Alison Frankel

N.Y. AG rebuffed in clash with private lawyers with parallel claims

Alison Frankel
May 13, 2013 22:42 UTC

On Monday, former New York governors Mario Cuomo and George Pataki wrote an unusual joint opinion piecein The Wall Street Journal, calling on New York Attorney General Eric Schneiderman to drop threats that he will continue to seek injunctive relief against former AIG chief Hank Greenberg, even though the AG has already had to abandon damages claims because Greenberg reached a private settlement with investors in a securities class action. As my Reuters colleague Karen Freifeld explained in a really smart analysis last Friday, Schneiderman is constrained by a 2008 ruling that limits the AG’s right to recovery in the name of investors who have already settled a federal-court class action. Freifeld said that the same holding, Spitzer v. Applied Card, may ultimately force the AG to drop claims for money damages against Bank of America in connection with its merger with Merrill Lynch and against Ernst & Young for its audit of Lehman Brothers, even though both suits were brought under New York’s powerful Martin Act, which permits the state to bring securities claims on behalf of supposedly defrauded investors.

I’ve written a lot about the tension between class action lawyers and state regulators with parallel claims. The battle to recover damages on behalf of misled investors (and the right to claim credit for the recovery) is part of that interplay: In New York, whoever makes a deal first wins.

A 44-page decision Friday by U.S. District Judge Colleen McMahon of Manhattan provides a vivid illustration of the burgeoning competition between the New York AG and securities class action lawyers. McMahon ruled that plaintiffs’ lawyers are entitled to about 18 percent of a $220 million settlement on behalf of investors in the Bernard Madoff feeder fund Ivy Asset Management (and related defendants). As Daniel Fisher of Forbes reported Friday, she ordered a 25 percent haircut on the hours and rates that five plaintiffs’ firms billed for reviewing documents previously produced to regulators, finding that the firms (whom she otherwise praised to the skies) should not have jacked up billing rates for the contract lawyers who conducted the review.

What was more interesting to me, however, was McMahon’s evaluation of the role of the New York AG – the primary objector to the plaintiffs’ fee request – in obtaining the settlement. In the Ivy case, as in Greenberg’s, the AG brought a case alongside class action plaintiffs and uncovered some of the key evidence in the case. But in the final analysis, McMahon said, results are what matter.

The Ivy class actions, including an ERISA case and derivative suits, were filed within months of Madoff’s exposure in December 2008. But while the securities class actions were stayed pending the feeder fund’s motion to dismiss, former New York AG Andrew Cuomo began an investigation. Ivy was concerned enough about the AG that it entered settlement negotiations, offering in 2010 to pay $140 million in a global deal on behalf of investors in all of its affiliated Madoff feeder funds. Talks fell apart when the AG couldn’t assure a global deal. Ivy withdrew its offer and in May 2010 Cuomo’s office filed a detailed complaint against the funds, based on more than 10 million documents and 37 depositions.

Patent trolls and multidistrict litigation: It’s complicated

Alison Frankel
May 10, 2013 21:31 UTC

One of the key anti-troll elements of the America Invents Act of 2011 was the patent reform law’s restrictions on joinder. After September 2011, patent owners could not file complaints that named multiple, otherwise unrelated defendants who happened to make use of the same IP. The idea was to make it more expensive for plaintiffs to bring and litigate patent suits, to prevent forum shopping and to limit trolls’ leverage. Conventional wisdom was that the new law’s joinder restrictions were going to lead to an uptick in requests for the Judicial Panel on Multidistrict Litigation to consolidate cases for pretrial proceedings. If plaintiffs could persuade the JPMDL to consolidate cases for pretrial proceedings – especially if they could direct consolidated litigation to sympathetic judges – they could take some of the sting out of joinder restrictions.

As usual, reality is more complicated. Prompted by a squib about a patent MDL at the Gibbons blog IP Law Alert, I went to the JPMDL’s site to see if, in fact, plaintiffs have flocked to the panel since patent reform. Here’s what I found. There are 19 active MDLs categorized as patent matters. Three of them are Hatch-Waxman litigation between brand and generic drugmakers, so I eliminated them from additional consideration. Of the remaining 16 consolidated proceedings, five preceded the effective date of the patent reform law. So in the 15 months since AIA, the MDL panel has consolidated 11 patent matters. That seems to be a higher rate for consolidating patent litigation than we saw before patent reform, but the JPMDL still considers far more product liability, consumer and antitrust matters than patent litigation.

