On Wednesday, when most people are calculating how early they can slip out of work and begin their Thanksgiving festivities, an awful lot of high-priced New York lawyers will be fighting for seats at 27 Madison Avenue, where the New York Appellate Division, First Department, hears appeals. Billions of dollars of claims for breaches of representations and warranties on mortgage-backed securities hang on what the state appeals court decides about the time limits for these suits. Does the clock start ticking when the securities are issued and representations about underlying mortgage loans take effect? Or does New York’s six-year statute of limitations begin running only when the MBS seller refuses to repurchase loans that breach its contractual assurances? A five-judge appellate panel will confront the issue Wednesday in a case called Ace Securities v. Deutsche Bank Structured Products. The courtroom should be packed with lawyers and clients on both sides of New York’s sprawling MBS put-back litigation docket, who are hoping for clues about what the appeals court will decide.
Oh, those greedy contingency-fee lawyers. Is there nothing they won’t do to wring a few million bucks in fees from corporate defendants blamelessly and selflessly going about their business? Dish Network’s majority shareholder, Charles Ergen, and his friends and colleagues on the board performed a great service for the company’s minority shareholders when they secured Dish’s spot as the stalking-horse bidder for LightSquared spectrum licenses. Sure, Ergen had his own personal interest in the LightSquared deal because he’s the biggest creditor of the bankruptcy company. But Dish’s board went above and beyond Nevada’s statutory requirements for transactions in which a director has a conflicting financial interest. It appointed a special transaction committee of independent directors, who hired their own lawyers and financial advisors. With help from Ergen, his personal lawyers and Dish managers, the independent committee came up with a $2.2 billion bid, which the board voted to approve and the bankruptcy judge overseeing LightSquared’s Chapter 11 subsequently deemed the leading offer in the LightSquared auction process.
The basic scenario described by U.S. District Judge Paul Gardephe of Manhattan in an opinion made public on Wednesday should sound familiar to every white-collar defense lawyer out there. A company, in this case, the hedge fund D.B. Zwirn, falls under scrutiny, here for allegedly diverting investors’ money into boondoggles like a corporate jet. The company hires lawyers (Schulte Roth & Zabel and, later, Gibson, Dunn & Crutcher) to investigate the allegations. The lawyers prowl through documents and question internal witnesses. Eager to appear cooperative, the company volunteers to present its lawyers’ findings to regulators. And after the presentation, the Securities and Exchange Commission places blame squarely in the lap of a particular corporate official, here former Zwirn CFO Perry Gruss.
Alex Kozinski, Chief Judge of the 9th Circuit Court of Appeals is known for (among other things) his intellect, his libertarian leanings and his sharp writing style. I appeared last year on a panel with Kozinski and can attest to his charm and humor. But when Kozinski uses his wit against you, it stings. Just ask lawyers at Capstone Law and Sedgwick, who had the bad luck to negotiate the settlement of a class action in which Kozinski is a class member. That would have been fine if Kozinski were a satisfied client. He’s not, and as you can see from the brief he and his wife, Marcy Tiffany, filed last week in opposition to final approval of the settlement, Kozinski spares neither side.
Is this timing merely a coincidence? On Friday, JPMorgan Chase and the Houston law firm Gibbs & Bruns announced that they had reached a $4.5 billion settlement to resolve allegations that the bank breached representations and warranties to private investors in 330 JPMorgan and Bear Stearns mortgage-backed securities trusts. Gibbs & Bruns negotiated the JPMorgan settlement on behalf of 21 major institutional investors, including BlackRock, Pimco, Goldman Sachs and MetLife. Two days after the JPMorgan announcement, Kathy Patrick of Gibbs appeared in New York State Supreme Court to make her closing argument in support of her clients’ previous deal, an $8.5 billion settlement with Bank of America that has been held up for 2-1/2 years by a small group of Countrywide MBS investors who object to the deal. Will Patrick be back in court in 2016 to defend the JPMorgan settlement?
