Opinion

Alison Frankel

Victim in SCOTUS generics case has powerful amici: Harkin and Waxman

Alison Frankel
Feb 21, 2013 23:12 UTC

Last week a New Hampshire woman who suffered grievous side effects when she took a generic pain reliever manufactured by Mutual Pharmaceutical filed her merits brief at the U.S. Supreme Court, in a case that will determine whether the Food and Drug Administration’s regulation of generic drugs pre-empts state-law design defect claims against manufacturers. Karen Bartlett’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figelargue that design defect claims, unlike failure-to-warn claims, do not depend on the FDA-approved labels generics are required to carry under the Hatch-Waxman Act. That fact, they contend, distinguishes Bartlett’s case (and the underlying 1st Circuit Court of Appeals ruling Mutual is challenging) from the reasoning the Supreme Court applied in its 2011 decision in Pliva v. Mensing, which held that generics are not liable for failing to warn of dangerous side effects because they are required to carry the same labels approved by the FDA for brand-name versions of their products.

Bartlett’s brief, which also urged the justices to disregard the U.S. government’s changing position on pre-emption for drugmakers, said that the Supreme Court really should consider congressional intent – as the court itself acknowledged when it ruled that FDA regulation doesn’t pre-empt state-law product liability suits against brand-name drugmakers in the 2009 case Wyeth v. Levine. Congress was certainly aware of state-court product liability litigation when it passed the Hatch-Waxman Act in 1984, just as it was previously aware of such litigation when it originally enacted the Food, Drug and Cosmetic Act establishing the FDA’s regulation of pharmaceuticals. Neither law, Bartlett’s brief said, includes a provision expressly stating that those product liability claims are pre-empted by federal regulation. Quoting from the Supreme Court’s Levine decision, the brief argues that the absence of pre-emption clauses in Hatch-Waxman and the FDCA is “powerful evidence” that Congress didn’t intend FDA regulation to pre-empt common law claims.

Here’s even more powerful evidence of Congress’s intent: a newly filed amicus brief filed by Senator Tom Harkin (D-Iowa) and Representative Henry Waxman (D-California, and, yes, the Waxman of Hatch-Waxman) in support of Bartlett. Harkin and Waxman, who are represented by Allison Zieve of the Public Citizen Litigation Group, say lawmakers’ intentions couldn’t be clearer. If Congress wanted federal regulation to preclude personal injury suits, it would have said so. It’s no accident that Congress did not, according to the brief.

“The notion that FDA regulation broadly pre-empts design-defect claims against prescription drug manufacturers finds no support in the text or purpose of the FDCA, runs counter to the … provision addressing product liability law and ignores more than 75 years of history in which damages suits and federal drug approval have co-existed,” the brief said. “Congress is well aware of its authority to pre-empt state damages actions, and with respect to prescription drugs, as with (over-the-counter) drugs, it has not done so. Moreover, in recent years, following litigation addressing whether federal regulation pre-empts state-law claims regarding injuries caused by drugs, both chambers of Congress have considered pre-emption of state-law claims concerning drugs. Yet Congress has taken no action to change the historical framework through which state law controls whether injured patients have a tort remedy.”

Zieve of Public Citizen told me that Waxman’s office reached out to her group after the Justice Department filed its brief in support of pre-emption of design defect claims against generics. Public Citizen, which has actively opposed pre-emption of personal injury litigation against generics, wasn’t planning to enter the fray in the Mutual case, Zieve said, but the public interest group and Waxman agreed that the government’s filing seemed to escalate the case’s risk for consumers. Waxman recruited Harkin to join the brief; Public Citizen would have tried to bring in more members of Congress if there had been more time, Zieve told me. (I asked if she reached out to Orin Hatch, the Utah Republican who co-sponsored the Hatch-Waxman Act. She said she didn’t because she didn’t think he’d join her side.)

Will 2nd Circuit limit on UBS liability in terror case have ripples?