And interestingly, it was defendants who moved for pretrial consolidation in seven of the 11 patent MDLs. Plaintiffs opposed the consolidation motions in all of those cases. Plaintiffs, meanwhile, brought four of the transfer motions, and defendants opposed all of them. In two of the four plaintiffs’ MDL attempts, patent holders requested that their cases be consolidated in the Eastern District of Texas, widely reckoned to be a plaintiff-friendly jurisdiction (otherwise known as a troll haven). The JPMDL agreed to consolidate both litigations but sent the matters to judges in other districts. The one patent MDL transferred to a judge in the Eastern District of Texas, In re Parallel Networks, was consolidated on a motion by defendants that was opposed by the plaintiff.

Anonymous online reviews may not be so anonymous

Alison Frankel
May 9, 2013 22:30 UTC

On Wednesday, the Public Citizen Litigation Group filed an appeal for the online review site Yelp, asking the Virginia Court of Appeals to review a trial-court order compelling Yelp to reveal the identity of seven anonymous reviewers who complained about a Washington carpet-cleaning service that subsequently sued them for libel and defamation. Yelp and Public Citizen contend that Alexandria City Circuit Court Judge James Clark got it wrong when he ruled that despite First Amendment protection for anonymous online critics, a Virginia statute requires the disclosure of their names when their identity is central to claims against them.

That’s a pretty scary holding if you live in Virginia and are in the habit of expressing yourself anonymously on the Internet. I should note that there are restrictions on how far the ruling goes. Hadeed Carpet Cleaning’s libel suit asserts that the seven particular John Does named as defendants were actually competitors smearing Hadeed, not customers posting genuine reviews. Judge Clark agreed that because Hadeed claimed the seven reviewers falsely represented themselves, it met the standard set out in the state law governing disclosure of their identity.

The problem, at least according to Public Citizen, is that the standard in Virginia isn’t clearly defined by that law. Appeals courts in the state have not previously considered this question, but Public Citizen argues in the brief filed Wednesday that other state appellate courts have, and they’ve all reached conclusions contrary to Judge Clark’s. “Every other appellate court has held, whether under the First Amendment or under state procedures, that anonymous defendants are entitled to demand that the plaintiff make a factual showing, not just that the anonymous defendant has made critical statements, but also that the statements are actionable and that there is an evidentiary basis for the prima facie elements of the claim,” the brief said. Yelp’s lead counsel, Paul Alan Levy of Public Citizen, told me the Virginia trial judge flat out erred in his interpretation of both the Virginia statute – which Levy says is merely procedural and does not set out a standard for disclosing a critic’s identity – and prevailing precedent.

Are mortgage-backed securities bonds or equity? 2nd Circuit to decide

Alison Frankel
May 8, 2013 21:29 UTC

I’m ready to make a bold declaration: We’ve reached the beginning of the end of private litigation over deficient mortgage-backed securities. Think about it. The bond insurers that pioneered MBS cases are reaching settlements right and left with the banks that sponsored notes. MBIA’s $1.7 billion deal with Bank of America is the most dramatic, but Assured Guaranty reached a $358 million settlement with UBS on the same day. MBS class actions are in their end stages, now that the U.S. Supreme Court has signaled disinterest in MBS class standing. New securities fraud complaints by individual MBS investors have tailed off, and though I continue to see new breach-of-contract filings by trustees suing at the direction of noteholders with the requisite voting rights, time is running out on those suits even under New York’s generous statute of limitations. I don’t think it’s a coincidence that Kathy Patrick of Gibbs & Bruns, who has spent the last few years deep in talks with big banks over the put-back claims of her enormous institutional investor clients, told my Reuters colleague Karen Freifeld that she’s looking ahead to Libor securities litigation. Or that Quinn Emanuel Urquhart & Sullivan, which began preparing to represent plaintiffs in MBS cases all the way back in early 2008, is now investing heavily in products liability litigation.

Don’t get me wrong. Billions of dollars are still going to move from banks to monolines and investors, especially once the Federal Housing Finance Agency cases begin to settle. But we’ve climbed almost to the top of the learning curve. We know the myriad deficiencies in the underwriting and securitization process and the multifaceted defenses banks and credit rating agencies have raised to evade liability for those deficiencies. That’s valuable information, and not just for MBS plaintiffs. If the market for residential mortgage-backed securities is ever to be revived robustly – which, at least in the ideal of policy, would be of enormous benefit to homeowners – investors and sponsors alike will be wiser and warier.

