Opinion

Alison Frankel

Dela. high court to rule: Can derivative fraud suits outlive mergers?

Alison Frankel
Jan 11, 2013 23:07 UTC

If ever there was a corporate board that should have been worried about breach-of-duty accusations, it was the directors of Countrywide in 2007 and 2008, after the collapsing real estate market exposed fatal flaws in the mortgage lender’s business model. Shareholder lawyers, always quick to sense opportunity in corporate scandal, began to file derivative suits accusing Countrywide directors of countenancing fraud in the fall of 2007. By May 2008, the cases had been consolidated in federal court in Los Angeles, and lead counsel at Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer had successfully countered most of the defendants’ dismissal arguments. At that point, it appeared that the Countrywide case could turn out to be a true rarity: a derivative suit that actually generated money damages.

Then Bank of America rode in and bought Countrywide for $2.5 billion. Regardless of what you think of that acquisition, which has been dubbed the worst banking deal of all time, the merger offered at least one very distinct benefit for Countrywide board members. Because the deal was structured as a stock-for-stock transaction, the Countrywide shareholders who had brought derivative breach-of-duty claims against the board, and had survived a motion to dismiss most of those claims, no longer held Countrywide stock. That meant they no longer had standing to assert their case on behalf of Countrywide. After the merger was completed in July 2008, Bank of America, not the former Countrywide shareholders, owned claims against Countrywide board members — and BofA certainly wasn’t going to assert them, since the merger agreement specifically indemnified the board.

The merger, in other words, seemed to spell the end of the derivative suit. In December 2008, U.S. District Judge Mariana Pfaelzer of Los Angeles said as much when she dismissed the case. The judge quoted from the Delaware Supreme Court’s 1984 ruling in Lewis v. Anderson: “It is well established that a merger which eliminates a derivative plaintiff’s ownership of shares of the corporation for whose benefit she has sued terminates her standing to pursue those derivative claims.” Lewis included an exception for cases in which the entire merger is a fraud engineered to protect the board, but Pfaelzer said the fraud exception doesn’t encompass the BofA deal, in which the directors’ escape from liability was the side effect of a legitimate merger.

Or does it? On Thursday, the 9th Circuit Court of Appeals breathed life into the former Countrywide shareholders’ derivative claims, with an order asking the Delaware Supreme Court to clarify the scope of the fraud exception. The 9th Circuit order frames the question legalistically, but it comes down to this: If shareholders plausibly allege that the board’s fraud made the company vulnerable to an acquisition at fire-sale prices, can they maintain derivative claims?

The Delaware Supreme Court’s answer could have consequences way beyond the Countrywide case. Countrywide, after all, is hardly the only company to end up in an acquirer’s hands after a corporate scandal depresses its share price. (Think of Bear Stearns, Washington Mutual and Massey Energy, for instance.) If the Delaware Supreme Court holds that in order to proceed with derivative claims, it’s enough for shareholders to assert that the board’s wrongful conduct led directly to the acquisition, we could see a spike in significant derivative cases.

Latest in private Libor cases: California city, counties file suit

Alison Frankel
Jan 10, 2013 23:35 UTC

The first time I wrote about private antitrust claims against banks for rigging the London Interbank Offered Rate (or Libor), it was August 2011 and the judicial panel on multidistrict litigation had just consolidated 18 class actions alleging a conspiracy to manipulate the benchmark rates, which are used to set variable interest rates on all sorts of securities around the world. I titled the piece, “The megabillions litigation you’ve never heard of.”

How things have changed in the 17 months since then! The private Libor litigation still has megabillions potential, but thanks to the tsunami of Libor news in 2012, everyone knows it. The consolidated cases are proceeding in federal court in Manhattan before U.S. District Judge Naomi Reice Buchwald, who is considering fully briefed motions to dismiss by more than a dozen bank defendants. Meanwhile, new claimants have piled on. I’ve already told you about the class actions filed after the $450 million Barclays settlement last summer, which tried to distinguish themselves from the cases already under way. Now there’s another wrinkle in the private Libor litigation: On Wednesday, the counties of San Diego and San Mateo, the city of Riverside and the municipal utility district of Oakland filed simultaneous antitrust complaints in three different federal courts in their home state of California. And a lawyer from the firm that filed all of the new cases, Cotchett, Pitre & McCarthy, told me Thursday that he is hoping more California cities and counties will join in. “California public entities — that’s who we’re trying to gather up,” said Daniel Sterrett of Cotchett.

