Alison Frankel

Did banks jump too soon in opposing eminent domain mortgage seizures?

Alison Frankel
Aug 23, 2013 21:12 UTC

The first rule of litigation in federal court is that you can’t bring a suit unless it’s based on an actual controversy. U.S. courts do not issue advisory opinions. Federal judges only have jurisdiction to oversee disputes that present an issue ripe for decision. And according to a new brief by the city of Richmond, California, its plan to use eminent domain to take over mortgages from mortgage-backed securities trusts is not ripe under Article III of the U.S. Constitution and should not be tested in the suits that MBS trustees filed earlier this month in federal court in San Francisco. Counsel for the city and Mortgage Resolution Partners (the private company supplying the capital for Richmond’s contemplated mortgage takeover plan) contend that Wells Fargo and Deutsche Bank acted precipitately when they moved for a preliminary injunction to block the city from proceeding with eminent domain takeovers.

According to Richmond’s lawyers at Altshuler Berzon, the eminent domain plan is still a hypothetical, not a reality, because the city council hasn’t yet voted on a resolution specifically approving the takeover of any loan, and it may reject such a resolution if one is proposed (despite a unanimous vote in April to launch the mortgage seizure program). Even if the council does vote to snatch some or all of the 624 mortgages that Richmond has offered to buy from MBS trusts (and that MBS trusts have refused to sell), the brief said that the proper time and place for the MBS trustees to raise their objections to the plan’s constitutionality is in an eminent domain proceeding in California state court, not a preliminary injunction case in federal court.

I predicted when the banks filed their suits that ripeness was going to be the threshold question in the battle over eminent domain mortgage seizures. The city’s brief shows how much Richmond and MRP would like to erase the trustees’ federal-court challenge without even litigating the merits of arguments that the plan, which the trustees claim will benefit MRP and selected homeowners at the expense of MBS investors and the broader housing market, violates the Takings, Commerce and Contracts clauses. Richmond’s new brief does address those arguments, asserting that a program intended to benefit strapped homeowners and ward of foreclosure blight easily satisfies the “public use” requirement of a government taking; that the plan doesn’t violate the Commerce Clause because it does not discriminate against investors outside of California; and that the Supreme Court held in the 1984 decision Hawaii Housing Authority v. Midkiff that the Contracts Clause doesn’t apply to eminent domain seizures. Richmond and MRP also make some constitutional arguments of their own, asserting that the city council has a First Amendment right to establish a record on the use of eminent domain to take over securitized mortgages. But the bulk of the new brief is dedicated to showing U.S. District Court Charles Breyer – who is overseeing the Wells Fargo and Deutsche Bank case – that he doesn’t have jurisdiction.

“The banks protest that the city has taken ‘substantial steps’ to implement what they call a ‘seizure program,’” the brief said. “But, by the same logic, the federal government had taken ‘substantial steps’ to implement a national health care ‘program’ long before Congress eventually passed legislation, including multiple town hall meetings, economic analyses, blue-ribbon commissions, etc., over the course of many years. President Obama had even promised such a ‘program’ would come to fruition if he were elected. Yet before Congress actually adopted (and the President signed) the necessary legislation, no one would have standing to challenge it because implementation was still ‘conjectural’ and ‘hypothetical’” – just like, the brief contended, Richmond’s eminent domain plan. The banks’ case, the brief said, is “the quintessential example of claims that are not Article III ripe.”

The new brief is actually not the first time in the very brief history of this suit that Richmond and MRP have requested that Judge Breyer end the banks’ bid for a preliminary injunction. Last week the defendants asked the judge to remove the Wells Fargo and Deutsche Bank injunction motion from the court calendar because the case is not ripe. The trustees’ response, which is a preview of the arguments their lawyers at Ropes & Gray will make next week against the city’s latest brief, argued that there’s no real doubt Richmond will use its eminent domain power to seize the mortgages that the trusts have refused to sell and that unless the city’s plan is enjoined, MBS trusts will suffer irreparable harm.