Alison Frankel
Feb 20, 2013 23:04 UTC

Have you heard about the story by a reporter for the New York Daily News who says he inadvertently started a rumor that Senator Chuck Hagel, President Obama’s nominee to head the Defense Department, received speaking fees from a group called Friends of Hamas? The reporter, Dan Friedman, wrote in a piece Monday that earlier this month, he called a congressional staffer to check out reports that Hagel had received fees from controversial groups. He pressed for details on the groups, using what he considered farcical, made-up names like “Junior League of Hezbollah” and “Friends of Hamas.” The next thing Friedman knew, conservative websites published speculation that Hagel had accepted fees from Friends of Hamas, citing Capitol Hill sources. Eventually, after mainstream sites questioned the existence of the group, the story fizzled.

“Friends of Hamas” may be fictional, but according to ongoing litigation against financial institutions including Arab Bank, National Westminster Bank and Credit Lyonnais, Hamas and other terror groups had, at least, friendly customer relationships with their bankers. In cases in federal court in Brooklyn and Manhattan, victims of terrorist acts have asserted that the banks violated the Anti-Terrorism Act (ATA) by enabling groups like Hamas to finance bombings. More than a half-dozen suits involving thousands of terror victims have survived defense motions to dismiss and are headed for summary judgment rulings.

The banks believe their defenses received a boost last week from the 2nd Circuit Court of Appeals in a decision captioned Rothstein v. UBS. A three-judge appellate panel (Judges Amalya Kearse, Raymond Lohier andChristopher Droney) upheld the dismissal of an ATA case against UBS, finding that the plaintiffs hadn’t shown a proximate link between UBS’s admission of forbidden transfers of U.S. currency to Iran and acts of terror by Iran-sponsored groups like Hamas and Hezbollah. The plaintiffs had argued that because UBS was fined $100 million for breaching U.S. financial sanctions against Iran, the bank bore the burden of showing that its money transfers to Iran were not used to finance terror. The 2nd Circuit disagreed on burden shifting, holding that the language of the ATA indicates that Congress wanted terror victims to show a direct nexus between their injuries and defendants’ actions. In this case, the appeals court said, the plaintiffs couldn’t show that Iran specifically used transfers from UBS to finance terror operations by groups it backed. The ruling said the ATA does not carry a strict liability standard that would open up claims against anyone who provided money to a state sponsor of terrorism. It also held there’s no cause of action for aiding and abetting under the ATA.

Facebook IPO derivative ruling: a cure for multiforum madness?

Alison Frankel
Feb 15, 2013 00:22 UTC

Every company considering an IPO owes a hearty thanks to U.S. District Judge Robert Sweet of Manhattan for his decision Wednesday to dismiss four shareholder derivative suits against Facebook board members. Sweet’s painstaking 70-page opinion includes holdings that are great for Facebook’s defense of a parallel securities class action over its disclosures to IPO investors, but the judge also reached precedent-setting conclusions on standing and ripeness that will help other derivative defendants ward off IPO-based claims in state court. Facebook’s lead lawyers, Andrew Clubok of Kirkland & Ellis and Richard Bernstein of Willkie Farr & Gallagher, certainly deserve credit for coming up with innovative arguments to establish valuable precedent in IPO cases.

I believe Sweet’s ruling may have application beyond IPO derivative suits, though. The decision could represent a way for defendants to address the proliferation of derivative suits that are inevitably filed in multiple state courts after M&A deals are announced.

First, a refresher on the allegations and procedural background of the Facebook derivative suits. The complaints allege that under the direction of Facebook’s board, the company failed to make adequate disclosures to IPO investors about Facebook’s revenue projections and challenges in adapting to smart device usage. (If those sound an awful lot like securities class action claims, that’s because the derivative suits parallel a securities case against Facebook that is also before Judge Sweet.) Three derivative suits were filed in state courts in California. A fourth was filed in federal court in Manhattan. Defendants removed the three California cases to federal court in San Francisco. Then, before shareholders could litigate motions to remand them to state court, the Judicial Panel on Multidistrict Litigation transferred all of the derivative litigation to Sweet in Manhattan federal court.

