Alison Frankel

Mortgage-backed securities investors who are convinced that banks intend to shift the cost of the $25 billion national mortgage settlement onto their shoulders are “evaluating their legal options,” according to Chris Katopis, executive director of the Association of Mortgage Investors (and a former clerk on the Federal Circuit Court of Appeals). The private investors, as I’ve reported, are outraged at the terms of the settlement, which sets no limit on the percentage of securitized mortgages the settling banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial — are permitted to modify to reach their $17 billion target for reducing the principal balance owed by struggling borrowers. Mortgage-backed noteholders believe the deal terms encourage banks to write down investor-owned first liens, rather than second lien mortgages in bank-owned portfolios. That incentive, they say, shifts the cost of the deal from the banks to mortgage-backed bondholders.

Their argument is gaining traction. The New York Times editorialized Sunday on the bank-friendly details of the national settlement, and both Zero Hedge and American Banker have picked up on the MBS investors’ cost-shifting theme. The U.S. Department of Housing and Urban Development, which has denied assertions that Secretary Shaun Donovan promised MBS investors a cap on modification of securitized mortgages, has been put on the defensive, issuing a “Myth vs. Fact” blog post to present its case for the settlement. The bond investors are doing a great job of whipping up outrage about the deal, which must be approved by a U.S. District Judge in federal court in Washington.

Unfortunately for the bond investors, outrage is not a cause of action.

Katopis told me he doesn’t want to give away any clues about the strategy MBS investors may pursue. There are certainly some very smart, creative lawyers who’ve counseled mortgage-backed noteholders over the last three years, including David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who represents the National Credit Union Administration in MBS securities suits and also happens to be one of the most prominent U.S. Supreme Court litigators around. (I tried to reach Frederick but he was arguing a case in Chicago and unavailable.)

As best I can determine, bondholders have two potential grounds on which to attempt to block the deal (aside from an amicus brief outlining their concerns with the terms of the settlement). They could argue that the settlement interferes with their contractual relationships with the banks that sponsored mortgage-backed securities, or they could make a way-out-of-the-box argument that the proposed settlement violates the Fifth Amendment’s takings clause, which prohibits the government from snatching private property without just compensation.

Neither argument looks very promising to me. The settlement contains a specific (albeit incredibly convoluted) clause deferring to the pooling and servicing agreements that govern MBS trusts. The banks are not supposed to be permitted to take any action to satisfy their obligations under the national settlement in violatation of their underlying contracts with investors. So even though they weren’t included in the negotiation of the national settlement, noteholders shouldn’t be any worse off contractually than they were under the terms of contracts they agreed to. Any judge weighing an objection to the national settlement on contract grounds would probably tell MBS investors to wait and see if any bank actually breaches an underlying contract, and then sue the bank. (That’s not so easy, of course; most pooling and servicing agreements require that noteholders pass a 25 percent voting-rights threshold even to begin the process that leads to contract litigation.)

When U.S. Senior District Judge Jed Rakoff rejected a $285 million settlement between Citigroup and the Securities and Exchange Commission last fall, he offered a stern rebuke to SEC lawyers who’d suggested his role was not to protect the public interest. “A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest,” Rakoff wrote in his oft-quoted ruling. “Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensible attribute of the federal judiciary.”

In the months since, at least three other federal judges have cited Rakoff in questioning whether settlements proposed by federal agencies serve the public interest, two in SEC cases and one in a Federal Trade Commission case. The SEC adopted a minor, mostly cosmetic revision in the policy that so provoked Rakoff — in which defendants are permitted to settle without admitting liability — but otherwise insisted that such compromises are the very foundation of federal enforcement efforts.

On Thursday, the agency’s position received a very powerful endorsement from the 2nd Circuit Court of Appeals. A three-judge panel ruled that the SEC’s case should be stayed pending a joint appeal of Rakoff’s ruling by the agency and Citigroup, overturning a Rakoff order that the case proceed. The extraordinary 17-page appellate ruling concludes that Citi and the SEC are likely to succeed in their argument that Rakoff was wrong to reject the settlement.