Self-made corporate billionaires are a rare breed, and I think we can all agree that they deserve respect for their acumen and tenacity. What they don’t deserve, if they’ve accepted shareholder money through the capital markets, is unfettered control of their businesses. Public companies cannot treat corporate governance best practices as a nuisance, or worse, a hindrance – especially when the company’s interests may be at odds with those of its billionaire founder.
On Friday, as you’ve surely heard, the U.S. Supreme Court agreed to hear Halliburton v. Erica P. John Fund, which challenges an essential building block of securities fraud class actions. Halliburton’s cert petition presented the question of whether the Supreme Court should overrule its own 1988 decision in Basic v. Levinson, which held that investors in broadly traded stock presumptively relied on public misstatements. Basic’s fraud-on-the-market theory freed securities class action lawyers from having to show that individual shareholders made investment decisions based on fraudulent misrepresentations, permitting the certification of enormous classes of investors. If the justices decide to chuck Basic’s presumption of reliance, it’s hard to imagine how plaintiffs’ lawyers will be able to win certification of securities fraud class actions. As Max Berger of Bernstein Litowitz Berger & Grossmann said at a securities litigation conference on Tuesday, “I seldom lose sleep at night, but one of the things that keeps me up is what the Supreme Court is going to do in Halliburton. It’s a game changer.”
Remember the spate of fraud cases by the National Credit Union Administration in federal court in Manhattan earlier this fall? Perhaps emboldened by its quiet success in settling claims that failed credit unions were duped into buying fraudulently depicted mortgage-backed securities, NCUA filed complaints against nine banks that sold more than $2 billion of MBS to two credit unions that subsequently went under. The suits, which name Morgan Stanley, Barclays, JPMorgan Chase, Credit Suisse, RBS, UBS, Ally, Wachovia and Goldman Sachs, have all been transferred to U.S. District Judge Denise Cote, who has been notoriously tough on the same defendants (and others) in MBS fraud suits brought by the Federal Housing Finance Agency.
I suspect that the American public doesn’t have much sympathy to spare for the big-time lawyers whose firms have reaped untold millions of dollars defending Too Big to Fail institutions against accusations that they caused the Great Recession. But those lawyers sure cast themselves and their clients in a pitiable light at a securities conference at the New York Bar Association on Tuesday. Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison, best known for representing Citigroup, said he was “relentlessly pessimistic” about the near-term litigation prospects for banks, given the de facto impossibility of standing up to threats from government enforcers. Scott Musoff of Skadden, Arps, Slate, Meagher & Flom, who defended UBS (and is still defending Societe Generale) against securities fraud claims by the Federal Housing Finance Agency, noted that FHFA’s wards, Fannie Mae and Freddie Mac, were quasi-private concerns when they took on risk from securitized subprime mortgages, yet claims by FHFA are treated as though they’re asserted by a government regulator. And Julie North of Cravath, Swaine & Moore questioned whether it’s fair to preclude banks from attributing investor losses in mortgage-backed securities to the broad economic downturn and not to bank misrepresentations.
Davis Polk & Wardwell had an interesting post last week at the Harvard Law School Forum on Corporate Governance. As the post noted, shareholder lawyers recently dropped their appeal of a ruling in June by Chancellor Leo Strine of Delaware Chancery Court that upheld the validity of corporate bylaws requiring shareholders to litigate in Delaware. With Strine’s ruling in Boilermakers v. Chevron entrenched, at least for now, as Delaware precedent, Davis Polk asked, is there any reason why businesses shouldn’t rush to adopt forum selection provisions? According to the firm, about 120 corporations, mostly in Delaware, have done just that. But Davis Polk also said there are a couple of reasons to wait. For one thing, shareholders may look askance at forum selection provisions, and could even try to extract revenge against board members who push for them. And for another, it’s not clear that judges in jurisdictions outside of Delaware will obey the law according to Leo Strine.