FDA confirms: It’s considering rule change for generic labels

Alison Frankel
Feb 13, 2013 22:37 UTC

Last month, when I wrote about the Obama administration’s apparent flip-flop on the question of federal pre-emption of product liability claims against generic drugmakers, I mentioned a curious footnote in the Justice Department’s Supreme Court amicus brief in Mutual Pharmaceutical v. Barrett. All the wrangling over liability for generics, which are required by law to use the same labels as the brand-name drugs they replicate, could be unnecessary, Justice hinted. “This office has been informed that Food and Drug Administration is considering a regulatory change that would allow generic manufacturers, like brand-name manufacturers, to change their labeling in appropriate circumstances,” the brief said. “If such a regulatory change is adopted, it could eliminate pre-emption of failure-to-warn claims against generic-drug manufacturers.”

I should have given the footnote more attention. In the last couple of weeks, it has prompted speculation by a number of pharma websites about whether the FDA really intends to upend longstanding policy barring generics from altering their labels, and, if so, what that portends for their product liability exposure. On Wednesday, I emailed the FDA to ask. In an email response, an FDA representative confirmed what the Justice Department footnote suggested: “FDA is considering a regulatory change that would allow generic manufacturers, like brand-name manufacturers, to change their labeling in appropriate circumstances,” the agency said. “FDA intends to provide an opportunity for public comment with respect to any such proposed changes to its regulations.”

The FDA email, according to Kurt Karst of Hyman, Phelps & McNamara (and the FDA Law Blog), is the first confirmation of what FDA watchers have been anticipating since the U.S. Supreme Court’s 2011 ruling in Pliva v. Mensing freed generics from liability for failing to warn consumers about dangerous side effects.

Whistle-blower claims Cadwalader, Wittels ruined his life

Alison Frankel
Feb 12, 2013 22:44 UTC

A new complaint against Cadwalader, Wickersham & Taft and Sanford Heisler by a onetime engineer for Seagate Technology who became a whistle-blower against his former employer, is the latest evidence that whistle-blowers lead difficult lives. And according to the engineer, Paul Galloway, the lawyers who were supposed to be helping him instead made him unemployable.

In 2009 Galloway reached out to a company called Convolve, which, along with the Massachusetts Institute of Technology, was suing Seagate for patent infringement and theft of trade secrets. Galloway, who was unemployed at the time (his complaint does not provide details), suggested in an email that he might have information about Seagate violating a non-disclosure agreement. Debra Steinberg of Cadwalader, who represented Convolve and MIT, followed up with Galloway. According to the engineer’s suit, Steinberg asked if he had his own lawyer. Galloway said he didn’t. He alleges that he subsequently received a call from the CEO of Convolve, who recommended that he retain Steven Wittels, then a name partner at the noted employment firm now known as Sanford Heisler.

Galloway met with Wittels, who determined that the engineer didn’t have a cause of action against Seagate. But Wittels also mentioned that Convolve’s lawyers wanted to meet Galloway, and, according to the complaint, later sent the engineer a retainer agreement that linked Wittels’s contingency fees to the Convolve litigation. Galloway alleges that, unbeknownst to him, Wittels was a personal friend of the Convolve CEO, and Convolve was secretly paying Galloway’s legal bills.

California AG’s false claims case vs S&P: secret route to issuers?

Alison Frankel
Feb 11, 2013 23:26 UTC

If you’ve been keeping track of the Justice Department’s civil suits against banks accused of marketing deeply flawed mortgage-backed securities and collateralized debt obligations, you know there are two laws at the heart of the feds’ cases: the Financial Institutions Reform, Recovery and Enforcement Act and the False Claims Act. (Shout-outs to my Reuters colleagues Aruna Viswanatha and Nate Raymond, who noted Justice’s creative application of these two laws long before most reporters knew FIRREA from an unfortunate stomach complaint.) The FCA, which offers the prospect of triple damages, has provided the federal government with a particularly big stick to use against banks. As of last November, federal prosecutors had already cited the FCA in more than half a dozen civil fraud suits against such mortgage lenders as BofA, Citigroup, Deutsche Bank and Flagstar, obtaining more than $1.6 billion in settlements, mostly based on alleged defrauding of a federal home insurance program.

The Justice Department, in other words, isn’t shy about asserting the FCA in mortgage cases, even when its interpretation of a “claim” stretches the classic whistle-blower definition of a government contract or request for payment under a government program. Manhattan U.S. Attorney Preet Bharara, for instance, brought claims under both the FCA and FIRREA when he sued Bank of America in November for supposedly deceiving Fannie Mae and Freddie Mac about deficient underwriting of mortgages peddled by Countrywide.

