It’s safe to say that the besieged hedge fund SAC Capital has lots more to worry about than a class action by investors in Elan Corporation, one of the companies whose shares the fund supposedly traded on the basis of inside information. The New York Times and The Wall Street Journal reported Wednesday that federal prosecutors in New York are on the verge of indicting SAC, the culmination of an insider trading investigation in which four onetime fund employees have pleaded guilty and two more, including the star portfolio manager Michael Steinberg, are facing criminal charges. SAC founder Steven Cohen is busy defending against Securities and Exchange Commission allegations that could knock him out of the industry, and SAC outside investors have pulled $5 billion out of the fund.
Three weeks ago, the 2nd Circuit Court of Appeals ruled in a case called In re IndyMac Mortgage-Backed Securities Litigation that the filing of a class action does not stop the clock on the three-year time bar for federal securities claims. According to the appeals court, the U.S. Supreme Court’s famous 1974 ruling in American Pipe v. Utah, which said that the statute of limitations can be tolled by the filing of a class action, does not apply to the statute of repose because that absolute time bar gives defendants substantive rights that cannot be abridged. The 2nd Circuit’s decision, as I’ve reported, was at odds with a 13-year-old ruling from the 10th Circuit, which found in Joseph v. Q.T. Wiles that a pending class action tolls the statute of repose as well as the statute of limitations.
The biggest municipal bankruptcy proceeding in U.S. history is less than a week old but it’s already promising to generate enough legal controversy to gainfully employ the platoons of lawyers vying for a role in the Chapter 9 case. A state court judge in Lansing, Michigan, has teed up a fight over Michigan Governor Richard Snyder’s right to authorize Detroit’s petition for Chapter 9 protection. That’s a novel procedural question, as I’ll explain below. I don’t think doubts about Snyder’s authorization will stop U.S. Bankruptcy Judge Steven Rhodes from pushing Detroit’s Chapter 9 proceeding forward – but they may well impact Rhodes’s eventual determination of the city’s eligibility for Chapter 9 protection.
If Khaled Asadi, a former GE Energy executive who lost his job after alerting his boss to concerns that GE might have run afoul of the Foreign Corrupt Practices Act, had sued his old employer in New York or Connecticut, things might have worked out differently for him. Several federal trial judges in those jurisdictions have ruled that whistle-blowers who report corporate wrongdoing internally are protected by the Dodd-Frank Act of 2010, even though the statute defines whistle-blowers as employees who report securities violations to the Securities and Exchange Commission. But Asadi, who worked in GE Energy’s office in Amman, Jordan, filed a claim that the company had illegally retaliated against him in federal district court in Houston. And on Wednesday, the 5th Circuit Court of Appeals – with hardly a nod to contrary lower-court decisions in other circuits – ruled that Asadi is not a whistle-blower under Dodd-Frank because he talked to his boss and not the SEC.
Remember UBS’s attempt to play what it considered a get-out-of-jail-free card in the megabillions litigation over mortgage-backed securities UBS and more than a dozen other banks sold to Fannie Mae and Freddie Mac? UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom came up with an argument that could have decimated claims against all of the banks: When Congress passed the Housing and Economic Recovery Act of 2008 and established the Federal Housing Finance Agency as a conservator for Fannie Mae and Freddie Mac, UBS said, lawmakers explicitly extended the one-year statute of limitations on federal securities claims – but neglected to extend, or even mention, the three-year statute of repose. UBS argued that FHFA’s suits, which in the aggregate asserted claims on more than $300 billion in MBS, were untimely because they were filed after the statute of repose expired.
Last spring, when U.S. District Judge Naomi Reice Buchwald of Manhattan decimated the consolidated private litigation over banks’ manipulation of the London Interbank Offered Rate, the only claims that remained upright in the rubble of her ruling were those brought under the Commodity Exchange Act, which makes tampering with the price of exchange-traded commodities or futures illegal. Buchwald’s opinion cited a plethora of Manhattan federal court decisions that permitted victims of futures price manipulation to move forward with their suits, including three consolidated class actions involving rigged prices for oil futures. I suspect we’re going to be hearing a lot more about those cases over the next several months. Even as the class action bar tries to persuade the 2nd Circuit Court of Appeals to reinstate the Libor antitrust claims that Buchwald dismissed, plaintiffs lawyers are gearing up for the next big litigation: claims that BP, Royal Dutch Shell, Statoil and other unidentified conspirators violated commodity and antitrust laws by reporting false prices for North Sea Brent crude oil to the price-setting agency Platts.
Remember the shocking ruling a couple of years ago by U.S. Bankruptcy Court Judge Mary Walrath in the bankruptcy of Washington Mutual Inc? In September 2011, Walrath refused to approve a hard-fought $7 billion reorganization plan for WMI because of concerns that four distressed debt hedge funds might have traded WaMu notes based on confidential information they or their lawyers obtained in negotiations to resolve the bankruptcy. The hedge funds were outraged by Walrath’s decision, which they said was wrong on both the facts and the law. Ultimately, however, they agreed to make the whole mess go away by kicking about $30 million of their expected recovery to WMI shareholders, who had first raised the insider trading accusations.
Well, that didn’t take long.
Two weeks ago, the U.S. Supreme Court held in Hollingsworth v. Perry that an advocacy group opposing same-sex marriage could not stand in the shoes of California officials to appeal a trial court ruling that the state’s ban was unconstitutional. Yesterday, the firm that argued in the Supreme Court for same-sex couples, Gibson, Dunn & Crutcher, filed a letter brief at the 4th Circuit, arguing that under Perry, three public interest groups do not have standing to appeal a trial court ruling against the Consumer Products Safety Commission.
The oil giant BP has recently done a very good job of casting itself as the victim of greedy plaintiffs lawyers looking to get rich by submitting unwarranted claims for businesses that weren’t actually harmed by the Deepwater Horizon oil spill. Did you see the company’s full-page advertisements to that effect in The Wall Street Journal and The New York Times? Or maybe you read smart pieces by Paul Barrett of BloombergBusinessweek (“How BP Got Screwed on Gulf Oil Spill Claims”) or Joe Nocera of the Times (“Justice, Louisiana Style”), who both pointed out that the court-appointed lawyer serving as the administrator of BP’s multibillion-dollar class action settlement is himself a onetime plaintiffs lawyer – as is the New Orleans federal judge overseeing the deal. (Lawyers representing BP claimants, I should note, dispute just about everything BP says about the judge and the administrator.)
In August of 2012, the U.S. Treasury and the Federal Housing Finance Agency announced that they had amended the terms of Treasury’s investment in Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders under FHFA’s conservatorship. After Fannie and Freddie went into conservatorship in the economic crisis of 2008, Treasury invested more than $100 billion in a new class of senior preferred stock that guaranteed the government first dibs on a percentage of Fannie or Freddie profits. Those seemed like a distant hope in 2008, but by 2012, Fannie and Freddie were, in fact, making money. Preferred shareholders junior to the government believed the mortgage lenders were generating enough profits to pay Treasury’s dividend and leave something for them as well. But in August, FHFA and the government – without consulting Fannie and Freddie junior preferred shareholders – disclosed that under a newly executed “net worth sweep,” Treasury would be receiving all of the profits kicked out by Fannie Mae and Freddie Mac, then and in the future.