Opinion

Alison Frankel

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.

The Chicago fund has survived dismissal motions in two MBS trustee cases in federal court in Manhattan, one against Bank of New York Mellon before U.S. District Judge William Pauley and the other against BofA (as successor to LaSalle) and U.S. Bank before U.S. District Judge Katherine Forrest. As I’ve previously written, both judges agreed with Scott + Scott that mortgage-backed securities are debt, not equity, which subjects MBS trustees to the federal Trust Indenture Act of 1939. In February, Pauley denied BNY Mellon’s motion to reconsider but granted the trustee permission to seek an interlocutory appeal. (Forrest, meanwhile, just reconfirmed her analysis of MBS trustees and the TIA in a May 6 opinion denying the trustees’ motion to dismiss an amended complaint filed by Scott + Scott.)

In their brief asking the 2nd Circuit to accept the discretionary appeal, BNYM’s lawyers at Mayer Brownemphasized the “enormous practical importance” of the issue. Pauley’s ruling, the bank asserted, was at odds with the guidance of the Securities and Exchange Commission and the established expectations of the securitization industry, which (according to the bank) considers mortgage-backed securities to be equity, not debt, and thus out of the purview of the TIA. Industry groups, including the Securities Industry and Financial Markets Association and the American Bankers Association, consider this to be a significant enough issue that they filed amicus briefs supported BNYM’s request to be heard on appeal, just as they had previously backed its motion for reconsideration.

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.

How to woo a judge (when $8.5 bln is at stake)

Alison Frankel
May 6, 2013 23:01 UTC

With the gigantic news Monday that Bank of America has reached a global settlement with the bond insurer MBIA - agreeing to pay MBIA $1.7 billion and acquiring five-year warrants on about 10 million shares of the insurer’s holding company – the bank’s most pressing piece of litigation has become its proposed $8.5 billion settlement with investors in Countrywide mortgage-backed securities. Friday was the deadline for noteholders who have previously intervened in the special proceeding to evaluate the deal to announce where they stand.

There were some encouraging developments for BofA and fellow settlement proponents Bank of New York Mellon (the Countrywide MBS trustee) and the major institutional investor group represented by Gibbs & Bruns. The investment management firm Fir Tree, whose funds hold Countrywide notes with a face value of $550 million, announced support for the proposed settlement, asserting that the “widespread lack of objection” by Countrywide MBS investors “reflects deep and broad support among holder of securities for the proposed settlement.” The Federal Housing Finance Agency, which had filed a wishy-washy “conditional objection” to the deal back in September 2011, dropped its half-hearted resistance. And the New York and Delaware attorneys general, who entered the case with a bang, departed with a whimper, deferring to “capable and sophisticated counsel” for private noteholders with objections to handle things from here.

But a total of 68 noteholders objected to the settlement in filings on Friday. And though 20 of them are affiliated with AIG, they’re otherwise a diverse group that includes four Federal Home Loan Banks, a couple of public pension funds and Cranberry Park, the nom de litigation of an investment fund family with a significant Countrywide MBS stake. As I read competing briefs by objecting noteholders, who want New York State Supreme Court Justice Barbara Kapnick to reject the $8.5 billion settlement, and by BNY Mellon, which brought the special proceeding under state trust law to win court approval of the deal, I was struck by the difference in the way the two sides want Kapnick to look at the settlement. Opponents are asking the judge to examine the settlement through a microscope, scrutinizing details. Proponents want her to take a broad view of the trustee’s discretion and the magnitude of $8.5 billion.

Kiobel’s first casualty: Turkcell drops ATS bribery case

Alison Frankel
May 2, 2013 21:19 UTC

Last April, when the Turkish cellular services company Turkcell filed an Alien Tort Statute suit against South Africa’s MTN Group in federal district court in Washington, I was skeptical. Sure, Turkcell raised salacious allegations about how MTN wrested away its contract to provide cell services in Iran, including supposedly illegal arms deals and vote-peddling at the United Nations. But I said at the time that allegations of corporate corruption aren’t usually the stuff of ATS suits, and, moreover, that the U.S. Supreme Court had already agreed to take up the issue of the statute’s reach beyond U.S. borders in Kiobel v. Royal Dutch Petroleum. I predicted that Turkcell’s case – which was so explosive that MTN’s stock fell 6 percent when it was disclosed – would not survive in American courts.

Yep, this is going to be one of those “I told you so” posts. In October, after the Supreme Court heard oral arguments in Kiobel, U.S. District Judge Reggie Walton stayed the Turkcell litigation until the justices issued a ruling on the extraterritorial application of the ATS. As you know, the Supreme Court finally decided Kiobel in April, ruling that plaintiffs must be able to demonstrate a strong connection between their allegations and the United States to overcome a presumption that the ATS does not apply to overseas conduct. That decision sealed the fate of Turkcell’s suit, which alleged only glancing ties to the United States. On Wednesday, the company’s lawyers at Patton Boggs agreed to dismiss the case. Turkcell hinted in a press release that it would refile its claims in another jurisdiction. (And in fairness, at the time the company sued in federal court in Washington, precedent from the District of Columbia Court of Appeals in Doe v. Exxon Mobil held that the ATS does extend overseas.)