So it was notable that last week, when the Justice Department sued Standard & Poor’s for knowingly promulgating false ratings of deficient securities, it brought claims under only FIRREA, not the FCA. More than a dozen states that rode sidecar with Justice sued under state trade practices or unfair competition laws rather than under state versions of the federal False Claims Act. Only one state, California, also sued S&P for violating its state false claims law.

Can we now admit it’s time to end issuer-pays credit rating model?

Alison Frankel
Feb 5, 2013 23:21 UTC

In July 2007, a recently hired analyst in Standard & Poor’s structured finance group exchanged a series of emails with an investment banking client who wanted to know how the new job was going. Things were just great, the analyst said sardonically, “aside from the fact that the MBS world is crashing, investors and media hate us and we’re all running around to save face … no complaints.” Part of the problem, the analyst said in a subsequent email, was that some people at S&P had been pushing to downgrade structured finance deals, “but the leadership was concerned of p*ssing off too many clients and jumping the gun ahead of Fitch and Moody’s.

I suspect that only an investment banker could find it in his or her heart to sympathize with a credit analyst in the summer of 2007, but this one suggested that some good might come from S&P’s internal conflict. “This might shake out a completely different way of doing biz in the industry,” the banker wrote. “I mean come on, we pay you to rate our deals and the better the rating the more money we make?!?! Whats up with that? How are you possibly supposed to be impartial????”

The email exchange, recounted deep in the Justice Department’s new civil complaint against S&P and its parent, McGraw-Hill, pretty well sums up the entire theory of the government’s case against the rating agency. S&P, according to the Justice Department, had a choice as the housing market began to collapse and subprime mortgages began to default. Rating agency analysts who monitored mortgage-backed securities knew the crash was coming and warned repeatedly that previous ratings of mortgage-backed instruments were no longer a reliable gauge. But rather than heed those warnings and toughen standards on mortgage-tied instruments, S&P continued to accept fees from banks in exchange for conferring its blessing on tens of billions of dollars of collateralized debt obligations. When truth collided with the client relationships that generated S&P’s revenue, in other words, money won out.

$8.7 bln ResCap MBS deal takes a beating in new objections

Alison Frankel
Feb 4, 2013 22:25 UTC

Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities gets all the attention, most recently in a column Sunday by Gretchen Morgenson of The New York Times, who cited new claims that echo old allegations of banks shortchanging MBS noteholders through modification of underlying investor-owned loans. Meanwhile, though, a similar global MBS deal between institutional investors and Residential Capital, the now bankrupt former mortgage lending arm of Ally Financial, has garnered much less outside attention, even though it permits MBS holders to assert an $8.7 billion claim in the bankruptcy, without opposition from ResCap. Friday was the deadline for objections in ResCap’s Chapter 11 to MBS investors’ $8.7 billion allowed claim. And the details that emerged in filings by ResCap bondholders, unsecured creditors and bond insurers that oppose the $8.7 billion deal add up to as compelling a story as the BofA saga, when it comes to assigning blame for and assessing victims of the mortgage crisis.

According to the new filings (especially those of the trustee for senior unsecured ResCap notes, the ad hoc committee of junior unsecured noteholders and the unsecured creditors committee), ResCap’s $8.7 billion allowed-claim settlement with MBS investors was engineered by Ally, which wanted to minimize its own liability to its mortgage unit. The filings point to emails and other evidence suggesting that Ally’s chief in-house litigation counsel, Timothy Devine, led negotiations with Kathy Patrick of Gibbs & Bruns, who represents the big institutional investor group that first notified ResCap of alleged breaches of its representations and warranties on underlying mortgages back in October 2011. (That group, like the BofA investor group, includes BlackRock and Pimco.)

The objectors claim that as ResCap approached Chapter 11, Ally executives estimated that Ally’s exposure to its ailing mortgage subsidiary could be as high as $2 billion. To minimize its own contribution to the ResCap estate, objectors assert, Ally supposedly agreed to back an unreasonably large estimate of ResCap’s put-back liability to MBS noteholders in exchange for support from MBS investors, who are ResCap’s primary creditors, for a $750 million settlement between Ally and ResCap. The supposed quid pro quo between Ally and the MBS investors group was a win for both of them but, objectors contend, only at the expense of monolines and ResCap’s other creditors. They argue that an $8.7 billion allowed claim for MBS investors would give holders of mortgage-backed notes an inflated share of the ResCap estate.

