Opinion

Alison Frankel

UBS ‘likely’ to settle with FHFA before January trial: bank co-defendants

Alison Frankel
Jul 17, 2013 19:03 UTC

Remember UBS’s attempt to play what it considered a get-out-of-jail-free card in the megabillions litigation over mortgage-backed securities UBS and more than a dozen other banks sold to Fannie Mae and Freddie Mac? UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom came up with an argument that could have decimated claims against all of the banks: When Congress passed the Housing and Economic Recovery Act of 2008 and established the Federal Housing Finance Agency as a conservator for Fannie Mae and Freddie Mac, UBS said, lawmakers explicitly extended the one-year statute of limitations on federal securities claims – but neglected to extend, or even mention, the three-year statute of repose. UBS argued that FHFA’s suits, which in the aggregate asserted claims on more than $300 billion in MBS, were untimely because they were filed after the statute of repose expired.

The judge overseeing almost all of the FHFA MBS suits, U.S. District Judge Denise Cote, denied UBS’s motion to dismiss in 2012. The bank, she said, was splitting hairs: Congress clearly intended to give FHFA a chance to evaluate its potential causes of action and believed it was doing so when it extended the statute of limitations. The judge subsequently applied the same reasoning to other banks’ motions to dismiss FHFA suits on timeliness grounds, but she also granted UBS permission to take the issue to the 2nd Circuit Court of Appeals. Cote said that whichever way the appeals court ruled, its decision would help resolve the FHFA litigation. If she were reversed, FHFA’s claims would be drastically narrowed; if she were upheld, the banks would be more inclined to settle.

In April, as you probably recall, a three-judge 2nd Circuit panel affirmed Judge Cote. In the appeal, UBS stood alone among the FHFA bank defendants as a party, though the other banks filed an amicus brief endorsing UBS’s position that Congress failed to extend the statute of repose. Since the 2nd Circuit’s ruling, UBS and FHFA have been engaged in whirlwind discovery, which is scheduled to close in September. Judge Cote has set an inviolable January trial date for FHFA’s case against UBS.

That looming trial date has cause the other FHFA bank defendants to worry that UBS will settle with the conservator before the statute of repose issue hits the U.S. Supreme Court’s docket. In an emergency petition filed Monday at the 2nd Circuit (and first spotted by my Reuters colleague Karen Freifeld), the other banks with cases before Judge Cote asked the appeals court to permit them to intervene in the UBS case for the purposes of submitting a certiorari petition to the Supreme Court. The deadline for that petition is Sept. 3, the banks wrote. They want to intervene “to ensure that even if – as is likely – the UBS action is resolved before a petition is filed or before consideration of that case by the Supreme Court, (they) can still seek timely review.”

I thought it was rather bold of UBS’s fellow defendants to predict its imminent FHFA settlement, so I emailed UBS lawyers at Skadden for a reaction. Through a firm representative, they declined to comment. I also reached out to FHFA counsel at Quinn Emanuel Urquhart & Sullivan and to Barclays’ counsel at Sullivan & Cromwell, who took the lead on the other banks’ emergency petition at the 2nd Circuit. They didn’t get back to me.

The next great benchmark manipulation case?

Alison Frankel
Jul 16, 2013 19:27 UTC

Last spring, when U.S. District Judge Naomi Reice Buchwald of Manhattan decimated the consolidated private litigation over banks’ manipulation of the London Interbank Offered Rate, the only claims that remained upright in the rubble of her ruling were those brought under the Commodity Exchange Act, which makes tampering with the price of exchange-traded commodities or futures illegal. Buchwald’s opinion cited a plethora of Manhattan federal court decisions that permitted victims of futures price manipulation to move forward with their suits, including three consolidated class actions involving rigged prices for oil futures. I suspect we’re going to be hearing a lot more about those cases over the next several months. Even as the class action bar tries to persuade the 2nd Circuit Court of Appeals to reinstate the Libor antitrust claims that Buchwald dismissed, plaintiffs lawyers are gearing up for the next big litigation: claims that BP, Royal Dutch Shell, Statoil and other unidentified conspirators violated commodity and antitrust laws by reporting false prices for North Sea Brent crude oil to the price-setting agency Platts.