The dismissal on jurisdictional grounds does, however, leave unanswered the other question Turkcell’s case raised: Are bribery and corruption violations of the international law of nations? The Alien Tort Statute was enacted in 1789 to provide a forum for such violations of global standards of behavior, then fell into obscurity. Since its revival in the 1970s, ATS cases have generally involved human rights atrocities, which clearly fall under the international law rubric. Courts were reluctant, however, to permit corporate plaintiffs to make use of the ATS in what boiled down to business disputes.

Libor litigation lives! Schwab refiles fraud claims in state court

Alison Frankel
Apr 30, 2013 20:49 UTC

A month ago – right after U.S. District Judge Naomi Reice Buchwald of Manhattan issued a stunning decision that dismissed antitrust and racketeering class action claims against the global banks involved in the process of setting the benchmark London Interbank Offered Rate – I told you that individual investors might be able to rise from the wreckage with common-law fraud and federal securities suits, so long as they could show that they were deceived by the banks’ misrepresentations about Libor’s legitimacy and held enough Libor-pegged securities to justify the expense of litigating claims on their own. On Monday, Charles Schwab filed a new complaint in San Francisco County Superior Court asserting that it meets both of those conditions: Schwab entities supposedly purchased billions of dollars of Libor-based financial instruments based on false assurances that the benchmark was set honestly.

Citing admissions from Libor settlements that U.S. and British regulators have reached with Barclays, UBS and Royal Bank of Scotland, as well as expert reports developed in the decimated federal multidistrict Libor litigation, Schwab’s lawyers at Lieff, Cabraser, Heimann & Bernstein claim that Libor banks conspired to suppress the benchmark borrowing rate. That artificial suppression, according to Schwab, permitted the banks to pay unduly low interest rates on floating-rate securities pegged to Libor and even on short-term fixed-rate notes with returns based on Libor rates. The parent company and various Schwab funds are asserting common-law fraud, breach of contract and unjust enrichment claims; violation of California’s trade practices statute; and federal securities claims.

Schwab (which also brought individual claims, now dismissed, in the antitrust MDL) takes care to address two potential bank defenses: reliance and timeliness. The bulk of the 125-page complaint is dedicated to demonstrating that Libor was manipulated, but Schwab spends several pages detailing the banks’ public assurances that it was not. The supposed conspiracy to depress Libor, according to the complaint, “was, by its very nature, self-concealing.” Reasonable investors could not know that the rate was being suppressed, Schwab said, when officials from Credit Suisse, JPMorgan Chase, Bank of America and Citigroup were assuring the public that Libor was legitimate.

Will CDO investors’ deal boost litigation against rating agencies?

Alison Frankel
Apr 29, 2013 21:28 UTC

This is a rare sentiment, but thank goodness for Congress. Were it not for reports issued in 2011 by theFinancial Crisis Inquiry Commission (an expert panel created by federal statute) and the Senate Subcommittee on Investigations, we’d have precious little public-record testimony about the role that the credit rating agencies Standard & Poor’s, Moody’s and Fitch played in the near collapse of the economy. With Friday’s settlement between S&P, Moody’s and two groups of investors in collateralized debt obligations known as Cheyne and Rhinebridge, we’ve lost one of our last remaining chances to see the rating agencies answer to private investors.

I want to emphasize that the deal is a landmark. It is apparently the first time that S&P and Moody’s have settled accusations that investors were misled by their ratings. That’s unquestionably a great result for the CDO purchasers in the case and for their lawyers at Robbins Geller Rudman & Dowd, who have battled since 2008 to keep $700 million in fraud and negligence claims alive. Unlike investors in more than three dozen other cases claiming the credit rating agencies facilitated the issue of toxic mortgage-backed securities, Abu Dhabi Bank, the Kings County pension fund and their fellow CDO purchasers survived preliminary motions, beating back the agencies’ argument that their ratings were opinions protected by the First Amendment. Then, through discovery, Robbins Geller uncovered hot documents - even more than the rating agencies produced to Congress – that helped investors withstand defense requests for summary judgment.

Lead counsel Luke Brooks and Daniel Drosman of Robbins Geller declined to disclose the terms of the CDO settlement but told me Monday that their clients are very pleased with “what we view as an extraordinary result.” (An S&P representative declined to comment; a Moody’s spokesman told Reuters that the agency wanted to put the CDO litigation behind it.)