Suit reveals new details of Paulson’s role in Goldman Abacus CDO

Alison Frankel
Jan 31, 2013 23:26 UTC

Ever since Goldman Sachs agreed to pay $550 million to resolve claims by the Securities and Exchange Commission that it deceived investors in the Abacus collateralized debt obligation, there’s been a giant question mark hovering over the hedge fund Paulson & Co. Paulson worked with Goldman Sachs to select the CDO’s reference portfolio of mortgage-backed securities, then reaped the profits from a short position when the instrument failed. The implication was that Paulson picked securities that doomed Abacus, but the SEC never brought a case against the hedge fund. And when the bond insurer ACA Financial Guaranty, which was nominally the portfolio selection agent on the CDO, sued in 2011 to recover the $30 million it lost (plus punitive damages), it named only Goldman as a defendant.

But on Wednesday, New York State Supreme Court Justice Barbara Kapnick of Manhattan ruled from the bench that ACA can file an amended complaint – and this one names Paulson & Co and the Paulson Credit Opportunities fund as defendants. The 49-page suit, which was attached as an exhibit to ACA’s motion to file, adds layers of detail to what was previously known about Paulson’s involvement with the Abacus CDO, based on discovery not only from ACA’s suit but also from the SEC’s ongoing case against former Goldman vice president Fabrice Tourre. There aren’t huge surprises in the new evidence, but the disclosure of a side agreement between Goldman and Paulson and of a phone conversation in which Goldman assures ACA that Paulson has a long position appear to bolster ACA’s assertion that it was the dupe of a secret deal between the investment bank and the hedge fund.

“This is a very significant event,” said ACA counsel Marc Kasowitz of Kasowitz, Benson, Torres & Friedman. “It’s the first time Paulson has been fronted for having a share of the responsibility in Abacus.”

Who are Justice Department’s ‘outside experts’ on prosecuting banks?

Alison Frankel
Jan 30, 2013 23:56 UTC

Lanny Breuer made the formal announcement Wednesday that he is stepping down as head of the Justice Department’s criminal division, after a week that he surely won’t remember as his favorite in public service. Last Tuesday, PBS’s Frontline made Breuer seem insincere and evasive about Justice’s failure to prosecute bankers involved in mortgage securitization. Then yesterday, a pair of U.S. senators, Chuck Grassley (R-Iowa) and Sherrod Brown (D-Ohio), sent a follow-up letter to Attorney General Eric Holder, demanding information about the Justice Department’s settlements with big banks. In particular, the letter quoted comments by both Holder and Breuer about receiving advice from “experts” on the dire economic consequences of indicting financial institutions. Brown and Grassley asked the Justice Department to disclose the identity (and compensation) of all outside experts who opined on prosecuting banks with more than $1 billion in assets and to explain how it vetted the experts to ensure that they “provided unconflicted and unbiased advice to DOJ.”

Based on a speech Breuer gave to the New York City Bar Association last September, some of the experts who spoke with the Justice Department about what would happen if global corporations faced criminal charges were certainly not unbiased: They were economists brought in by targets to dissuade the department from indicting their clients. Let’s be clear: Listening to arguments from potential defendants is an entirely appropriate exercise of prosecutorial discretion; as Breuer said in his speech, responsible law enforcement demands that prosecutors consider the consequences of their actions. But with Grassley and Brown now pressing the Justice Department on who advised Holder and Breuer to protect jobs and markets by deferring prosecution of big banks, Justice critics could try to turn Breuer’s words against him and his office.

The senators’ letter cites Breuer’s remarks to Frontline, which helpfully posted a transcript of its interview with the assistant AG. “In any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect, it affects the economy,” Breuer told Frontline. “At the Department of Justice, we’re being aggressive, but we should in fact take into consideration what the experts tell us. That doesn’t mean we won’t go forward, but it has to be a factor.”

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