Bank of America really, really does not want CEO Brian Moynihan to sit for a deposition in bond insurer MBIA’s breach-of-contract case against Countrywide and BofA.

According to the transcript of a hearing on the issue last Friday morning before Manhattan State Supreme Court Justice Eileen Bransten, the bank’s lawyers at O’Melveny & Myers said that under the so-called Apex rule — which essentially says that high-ranking executives shouldn’t have to waste their time responding to deposition questions that lesser-ranking officials can answer just as well — Moynihan should be shielded from testifying because he doesn’t have unique personal knowledge of the disputed facts in the case. He’s also a very busy man, said Jonathan Rosenberg of O’Melveny. Rosenberg displayed a slide that showed all of BofA’s “enormous operations,” which he said demanded “24/7 work from senior executives, especially the CEO.” MBIA’s insistence on taking testimony from Moynihan, when BofA has already offered up for deposition several senior bank executives with the same knowledge as the CEO, amounts to harassment, according to BofA.

“There’s no basis to say they have to have Brian Moynihan when they have access to all these other people,” including former BofA CEO Ken Lewis, Rosenberg said. “This effort to depose Brian Moynihan is for harassment purposes.” If Bransten allowed the deposition in MBIA’s case, other bond insurers suing Countrywide would “seek their own shot,” the O’Melveny lawyer said, which “would clearly be disruptive to the business of Bank of America to lose their CEO to substantial time in prepping for and taking depositions.”

If the Foreign Corrupt Practices Act is Peyton Manning, the Travel Act could turn out to be his little brother Eli.

Allow me to explain. As we all know, until the last several months, FCPA has been one of the Justice Department’s Hall of Fame success stories. Prosecutors have reaped billions in settlements with corporations accused of bribing foreign officials to obtain state-sponsored contracts. The list of FCPA defendants that signed plea deals — including Siemens and Halliburton — is long and sobering, which means the Justice Department met the dual goals of buffing up its prosecution record and satisfying the larger U.S. policy interest in deterring overseas corruption. But of late the department’s FCPA record has taken a hit (sort of like Peyton’s neck) with the dismissal of the Lindsey Manufacturing and Africa sting case.

Is this the moment for the Travel Act to catch up with its better-known brother, a la Eli Manning?

It’s been all of three weeks since U.S. District Judge Lewis Kaplan of Manhattan federal court lifted a stay on Chevron’s fraud and racketeering suit, which was filed in 2010 against the Ecuadoreans who accuse the oil company of contaminating the Lago Agrio region of the rainforest as well as the Ecuadoreans’ lawyers and advisers. But the two sides in this corollary to the endless litigation that produced an $18.2 billion judgment against Chevron in the Ecuadorean courts have picked up as though they never left off. This week Chevron filed a motion for partial summary judgment and renewed its motion for an attachment order that would effectively block the Ecuadoreans from enforcing their award. Lawyers for the RICO defendants, predictably, have responded with accusations of dirty tricks against Chevron and its counsel at Gibson, Dunn & Crutcher.

Chevron’s summary judgment motion, which asks Kaplan to reject collateral estoppel defenses based on findings in the Ecuadorean courts, is mostly a reformulation of arguments that have become all too familiar to anyone who follows the litigation. So I’ll focus on the new attachment motion, which includes some information we haven’t seen before. In January, you may recall, Kaplan denied Chevron’s request for a highly unusual pretrial order that would essentially have frozen the assets of the RICO defendants in anticipation of a Chevron victory and damages award in the New York case. The judge said that Chevron hadn’t sufficiently specified its alleged damages, aside from citing the $18.2 billion Ecuadorean judgment. “In these circumstances, Chevron has not demonstrated a likelihood of recovering any specific amount of damages,” Kaplan wrote. But he invited Chevron to come back when it had firmer evidence of its potential damages.

Chevron said in this week’s motion that it now has the evidence Kaplan asked for. The company hired two academic economists, Harvard’s Steven Shavell and Stanford’s Steven Grenadier, to determine the current value of the $18.2 billion judgment. Based on “the prices already paid or promised in exchange for interests in the judgment,” the economists opined that at this moment, the $18.2 billion award is worth $200 million. Chevron said that under RICO’s treble damages, it can realistically claim $600 million in a potential award in the fraud and racketeering case.