Lowey Dannenberg Cohen & Hart filed the first class action, in federal court in Manhattan, on May 22, just days after investigators from the European Commission raided oil company offices in a probe of alleged collusion to distort prices for crude oil and biofuels during the half-hour window in which Platts sets prices. Five more class actions have since hit the docket in Manhattan and one in federal court in Louisiana, all naming BP, Statoil and Shell as defendants. (EC investigators also collected information from Platts, a division of McGraw Hill, but it has not been targeted in the private suits.) Last Thursday, Lowey Dannenberg petitioned the Judicial Panel on Multidistrict Litigation to consolidate the cases before U.S. District Judge Andrew Carter, who’s been assigned to oversee all of the New York filings.

The complaints are light on specific details of the alleged collusion, but with Britain’s Serious Fraud Office and the U.S. Federal Trade Commission reportedly investigating crude oil price-setting along with the European Commission, class action lawyers should eventually be able to piggyback on regulatory findings. Plaintiffs lawyers seem to have filed now because they’re worried about the statute of limitations for claims of alleged price-fixing that go back to 2002. Several of the complaints, in fact, assert that the statute should be tolled because the defendants conspired to cover up their conspiracy.

GM judge aims to prevent insider trading by distressed debt funds

Alison Frankel
Jul 15, 2013 20:50 UTC

Remember the shocking ruling a couple of years ago by U.S. Bankruptcy Court Judge Mary Walrath in the bankruptcy of Washington Mutual Inc? In September 2011, Walrath refused to approve a hard-fought $7 billion reorganization plan for WMI because of concerns that four distressed debt hedge funds might have traded WaMu notes based on confidential information they or their lawyers obtained in negotiations to resolve the bankruptcy. The hedge funds were outraged by Walrath’s decision, which they said was wrong on both the facts and the law. Ultimately, however, they agreed to make the whole mess go away by kicking about $30 million of their expected recovery to WMI shareholders, who had first raised the insider trading accusations.

But Walrath’s ruling continues to loom over the twilit world of distressed debt trading, most notably right now in a heated fight over noteholders’ claims to about $2.7 billion from the bankruptcy estate of General Motors. In an order late last month authorizing the appointment of a mediator, U.S. Bankruptcy Judge Robert Gerber of Manhattan said explicitly that noteholders participating in the mediation must establish screening procedures to insure that confidential information doesn’t fall into the hands of traders in the securities. Gerber was even more explicit in a June 11 hearing on the prospective mediation: If hedge funds that own the notes trade them based on developments in the settlement negotiations, they risk being found in contempt of court. Gerber’s warnings establish some bright-line boundaries in a generally opaque market.

The incredibly complex GM dispute centers on notes issued in late 2008 and early 2009 by a subsidiary called Nova Scotia Financing Company, whose only assets were intercompany loans to GM Canada. Investors who bought up the notes knew they had great leverage against GM, which was desperate to keep its Canadian business out of bankruptcy. So as GM finalized its petition for Chapter 11 bankruptcy in the United States, it reached a deal in which the Nova Scotia noteholders would drop their claims against GM Canada in exchange for a $367 million consent fee and a promise that GM would back their $2.7 billion claim against its estate. (I’m leaving out reams of ancillary details, but you get the gist.)

‘Company Doe’ cites gay marriage ruling to block consumer group appeal

Alison Frankel
Jul 12, 2013 19:11 UTC

Well, that didn’t take long.

Two weeks ago, the U.S. Supreme Court held in Hollingsworth v. Perry that an advocacy group opposing same-sex marriage could not stand in the shoes of California officials to appeal a trial court ruling that the state’s ban was unconstitutional. Yesterday, the firm that argued in the Supreme Court for same-sex couples, Gibson, Dunn & Crutcher, filed a letter brief at the 4th Circuit, arguing that under Perry, three public interest groups do not have standing to appeal a trial court ruling against the Consumer Products Safety Commission.

The issue of the consumer groups’ standing is just the latest development in this precedent-setting litigation over the Consumer Product Safety Improvement Act of 2008. Among other things, the 2008 law required the CPSC to establish a publicly accessible database for reports of unsafe products. In 2011, an unidentified local government agency submitted an incident report to the commission, which alerted the company that makes the purportedly problematic product. The company responded that the incident report was materially inaccurate and should not be published. There was considerable back-and-forth between the company and the commission, in which the commission suggested revisions to the incident report that the company rejected as materially inaccurate. In October 2011, the company sued to enjoin the commission from publishing its third version of the incident report, arguing that it would suffer irreparable harm from a baseless and inflammatory accusation.