How SCOTUS’s Amex ruling may help businesses evade class actions

Alison Frankel
Aug 22, 2013 22:21 UTC

Now that the U.S. Supreme Court has pretty much knocked down all barriers to contracts prohibiting classwide arbitration, via 2011′s AT&T Mobility v. Concepcion and last term’s American Express v. Italian Colors, have businesses actually rushed to add mandatory individual arbitration clauses to their contracts? A new study of agreements between franchisors and franchisees finds that they have not, and theorizes that the side effects of arbitration, including the limited right to appeal, may deter some businesses from adopting mandatory arbitration clauses. What’s more, the study’s authors – two law professors with long expertise in arbitration – hypothesize that the Supreme Court’s Amex ruling may permit businesses to prohibit class litigation without the collateral consequences of arbitration agreements.

In “Sticky’ Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex,” Peter Rutledge of the University of Georgia and Christopher Drahozal of the University of Kansas look specifically at contracts in the franchise industry, which they say were predicted to be revamped after the court’s Concepcion ruling to include mandatory arbitration clauses. (Rutledge and Drahozal have previously studied mandatory arbitration clauses in credit card agreements, but Drahozal told me that his work as a special advisor to the Consumer Financial Protection Bureau precludes him from publishing on issues before the CFPB.) The empirical data they collected (from 68 franchisors listed as the top franchising opportunities in Entrepreneur Magazine and from a random sample of 239 franchise agreements filed with the Minnesota Department of Commerce) indicates that Concepcion did not actually have much of an impact on franchise contracts. The percentage of franchisors using arbitration clauses increased from 39.7 percent before the ruling to 44.1 percent in 2013, or 49.4 percent of franchises in 2011 to 50.6 percent in 2013. Not all of those clauses, moreover, include class arbitration waivers. In 2011, 77.8 percent of franchisors with arbitration clauses prohibited classwide actions; by 2013, after Concepcion, the percentage was up to 86.7 percent. Those numbers, write Rutledge and Drahozal, show “at most a slight shift to arbitration following Concepcion, and certainly not the ‘tsunami’ predicted by some commentators.” (Hat tip to Andrew Trask of McGuireWoods, author of the Class Action Countermeasures blog.)

The professors include the caveat that their data is only on franchise contracts, and they note that other businesses – particularly online consumer giants such as Sony, Netflix, eBay and Instagram – have inserted post-Concepcion mandatory arbitration clauses in their contracts. (Sony and Netflix switched over to arbitration after defending big data breach class actions, they point out.) The two years since Concepcion may also not have been enough time for a robust assessment of the ruling’s impact, Rutledge and Drahozal wrote. And in a phone interview, Drahozal emphasized that this study didn’t directly measure whether Concepcion has led to a decline in class action litigation.

Diamond, shareholders reach unusual deal: class to receive stock

Alison Frankel
Aug 21, 2013 22:20 UTC

On Wednesday, lawyers representing a certified class of shareholders who claim Diamond Foods deceived them about its payments to walnut growers in 2010 and 2011, notified U.S. District Judge William Alsup of San Francisco that they’ve reached a proposed settlement with the company. According to the memo in support of the deal, class counsel at Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein were confident that they’d be able to prove at least $270 million and as much as $430 million in damages against the company. Instead, they’re settling for about $107 million, $11 million in cash and the remaining $96 million in Diamond common shares. Yes, that’s right. The supposedly defrauded and disillusioned shareholders in the Diamond class action are being compensated with more stock in the offending company. It’s like that old joke: First prize is a week in Philadelphia; second prize is TWO weeks there.

Class counsel explain in their memo why they had little choice but to agree to the unusual structure of this proposed settlement, which must still be approved by Alsup. Diamond is on the brink of insolvency, with $579 million in debt and just $7.2 million in cash, according to its latest balance sheet. Its primary asset is goodwill and its core walnut business is in decline. Because of the overhang of the shareholder class action, the memo said, the company can’t attract new capital and may even run into problems refinancing its existing loans. There’s some insurance money, the memo said, but the cost of continuing to litigate the case is consuming those funds.