Is there any trademark owner with less of a sense of humor than Louis Vuitton? I thought the French fashion house couldn’t outdo its 2010 trademark case against Hyundai for a momentary glimpse of a basketball with a Vuitton-like pattern in a Superbowl ad spoofing the rich. I was wrong. Last week Louis Vuitton trademark counsel Michael Pantalony sent a cease-and-desist letter to the dean of the University of Pennsylvania Law School, demanding that Penn take down posters advertising a March 20 fashion IP symposium because the posters “misappropriated and modified” Vuitton’s trademarked monogram design.

“This egregious action is not only a serious willful infringement and knowingly dilutes the LV trademarks, but also may mislead others into thinking that this type of unlawful activity is somehow ‘legal’ or constitutes ‘fair use’ because the Penn Intellectual Property Group is sponsoring a seminar on fashion law and ‘must be experts,’” the letter said. (You can see the whole missive at Charles Colman‘s Law of Fashion blog.)

Seriously? Consider the audience at whom this particular poster is directed: people interested in fashion trademark issues. These are not guileless consumers who might be misled into thinking that Louis Vuitton had modified its famous monogram design to include TMs instead of LVs. They’re folks who get the joke, who understand that the clever designer who created the poster was probably riffing on Louis Vuitton’s reputation as a notoriously relentless enforcer of its mark. The layers of irony in Vuitton’s reaction to the poster are remarkable.

Robert Rosenkranz was one hell of a CEO and chairman for Delphi Financial Group. As Vice Chancellor Sam Glasscock details in a 56-page ruling issued late Tuesday, when Rosenkranz took the insurance holding company public in 1990, he created two classes of shares, one for the public and one for him. His shares carried 10 times the voting power of the public shares, which meant, for all intents and purposes, that he controlled the company despite owning only a 13 percent equity stake. Rosenkranz did surrender some rights in Delphi’s charter, though. Upon the sale of the company, his Class B stock would convert to Class A, which, according to Glasscock, was intended to eliminate the possibility that Rosenkranz would receive a control premium for his shares if the company were acquired.

That assumption, however, underestimated the creativity of Robert Rosenkranz. When a company called Tokio Marine Holdings came along with an offer to acquire Delphi, Rosenkranz told Delphi’s board that he wouldn’t agree to any deal that treated him like an ordinary shareholder. As Glasscock put it: “Notwithstanding the charter provision, he would not consent to the sale without a premium paid for his Class B stock.” Rosenkranz argued that the charter precluding such an arrangement could simply be amended to permit it. (Rosenkranz inspired Deal Prof Steven Davidoff to write a column on the hubris of CEOs — and the scrutiny they can now expect to receive in Delaware.) The Delphi board, advised by Cravath, Swaine & Moore, was in a bind. Tokio Marine was offering a huge premium on Delphi’s share price, as much as 75 percent. But its controlling shareholder — and the sole negotiator of the deal — said he would veto the acquisition if he didn’t get his way.

A special committee of independent board members ultimately held its nose and endorsed a $9 per share differential between public shares and Rosenkranz shares in Tokio Marine’s overall $2.7 billion offer. Shareholders, predictably, sued to block the deal, arguing (among other things) that Rosenkranz and the rest of the board breached their fiduciary duty to the Class A shareholders by permitting Rosenkranz to negotiate a control premium for himself. The Delphi shareholders, who had counsel from about half of the M&A class action bar — Grant & Eisenhofer; Bernstein Litowitz Berger & Grossmann; Prickett, Jones & Elliot; Robbins Geller Rudman & Dowd; and Kessler Topaz Meltzer & Check — asked the court to enjoin a shareholder vote on the deal.

In a stunning order Monday, the U.S. Supreme Court essentially said it had been looking at the wrong issue in an Alien Tort Statute case called Kiobel v. Royal Dutch Petroleum. It called for new briefs that reframe Kiobel as an examination of the extraterritorial application of the ATS. Given the justices’ reluctance to extend U.S. jurisdiction beyond our borders, expressed so fatefully in their 2010 ruling in Morrison v. National Austrialia Bank, the recasting of Kiobel has the potential to devastate U.S. human rights litigation based on overseas conduct.