The 2nd Circuit agreed Tuesday to hear an appeal that should go a long way toward answering one of the most controversial remaining questions in MBS litigation: What is the potential exposure of securitization trustees to MBS investors? As you know, the responsibilities of MBS trustees have been hotly debated in Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities, with an expert for objectors to the settlement arguing that trustees are inherently conflicted by institutional relationships with MBS sponsors. That’s an interesting theoretical point, but meanwhile, in a lower-profile arena of MBS litigation, a Chicago police pension fund represented by Scott + Scott has asserted claims directly against securitization trustees that supposedly breached their duty to noteholders.

Who won the $1.7 bln settlement between BofA and MBIA?

Alison Frankel
May 7, 2013 21:26 UTC

On Monday, after word leaked that Bank of America and MBIA had resolved their epic five-year, multidimensional litigation against one another, investors in both companies judged the deal. Shares in MBIA, whose structured finance arm had been widely considered to be on the brink of a regulatory takeover, closed 45 percent higher at $14.29, adding about a billion dollars to the market capitalization of the insurer’s holding company. Bank of America’s shares went up as well. They didn’t rise as dramatically as MBIA’s, closing up 5 percent at $12.88. But that added $6.9 billion to BofA’s market cap – three times as much as the $1.6 billion in cash that the bank agreed to pay to MBIA as part of the settlement.

The comparison between the raw percentage rise in share price and the total dollars added to each company’s market cap is instructive in considering which side, if either, got the better of this settlement. As investor reaction indicated, this deal was much more important to MBIA than to Bank of America. With $1.6 billion in cash from the bank, plus the remittance of $137 million in MBIA notes held by BofA, MBIA’s withered structured finance arm can pay back the $1.7 billion it owes the company’s bond insurance arm, which financed settlements with some of the banks that had challenged MBIA’s 2009 restructuring. BofA also agreed in Monday’s settlement to drop its regulatory and fraud claims stemming from that restructuring, which leaves only Societe Generale remaining in restructuring cases against MBIA. Assuming the insurer can reach a settlement with Societe Generale, the cloud of uncertainty over its 2009 split will be entirely removed and MBIA’s bond insurance arm will be able to return to the business of writing policies on state and municipal financings.

MBIA also eliminated any uncertainty about what it might owe Bank of America under credit default swap agreements with BofA predecessor Merrill Lynch. BofA held a total of $7.4 billion in MBIA policies, $6.1 billion of which was on CDS deals. The actual value of those policies was a matter of speculation and interpretation. I’ve heard that Bank of America had drastically written down its potential recovery from MBIA to the neighborhood of a $1 billion. But if MBIA went into rehabilitation (the insurance version of Chapter 11), the priority of claims by CDS counterparties would have been determined by New York State Department of Finance chief Benjamin Lawsky, who has been deeply involved in settlement talks between MBIA and BofA and might have been using the priority of claims as a bargaining chip. In any event, MBIA’s takeaway from the settlement isn’t just the $1.7 billion in cash and other considerations it received from BofA. It’s really that amount plus BofA’s potential recovery from the CDS policies.

How to woo a judge (when $8.5 bln is at stake)

Alison Frankel
May 6, 2013 23:01 UTC

With the gigantic news Monday that Bank of America has reached a global settlement with the bond insurer MBIA - agreeing to pay MBIA $1.7 billion and acquiring five-year warrants on about 10 million shares of the insurer’s holding company – the bank’s most pressing piece of litigation has become its proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. Friday was the deadline for noteholders who have previously intervened in the special proceeding to evaluate the deal to announce where they stand.

There were some encouraging developments for BofA and fellow settlement proponents Bank of New York Mellon (the Countrywide MBS trustee) and the major institutional investor group represented by Gibbs & Bruns. The investment management firm Fir Tree, whose funds hold Countrywide notes with a face value of $550 million, announced support for the proposed settlement, asserting that the “widespread lack of objection” by Countrywide MBS investors “reflects deep and broad support among holder of securities for the proposed settlement.” The Federal Housing Finance Agency, which had filed a wishy-washy “conditional objection” to the deal back in September 2011, dropped its half-hearted resistance. And the New York and Delaware attorneys general, who entered the case with a bang, departed with a whimper, deferring to “capable and sophisticated counsel” for private noteholders with objections to handle things from here.