So, according to class counsel, shareholders’ only real shot at recovery was to agree to accept more Diamond equity, and sooner rather later. Otherwise, the class risks driving Diamond into bankruptcy. That would certainly be the outcome, the brief said, if the lead plaintiff, the Mississippi Public Employees’ Retirement System, insisted on trying the case and obtaining a judgment against Diamond. It’s in the best interests of class members, the brief said, not to bankrupt the company and become judgment debtors but to accept $11 million in cash (all that remains of Diamond’s insurance proceeds) and 4.45 million shares of Diamond common stock, the maximum the company can issue without triggering a shareholder vote.

How Harbinger admissions to SEC will impact investors’ class action

Alison Frankel
Aug 20, 2013 21:47 UTC

For the last, oh, 40 years or so, white-collar defense lawyers have been telling the Securities and Exchange Commission that their corporate clients would never agree to settlements that required them to admit wrongdoing because of the collateral effect of such admissions in private class action litigation with investors. Businesses can stomach paying millions of dollars in penalties and disgorgement to the SEC, the theory goes, but their gorge rises at the prospect of paying billions in damages to class action plaintiffs because they can’t contest liability. The SEC was content for decades to leave that assertion unchallenged, permitting defendants to resolve its allegations without admitting or denying their misconduct. That all changed in June, when, as you know, SEC Chair Mary Jo White announced a new policy: In the most egregious cases, the SEC would demand an admission as a condition of settlement.

The agency’s policy change occasioned a lot of speculation about how admissions to the SEC would impact investor class actions, and how defendants and their lawyers might try to mitigate the harm. Now, however, we’ll get some actual answers. SEC lawyers obtained their first admission under the agency’s new policy on Monday, when the hedge fund Harbinger Capital and its founder Philip Falcone not only agreed to pay $18 million in fines and penalties but also agreed to admit to the SEC’s recitation of misconduct. And now securities class action lawyers in a 2-year-old case brought by investors in Harbinger feeder funds are deliberating about the best way to use those SEC admissions in their suit, in which U.S. District Judge Alison Nathan of Manhattan is considering Harbinger’s motion to dismiss.

Unfortunately for the rest of the securities bar, the Harbinger class action isn’t a perfect vehicle to test the effect of SEC admissions. For one thing, the case involves hedge fund investors, not shareholders of a public company; so, as Evan Stewart of Zuckerman Spaeder told my Reuters colleague Emily Flitter, Falcone and his Harbinger have “a different magnitude of exposure” than a publicly traded corporation. Nor does the litigation assert classic federal securities fraud claims, but rather state-law fraud, negligence and breach-of-duty causes of action. As a result, the suit raises some unusual procedural issues, including defense arguments that the class action is precluded by the Securities Litigation Uniform Standards Act, as well as a conflation of direct claims that feeder fund investors were defrauded and indirect claims that Falcone breached his fiduciary duty to Harbinger. Moreover, many of the investors’ allegations involve Harbinger’s supposed misrepresentations about its investment in the now-bankrupt wireless broadband company LightSquared. The SEC’s settlement with Falcone and Harbinger does not even mention LightSquared, so investors certainly can’t argue that the defendants have admitted liability for statements related to that investment.

How long did JPMorgan (allegedly) deceive investors?

Alison Frankel
Aug 19, 2013 20:28 UTC

Last week’s criminal complaints against former JPMorgan Chase derivatives traders Javier Martin-Artajo and Julien Grout – who allegedly mismarked positions in the bank’s infamous synthetic credit derivatives portfolio to hide hundreds of millions of dollars of trading losses in early 2012 by the JPMorgan Chief Investment Office – does not directly impact the shareholder class action under way in federal court in Manhattan. But you can be sure that the plaintiffs firms leading the class action were gratified that the Manhattan U.S. Attorney has decided the so-called “London Whale” losses merit criminal charges. When U.S. District Judge George Daniels hears arguments next month on the bank’s motion to dismiss the class action, shareholder lawyers will absolutely remind him that prosecutors believe a criminal cover-up took place. JPMorgan’s lawyers at Sullivan & Cromwell moved in June to dismiss the entire shareholder class action, but as I’ve said before, I don’t think there’s much chance Judge Daniels will toss claims based on bank officials’ statements about the London Whale losses. The government’s new criminal charges make that prospect even more remote.