You’ve probably noted my repeated references to “the company” and wondered what company I’m talking about. You’ve also probably wondered what the allegedly unsafe product is, and what’s in the inflammatory local government report on it. Keep on wondering. Gibson Dunn filed the injunction suit in federal court in Greenbelt, Maryland, on behalf of “Company Doe.” Through two years of subsequent litigation, the identity of the company and the nature of its product have remained a secret. U.S. District Judge Alexander Williams permitted Company Doe to try its case anonymously, with all factually-specific filings under seal.

BP, buyer’s remorse and the future of mass tort settlements

Alison Frankel
Jul 11, 2013 22:27 UTC

The oil giant BP has recently done a very good job of casting itself as the victim of greedy plaintiffs lawyers looking to get rich by submitting unwarranted claims for businesses that weren’t actually harmed by the Deepwater Horizon oil spill. Did you see the company’s full-page advertisements to that effect in The Wall Street Journal and The New York Times? Or maybe you read smart pieces by Paul Barrett of BloombergBusinessweek (“How BP Got Screwed on Gulf Oil Spill Claims”) or Joe Nocera of the Times (“Justice, Louisiana Style”), who both pointed out that the court-appointed lawyer serving as the administrator of BP’s multibillion-dollar class action settlement is himself a onetime plaintiffs lawyer – as is the New Orleans federal judge overseeing the deal. (Lawyers representing BP claimants, I should note, dispute just about everything BP says about the judge and the administrator.)

Nocera made the rhetorical point that lots of people don’t particularly mind that a multinational oil company responsible for a perceived environmental tragedy might have to fork over some extra billions. According to Nocera, we should nevertheless be troubled by BP’s “fleecing,” if for no other reason than the disincentive BP’s experience offers to future defendants facing an onslaught of claims. Nocera credits BP with behaving honorably after the oil spill, setting up an out-of-court claims facility to get more than $6 billion quickly into the hands of injured property owners and businesses. “Yet its efforts to do right by the Gulf region have only emboldened those who view it as a cash machine,” Nocera said. “The next time a big company has an industrial accident, its board of directors is likely to question whether it really makes sense to ‘do the right thing’ the way BP has tried to.”

BP’s rock-star appellate lawyer, Theodore Olson of Gibson, Dunn & Crutcher, made a similar argument in a brief to the 5th Circuit Court of Appeals, which heard BP’s arguments for mercy earlier this week. BP went to the appeals court after U.S. District Judge Carl Barbier approved the class action administrator’s interpretation of how business economic losses should be calculated under the settlement. In the oil company’s view, Barbier and the administrator, Patrick Juneau, have essentially rewritten settlement terms to invite claims by businesses that suffered no losses attributable to the oil spill. The BP deal “could serve as a positive landmark in American jurisprudence because of its ambitious size, its innovative nature, and the speed with which it was negotiated to compensate injured parties,” Gibson Dunn wrote. “Instead, it is poised to become an indelible black mark on the American justice system.

Fannie, Freddie shareholders demand lost dividends from U.S. in new class action

Alison Frankel
Jul 10, 2013 21:29 UTC

In August of 2012, the U.S. Treasury and the Federal Housing Finance Agency announced that they had amended the terms of Treasury’s investment in Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders under FHFA’s conservatorship. After Fannie and Freddie went into conservatorship in the economic crisis of 2008, Treasury invested more than $100 billion in a new class of senior preferred stock that guaranteed the government first dibs on a percentage of Fannie or Freddie profits. Those seemed like a distant hope in 2008, but by 2012, Fannie and Freddie were, in fact, making money. Preferred shareholders junior to the government believed the mortgage lenders were generating enough profits to pay Treasury’s dividend and leave something for them as well. But in August, FHFA and the government – without consulting Fannie and Freddie junior preferred shareholders – disclosed that under a newly executed “net worth sweep,” Treasury would be receiving all of the profits kicked out by Fannie Mae and Freddie Mac, then and in the future.

On Wednesday, junior preferred shareholders filed a class action in the U.S. Court of Federal Claims, asserting that the August 2012 agreement between FHFA and the Treasury amounted to an illegal seizure of their property in violation of the Takings Clause of the Fifth Amendment of the U.S. Constitution. The preferred shareholders, represented by Boies, Schiller & Flexner and Kessler Topaz Meltzer & Check, point to the $66.3 billion dividend Fannie and Freddie paid to the government in the second quarter of 2013, arguing that more than $60 billion of that money was misappropriated from them.