But a total of 68 noteholders objected to the settlement in filings on Friday. And though 20 of them are affiliated with AIG, they’re otherwise a diverse group that includes four Federal Home Loan Banks, a couple of public pension funds and Cranberry Park, the nom de litigation of an investment fund family with a significant Countrywide MBS stake. As I read competing briefs by objecting noteholders, who want New York State Supreme Court Justice Barbara Kapnick to reject the $8.5 billion settlement, and by BNY Mellon, which brought the special proceeding under state trust law to win court approval of the deal, I was struck by the difference in the way the two sides want Kapnick to look at the settlement. Opponents are asking the judge to examine the settlement through a microscope, scrutinizing details. Proponents want her to take a broad view of the trustee’s discretion and the magnitude of $8.5 billion.

Kiobel’s first casualty: Turkcell drops ATS bribery case

Alison Frankel
May 2, 2013 21:19 UTC

Last April, when the Turkish cellular services company Turkcell filed an Alien Tort Statute suit against South Africa’s MTN Group in federal district court in Washington, I was skeptical. Sure, Turkcell raised salacious allegations about how MTN wrested away its contract to provide cell services in Iran, including supposedly illegal arms deals and vote-peddling at the United Nations. But I said at the time that allegations of corporate corruption aren’t usually the stuff of ATS suits, and, moreover, that the U.S. Supreme Court had already agreed to take up the issue of the statute’s reach beyond U.S. borders in Kiobel v. Royal Dutch Petroleum. I predicted that Turkcell’s case – which was so explosive that MTN’s stock fell 6 percent when it was disclosed – would not survive in American courts.

Yep, this is going to be one of those “I told you so” posts. In October, after the Supreme Court heard oral arguments in Kiobel, U.S. District Judge Reggie Walton stayed the Turkcell litigation until the justices issued a ruling on the extraterritorial application of the ATS. As you know, the Supreme Court finally decided Kiobel in April, ruling that plaintiffs must be able to demonstrate a strong connection between their allegations and the United States to overcome a presumption that the ATS does not apply to overseas conduct. That decision sealed the fate of Turkcell’s suit, which alleged only glancing ties to the United States. On Wednesday, the company’s lawyers at Patton Boggs agreed to dismiss the case. Turkcell hinted in a press release that it would refile its claims in another jurisdiction. (And in fairness, at the time the company sued in federal court in Washington, precedent from the District of Columbia Court of Appeals in Doe v. Exxon Mobil held that the ATS does extend overseas.)

The dismissal on jurisdictional grounds does, however, leave unanswered the other question Turkcell’s case raised: Are bribery and corruption violations of the international law of nations? The Alien Tort Statute was enacted in 1789 to provide a forum for such violations of global standards of behavior, then fell into obscurity. Since its revival in the 1970s, ATS cases have generally involved human rights atrocities, which clearly fall under the international law rubric. Courts were reluctant, however, to permit corporate plaintiffs to make use of the ATS in what boiled down to business disputes.

Libor litigation lives! Schwab refiles fraud claims in state court

Alison Frankel
Apr 30, 2013 20:49 UTC

A month ago – right after U.S. District Judge Naomi Reice Buchwald of Manhattan issued a stunning decision that dismissed antitrust and racketeering class action claims against the global banks involved in the process of setting the benchmark London Interbank Offered Rate – I told you that individual investors might be able to rise from the wreckage with common-law fraud and federal securities suits, so long as they could show that they were deceived by the banks’ misrepresentations about Libor’s legitimacy and held enough Libor-pegged securities to justify the expense of litigating claims on their own. On Monday, Charles Schwab filed a new complaint in San Francisco County Superior Court asserting that it meets both of those conditions: Schwab entities supposedly purchased billions of dollars of Libor-based financial instruments based on false assurances that the benchmark was set honestly.

Citing admissions from Libor settlements that U.S. and British regulators have reached with Barclays, UBS and Royal Bank of Scotland, as well as expert reports developed in the decimated federal multidistrict Libor litigation, Schwab’s lawyers at Lieff, Cabraser, Heimann & Bernstein claim that Libor banks conspired to suppress the benchmark borrowing rate. That artificial suppression, according to Schwab, permitted the banks to pay unduly low interest rates on floating-rate securities pegged to Libor and even on short-term fixed-rate notes with returns based on Libor rates. The parent company and various Schwab funds are asserting common-law fraud, breach of contract and unjust enrichment claims; violation of California’s trade practices statute; and federal securities claims.