But what about shareholder allegations that JPMorgan lied to them and the Securities and Exchange Commission back in 2010 and 2011, when the bank touted its superior internal controls and risk management procedures? Those allegations would dramatically extend the time frame for class membership, opening the case up to claims by shareholders who traded JPMorgan shares beginning in February 2010, not just those who traded the stock in the first half of 2012, before the bank issued a restatement of its earnings to reflect London Whale losses in July 2012. The government hasn’t alleged misconduct in those 2010 and 2011 statements, though according to Dealbook, the bank and the SEC may be negotiating a deal based on internal control failures. If the SEC does, in fact, secure an admission from the bank that its internal controls were deficient, shareholders’ burden would be narrowed to establishing that JPMorgan officials knowingly misrepresented the bank’s ability to manage risk.

JPMorgan’s arguments for why shareholders can’t meet that burden should be required reading for every investor operating under the apparently mistaken belief that you can rely on what you read in SEC filings and what you hear from corporate officials. JPMorgan was supposed to be different than financial institutions that teetered or fell in the financial crisis, and as shareholders wrote last week in their opposition to the bank’s dismissal motion, investors paid a premium for its supposed commitment to discipline and risk management. Yet now JPMorgan says that even if its representations about internal controls were false – which, of course, it insists they were not – those statements are not actionable because no investor actually relied upon such immaterial puffery. As JPMorgan depicts things, you should no more believe an SEC filing than the patter of a carney trying to convince you to knock over the pyramid of milk bottles.

The danger to states’ rights in 2nd Circuit’s ruling on Vermont nukes

Alison Frankel
Aug 16, 2013 21:03 UTC

On Wednesday, as my Reuters pal Nate Raymond ably reported, the 2nd Circuit Court of Appeals handed a big victory to the energy company Entergy and its lawyers at Quinn Emanuel Urquhart & Sullivan, upholding a Vermont federal court injunction that effectively bars the state from shutting down Entergy’s Vermont Yankee nuclear plant. A three-judge 2nd Circuit panel agreed with U.S. District Judge Garvan Murtha that Vermont state laws that would have had the effect of closing the plant are pre-empted by the federal Atomic Energy Act.

To reach that decision, the appeals court, like Murtha, looked beyond the plain language of the enacted laws to legislative history suggesting that the statutes were motivated by safety concerns about nuclear energy, which the U.S. Supreme Court has held to be the province of the federal government. Even though the laws on their face addressed economic and policy concerns that are within the state’s purview, the 2nd Circuit said the admittedly incomplete legislative record indicated that Vermont had engaged in statutory sleight of hand to hide its true intentions.

The appellate deep dive into the state legislative record should give pause to every state government within the 2nd Circuit. In fact, the panel’s ruling seems to confirm the worst fears of the National Conference of State Legislatures, as outlined in an amicus brief urging the appeals court to overturn Murtha. “Legislative record excerpts are neither an appropriate means of controlling legislative authority nor a reliable indicator of legislative motivation,” the brief said. “Left uncorrected, this type of misguided judicial inquiry will inevitably chill state legislatures’ willingness to debate policy issues robustly and to solicit a variety of viewpoints about proposed legislation openly. Accordingly, all state legislatures – and indeed all courts – should be concerned.”