The allegations in the California suits will be familiar to anyone who has followed the burgeoning Libor scandal, in which banks supposedly falsified reports of interbank borrowing rates to a British banking authority in order to improve trading positions or avoid damaging their reputations. The new complaints aren’t even the first to mine documents released by British and U.S. regulators in connection with UBS’s $1.5 billion settlement in December. The Los Angeles County Employees Retirement Association, represented by Bernstein Litowitz Berger & Grossmann, filed a class action on Dec. 21 that included allegations based on the UBS materials. (The pension fund’s suit, interestingly, asserts only federal racketeering and California state-law claims that are not already in the ongoing class action, so at least as the original case is currently pleaded, the pension fund’s case doesn’t overlap it.)

Supreme Court declines to halt 2nd Circuit’s Twiqbal pushback

Alison Frankel
Jan 9, 2013 23:57 UTC

In litigation, as in life, there’s usually no better strategy for catching the attention of rulemakers than to tattle on subordinates for ignoring their directives. That was clearly the thinking of lawyers for a group of magazine publishers who wanted the U.S. Supreme Court to review a 2012 ruling by the 2nd Circuit Court of Appeals that revived an antitrust conspiracy case against them. The publishers’ petition for certiorari claimed that the 2nd Circuit opinion undermined the high court’s holdings in Bell Atlantic v. Twombly and Ashcroft v. Iqbal – the incredibly consequential recent Supreme Court decisions that made it easier for defendants to win the dismissal of plaintiffs’ complaints. The publishers called on the justices to use the opportunity of the 2nd Circuit decision, captioned Anderson News v. American Media, to reiterate their intentions in Twombly and Iqbal (known slangily as Twiqbal).

On Monday, the Supreme Court refused to take the bait and denied the cert petition. That leaves the publishers’ brief to serve the perverse purpose of explaining to antitrust plaintiffs (and, for that matter, plaintiffs in all sort of other cases) exactly how the 2nd Circuit’s Anderson decision permits them to get past dismissal motions premised on Twombly and Iqbal. (The brief even includes a handy rundown on trial judges outside of the 2nd Circuit who have cited the Anderson case when they refused to toss antitrust complaints.) The justices may, of course, decide later on to revisit circuit court interpretations of Twiqbal, but for now the cert denial is undoubtedly good news for plaintiffs.

In the underlying case, the magazine wholesaler Anderson News c laimed that it was driven out of business when publishers conspired to resist its attempt to impose new per-magazine and inventory surcharges on them. U.S. District Judge Paul Crotty tossed the complaint, finding that Anderson hadn’t met the Twombly standard of creating a plausible inference of collusion, since there were alternative and legitimate business reasons for each publisher independently to decide not to pay the new charges. But in April 2012, the 2nd Circuit vacated Crotty’s decision.

How AIG’s board ended up in the middle of Greenberg’s suit v. U.S.

Alison Frankel
Jan 9, 2013 00:10 UTC

On Wednesday, as Dealbook reported in a terrific story Monday night, AIG’s 12 board members will hear an extraordinary presentation. Starr International Company, which is controlled by former AIG chief Hank Greenberg, will ask the company to join a $25 billion case in federal claims court that accuses the United States of wrongfully seizing control of AIG from shareholders when the government took control of the teetering insurer in September 2008. Then, according to a court filing in which AIG described the process, the government and the Federal Reserve Bank of New York will counter Starr’s arguments and urge the board to forego litigating against its federal saviors (who have since been paid back in full). By the end of the month, the board will decide whether to take on Starr’s derivative claims against the government, risking accusations of ingratitude, or to vote against pursuing the litigation, risking possible shareholder derivative claims that it has breached its own fiduciary duties.

Starr hasn’t made any threats of breach-of-duty claims against AIG’s board, and its lawyers at Boies, Schiller & Flexner declined comment through a firm representative. So far, AIG’s conduct in Starr’s litigation against the federal government has actually helped Greenberg’s company, as you’ll see below. But as the AIG board deliberates, directors will be wary of the former chairman’s well-exercised trigger finger for lawsuits.

