Opinion

Alison Frankel

Chutzpah redefined? Rating agencies want FHFA to share discovery costs

Alison Frankel
May 20, 2013 18:01 UTC

One of the most salient bits of information in the Justice Department’s civil complaint against Standard & Poor’s and its parent, McGraw-Hill - aside from the revelation that one S&P analyst devised a 2007 dance video riffing on the Talking Heads song “Burning Down the House” – is the amount S&P supposedly earned for rating mortgage-backed securities as banks rushed to squeeze every last dollar from the securitization boom. According to the government, the agency’s Global Asset-Backed Securities Unit was assessing MBS in such a hurry in 2006 and 2007 that S&P rating committees spent less than 15 minutes reviewing analyst evaluations. Yet the agency was rewarded munificently for its efforts. In 2006, S&P was supposedly paid $278 million in fees by the banks whose MBS deals it rated. In 2007 it was paid $243 million for rating MBS.

I’m resurrecting Justice’s report on those fees because last week, S&P’s lawyers at Cahill Gordon & Reindel informed U.S. District Judge Denise Cote of Manhattan that it should not have to bear the entire $180,000 cost of producing in electronic form about 400 MBS files to the Federal Housing Finance Agency, which has served third-party subpoenas on S&P, Moody’s and Fitch in 15 securities suits against MBS issuers and underwriters. Satterlee Stephens Burke & Burke filed a similar letter to Cote on behalf of Moody’s, which claims vendor costs of $46,000 to produce files on 470 MBS deals it rated. Fitch’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison  protested over the agency’s $50,000 in vendor costs on 150 securitizations.

FHFA, let’s remember, is basically bringing its MBS claims on behalf of taxpayers, since it’s the conservator of Fannie Mae and Freddie Mac, the government-sponsored mortgage funders that were the biggest MBS investors in the securitization market. So to reduce the dispute over who should bear the cost of the rating agencies’ compliance with FHFA’s subpoenas to its most basic terms, companies that earned hundreds of millions of dollars by conferring unwarranted blessings on suspect deals are balking at thousands of dollars in costs to help taxpayers determine if they were duped.

Anyone else think the credit rating agencies might want to reconsider the optics of their protest?

Of course, the cost dispute isn’t quite as simple as it might seem. (In litigation, what is?) FHFA’s lawyers atQuinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman served third-party subpoenas on the rating agencies in August 2012. FHFA has 15 cases under way in Cote’s court (and one in Connecticut federal court), so it demanded rating agency files on nearly a thousand MBS deals in total, spread across the three agencies and 15 cases. Though FHFA assured the rating agencies that in its theory of liability, S&P, Moody’s and Fitch were also deceived by MBS sponsors and should produce files to vindicate the ratings they conferred, the agencies balked at the housing agency’s demand. It would cost millions of dollars in attorney and paralegal time to review the millions of pages of documents FHFA had demanded, the agencies said. Perhaps forgetting that the government contends S&P committees spent only 15 minutes deciding whether to approve MBS ratings, the agencies told FHFA that it would take about three hours to go over each deal file before it could be imaged for production.

Wal-Mart’s whistle-blower problem: Public revelations trump privilege

Alison Frankel
May 17, 2013 20:31 UTC

Attorney-client privilege confers powerful protection over confidential corporate documents. But according to arulingThursday by Chancellor Leo Strine of Delaware Chancery Court, once documents have become public – even if by dubious means – they can be used in litigation.

In May of 2012, shareholder lawyer Stuart Grant of Grant & Eisenhofer opened a thick packet he’d received in the mail. On behalf of clients, Grant had recently sent a demand for information to Wal-Mart, following up on The New York Times’ stunning revelations about the company’s attempt to shut down an internal investigation of alleged bribery of Mexican officials. Wal-Mart lawyers had said they would respond to Grant’s books-and-records demand, and Grant told me in an interview that he at first thought the envelope contained that response. Grant quickly realized that the mailing was not, in fact, official corporate correspondence: He had been sent a 190-page trove of confidential Wal-Mart documents.

“Immediately our reaction was, ‘What are our obligations?’ We did research, we did everything we needed to do,” Grant said. After determining that the return address on the packet was a fake, Grant notified Wal-Mart that he’d received the documents on June 1, 2012.

