Opinion

Alison Frankel

After Libor, arguments against financial regulation are a joke

Alison Frankel
Dec 19, 2012 22:39 UTC

Everyone who has ever claimed that the financial industry is overregulated should be forced to read the final notice on UBS’s manipulation of the London interbank offered rate issued Wednesday by the United Kingdom’s Financial Services Authority.

UBS disclosed its cooperation with antitrust authorities more than a year ago, so it’s no surprise that the bank was penalized, though the size of the penalty – a total of $1.5 billion to United States, UK and Swiss regulators – was certainly notable, particularly because UBS had been granted leniency for some parts of the Libor probe. But what’s most striking about the FSA’s filing on UBS, just like its previous notice on Barclays, is the brazenness of the misconduct the report chronicles. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel. (Libor rates, which are reported for a variety of currencies, average the borrowing rates reported by global banks; 13 banks are on the yen panel.)

The corruption was breathtakingly widespread. According to the FSA, UBS took good care of the brokers who helped the bank in its rate-rigging campaign: Two UBS traders whose positions depended on Libor rates, for instance, engaged in wash trades to gin up “corrupt brokerage payments … as reward for (brokers’) efforts to manipulate the submissions.” In one notorious 2008 phone conversation recounted in the FSA filing, a UBS trader told a brokerage pal, “If you keep (the six-month Libor rate) unchanged today … I will fucking do one humongous deal with you…. Like a 50,000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”

According to the FSA, the bank’s rate manipulation, whether to improve UBS’s trading positions or to protect the bank’s image, was so endemic that one flummoxed rate submitter complained in 2007 of being caught between demands by two different traders who wanted two different fake submissions. “I got to say this is majorly frustrating that those guys can give us shit as mu c h as they like…. One guy wants us to do one thing and (the other) wants us to do another,” he told a UBS manager, according to the FSA. Even after The Wall Street Journal first broke news of suspected Libor manipulation in 2008, UBS managers discussed continuing their rate-rigging, this time with the goal of staying in the middle of the pack of rate reports so it would look as though they weren’t engaged in rigging.

UBS and Barclays, moreover, weren’t outliers, according to the FSA. Since Libor rates are averaged, the banks had to collude with other panel banks to affect the reported rates. The FSA filings indicate that they did. The same UBS trader who rewarded brokers with fees for wash trades, for instance, supposedly entered into trades with the specific purpose of aligning his position with those of traders at other panel banks so that they could all share in the benefits of rate-rigging. “UBS’s misconduct,” the FSA said Wednesday, “extended beyond UBS’s own internal submission processes to sustained and repeated attempts to influence the submissions of other banks, acting in collusion with panel banks and brokers at a number of different broker firms.”

What is Goldman Sachs’s standard for indemnifying legal fees?

Alison Frankel
Dec 18, 2012 23:17 UTC

What do Rajat Gupta and Sergey Aleynikov have in common? Not much, on the surface. One is the patrician former McKinsey chief and Goldman Sachs director, the other a scruffy young computer programmer. But as you probably know, Gupta and Aleynikov both got on the wrong side of Goldman Sachs. Gupta was convicted this summer of leaking inside information about the bank to Galleon Group founder Raj Rajaratnam. Aleynikov, a former Goldman computer programmer, was convicted in 2010 on federal charges of stealing the bank’s high-frequency trading code when he defected to a rival start-up but was set free last April by the 2nd Circuit Court of Appeals. (He has since been charged by the Manhattan district attorney for state-law crimes.)

Gupta and Aleynikov have also both learned the consequence of crossing Goldman Sachs: The bank will not willingly pay their legal fees. Goldman moved in October for restitution of some $7 million it laid out for Gupta’s defense in his criminal case in federal court in Manhattan. (Like Morgan Stanley in its pursuitof $5 million from inside trader Joseph “Chip” Skowron, Goldman also demanded the return of part of Gupta’s compensation as a director.) On Friday, Gupta’s counsel at Weil, Gotshal & Manges filed a brief before U.S. Senior District JudgeJed Rakoff, arguing that Goldman is not entitled to restitution because, among other things, Goldman wasn’t a victim of the conspiracy at the heart of his conviction. There’s precious little precedent on this kind of claim, but last March Rakoff’s Manhattan federal court colleague Denise Cote found that Morgan Stanley was, indeed, a victim of Skowron’s trading, even though the only direct effect on the bank was the $32 million it paid to settle the Securities and Exchange Commission’s case.