Starr’s campaign against the feds began in November 2011 as two different cases: the federal claims court complaint against the United States (asserting both direct shareholder claims and derivative claims on behalf of AIG for the government’s supposedly unconstitutional conduct) and a shareholder derivative complaint in federal court in Manhattan against the Federal Reserve Bank of New York, which was the instrument of the $182 billion federal bailout of AIG. In a landmark (and cogently written) ruling last November, U.S. District JudgePaul Engelmayer dismissed the entire case in Manhattan federal court. The judge said (and here I’m summarizing an 89-page ruling) that Starr hadn’t adequately established the Federal Reserve’s fiduciary duty to AIG and its shareholders, and even if such a duty existed, AIG’s claims under Delaware law would be pre-empted by the federal government’s larger responsibility to stabilize the national economy.

In tax fraud case, sins of defense lawyers are visited on client

Alison Frankel
Jan 7, 2013 23:48 UTC

Should a law firm’s client suffer the consequences of a misstep by his lawyers?

That seems to be the fate of David Parse, a former Deutsche Bank accountant who was convicted of mail fraud and obstructing an investigation in 2011, as part of what’s been called the government’s biggest-ever tax fraud prosecution. Last week, U.S. District Judge William Pauley of Manhattan once again refused to grant Parse a new trial, even though the judge previously vacated the convictions of three of Parse’s co-defendants (including two former Jenkens & Gilchrist partners), after evidence surfaced that a juror lied during jury selection. Pauley’s latest ruling, which marks the second time the judge has refused to order a new trial for Parse, concludes that Parse’s former lawyers at Brune & Richard were not ineffective counsel, even though they made what turned out to be a disastrous decision not to inform the court of suspicions about the lying juror.

I’ve previously written about Brune & Richards’ bizarre ethics dilemma, but to recap quickly: During jury selection, the firm ran across evidence that suggested a juror in the Parse case had the same name as a New York lawyer suspended from practice for alcohol abuse. Because of inconsistencies in the juror’s responses in voir dire, Brune & Richard concluded that the names were a coincidence and said nothing to the court before the trial — or during jury deliberations, when the juror used legal jargon in a note to the judge and the firm’s suspicions were reawakened.

Monday at SCOTUS: revisiting the Class Action Fairness Act

Alison Frankel
Jan 4, 2013 23:23 UTC

One of the signal achievements of pro-business litigation reformers will come under the scrutiny of the U.S. Supreme Court on Monday, when the justices hear the case of Standard Fire v. Knowles.

Standard Fire, as I’ve previously reported, presents the question of whether class action plaintiffs can proceed in state court by stipulating to damages of less than $5 million — the threshold Congress specified for removal to federal court in 2005′s Class Action Fairness Act — or whether such stipulations improperly impinge on defendants’ due process rights. Depending on how broadly the justices interpret that issue and which way they rule, the case could be the Supreme Court’s opportunity to clamp down on the tactics of plaintiffs’ lawyers to evade CAFA — or a means of undermining tort reformers’ favorite federal law.

Here’s why. In the underlying case, the purported name plaintiff of a statewide class action claiming that Standard Fire underpaid policyholders in Arkansas signed a “sworn and binding” stipulation that he would not ask for damages of more than $5 million. That’s a magic number under CAFA. As you know, the law mandates that almost all class actions proceed in federal court, with an exception for cases involving statewide classes of fewer than 100 people or damages of less than $5 million. That might seem straightforward enough, but Standard Fire and a whole lot of other defendants claim that plaintiffs are abusing the exception, stipulating to damage claims and then, once they get classes certified in state court, extracting settlements of more than $5 million from companies worried about the risk and expense of class action litigation.