How to define a market rate for fees in class action megacases

Alison Frankel
Aug 15, 2013 19:50 UTC

In a notable 2001 opinion called In the Matter of Synthroid Marketing Litigation, Judge Frank Easterbrook of the 7th Circuit Court of Appeals set out guidelines for trial judges awarding fees to plaintiffs lawyers in class action megacases, defined as those in which the class recovery exceeds $75 million. Easterbrook said there should be no automatic cap on fees, even in these very big cases. Instead, he pointed to the 7th Circuit’s oft-stated preference for fee awards that reflect both the risk borne by class counsel and “the normal rate of compensation in the market at the time.” The 7th Circuit has made it clear that the best way to assure a market rate is for class action lawyers and their clients to reach a fee agreement before the litigation begins, but the 2001 Synthroid opinion didn’t specify exactly how trial judges should approximate an arm’s-length negotiation if there’s no preset deal on fees. In a 2003 follow-up opinion, Easterbrook and his fellow panel members actually set class counsel fees themselves, finding that “a decent estimate of the fee that would have been established in ex ante arms’-length negotiations” was a sliding percentage of recovery that declined as the size of the settlement increased.

Objectors to a flat 27.5 percent fee award of $55 million to Robbins Geller Rudman & Dowd in a $200 million securities class action settlement with Motorola were counting on Judge Easterbrook’s two Synthroid opinions when they asked him and two other 7th Circuit judges to cut Robbins Geller’s fees. That proved a vain hope. In a seven-page opinion Wednesday, Easterbrook and his colleagues upheld U.S. District Judge Amy St. Eve‘s approval of the firm’s $55 million award, despite finding 27.5 percent in fees to be “exceptionally high” in a megacase and expressing concern about the flat percentage structure of the award.

The panel, which also included Judges Ilana Rovner and David Hamilton, said it was assuaged that none of the institutional investors in the class, which hold, in combination, more than 70 percent of the claims in the settlement fund, objected to Robbins Geller’s fees. They’re sophisticated litigants with a fiduciary duty to preserve class assets, the appeals court said. So even though the fee award was “at the outer limit of reasonableness,” it was within St. Eve’s discretion to award it. That finding seemed to me to be in keeping with the 7th Circuit’s customer-oriented preference for class action clients to determine the market rate for their lawyers’ fees, just like clients in other kinds of cases.

Does Dodd-Frank protect foreign whistle-blowers?

Alison Frankel
Aug 14, 2013 18:25 UTC

In the first full year of operation for the Securities and Exchange Commission’s Dodd-Frank whistle-blower program, the agency received 324 tips from whistle-blowers working outside of the United States – almost 11 percent of all the whistle-blower reports received by the SEC. If those tips eventually result in sanctions of more than $1 million, the SEC whistle-blowers will be in line for bounties. But if they’re fired by their companies for disclosing corporate wrongdoing, they may not be able to sue under Dodd-Frank because the law’s anti-retaliation protection for whistle-blowers does not specify that it extends overseas. And as you know, the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank holds that civil laws should be presumed not to apply overseas unless they say otherwise.

Morrison’s application to Dodd-Frank’s whistle-blower protection is playing out right now in federal court in Manhattan, in a retaliation suit brought by a Taiwanese compliance officer for a Chinese subsidiary of Siemens. (The Wall Street Journal was the first to report on the case.) Meng-Lin Liu and his lawyer at Kaiser Saurborn & Mair allege that after Liu reported his suspicions to Siemens’ CFO for Healthcare in China, claiming that the company was violating the Foreign Corrupt Practices Act by engaging in a kickback scheme involving the sale to public hospitals of medical imaging equipment, he was dismissed from his job. In January 2013, Liu sued Siemens under Dodd-Frank for double his back pay.

Siemens’ lawyers at Kirkland & Ellis raised two defenses in the company’s motion to dismiss the suit. Liu wasn’t entitled to protection under Dodd-Frank, Siemens said, because he had initially reported his concerns internally, and not to the SEC. And moreover, he wasn’t covered by Dodd-Frank’s anti-retaliation provisions because they don’t specifically extend abroad.

SEC bounties should supplant securities class actions: law prof

Alison Frankel
Aug 13, 2013 19:52 UTC

There are a lot of plaintiffs lawyers out there hoping to reap big rewards from the Securities and Exchange Commission’s 2-year-old whistle-blower program. When the SEC, acting at the direction of Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act, implemented procedures last August to pay tipsters a bounty for information leading to sanctions of more than $1 million, law firms started running advertisements targeting corporate insiders with evidence of securities violations at their companies. If you run a Google search using the phrases “whistle-blower” and “SEC,” you’ll see exactly what I mean.