The comparatively narrow question Kiobel originally presented to the Supreme Court was whether corporations can be held liable under the ATS, a once-obscure 1789 law that human rights advocates revived in the 1980s to address international atrocities against non-U.S. citizens. The 2nd Circuit Court of Appeals had ruled in Kiobel that corporations are immune under the ATS; three other federal appeals courts had held otherwise. The Kiobel merits briefing by Shell and the Nigerian claimants (available here) mostly addressed the corporate liability question.

But barely had Kiobel oral arguments begun last Tuesday when Justice Anthony Kennedy interrupted plaintiffs lawyer Paul Hoffman of Schonbrun DeSimone Seplow Harris Hoffman & Harrison to point out that the United States appears to be the only country in the world to “exercise universal civil jurisdiction over alleged extraterritorial human rights abuses to which the nation has no connection.” (Kennedy was reading from an amicus brief Chevron filed in support of Shell.) Other justices picked up and amplified Kennedy’s point. Justice Samuel Alito put the question most bluntly, asking Hoffman, “What business does a case like this” — a suit by foreign nationals against a foreign-based corporation for its alleged complicity in state-sponsored torture and murder in Nigeria — “have in the courts of the United States?”

The Countrywide mortgage-backed securities investors who have accused Kathy Patrick and her firm, Gibbs & Bruns, of being patsies in Bank of America’s proposed $8.5 billion MBS put-back settlement might want to talk to Credit Suisse about whether Patrick is inclined to collude with bank defendants.

Late Friday, as Jon Stempel reported for Reuters, U.S. District Judge James Graham of Columbus federal court denied Credit Suisse’s motion for summary judgment on federal and common-law securities fraud claims by investors who bought National Century Financial bonds about a decade ago. National Century was supposed to be securitizing healthcare receivables, but those receivables turned out to be largely illusory. The company collapsed and its three leading officials are now serving long prison terms. Patrick represents a group of large National Century noteholders, including PIMCO, who allege that Credit Suisse facilitated the fraud by serving as a manager in some $2 billion in private placements of National Century bonds. Kasowitz Benson Torres & Friedman represents several other National Century noteholders and has worked alongside Gibbs & Bruns in the multidistrict litigation consolidated before Graham.

There’s a lot to digest in the judge’s 115-page summary judgment ruling, including more than you ever wanted to know about the applicability of various state blue-sky securities laws to Credit Suisse’s alleged abetting of fraud at National Century. But the most significant portion of the opinion is Graham’s discussion of why Credit Suisse is potentially responsible for alleged misstatements in National Century’s private placement memos, despite warnings in the memos that the bank didn’t independently verify the information contained within.

If it weren’t for the $500 million that won’t go to asbestos victims as a result of the enmity between Chubb Insurance and Travelers Insurance, this story would be a funny O. Henry-esque lesson in the ironies of litigation. But there’s nothing funny about plaintiffs losing out on $500 million they’ve been counting on since 2004, especially because they had absolutely nothing to do with the loss. What we have here is a cautionary tale of the unintended consequences that abound in long-running, complex litigation.

On Thursday, as Jon Stempel reported for Reuters, U.S. District Judge John Koeltl of Manhattan federal court ruled that a 2004 settlement between Travelers and asbestos victims who long ago brought suits against the insurer was unenforceable. In a 32-page opinion that makes a valiant effort to streamline one of the most complicated records you’ll ever see, Koeltl concluded that the preconditions of the settlement were not satisfied because Travelers hadn’t been released from all the claims the deal was supposed to resolve.

To understand why, we have to back up to 2004. That’s when Travelers decided it was cheaper, in the long run, to buy peace with people asserting asbestos claims deriving from Travelers’ coverage of Johns Manville than to continue insisting the insurance company was absolved from liability through an $80 million contribution to the Manville Trust in 1986. Travelers agreed to put up a total of $445 million to settle with three groups of plaintiffs. As a condition of the settlement, Travelers insisted on a final court order releasing it from any asbestos-related claims.