NY pension fund’s bold tactic to force campaign spending disclosure

Alison Frankel
Jan 3, 2013 23:44 UTC

Since 2010, when the U.S. Supreme Court unleashed corporate political spending in Citizens United v. Federal Election Commission, shareholder advocates have been warning of the dire consequences of secret campaign contributions and demanding that corporations reveal their political spending. The Coalition for Accountability in Political Spending, among other groups, called upon the Securities and Exchange Commission to mandate the disclosure of corporate campaign spending, but the SEC has so far sidestepped the issue. Activists working with groups such as the Center for Political Accountability have used the threat (and occasionally the fact) of proxy votes on disclosure to pressure more than 100 large public companies to pledge to report their campaign spending. But, as The New York Times reported this summer, it’s all too easy for corporations to evade their own promises by masking political contributions as lobbying expenses. With limited means of compelling public companies to agree to reveal political contributions — and no means of enforcing voluntary disclosure — shareholders are at the mercy of the companies they supposedly own.

A new suit by the New York State Common Retirement Fund could change that balance of power. Thecomplaint, filed Thursday in Delaware Chancery Court by the pension fund’s lawyers at Bernstein Litowitz Berger & Grossmann and Bouchard Margules & Friedlander, seeks to compel the chipmaker Qualcomm to turn over its books and records so shareholders can see all of the company’s political contributions. This suit marks the first attempt to use Delaware’s books and records law, known as Section 220, to obtain information about corporate campaign spending. If it’s successful, other shareholders will surely follow the New York pension fund’s lead.

That’s a big if, though. If you follow Delaware litigation, you’re probably aware that Chancery Court judges have lately been insisting that plaintiffs’ lawyers take advantage of shareholders’ books-and-records rights to investigate potential breach-of-duty claims before they file derivative suits against corporate directors. That would seem to augur well for the New York pension fund. So does its compliance with Delaware procedures. The $150 billion fund, which is headed by New York Comptroller Thomas DiNapoli and owns more than $380 million in Qualcomm shares, sent Qualcomm a letter in August, demanding to inspect its records on political spending to assure that the contributions were in shareholders’ interests. Qualcomm refused, according to the complaint. The company and the fund then spent six weeks negotiating the terms of a discussion of Qualcomm’s disclosures, which finally took place in October. Qualcomm agreed to some prospective disclosures in that conversation but has since failed to implement the promised reforms, according to the complaint. Shareholders only sued, the complaint said, when it became clear that litigation was the only way to get the information they wanted.

Judge in gargantuan Google privacy class action: No harm, no case

Alison Frankel
Jan 2, 2013 23:13 UTC

Last June, while the country was transfixed by the U.S. Supreme Court’s ruling on the constitutionality of Obamacare, the justices quietly ducked an issue that has bedeviled Silicon Valley for more than a decade. The court issued a ruling that it had “improvidently” granted certiorari in a case called First American Financial v. Edwards, which presented the question of whether plaintiffs have standing to sue if they cannot demonstrate an injury. The Supreme Court’s decision to pass left in place a 9th Circuit Court of Appeals finding that plaintiffs can establish standing through a statutory claim even if they weren’t harmed by the defendant’s conduct.

Tech companies had been hoping for a different result, since plaintiffs in class actions claiming violations of their privacy often can’t show that they suffered any actual injury from the use of their personal information. Defendants have been fairly successful with arguments that class members in privacy cases can’t establish standing through an injury-in-fact, but plaintiffs can still survive dismissal motions by citing violations of laws that carry statutory damages. That’s why cases such as the class action involving Facebook’s “Sponsored Stories” advertising result in multimillion-dollar settlements: Defendants face statutory claims by legions of class members.

Last Friday, Google avoided a similar fate, at least for the time being. U.S. Magistrate Judge Paul Grewal of San Jose, California, dismissed a class action asserting that the universal terms of service Google imposed in March 2012 violated users’ privacy rights, as well as the federal Wiretap Act and California state consumer laws. The magistrate said that the class, represented by Gardy & Notis, Grant & Eisenhofer and Bursor & Fisher, can file an amended complaint based on the state Right to Publicity Act but said that plaintiffs will have to show specifically that Google used their voice or likeness without their consent, which they so far haven’t been able to do. (Plaintiffs’ lawyer Kelly Noto didn’t return my call for comment.)