‘Iqbal Effect’ on housing, employment cases skews Republican: new study

Alison Frankel
May 16, 2013 22:37 UTC

In 2007, the U.S. Supreme Court redefined the pleading standard for antitrust suits in Bell Atlantic v. Twombly. In 2009, it extended the new standard to all civil cases in Ashcroft v. Iqbal. Since then, according to Westlaw,Twombly has been cited as a reference 191,394 times and Iqbal, 123,714. A lot of those citations in judicial opinions are boilerplate, but that very fact tells you how important Twombly and Iqbal have become. Judges now reflexively apply the Iqbal standard – which directs them to use their judicial experience and common sense to decide whether a plaintiff’s allegations are plausible, not merely conceivable – in deciding whether to dismiss complaints.

The big question in the post-Iqbal era has always been whether the discretion the Supreme Court gave to trial judges would affect not just dismissal rates but also the kinds of cases that are dismissed. Civil rights advocates, in particular, worried that judges who were politically inclined toward skepticism about their claims would use Iqbal to justify dismissing their suits. The overall impact of the new pleading standard continues to be debated in legal academia, but a soon-to-be-published study in the Akron Law Review suggests that Iqbal’s impact on civil rights cases has, in fact, skewed politically.

The study, “The Politics of Procedure: An Empirical Analysisof Motion Practice in Civil Rights Litigation Under the New Plausibility Standard,” looked at 548 employment and housing discrimination suits filed between 2004 (before Twombly) and 2010 (after Iqbal) – all such cases in which there was a reported dismissal decision. Albany Law School professor Raymond Brescia, one of the co-authors, had previously analyzed Iqbal’s impact on dismissal rates in those 548 cases, reaching the somewhat surprising conclusion that dismissals with prejudice increased at only a slight rate after Iqbal. That previous paper, by its own admission, called for refined analysis, so Brescia and student Edward Ohanian re-examined dismissal rates, taking into account such factors as the judge’s race, gender and, as a proxy for political views, appointment by Democratic or Republican presidents.

N.Y. judges split on time bar for billion-dollar MBS put-back claims

Alison Frankel
May 15, 2013 20:50 UTC

It is no exaggeration to say that billions of dollars hang on the question of whether New York Supreme Court Justice Shirley Kornreich or her colleague Justice Peter Sherwood is correct about how long mortgage-backed securities trustees have to assert claims that MBS sponsors breached representations and warranties. There’s no disagreement that under New York law, which applies to most MBS deals, the statute of limitations for breach of contract suits is six years. But in dueling opinions issued Tuesday, Kornreich and Sherwood came to different conclusions about when the statute begins to run. Sherwood sided with the securitizer Nomura and its lawyers at Orrick, Herrington & Sutcliffe, ruling that the clock starts ticking on the securitization’s closing date. Kornreich explicitly rejected that theory in a trustee case filed by Kasowitz, Benson, Torres & Friedman against DB Structured Products, finding instead that DB’s refusal to repurchase supposedly defective underlying loans triggered the statute.

The statute of limitations for MBS trustee breach of contract suits, otherwise known as put-back claims, is an issue of first impression in New York state court, and given that these two judges have now reached opposite conclusions about the same federal-court precedent (Structured Mortgage Trust v. Daiwa Finance and Lehman Brothers v. Evergreen), we’ll have to wait to see what the state appeals court thinks. The question for the appeals court is stark: Is an MBS pooling and servicing agreement breached when underlying loans fall short of promises the sponsor makes on the day the deal is signed or does the breach occur only when the sponsor fails to meet a continuing obligation to repurchase deficient loans?

To get a sense of the magnitude of that question, consider Sherwood’s footnote that 14 MBS cases in his court alone will be affected by his interpretation of the statute of limitations. Joseph Frank of Orrick told me that four of those cases are against Nomura, asserting aggregate damages of $500 million. And that’s just a few cases before one judge. The statute issue is so momentous that the Association for Mortgage Investors, a trade group, submitted an amicus brief in the Nomura case Sherwood decided, asserting that MBS sponsors have a continuing obligation to repurchase defective mortgages.