The new shareholder class action follows an injunction suit filed Sunday in federal court in Washington by Perry Capital and its lawyers at Gibson, Dunn & Crutcher. The Perry suit, which claims that the August 2012 agreement between Treasury and FHFA “enriches the federal government through a self-dealing pact, and destroys tens of billions (of dollars) of value in the companies’ preferred stock,” seeks a declaratory judgment that the amended agreement violates the Administrative Procedures Act, as well as an injunction against implementing the new agreement. In addition, the mutual fund Fairholme Funds and several insurance companies that own Fannie Mae and Freddie Mac junior preferred shares filed a Takings Clause case on Tuesday night in the Court of Federal Claims. Cooper & Kirk, which represents the Fairholme plaintiffs, raises allegations that parallel those in the new class action but brought the case only on behalf of the named shareholders.

Case sparked by plaintiffs lawyer? Nothing wrong with that: 7th Circuit

Alison Frankel
Jul 9, 2013 18:47 UTC

Until fate, in the person of a private investigator, brought her together with a Mississippi whistle-blower lawyer named Timothy Matusheski, Debra Leveski didn’t even know she could sue her former employer, the for-profit university ITT Educational Services, for supposedly duping the federal government. Leveski spent about 10 years working at ITT’s campus in Troy, Michigan, first as a recruitment officer, then in the financial aid office. She left the company in 2006 as part of the settlement of a sexual harassment suit she brought against ITT. Less than six months later, Leveski received a letter from an investigator working for Matusheski, who at the time specialized in False Claims Act suits against for-profit universities, which had come under scrutiny for allegedly enrolling students simply to receive federal student aid funding. Intrigued, Leveski called the investigator and eventually met with Matusheski.

The Mississippi lawyer told me that when his investigator first reached out to Leveski, his intention was just to find out something from her about ITT’s financial aid procedures. (He knew from public records in her harassment suit that she had worked in the company’s financial aid office.) “After listening to her talk,” he said, “I said she had a potential claim under the False Claims Act and she should ask her attorney about it.” According to Matusheski, Leveski consulted her lawyer, who sent her back to him. Leveski then did some research on FCA cases, including a previously dismissed FCA case against ITT, and on Matusheski. In July 2007, the Mississippi lawyer filed an FCA case against ITT in federal court in Indianapolis, naming Leveski as the relator.

Does this chain of events raise your suspicions about the validity of Leveski’s suit? What if I told you that Matusheski advertised to find former financial aid and recruiting officers from for-profit institutions? Or that the whistle-blower lawyer brought a series of FCA suits on behalf of former employees he tracked down through their unrelated employment suits?

Do surveillance court’s secret rulings violate U.S. Constitution?

Alison Frankel
Jul 8, 2013 22:19 UTC

The more we find out about the mostly secret inner workings of the U.S. Foreign Intelligence Surveillance Court, the more questions we should all have about the intersection of national security and Fourth Amendment restrictions on unreasonable searches by government authorities. Based on recent comments by U.S. Supreme Court Justices Elena Kagan and Stephen Breyer, the court is primed for an inevitable constitutional review of the National Security Agency’s program of gathering phone and Internet data from foreign suspects and U.S. citizens alike under provisions of the Patriot Act and the Foreign Intelligence Surveillance Act. That debate will surely center on the Fourth Amendment, but a lesser-known argument that has popped up in some cases challenging FISA wiretaps raises different constitutional objections to the NSA’s widespread data collection. And just as it was in California’s ban on gay marriage, Article III of the Constitution could be the linchpin of any Supreme Court decision on the legality of the NSA program.

First, I want to recap a pair of terrific Sunday pieces in which The Wall Street Journal and The New York Times reported on the ex parte legal precedent the FISC is setting, outside the view of anyone but the government officials asking the court to bless widespread data collection. The Journal’s piece, by Jennifer Valentino-DeVries and Siobhan Gorman, focused on the FISC’s broad interpretation of the word “relevant” in classified orders dating back to the mid-2000s. According to the Journal, the 11 judges on the surveillance court have moved away from the Supreme Court’s standard that government requests for information are “relevant” if they present a “reasonable expectation” that the information will be related to an ongoing investigation. Instead, the FISC apparently reasoned that anti-terror investigations are so different from ordinary criminal cases that a much broader category of information falls under the umbrella of relevance. The FISC’s secret widening of the definition of relevance, according to the Journal, seems to be the justification for the NSA’s collection of phone and Internet data from U.S. citizens under Section 215 of the Patriot Act.