Aleynikov’s fee dispute with Goldman presents a different but equally novel question: Who exactly is indemnified under the bank’s protection for “officers”? Aleynikov, who had the title of vice president at Goldman, Sachs & Co, a subsidiary of the Goldman Sachs Group, says he’s an officer and thus entitled to indemnification for his defense fees. Goldman argues that the programmer’s title was a meaningless courtesy that’s understood in the industry to carry no actual officer’s duties. Indemnification, according to the bank’s lawyers at Boies, Schiller & Flexner, doesn’t apply to lower-level employees like Aleynikov; Goldman offered an affidavit from Goldman Sachs Group general counsel Gregory Palm to support its assertion.

MBS investors’ trade group moves to counter adverse put-back rulings

Alison Frankel
Dec 17, 2012 22:34 UTC

The Association of Mortgage Investors isn’t sitting around and waiting for more bad precedent on the obligations of mortgage-backed securities issuers.

Last week, the trade group of MBS investors, as well as an investment advisor that acts as a collateral manager for institutional investors in mortgage-backed notes, took the rare step of requesting leave to file an amicus brief at the trial stage of a breach-of-contract case against UBS. The trade group believes the stakes are high enough to warrant its involvement: If the bank’s interpretation of its obligation to compensate MBS trusts for deficient underlying loans is adopted by a New York court, the AMI’s memo said, “this will establish an adverse precedent that may result in a market-wide windfall to responsible parties such as (UBS) at the expense of RMBS investors.”

The filing, by counsel at Holwell Shuster & Goldberg, doesn’t come in a vacuum. A few months back, I told you about a ruling from U.S. District Judge John Tunheim of Minnesota in one of the earliest MBS put-back cases, in which the trustee of a $555 million Wells Fargo offering asserted that mortgage originators had breached representations and warranties about the underlying loans. Expanding on a previous adverse ruling for investors by U.S. Senior District Judge Paul Magnuson – who found that under MBS pooling and servicing agreements, investors can only demand the repurchase of deficient loans, not corresponding money damages — Tunheim said that MBS trustees have no cause of action based on foreclosed loans, since those mortgages are already extinguished and can’t be repurchased by originators.

Leading theory of Dodd-Frank rule challenges takes a body blow

Alison Frankel
Dec 14, 2012 21:26 UTC

If there were a Playboy magazine for sexy federal laws, the Administrative Procedure Act would not be in it. I seriously doubt that any “Law and Order” episode or plotline of “The Good Wife” has been built around the 1946 statute that governs how federal agencies may establish new regulations, and yet judicial interpretations of the APA are what determine if new regulations live or die. Consider, for instance, the Dodd-Frank financial reforms. Congress got all the credit or blame (depending on your perspective) for passing the umbrella law in 2010, but its actual implementation depends on the rule makers at the Securities and Exchange Commission and Commodity Futures Trading Commission, enacting regulations in accordance with the APA.

Business groups including the U.S. Chamber of Commerce have sued to overturn five new Dodd-Frank rules the SEC and CFTC approved, each time claiming that the agencies did not follow proper procedures. Specifically, the challenges — both to two CFTC rules expanding regulation of derivatives trading and to the SEC’s proxy access, extraction issuer and conflicts mineral rules — have asserted that the SEC and CFTC did not engage in sufficient analysis of the costs and benefits of the new regulations.