SAC’s Steinberg claims judge-shopping but loses bid for reassignment

Alison Frankel
May 15, 2013 05:44 UTC

For defense lawyers, it’s always a calculated risk to intimate that the judge presiding over your client’s case may not be entirely impartial. Whether you make that suggestion in a recusal motion or, in very extreme circumstances, in a mandamus petition, you’re implicitly acknowledging that your client has little or nothing to lose by challenging the trial court’s judgment (and inevitably irritating the judge).

Michael Steinberg of SAC Capital is facing a Nov. 18 trial on federal fraud and conspiracy charges stemming from his supposed insider trading in Dell and Nvidia shares. That trial will take place before U.S. District JudgeRichard Sullivan of Manhattan, despite the best efforts of Steinberg’s lawyers at Kramer Levin Naftalis & Frankel.

Lead defense counsel Barry Berke of Kramer Levin hedged the risk of offending Sullivan by framing his letter request for reassignment to a new judge as an accusation of prosecutorial judge-shopping. In a nine-page letter to Sullivan and Chief Judge Loretta Preska, Berke asserted that the government improperly brought its case against Steinberg as a superseding indictment even though the previously indicted insider trading defendants in the case had already pleaded guilty or been convicted at trial. Prosecutors’ motive, according to the letter, was to proceed before Sullivan, who has sided with the government’s argument that it need not prove a tippee was aware the tipper stood to benefit from passing inside information. Two other judges in the Southern District of New York have instructed juries otherwise on this issue, which Kramer Levin said is central to the Steinberg case because the hedge fund manager “is at least four steps removed from the alleged tippers in the two stocks specifically charged in the indictment.”

N.Y. AG rebuffed in clash with private lawyers with parallel claims

Alison Frankel
May 13, 2013 22:42 UTC

On Monday, former New York governors Mario Cuomo and George Pataki wrote an unusual joint opinion piecein The Wall Street Journal, calling on New York Attorney General Eric Schneiderman to drop threats that he will continue to seek injunctive relief against former AIG chief Hank Greenberg, even though the AG has already had to abandon damages claims because Greenberg reached a private settlement with investors in a securities class action. As my Reuters colleague Karen Freifeld explained in a really smart analysis last Friday, Schneiderman is constrained by a 2008 ruling that limits the AG’s right to recovery in the name of investors who have already settled a federal-court class action. Freifeld said that the same holding, Spitzer v. Applied Card, may ultimately force the AG to drop claims for money damages against Bank of America in connection with its merger with Merrill Lynch and against Ernst & Young for its audit of Lehman Brothers, even though both suits were brought under New York’s powerful Martin Act, which permits the state to bring securities claims on behalf of supposedly defrauded investors.

I’ve written a lot about the tension between class action lawyers and state regulators with parallel claims. The battle to recover damages on behalf of misled investors (and the right to claim credit for the recovery) is part of that interplay: In New York, whoever makes a deal first wins.

A 44-page decision Friday by U.S. District Judge Colleen McMahon of Manhattan provides a vivid illustration of the burgeoning competition between the New York AG and securities class action lawyers. McMahon ruled that plaintiffs’ lawyers are entitled to about 18 percent of a $220 million settlement on behalf of investors in the Bernard Madoff feeder fund Ivy Asset Management (and related defendants). As Daniel Fisher of Forbes reported Friday, she ordered a 25 percent haircut on the hours and rates that five plaintiffs’ firms billed for reviewing documents previously produced to regulators, finding that the firms (whom she otherwise praised to the skies) should not have jacked up billing rates for the contract lawyers who conducted the review.

Patent trolls and multidistrict litigation: It’s complicated

Alison Frankel
May 10, 2013 21:31 UTC

One of the key anti-troll elements of the America Invents Act of 2011 was the patent reform law’s restrictions on joinder. After September 2011, patent owners could not file complaints that named multiple, otherwise unrelated defendants who happened to make use of the same IP. The idea was to make it more expensive for plaintiffs to bring and litigate patent suits, to prevent forum shopping and to limit trolls’ leverage. Conventional wisdom was that the new law’s joinder restrictions were going to lead to an uptick in requests for the Judicial Panel on Multidistrict Litigation to consolidate cases for pretrial proceedings. If plaintiffs could persuade the JPMDL to consolidate cases for pretrial proceedings – especially if they could direct consolidated litigation to sympathetic judges – they could take some of the sting out of joinder restrictions.