The New York Times’s Eric Lichtblau reported that the FISC’s classified rulings “reveal that the court has taken on a much more expansive role by regularly assessing broad constitutional questions and establishing important judicial precedents, with almost no public scrutiny.” In addition to expanding an exception to the Fourth Amendment’s warrant requirements when the government can identify “special needs” in terror cases, he wrote, the surveillance court has made new law governing intelligence related to cyberattacks and nuclear proliferation, serving as a “parallel Supreme Court” that will “most likely shape intelligence practices for years to come.”

Delaware justices: Do we need new vehicle for post-merger derivative suits?

Alison Frankel
Jul 3, 2013 22:04 UTC

You might not expect Dr. Seuss and Jekyll & Hyde to be invoked in oral arguments before the Delaware Supreme Court on the question of whether shareholder derivative breach-of-duty claims against corporate directors can survive a merger when that merger is allegedly the result of the directors’ misconduct. But indeed they were, amid discussion of slippery, transmogrified claims that left four Delaware justices (as well as lawyers on both sides) searching for analogies.

If I had to proffer a prediction, I’d guess that the Supreme Court will adopt the Jekyll & Hyde model – finding that shareholders have a surviving claim under the fraud exception Delaware justices already carved out in the court’s seminal 1984 decision in Lewis v. Anderson – rather than create a new, Seussian “quasi-derivative” cause of action. Either way, I think that oral arguments, which I was able to watch live courtesy of Courtroom View Network, boded well for shareholders trying to revive a derivative suit against Countrywide’s directors and officers, and not so well for Countrywide, despite the best efforts of its counsel Brian Pastuszenski of Goodwin Procter.

As it happens, the shareholder derivative suit came to the Delaware Supreme Court by way of the 9th Circuit Court of Appeals, which certified a question to the state justices in January: “Whether, under the ‘fraud exception’ to Delaware’s continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims.” The 9th Circuit said it needed an answer from Delaware in order to decide whether to reanimate a years-old shareholder suit against Countrywide’s board that had been dismissed by a district judge in Los Angeles after Bank of America acquired the mortgage lender.

The 2nd Circuit splits with 10th on tolling time bar in securities cases

Alison Frankel
Jul 2, 2013 21:36 UTC

Is the statute of repose – the once obscure cousin of the statute of limitations that burst into prominence as a defense in litigation over mortgage-backed securities – coming to the U.S. Supreme Court?

That’s the thrilling prospect now before us, thanks to a decision last week by the 2nd Circuit Court of Appeals in a case against the onetime mortgage securitizer IndyMac and underwriters of some of its MBS offerings. The 2nd Circuit panel – Judges Jose Cabranes, Reena Raggi and Susan Carney – ruled that the filing of a class action does not stop the clock for class members on the three-year statute of repose for federal securities claims. That holding is contrary to a ruling from the 10th Circuit, which found in Joseph v. Q.T. Wiles in 2000 that a pending class action tolls the statute of repose as well as the statute of limitations. The Roberts Court is known for granting review even of arcane issues that have split the federal circuits, and tolling of the statute of repose could impact the outcome of a lot more cases than, say, the intersection of appellate deadlines and awards for contractual legal fees, which the Supreme Court is already scheduled to hear next term.

Plaintiffs lawyer Joseph Tabacco of Berman DeValerio, who was on the wrong end of last week’s 2nd Circuit decision, told me his clients have not yet decided on their next step, which could be to ask the 2nd Circuit for en banc review or to ask the panel for a ruling that its holding applies only prospectively. The statute of repose isn’t as problematic in this particular case as it once seemed, Tabacco said, because some plaintiffs who had been excluded from the IndyMac MBS class action saw their claims revived after the 2nd Circuit remade the rules for MBS class standing in NECA-IBEW v. Goldman. Nevertheless, Tabacco told me, “this is too important an issue” to let the 2nd Circuit panel’s decision go unchallenged. “There are well-reasoned opinions on both sides,” he said. “Clearly, this is an open legal question.”

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