Schwab (which also brought individual claims, now dismissed, in the antitrust MDL) takes care to address two potential bank defenses: reliance and timeliness. The bulk of the 125-page complaint is dedicated to demonstrating that Libor was manipulated, but Schwab spends several pages detailing the banks’ public assurances that it was not. The supposed conspiracy to depress Libor, according to the complaint, “was, by its very nature, self-concealing.” Reasonable investors could not know that the rate was being suppressed, Schwab said, when officials from Credit Suisse, JPMorgan Chase, Bank of America and Citigroup were assuring the public that Libor was legitimate.

Will CDO investors’ deal boost litigation against rating agencies?

Alison Frankel
Apr 29, 2013 21:28 UTC

This is a rare sentiment, but thank goodness for Congress. Were it not for reports issued in 2011 by theFinancial Crisis Inquiry Commission (an expert panel created by federal statute) and the Senate Subcommittee on Investigations, we’d have precious little public-record testimony about the role that the credit rating agencies Standard & Poor’s, Moody’s and Fitch played in the near collapse of the economy. With Friday’s settlement between S&P, Moody’s and two groups of investors in collateralized debt obligations known as Cheyne and Rhinebridge, we’ve lost one of our last remaining chances to see the rating agencies answer to private investors.

I want to emphasize that the deal is a landmark. It is apparently the first time that S&P and Moody’s have settled accusations that investors were misled by their ratings. That’s unquestionably a great result for the CDO purchasers in the case and for their lawyers at Robbins Geller Rudman & Dowd, who have battled since 2008 to keep $700 million in fraud and negligence claims alive. Unlike investors in more than three dozen other cases claiming the credit rating agencies facilitated the issue of toxic mortgage-backed securities, Abu Dhabi Bank, the Kings County pension fund and their fellow CDO purchasers survived preliminary motions, beating back the agencies’ argument that their ratings were opinions protected by the First Amendment. Then, through discovery, Robbins Geller uncovered hot documents - even more than the rating agencies produced to Congress – that helped investors withstand defense requests for summary judgment.

Lead counsel Luke Brooks and Daniel Drosman of Robbins Geller declined to disclose the terms of the CDO settlement but told me Monday that their clients are very pleased with “what we view as an extraordinary result.” (An S&P representative declined to comment; a Moody’s spokesman told Reuters that the agency wanted to put the CDO litigation behind it.)

Microsoft win in rate-setting case vs Motorola is call to litigation

Alison Frankel
Apr 26, 2013 22:15 UTC

For the first time ever, a federal district judge has decided what constitutes a reasonable license rate for a portfolio of standard-essential patents. U.S. District Judge James Robart ruled late Thursday that Motorola is entitled to royalties of a half cent per unit for Microsoft’s use of standard-essential video compression patents and 3.5 cents per unit for Motorola’s wireless communication patents. According to Microsoft, those terms would require it to pay Motorola a grand total of about $1.8 million a year in royalties – a far cry indeed from the billions Motorola requested in a royalty demand to Microsoft in 2010. It’s still to be determined at a trial this summer whether Motorola breached its obligation to license its essential technology to Microsoft on reasonable terms. But make no mistake: Robart’s ruling on reasonable royalties is a dreadful outcome for Motorola and its parent, Google.

In fact, there’s a good argument that the framework Robart used to determine a fair royalty rate is bad news for all patent holders that depend on license fees for essential technology. Until the smart device wars, when Microsoft and Apple balked at Motorola’s licensing demands, product makers generally considered themselves to be at the mercy of companies that developed essential technology adopted by international standard-setting boards. Robart’s ruling, if it is eventually upheld by the 9th Circuit Court of Appeals, gives so-called implementers like Microsoft and Apple not only the methodology to whittle down patent holders’ licensing demands but also a recourse if negotiations stall. Implementers now know they can go to court and ask a judge to decide a fair royalty based on the relative value of essential patents to their final product. We’ve already seen courts and regulators blunt the threat of injunctions by holders of standard-essential patents. Robart’s decision shifts the balance of power even further away from patent holders.

To understand why, let’s run quickly through the findings in the 207-page opinion. The judge said early on that he agreed with Motorola’s lawyers at Ropes & Gray and The Summit Law Group that the best way to set a fair royalty rate would be to consider a hypothetical bilateral negotiation. He rejected Microsoft’s proposed “incremental value” approach, which would have based the value of essential patents on the cost of adopting alternative technology. But that was just about the only positive aspect of the ruling for Motorola.