That theory received a powerful endorsement from the District of Columbia Court of Appeals in July 2011, when a three-judge appellate panel struck down the SEC’s proxy access rule, which would have required public corporations to provide investors with information about shareholder-nominated board candidates. In a harsh assessment of the agency’s rule-making process, the District of Columbia Circuit found that the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters,” the opinion said. The appeals court concluded that the SEC had been arbitrary and capricious in enacting the proxy access rule, violating the APA.

Should Scalia step aside in gay marriage cases?

Alison Frankel
Dec 12, 2012 22:33 UTC

Controversy follows U.S. Supreme Court Justice Antonin Scalia like Pig Pen’s cloud of dirt. You’ve probably heard that on Monday night, when the justice was speaking at Princeton, a gay student confronted him about his dissent in the 2003 case of Lawrence v. Texas, in which the majority struck down a state law banning same-sex sodomy. Scalia’s dissent discussed the legitimate state interest in legislating morality, and warned that the majority’s holding called into question “state laws against bigamy, same-sex marriage, adult incest, prostitution, masturbation, adultery, fornication, bestiality, and obscenity.” He also called the opinion “the product of a Court, which is the product of a law-profession culture, that has largely signed on to the so-called homosexual agenda, by which I mean the agenda promoted by some homosexual activists directed at eliminating the moral opprobrium that has traditionally attached to homosexual conduct.”

In responding to the brave Princeton student, Duncan Hosie, who asked about his comparison of homosexuality to bestiality, Scalia was characteristically unrepentant. “If we cannot have moral feelings against homosexuality, can we have it against murder?” Scalia said, according to the Los Angeles Times. “Can we have it against other things? I don’t apologize for the things I raise.” (MSNBC did an extended segment on the flap, featuring Hosie and Georgetown University law professor Jonathan Turley.)

It’s safe to say that Scalia, an avowed Catholic, is not likely to receive huzzahs at his local Gay Pride march. But does his apparent approval of “the moral opprobrium that has traditionally attached to homosexual conduct” mean that he should not be part of the court that decides the constitutionality of gay marriage?

Bond insurers tee up constitutional showdown with Calpers

Alison Frankel
Dec 11, 2012 23:17 UTC

The star litigator David Boies of Boies, Schiller & Flexner, who has a knack for ending up in the middle of the most pressing issues of the day, told me recently that the next great American crisis is $5 trillion in unfunded pension liability for city and state governments. Boies just signed on to defend Rhode Island from state workers’ challenges to the sweeping pension overhaul legislation passed in 2011, and he predicts that if elected officials in other states don’t take similar action, the United States faces an unprecedented wave of government bankruptcies.

That prediction underscores the significance of the bankruptcy proceeding of San Bernardino, California, a Los Angeles exurb undone by swollen salaries and retirement benefits for city workers. In August, San Bernardino filed for protection from its creditors under Chapter 9, the rarely invoked Bankruptcy Code provision for municipalities. In late November, the city council passed a proposal to resolve its $46 million budget deficit. The plan called for San Bernardino to continue deferring pension contributions to the California Public Employees’ Retirement System, which it stopped paying in August. As of the end of last month, the city owed Calpers, its biggest creditor, more than $5 million.

San Bernardino isn’t the only California city in deep financial trouble because of pension obligations, as Calpers and its lawyers at K&L Gates know all too well. On Nov. 27, the pension fund took pre-emptive action. As I reported, Calpers asked U.S. Bankruptcy Judge Meredith Jury of Riverside to lift the automatic stay on litigation against San Bernardino so it could bring a state court enforcement action to recover what the city owes the fund. Calpers asserted that pension contributions are a component of employee compensation, which is entitled to priority in federal bankruptcy. The pension fund said it’s entitled to sue San Bernardino not only because it’s exempt from the automatic stay as an arm of the state but also because San Bernardino’s deferral of retirement payments violates state labor and pension laws.

