 times and Iqbal, 123,714. A lot of those citations in judicial opinions are boilerplate, but that very fact tells you how important Twombly and Iqbal have become. Judges now reflexively apply the Iqbal standard – which directs them to use their judicial experience and common sense to decide whether a plaintiff’s allegations are plausible, not merely conceivable – in deciding whether to dismiss complaints.

The big question in the post-Iqbal era has always been whether the discretion the Supreme Court gave to trial judges would affect not just dismissal rates but also the kinds of cases that are dismissed. Civil rights advocates, in particular, worried that judges who were politically inclined toward skepticism about their claims would use Iqbal to justify dismissing their suits. The overall impact of the new pleading standard continues to be debated in legal academia, but a soon-to-be-published study in the Akron Law Review suggests that Iqbal’s impact on civil rights cases has, in fact, skewed politically.

The study, “The Politics of Procedure: An Empirical Analysisof Motion Practice in Civil Rights Litigation Under the New Plausibility Standard,” looked at 548 employment and housing discrimination suits filed between 2004 (before Twombly) and 2010 (after Iqbal) – all such cases in which there was a reported dismissal decision. Albany Law School professor Raymond Brescia, one of the co-authors, had previously analyzed Iqbal’s impact on dismissal rates in those 548 cases, reaching the somewhat surprising conclusion that dismissals with prejudice increased at only a slight rate after Iqbal. That previous paper, by its own admission, called for refined analysis, so Brescia and student Edward Ohanian re-examined dismissal rates, taking into account such factors as the judge’s race, gender and, as a proxy for political views, appointment by Democratic or Republican presidents.

N.Y. judges split on time bar for billion-dollar MBS put-back claims

Alison Frankel
May 15, 2013 20:50 UTC

It is no exaggeration to say that billions of dollars hang on the question of whether New York Supreme Court Justice Shirley Kornreich or her colleague Justice Peter Sherwood is correct about how long mortgage-backed securities trustees have to assert claims that MBS sponsors breached representations and warranties. There’s no disagreement that under New York law, which applies to most MBS deals, the statute of limitations for breach of contract suits is six years. But in dueling opinions issued Tuesday, Kornreich and Sherwood came to different conclusions about when the statute begins to run. Sherwood sided with the securitizer Nomura and its lawyers at Orrick, Herrington & Sutcliffe, ruling that the clock starts ticking on the securitization’s closing date. Kornreich explicitly rejected that theory in a trustee case filed by Kasowitz, Benson, Torres & Friedman against DB Structured Products, finding instead that DB’s refusal to repurchase supposedly defective underlying loans triggered the statute.

The statute of limitations for MBS trustee breach of contract suits, otherwise known as put-back claims, is an issue of first impression in New York state court, and given that these two judges have now reached opposite conclusions about the same federal-court precedent (Structured Mortgage Trust v. Daiwa Finance and Lehman Brothers v. Evergreen), we’ll have to wait to see what the state appeals court thinks. The question for the appeals court is stark: Is an MBS pooling and servicing agreement breached when underlying loans fall short of promises the sponsor makes on the day the deal is signed or does the breach occur only when the sponsor fails to meet a continuing obligation to repurchase deficient loans?

To get a sense of the magnitude of that question, consider Sherwood’s footnote that 14 MBS cases in his court alone will be affected by his interpretation of the statute of limitations. Joseph Frank of Orrick told me that four of those cases are against Nomura, asserting aggregate damages of $500 million. And that’s just a few cases before one judge. The statute issue is so momentous that the Association for Mortgage Investors, a trade group, submitted an amicus brief in the Nomura case Sherwood decided, asserting that MBS sponsors have a continuing obligation to repurchase defective mortgages.

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