Those bounties – and accompanying legal fees for whistle-blower lawyers – have been slow to materialize. So far, the SEC has rewarded only two tipsters, though according to The Wall Street Journal, the agency’s regional director in Los Angeles, Michele Wein Layne, told the American Bar Association on Saturday to expect more (and more substantial) bounty payments. There’s certainly been no shortage of prospective whistle-blowers reaching out to the SEC. In fiscal year 2012, the Journal reported, the agency received about 300 whistle-blower tips, from all 50 states and several foreign countries. The time lag between tips and rewards, Layne reportedly said, is because it takes a while for the agency to check out and act upon the information it receives.

Despite the SEC bounty program’s slow start, a professor at Vanderbilt University Law School, Amanda Rose, is arguing in a new working paper that if the agency efficiently handles tips, the whistle-blower program should make shareholder securities class actions obsolete. Rose, a onetime associate at Gibson, Dunn & Crutcher, is no fan of private securities fraud litigation. In 2011 she published a University of Pennsylvania law review paper entitled “Fraud on the Market: An Action Without A Cause,” which should give you a good indication of her point of view. I’m pretty sure her latest hypothesis isn’t going to win over the shareholder class action bar. Nevertheless, Rose makes a provocative case, and with the fundamental viability of securities class actions under threat from U.S. Supreme Court justices who have questioned the fraud-on-the-market reasoning of 1988′s Basic v. Levinson, plaintiffs lawyers should take care to know their enemies. (Hat tip to the CLS Blue Sky Blog, where I first heard about Rose’s paper.)

Money damages should be good enough for Apple in smartphone wars

Alison Frankel
Aug 12, 2013 19:58 UTC

I hold few principles more dearly than the inherent value of intellectual property. I’d be crazy to think otherwise, considering that I’m a content creator. No one who starts from scratch, whether they’re writing a news story or developing a killer smartphone feature, abides copycats. So on one level my sympathies lie with the geniuses at Apple who developed the iPhone and iPad, only to see less innovative rivals steal ideas and market share.

But at this point in the long-running litigation between Apple and its smart device competitors, I believe the appropriate remedy for Apple’s injury is money – damages for past infringement of its patents plus a reasonable licensing fee for continued use – and not a ban on competing devices. I’d like to see the U.S. Trade Representative veto the exclusion order against certain Samsung devices issued Friday by the U.S. International Trade Commission, based on the ITC’s finding that Samsung’s infringed certain claims in two Apple patents. And I’m hoping that after oral arguments Friday, the Federal Circuit Court of Appeals agrees with U.S. District Judge Lucy Koh of San Jose, California, and concludes that Apple is not entitled to a post-trial injunction as the result of a jury finding last year that Samsung infringed six Apple smart device patents.

Patent laws, of course, entail the right to seek an injunction. The U.S. Supreme Court confirmed that right in 2006 in eBay v. MercExchange, though the court set a difficult-to-meet four-part test to determine whether courts should enjoin infringing products. MercExchange, as you probably know, was prompted by patent trolls’ use of injunctions (or the threat of injunctions) to extract favorable settlements from operating companies. But you also probably know that the smartphone patent wars have prompted courts and federal agencies to do a lot of thinking about injunctions in the context of products that employ thousands of patents. Much of that reconsideration has involved patents essential to technology standards, widely known as standard-essential patents. Patent owners are obliged, under agreements with standard-setting bodies, to license standard-essential patents on reasonable terms. That responsibility is in tension with the IP owner’s right to a bar on competing goods. Earlier this month, for instance, the U.S. Trade Representative made an extremely rare decision to overturn an ITC exclusion order that was based on Apple’s infringement of Motorola standard-essential technology. The ITC, like the Justice Department, the Federal Trade Commission, the U.S. Patent Office and several federal judges, said that, as a general rule, the danger of patent hold-up should preclude injunctions based on IP encumbered by licensing obligations.