As usual, reality is more complicated. Prompted by a squib about a patent MDL at the Gibbons blog IP Law Alert, I went to the JPMDL’s site to see if, in fact, plaintiffs have flocked to the panel since patent reform. Here’s what I found. There are 19 active MDLs categorized as patent matters. Three of them are Hatch-Waxman litigation between brand and generic drugmakers, so I eliminated them from additional consideration. Of the remaining 16 consolidated proceedings, five preceded the effective date of the patent reform law. So in the 15 months since AIA, the MDL panel has consolidated 11 patent matters. That seems to be a higher rate for consolidating patent litigation than we saw before patent reform, but the JPMDL still considers far more product liability, consumer and antitrust matters than patent litigation.

And interestingly, it was defendants who moved for pretrial consolidation in seven of the 11 patent MDLs. Plaintiffs opposed the consolidation motions in all of those cases. Plaintiffs, meanwhile, brought four of the transfer motions, and defendants opposed all of them. In two of the four plaintiffs’ MDL attempts, patent holders requested that their cases be consolidated in the Eastern District of Texas, widely reckoned to be a plaintiff-friendly jurisdiction (otherwise known as a troll haven). The JPMDL agreed to consolidate both litigations but sent the matters to judges in other districts. The one patent MDL transferred to a judge in the Eastern District of Texas, In re Parallel Networks, was consolidated on a motion by defendants that was opposed by the plaintiff.

Anonymous online reviews may not be so anonymous

Alison Frankel
May 9, 2013 22:30 UTC

On Wednesday, the Public Citizen Litigation Group filed an appeal for the online review site Yelp, asking the Virginia Court of Appeals to review a trial-court order compelling Yelp to reveal the identity of seven anonymous reviewers who complained about a Washington carpet-cleaning service that subsequently sued them for libel and defamation. Yelp and Public Citizen contend that Alexandria City Circuit Court Judge James Clark got it wrong when he ruled that despite First Amendment protection for anonymous online critics, a Virginia statute requires the disclosure of their names when their identity is central to claims against them.

That’s a pretty scary holding if you live in Virginia and are in the habit of expressing yourself anonymously on the Internet. I should note that there are restrictions on how far the ruling goes. Hadeed Carpet Cleaning’s libel suit asserts that the seven particular John Does named as defendants were actually competitors smearing Hadeed, not customers posting genuine reviews. Judge Clark agreed that because Hadeed claimed the seven reviewers falsely represented themselves, it met the standard set out in the state law governing disclosure of their identity.

The problem, at least according to Public Citizen, is that the standard in Virginia isn’t clearly defined by that law. Appeals courts in the state have not previously considered this question, but Public Citizen argues in the brief filed Wednesday that other state appellate courts have, and they’ve all reached conclusions contrary to Judge Clark’s. “Every other appellate court has held, whether under the First Amendment or under state procedures, that anonymous defendants are entitled to demand that the plaintiff make a factual showing, not just that the anonymous defendant has made critical statements, but also that the statements are actionable and that there is an evidentiary basis for the prima facie elements of the claim,” the brief said. Yelp’s lead counsel, Paul Alan Levy of Public Citizen, told me the Virginia trial judge flat out erred in his interpretation of both the Virginia statute – which Levy says is merely procedural and does not set out a standard for disclosing a critic’s identity – and prevailing precedent.

Are mortgage-backed securities bonds or equity? 2nd Circuit to decide

Alison Frankel
May 8, 2013 21:29 UTC

I’m ready to make a bold declaration: We’ve reached the beginning of the end of private litigation over deficient mortgage-backed securities. Think about it. The bond insurers that pioneered MBS cases are reaching settlements right and left with the banks that sponsored notes. MBIA’s $1.7 billion deal with Bank of America is the most dramatic, but Assured Guaranty reached a $358 million settlement with UBS on the same day. MBS class actions are in their end stages, now that the U.S. Supreme Court has signaled disinterest in MBS class standing. New securities fraud complaints by individual MBS investors have tailed off, and though I continue to see new breach-of-contract filings by trustees suing at the direction of noteholders with the requisite voting rights, time is running out on those suits even under New York’s generous statute of limitations. I don’t think it’s a coincidence that Kathy Patrick of Gibbs & Bruns, who has spent the last few years deep in talks with big banks over the put-back claims of her enormous institutional investor clients, told my Reuters colleague Karen Freifeld that she’s looking ahead to Libor securities litigation. Or that Quinn Emanuel Urquhart & Sullivan, which began preparing to represent plaintiffs in MBS cases all the way back in early 2008, is now investing heavily in products liability litigation.