The Supreme Court’s burgeoning business agenda

Alison Frankel
Dec 10, 2012 22:05 UTC

The marquee issue of the Supreme Court’s 2012 term will unquestionably be gay marriage, thanks to the justices’ fascinating decision Friday to review the 2nd Circuit Court of Appeals’ holding that the federal Defense of Marriage Act is unconstitutional under equal protection provisions and the 9th Circuit’s ruling that California’s ban on gay marriage is unconstitutional, albeit on narrower grounds. (My Reuters colleague Terry Baynes has an insightful backgrounder on the two cases and the impact of the double cert grant.) But more quietly, the justices have agreed to hear a clutch of cases that could result in a real retrenchment for big businesses and a corresponding ebbing of the power of individuals to hold corporations accountable.

Few of the cases — with the exception of the court’s consideration of the scope of the Alien Tort Statute inKiobel v. Royal Dutch Shell and the grant of cert Friday in the Federal Trade Commission’s pay-for-delay case against Watson, Solvay and Par — present entirely new questions for the Supreme Court. Nevertheless, in reconsidering issues such as the standards for class certification, the ability of corporations to avoid class claims through arbitration contracts and the potential personal injury liability of generic drugmakers, the justices have an opportunity to rethink the state of the law, reinforce the majority’s holdings and use previous rulings to bulldoze into new ground.

I’ve written before about the class certification issues the court chose to hear in the securities case of Amgen v. Connecticut Retirement Plans and the antitrust case of Comcast v. Behrend. (The cases were argued on the same day last month; Mayer Brown’s Class Defense blog has a summary.) In both, defendants argued in the broadest sense that because certification of a class puts enormous pressure on defendants, plaintiffs should have to jump a high bar to earn it. In Amgen, that comes down to a question of whether investors claiming securities fraud must prove that the defendant’s alleged misstatements were material in order to win certification; Comcast raises the similar question of whether antitrust plaintiffs must prove the validity of their theory of damages before their class can be certified.

Will Rajat Gupta get off? 2nd Circuit bail ruling offers clues

Alison Frankel
Dec 7, 2012 21:37 UTC

On Tuesday, Judges Jose Cabranes and Reena Raggi of the 2nd Circuit Court of Appeals ordered that former Goldman Sachs director and McKinsey chief Rajat Gupta remain free on bail while his lawyers at Wilmer Cutler Pickering Hale and Dorr and Kramer Levin Naftalis & Frankel try to get his insider trading convictionoverturned on appeal. That’s an unusual order from the appeals court, which typically defers to the judgment of the trial court on post-conviction bail. In this case, U.S. Senior District Judge Jed Rakoff, who oversaw the insider trading trial in June, refused to grant Gupta’s bail request.

The bar is quite high for the appeals court to permit a convicted defendant to defer serving a prison term. When Congress enacted the Bail Reform Act in 1984, its intention was to make bail a rare exception for convicted defendants, not the rule. The law said that post-conviction bail would only be granted if the appeal “raises a substantial question of law or fact likely to result in a reversal or an order for a new trial.” The 2nd Circuit clarified that standard in a 1985 decision called U.S. v. Randell, holding that defendants did not have to show that their appeal was likely to result in a reversal — a near impossible burden to meet — but that the appeal involved issues of such importance that if the defense prevailed, the conviction would likely be overturned. That’s a less formidable hurdle for convicted defendants, but it’s still tough enough that, according to former prosecutor Evan Barr of Steptoe & Johnson, who has written about the topic, post-conviction bail orders are “definitely not the norm.”

The grant of bail to Gupta, Barr said, means that the appeals court “has concluded that he has raised non-frivolous issues.” That’s good news for Gupta, whose motion to stay enforcement of his two-year prison term cited five potential grounds for overturning his conviction.

FTC sides with Apple on essential patents, undercuts Motorola

Alison Frankel
Dec 6, 2012 23:43 UTC

Last month, when a majority of the commissioners on the Federal Trade Commission issued a statement warning about aggressive assertion of standard-essential patents in connection with the merger of two companies that make car air conditioners, Reuters took note. On its own, the FTC’s statement wasn’t particularly interesting. But the antitrust watchdog is reportedly looking into allegations that Google is abusing the portfolio of essential tech patents it acquired in its merger with Motorola. Perhaps the FTC’s statement in the auto air-conditioning case, Reuters said, was an indicator of where the commission stood on Google’s use of Motorola’s patents.

