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.
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.
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.
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.
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.
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.
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.
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.
The long-anticipated fight over the constitutionality of using eminent domain to seize mortgages from mortgage-backed securities trusts is upon us. On Wednesday night, three MBS trustees filed complaints in federal district court in San Francisco, seeking declaratory judgments that Richmond, California, may not deploy its power of eminent domain to take over about 624 mortgages that belong to MBS noteholders. The suits, one brought on behalf of MBS trustees Wells Fargo and Deutsche Bank and the other on behalf of Bank of New York Mellon, raise overlapping though not identical arguments for why Richmond’s eminent domain plan violates the Takings, Contract, Equal Protection and Commerce Clauses of the U.S. Constitution as well as various state constitutional protections. The complaints introduce some new wrinkles in the eminent domain debate, such as an argument by BNY Mellon’s lawyers at Mayer Brown that the seizure of securitized mortgages will endanger the tax status of the MBS trusts that contain the loans, subjecting noteholders to a 35 percent tax on trust income. The trustees have also quantified the harm they face: The takeover of just the 624 loans Richmond has already proposed buying from MBS trusts for 80 percent of the current value of each house that’s collateral on the loan will cost noteholders as much as $200 million, according to Wells Fargo and Deutsche Bank lawyers at Ropes & Gray.
In May, when Chancellor Leo Strine of Delaware Chancery Court made new law on going-private deals – holding in In re MFW Shareholders Litigation that boards of companies with controlling shareholders are entitled to deference under the business judgment rule if they appoint an independent special committee to evaluate the buy-back offer and also obtain approval of the deal from a majority of the other shareholders – the judge said that one of the benefits of decision might be to reduce meritless breach-of-duty claims. Boards that provide double-barreled protection for minority shareholders, Strine said, should not have to endure full-blown trials to review those deals under the exacting “entire fairness” standard.