Don’t get me wrong. Billions of dollars are still going to move from banks to monolines and investors, especially once the Federal Housing Finance Agency cases begin to settle. But we’ve climbed almost to the top of the learning curve. We know the myriad deficiencies in the underwriting and securitization process and the multifaceted defenses banks and credit rating agencies have raised to evade liability for those deficiencies. That’s valuable information, and not just for MBS plaintiffs. If the market for residential mortgage-backed securities is ever to be revived robustly – which, at least in the ideal of policy, would be of enormous benefit to homeowners – investors and sponsors alike will be wiser and warier.

The 2nd Circuit agreed Tuesday to hear an appeal that should go a long way toward answering one of the most controversial remaining questions in MBS litigation: What is the potential exposure of securitization trustees to MBS investors? As you know, the responsibilities of MBS trustees have been hotly debated in Bank of America’s proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities, with an expert for objectors to the settlement arguing that trustees are inherently conflicted by institutional relationships with MBS sponsors. That’s an interesting theoretical point, but meanwhile, in a lower-profile arena of MBS litigation, a Chicago police pension fund represented by Scott + Scott has asserted claims directly against securitization trustees that supposedly breached their duty to noteholders.

Who won the $1.7 bln settlement between BofA and MBIA?

Alison Frankel
May 7, 2013 21:26 UTC

On Monday, after word leaked that Bank of America and MBIA had resolved their epic five-year, multidimensional litigation against one another, investors in both companies judged the deal. Shares in MBIA, whose structured finance arm had been widely considered to be on the brink of a regulatory takeover, closed 45 percent higher at $14.29, adding about a billion dollars to the market capitalization of the insurer’s holding company. Bank of America’s shares went up as well. They didn’t rise as dramatically as MBIA’s, closing up 5 percent at $12.88. But that added $6.9 billion to BofA’s market cap – three times as much as the $1.6 billion in cash that the bank agreed to pay to MBIA as part of the settlement.

The comparison between the raw percentage rise in share price and the total dollars added to each company’s market cap is instructive in considering which side, if either, got the better of this settlement. As investor reaction indicated, this deal was much more important to MBIA than to Bank of America. With $1.6 billion in cash from the bank, plus the remittance of $137 million in MBIA notes held by BofA, MBIA’s withered structured finance arm can pay back the $1.7 billion it owes the company’s bond insurance arm, which financed settlements with some of the banks that had challenged MBIA’s 2009 restructuring. BofA also agreed in Monday’s settlement to drop its regulatory and fraud claims stemming from that restructuring, which leaves only Societe Generale remaining in restructuring cases against MBIA. Assuming the insurer can reach a settlement with Societe Generale, the cloud of uncertainty over its 2009 split will be entirely removed and MBIA’s bond insurance arm will be able to return to the business of writing policies on state and municipal financings.

MBIA also eliminated any uncertainty about what it might owe Bank of America under credit default swap agreements with BofA predecessor Merrill Lynch. BofA held a total of $7.4 billion in MBIA policies, $6.1 billion of which was on CDS deals. The actual value of those policies was a matter of speculation and interpretation. I’ve heard that Bank of America had drastically written down its potential recovery from MBIA to the neighborhood of a $1 billion. But if MBIA went into rehabilitation (the insurance version of Chapter 11), the priority of claims by CDS counterparties would have been determined by New York State Department of Finance chief Benjamin Lawsky, who has been deeply involved in settlement talks between MBIA and BofA and might have been using the priority of claims as a bargaining chip. In any event, MBIA’s takeaway from the settlement isn’t just the $1.7 billion in cash and other considerations it received from BofA. It’s really that amount plus BofA’s potential recovery from the CDS policies.

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