2nd Circuit punts on constitutionality of judge’s diversity effort

Alison Frankel
Dec 24, 2012 19:19 UTC

Benjamin Wilson of Beveridge & Diamond and John Daniels of Quarles & Brady are two of the three African-American chairmen of Am Law 200 firms (Maurice Watson of Husch Blackwell is the third). Wilson and Daniels, who have known each other since they overlapped at Harvard Law School in the 1970s, sat down with a few Reuters journalists last week to talk about the African American Managing Partners Network, a networking group of law firm leaders that they’re championing. Daniels, in particular, talked about his goal of promoting African Americans as great lawyers and rainmakers, not as supporting partners. Both he and Wilson told us that one way to achieve this sort of Diversity 2.0 is to encourage a legal industry version of the National Football League’s “Rooney Rule,” in which, beginning in 2003, the NFL required teams to interview minority candidates for high-level coaching jobs. Just as the ranks of minority coaches have increased considerably since the Rooney Rule was instituted, Wilson and Daniels believe that if general counsel make an effort to interview black candidates when they’re looking for outside lawyers, African Americans will win those assignments.

One federal judge in Manhattan has been using the power of his position to impose a version of the Rooney Rule for the last several years. Since 2007, when U.S. District Judge Harold Baer appoints plaintiffs’ firms to serve as lead counsel in class actions in his courtroom, he requires them to include at least one women and one minority lawyer to staff the case. Baer has been unapologetic about his motives. In a 2010 interview with The New York Law Journal, the judge said firms “are behind where they should be” in promoting diversity. He “saw the counsel approval process as a tool at his disposal” to address what he regards as a persistent problem, the Law Journal wrote.

Plaintiffs’ firms now expect that they’ll have to wear diversity on their sleeves when they appear before Baer, but last December the judge’s policy came under attack from Ted Frank of the Center for Class Action Fairness. Frank appealed Baer’s approval of Sirius XM’s settlement of an antitrust class action, arguing (as he usually does) that the only true beneficiaries of the deal were plaintiffs’ lawyers, in this case Grant & Eisenhofer. Frank also claimed, with amicus support from The Center for Individual Rights, that Baer violated the due process and equal protection rights of the class when he imposed a diversity requirement on the class’s lawyers. The class action gadfly compared Baer’s order to excluding jurors from a trial on the basis of their race. “We have lots of precedent that the judicial system is supposed to be above this,” he told me last year. “It’s counter to what America stands for.”

Should state AGs be allowed to use contingency fee lawyers?

Alison Frankel
Dec 20, 2012 22:44 UTC

One of my themes of the year, beginning with a post way back on Jan. 3, has been the shifting relationship between state attorneys general and private plaintiffs’ lawyers. In several cases with major developments in 2012, state AGs have operated at odds with the private bar, a change from their traditional cooperation in pursuit of defendants. Those cases, however, remain the exception. State agencies continue to make a habit of hiring private lawyers on contingency, most notably to prosecute securities class actions and consumer fraud cases. To cite one prominent example, in the biggest class action settlement of the year, Bank of America’s $2.43 billion settlement of claims related to its acquisition of Merrill Lynch, the Ohio pension funds that served as lead plaintiff contracted for representation from Bernstein Litowitz Berger & GrossmannKessler Topaz Meltzer & Check; and Kaplan Fox & Kilsheimer.

It’s so common, in fact, for state AGs to turn to outside counsel that the Institute for Legal Reform, the litigation arm of the U.S. Chamber of Commerce, has targeted the issue. In February, former Florida AG Bill McCollum testified on behalf of the ILR before a congressional subcommittee on the U.S. Constitution, arguing that recent laws, including Dodd-Frank, have expanded the enforcement powers of state attorneys general, and, with that, the opportunities for private plaintiffs’ lawyers employed by AGs. He asserted that AGs’ use of contingency fee lawyers is a problem that demands congressional action.

“At the very least, use of such counsel without proper safeguards can give the appearance of impropriety and undermine public confidence in our legal system,” McCollum said. “State attorneys general should only enter into private attorney contingency fee contracts when their own office does not have the expertise or ability to handle a matter and the AG cannot locate an appropriate outside counsel to handle the matter on an hourly fee/non-contingency basis. Then only with complete transparency, a competitive bid process and caps on attorney fees, should contingency fee counsel be retained.”

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