Opinion

Alison Frankel

In new Pershing Square filings, Ackman takes Allergan’s dare

Alison Frankel
Aug 7, 2014 20:04 UTC

If Allergan’s insider trading and disclosure suit against the hostile bidders Valeant and Pershing Square is a bluff, Pershing just called it.

William Ackman’s hedge fund dumped a pile of documents that Allergan complained it had improperly withheld on the Securities and Exchange Commission on Wednesday, including Pershing’s original confidentiality agreements with the Canadian drug company Valeant, as well as the share call option and forward contracts in which the hedge fund acquired its 9.7 percent stake in Allergan.

Pershing and Valeant also filed a brief in federal court in Santa Ana, California, agreeing to expedited discovery so it can dispose quickly of Allergan’s claims. The brief, signed by Kirkland & Ellis for Pershing and Sullivan & Cromwell for Valeant, is actually styled as an opposition to a motion to expedite by Allergan’s lawyers at Latham & Watkins and Wachtell, Lipton, Rosen & Katz. But after accusing Allergan of suing to impede shareholders from calling for a special meeting to oust directors, Pershing and Valeant said they’re raring to defend themselves against Allergan’s accusations.

These quick responses to Allergan’s complaint seem intended to assure Allergan shareholders that Pershing and Valeant have nothing to hide. Those shareholders, of course, are considering whether to throw in with Pershing and demand that the Allergan board convene a special shareholder meeting – a suicide mission because the purpose of the meeting would be to oust Allergan directors. (Pershing and Valeant need to replace enough current board members to undo the company’s recently adopted poison pill, which precludes Pershing from acquiring a bigger Allergan stake.) The proxy advisory services ISS and Glass Lewis this week advised shareholders to join up with Pershing, which has to amass written consents from 25 percent of Allergan shareholders in order to demand the meeting.

Allergan’s primary goal right now, based on its Aug. 4 motion to expedite the California case, is to make sure that the special meeting doesn’t take place. It can do that in two ways: by raising sufficient doubts about Valeant and Pershing to dissuade shareholders from joining Pershing’s call for the meeting; or by obtaining a ruling that Valeant and Pershing really did violate securities laws. A judgment against the hostile bidders, Allergan said in its brief, would empower the board to refuse to convene a special shareholder meeting. It would also spell the end of Valeant’s tender offer and remove a drag on Allergan’s share price, the brief said.

In Sherlock case, 7th Circuit spurs war on copyright ‘extortionists’

Alison Frankel
Aug 5, 2014 20:37 UTC

Judge Richard Posner of the U.S. 7th Circuit Court of Appeals has confessed to reading the occasional legal thriller, but he’s no fan of the estate of Arthur Conan Doyle, the author who created the indelible detective Sherlock Holmes.

In June, Posner wrote an opinion holding that the Conan Doyle estate can’t interfere with the publication of an anthology of stories by modern authors inspired by Conan Doyle’s characters. All but 10 of Conan Doyle’s 60 Sherlock stories and novels are in the public domain, Posner wrote, and the estate’s attempts to extend its rights over the characters – chiefly by arguing that Sherlock Holmes and his sidekick, John Watson, weren’t fully developed until Conan Doyle wrote the final 10 works protected by copyright – have no basis in the law. On Tuesday, Posner and his 7th Circuit colleagues, Joel Flaum and Daniel Manion, underlined that decision by awarding about $30,700 to Leslie Klinger, the anthologist, for his legal fees in the appeal.

The circumstances of the Sherlock case are interesting enough on their own, but Posner’s fee opinion isn’t just a curiosity. It’s a call to arms against copyright “extortionists.”

Why did Allergan change its mind about Ackman and insider trading?

Alison Frankel
Aug 4, 2014 19:57 UTC

A few days after the Canadian pharmaceutical company Valeant announced that it had teamed up with the activist investor William Ackman to bid for Botox maker Allergan, Wachtell, Lipton, Rosen & Katz wrote a teeth-gnashing client alert about the new threat to corporate targets from the unholy alliance of a strategic bidder with an activist hedge fund. Commentators were already raising questions about whether Ackman and Valeant had engaged in insider trading, because Ackman secretly accumulated Allergan shares based on his knowledge of Valeant’s imminent takeover bid. But in that early memo, Wachtell didn’t claim Valeant and Ackman had broken insider trading rules. Instead, the firm bemoaned Valeant and Ackman’s “conspicuously structured” stratagem that “took express pains to sidestep” the Williams Act’s bar on trading in advance of a tender offer.

Unfortunately for Allergan and future target companies, Wachtell said, “The structure is crafty, and good for Valeant and Pershing Square (as long as no bad facts emerge, such as undisclosed arrangements, that could get them in trouble).”