We now have some more substantive evidence of what the FTC thinks about those patents — and it doesn’t bode well for Google. This week the agency filed an amicus brief in cross-appeals by Apple and Motorola of Judge Richard Posner‘s pox-on-both-your-houses dismissal of their claims against one another last summer. (Posner sits on the 7th Circuit Court of Appeals but heard the case as a district judge in federal court in Chicago; Apple and Motorola’s cross-appeals of his ruling are before the Federal Circuit.) The brief claims to be in support of neither party, but in reality the FTC sided squarely with Apple, arguing that when Posner refused to grant Motorola an injunction based on Apple’s unlicensed use of standard-essential patents, the judge correctly applied the U.S. Supreme Court’s 2006 ruling in Ebay v. MercExchange.

More broadly, the agency asserted that injunctions should not be wielded as a threat in licensing negotiations by holders of standard-essential patents, which are supposed to encourage competition by promoting interoperability. In exchange for the industrywide adoption of their patents, the FTC said, companies like Motorola commit to licensing their patents on reasonable and non-discriminatory terms. “However, a royalty negotiation that occurs under the threat of an injunction may be heavily weighted in favor of the patentee in a way that is in tension with the RAND commitment,” the agency’s brief said. “High switching costs combined with the threat of an injunction could allow the patentee to obtain unreasonable licensing terms despite its RAND commitment because implementers are locked into practicing the standard.” That’s particularly true, the brief said in an argument that echoed Posner’s ruling, when the patent at issue covers just one component of a complex device. Using the leverage of an injunction in licensing talks “is the essence of hold-up,” the FTC argued.

Accusations of confidential witness chicanery backfire on defense lawyer

Alison Frankel
Dec 5, 2012 22:37 UTC

The securities class action firm Robbins Geller Rudman & Dowd keeps running into problems with confidential witnesses. I’ve previously told you about a case in federal court in Manhattan in which U.S. Senior District Judge Jed Rakoff held a seven-hour hearing to decide if the plaintiffs’ firm misrepresented its contacts with four former Lockheed Martin employees who disavowed the allegations Robbins Geller attributed to them in a securities fraud complaint against Lockheed. Rakoff hasn’t ruled but, at the end of the hearing in October, said that three of the former Lockheed employees that Robbins Geller cited as confidential witnesses weren’t credible when they denied speaking with the plaintiffs’ firm. The Manhattan judge is now pondering whetherhearsay evidence obtained from confidential witnesses is sufficient to push securities class actions past defense dismissal motions.

Robbins Geller, meanwhile, is dealing with confidential witness recantations — and ensuing defense accusations of misconduct — in at least two other securities class actions, one in federal court in Atlanta, the other in Birmingham, Alabama. But an angry order issued Tuesday by the judge in Alabama shows that the fallout from these disputes over confidential witnesses isn’t limited to the plaintiffs’ bar. U.S. District Judge Inge Johnson ordered Victor Hayslip of Burr & Forman – who represents individual defendants in Robbins Geller’s Alabama class action against Regions Financial — to send a letter to U.S. District Judge William Duffey in Atlanta, apologizing for Hayslip’s previous “inappropriate and unprofessional” letter alerting Duffey to accusations against Robbins Geller in the Alabama case.

The backstory on Johnson’s order is a bit complicated, but it shows how messy these confidential witness recantations can be. Duffey, the Atlanta judge, is presiding over Robbins Geller’s securities class fraud case against SunTrust Banks. The complaint in that case, like so many in securities class actions, relied on information from a former employee. Yet when the former SunTrust worker was contacted by defense counsel, he denied telling Robbins Geller’s investigator what was attributed to him and said he wasn’t even employed by the bank at the time of the events described in the complaint. Based on the recantation, Duffey ended updismissing the class action.

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