A prophetic parenthetical? On Friday, Wachtell – now acting as counsel to Allergan, along with Latham & Watkins – filed a complaint in federal court in Los Angeles that accuses Valeant and Ackman of executing an “improper and illicit insider-trading scheme … flouting key provisions of the federal securities laws.” The suit not only claims that Valeant and Ackman didn’t make adequate disclosures to Allergan shareholders – reviving an old takeover defense tactic from the 1980s – but also pushes the novel theory that Ackman violated a provision of the Williams Act prohibiting anyone except an acquirer from trading on material non-public knowledge that the acquirer has taken “a substantial step” toward launching a tender offer.

Shareholders can use whistleblower documents in fraud complaint: judge

Alison Frankel
Aug 1, 2014 21:20 UTC

Here’s a new twist on an old story. A securities class action firm in the early stages of a fraud case tracks down a former employee of the defendant. The former employee dishes dirt about the company to an investigator, a boon for plaintiffs’ lawyers who have to draft a detailed complaint about corporate wrongdoing without the benefit of discovery from the defendant. The company protests, asserting that former employee was under a confidentiality agreement.

Often what happens next is that former employees recant their testimony, creating considerable awkwardness (or worse) for shareholder lawyers. But U.S. District Judge Edward Chen of San Francisco described a different scenario in an opinion Thursday in a securities fraud class action against the healthcare mobile communications company Vocera – which resulted in quite a different outcome for class counsel. In fact, securities lawyers who want to avoid controversy over confidential informants ought to consider adopting the strategy of Vocera class counsel from Labaton Sucharow.

As you know, under the Private Securities Litigation Reform Act of 1995, plaintiffs’ lawyers aren’t permitted access to discovery from defendants until after their complaints have withstood defense motions to dismiss. Yet to meet pleading standards, their complaints must provide detailed and specific allegations of fraud. So securities class action firms have little choice but to seek out corporate employees or former employees to flesh out their claims and push their cases beyond dismissal.

The other loser in Argentina debt saga: U.S. courts

Alison Frankel
Jul 31, 2014 20:49 UTC

There’s been a lot of talk in the Argentine debt crisis about whether U.S. courts have overstepped their bounds. At the end of 2011, you’ll recall, U.S. District Judge Thomas Griesa of Manhattan ruled that the pari passu, or equal treatment, clause of Argentina’s bond contracts entitles hedge fund holdouts that refused to participate in debt restructurings to payments alongside the more obliging exchange debtholders. Since then, Argentina and its allies, including the U.S. Justice Department, have argued that Griesa’s interpretation of the pari passu clause — which was subsequently affirmed by the 2nd U.S. Court of Appeals and left intact by the U.S. Supreme Court last month — gives too much power to creditors and undermines sovereigns.

On Wednesday, Argentine officials chose to default on exchange bonds rather than pay about $1.6 billion to, or otherwise reach a settlement with, the hedge fund holdouts. That decision exposed a stark truth: All the might of the U.S. judicial system cannot force a foreign nation to pay its debtors. U.S. judges can’t order the seizure of a foreign sovereign’s assets and they can’t throw foreign officials in jail for contempt. As Georgetown law professor Adam Levitin wrote in a very smart column in the Wall Street Journal, “There’s no way to bind a sovereign to its promise of complying with court orders any more than there is to its promise of payment.”

Griesa and the 2nd Circuit thought the pari passu injunctions were the club that would finally bludgeon Argentina into submission, after years of Argentine defiance of court-ordered judgments for NML Capital, Aurelius Capital and other holdout debt investors. The holdouts — many of which acquired defaulted Argentine debt on the cheap, gambling that they’d be able to recover from Argentina via litigation — tried all kinds of maneuvers to attach Argentine assets, only to run time and again into the country’s immunity as a foreign sovereign.

The best way to punish companies that lie to consumers

Alison Frankel
Jul 30, 2014 19:59 UTC

The 2nd Circuit U.S. Court of Appeals really pummeled the pharmaceutical manufacturing company Gnosis in an opinion Tuesday. Judges Rosemary Pooler, Reena Raggi and Richard Wesley affirmed that Gnosis must pay Merck more than $2.5 million in damages and attorneys’ fees for violating the Lanham Act with deceptive marketing about its folic acid product Extrafolate.

That’s not a lot of money for a global corporation, but it’s much, much more than Gnosis made from selling Extrafolate under false pretenses. The 2nd Circuit ruled that the lower-court judge who ruled against Gnosis after a bench trial in 2012, U.S. District Judge Richard Sullivan, was within his rights to award Merck three times the profits Gnosis realized from Extrafolate, even though the Lanham Act doesn’t authorize punitive damages. Gnosis’s egregious conduct — suggesting in marketing materials that its product was a pure isomer when, in fact, it was a mixture — justified an enhanced damages award, according to the 2nd Circuit, as well as the corrective advertising Judge Sullivan ordered.

The appeals court also rejected Gnosis’s argument that Merck hadn’t proved it was harmed by the supposedly false ads. The 2nd Circuit requires different proof depending on whether competitors are directly disparaged in false ads or are just in the same market as the deceptive advertiser, and Gnosis’s lawyers at Husch Blackwell contended that the company’s allegedly deceptive materials didn’t name Merck so Judge Sullivan erred in presuming Merck was injured. The 2nd Circuit said, however, that since Merck was the only company competing with Gnosis at the time of the false ads — and Merck actually produced the pure isomer Gnosis purported to be selling — it follows that Merck was damaged.

The big surprise in bids to lead GM ignition switch litigation

Alison Frankel
Jul 29, 2014 20:36 UTC

David Boies of Boies, Schiller & Flexner — the superstar litigator best known as the defender of same-sex marriage, Al Gore, securities class actions and Napster — is ready for a different sort of a challenge: He wants to be a products liability class action lawyer.

Boies was among the 60 or so lawyers who submitted an application Monday with U.S. District Judge Jesse Furman of Manhattan for a leadership spot in the consolidated litigation over GM’s ignition switch defects. Boies, whose firm filed a class action earlier this month in federal court in Mississippi on behalf of owners of defective GM cars, wants to serve as one of the three co-lead counsel in the case, arguing that he has long “worked to ensure that the efforts of a few benefit the injuries of many.”

Boies’s application was the wild card among Monday’s filings; his firm appears regularly as lead counsel in antitrust class actions but isn’t known for products liability cases. The other big-name applicants — including Motley Rice; Susman Godfrey; Beasley, Allen, Crow, Methvin, Portis & Miles; Baron & Budd; Robbins Geller Rudman & Dowd and Cohen Milstein Sellers & Toll — are more familiar in personal injury litigation.

How a lone New York judge squeezed billions from banks in MBS cases

Alison Frankel
Jul 28, 2014 21:56 UTC

Asking a federal appeals court to step into the fray of an ongoing case to reverse a decision by a trial judge is extraordinary. Petitions for a writ of mandamus, as such requests are known, assert that trial judges have committed such egregious errors that their appellate overseers must undo the damage immediately, before the case gets to a final judgment. Mandamus petitions are a desperation move, a last resort when you’ve got nothing to lose from alienating a trial judge who’s already ruled against you.

Last Thursday, RBS filed not one but three mandamus petitions at the 2nd, 9th and 10th circuits — an apparently unprecedented response to what the bank claims is an unprecedented abdication of responsibility by trial judges presiding over cases brought by the National Credit Union Administration (NCUA).

The suits, which involve billions of dollars in mortgage-backed securities purchased by failed credit unions, were filed in different federal districts, and the Judicial Panel on Multidistrict Litigation denied requests by bank defendants to consolidate them. But according to RBS, the trial judges took it upon themselves to streamline discovery, agreeing to abide by the rulings of a single “coordination judge.”

As crisis litigation draws to close, lessons for investors

Alison Frankel
Jul 16, 2014 22:12 UTC

We’re near the end. With the news Wednesday that Bank of America will pay AIG $650 million to settle their long-running and many-tentacled litigation over mortgage backed securities –along with a report in The Wall Street Journal that the credit rating agency Standard & Poor’s is contemplating a $1 billion settlement with the Justice Department for its MBS rating failures — it’s time to declare the twilight of financial crisis litigation.

Yes, there’s still some big work to be done, including BofA’s anticipated multibillion-dollar settlement with the Justice Department; the resolution of the Federal Housing Finance Agency’s last few cases on behalf of Fannie Mae and Freddie Mac; and dozens of private-investor breach-of-contract suits against the banks. But that’s the denouement, the last act.

So what have we learned, after six years of intense and expensive litigation? To me, the clearest lesson from financial crisis litigation is that investors cannot rely on anyone else’s assurances about complex securities.

Kozinski amends opinion in 9th Circuit ‘Innocence’ case v. Google

Alison Frankel
Jul 15, 2014 19:46 UTC

Something strange happened Friday in the infamous case of Cindy Lee Garcia v. Google at the 9th U.S. Circuit Court of Appeals. Chief Judge Alex Kozinski, who wrote the opinion in February that enjoined Google from linking to the anti-Islam film “Innocence of Muslims,” filed an amended opinion, even as the entire 9th Circuit considers Google’s petition for en banc review of the controversial February ruling.

The amended opinion, in which Kozinski is joined by Judge Ronald Gould, left the injunction in place but walked back a step or two from the controversial holding that the actor Cindy Lee Garcia is likely to succeed on the merits of her claim that Google is infringing her copyrighted five-second performance in ‘Innocence.’ (Garcia, as you may recall, was deceived by the maker of the inflammatory film, who overdubbed her lines to make it appear as though her character was calling Mohammad a pedophile. The film led to riots in the Muslim world and death threats against Garcia.)

The panel’s original holding that actors may, in certain circumstances, have an independent copyright on their individual performances threw Hollywood, Internet companies and First Amendment fans into a tizzy; Google’s en banc petition attracted 10 amicus briefs from dozens of interested parties. The new opinion, which adds only a few paragraphs to the original, cautions that the 9th Circuit injunction does not dictate a finding that Garcia actually has a copyright on her performance nor that Google is not entitled to fair use of the copyrighted material.

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