Microsoft win in rate-setting case vs Motorola is call to litigation

Alison Frankel
Apr 26, 2013 22:15 UTC

For the first time ever, a federal district judge has decided what constitutes a reasonable license rate for a portfolio of standard-essential patents. U.S. District Judge James Robart ruled late Thursday that Motorola is entitled to royalties of a half cent per unit for Microsoft’s use of standard-essential video compression patents and 3.5 cents per unit for Motorola’s wireless communication patents. According to Microsoft, those terms would require it to pay Motorola a grand total of about $1.8 million a year in royalties – a far cry indeed from the billions Motorola requested in a royalty demand to Microsoft in 2010. It’s still to be determined at a trial this summer whether Motorola breached its obligation to license its essential technology to Microsoft on reasonable terms. But make no mistake: Robart’s ruling on reasonable royalties is a dreadful outcome for Motorola and its parent, Google.

In fact, there’s a good argument that the framework Robart used to determine a fair royalty rate is bad news for all patent holders that depend on license fees for essential technology. Until the smart device wars, when Microsoft and Apple balked at Motorola’s licensing demands, product makers generally considered themselves to be at the mercy of companies that developed essential technology adopted by international standard-setting boards. Robart’s ruling, if it is eventually upheld by the 9th Circuit Court of Appeals, gives so-called implementers like Microsoft and Apple not only the methodology to whittle down patent holders’ licensing demands but also a recourse if negotiations stall. Implementers now know they can go to court and ask a judge to decide a fair royalty based on the relative value of essential patents to their final product. We’ve already seen courts and regulators blunt the threat of injunctions by holders of standard-essential patents. Robart’s decision shifts the balance of power even further away from patent holders.

To understand why, let’s run quickly through the findings in the 207-page opinion. The judge said early on that he agreed with Motorola’s lawyers at Ropes & Gray and The Summit Law Group that the best way to set a fair royalty rate would be to consider a hypothetical bilateral negotiation. He rejected Microsoft’s proposed “incremental value” approach, which would have based the value of essential patents on the cost of adopting alternative technology. But that was just about the only positive aspect of the ruling for Motorola.

NFL profits from violence, so is it liable to brain-injured retirees?

Alison Frankel
Apr 25, 2013 21:38 UTC

On Thursday night, professional football teams will hold their annual draft of college players. For the young men who are selected, the draft will be a dream realized, the culmination of years of hard work and hard knocks. But before they sign their million-dollar contracts, they might want to have a look at a photo taken earlier this month. It’s of Mary Ann Easterling, the widow of former Atlanta Falcons safety Ray Easterling, who shot himself last year after a long struggle with dementia. Easterling’s widow broke down earlier this month, at a press conference following a crucial hearing before the federal judge overseeing consolidated litigation against the National Football League by about 4,500 retired players who claim that the NFL deceived them about the risk of traumatic brain injury. According to the players, their NFL dream ended in the tragedy of depression, dementia, and, for 40 of them, death.

The NFL, as I’ve reported, takes the position that the players’ accusations of negligence and fraud are pre-empted by collective bargaining agreements between the players’ union and NFL teams. Health and safety are addressed in the agreements, the NFL contended last September in a motion to dismiss the players’ cases, so the retirees must arbitrate their claims rather than litigate them in court. The retirees responded last October, arguing in a brief opposing dismissal that their union agreements with NFL teams don’t address the league’s own duty to protect and deal honestly with players. According to the players, the NFL wants to have its cake and eat it too: The league profits from violence, packaging the most shattering on-the-field hits in films it sells to the public, yet it disavows responsibility for the toll of that violence.

It’s a mark of how seriously the NFL takes this litigation that for arguments earlier this month before U.S. District Judge Anita Brody of Philadelphia, the league brought in Paul Clement of Bancroft, the former Bush Administration solicitor general whose typical bailiwick is the U.S. Supreme Court. (The NFL is also represented by Paul, Weiss, Rifkind, Wharton & Garrison and Dechert.) The retired players had Supreme Court counsel of their own: David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel was brought in to argue by steering committee lead counsel from Seeger Weiss and Anapol Schwartz.

News Corp deal: a new way to police corporate political spending?

Alison Frankel
Apr 22, 2013 21:43 UTC

On Monday, the directors and officers of Rupert Murdoch’s News Corp agreed to settle a derivative suit accusing them of breaching their duty to shareholders by failing to avert the phone-hacking scandal at the company’s British newspapers. News Corp’s insurers will pay $139 million, in what shareholder lawyers atGrant & Eisenhofer called the largest-ever cash settlement of derivative claims in Delaware Chancery Court. The settlement, which comes as News Corp prepares to split its news and entertainment branches into two publicly traded companies, was produced after several months of mediation that took place while the company’s motion to dismiss was pending before Vice Chancellor John Noble.

The cash portion of the deal (which will be eventually reduced by legal fees paid to G&E, co-lead counsel fromBernstein Litowitz Berger & Grossmann and several other plaintiffs firms that managed to grab a piece of the case) is obviously the big news, but among the many corporate governance enhancements detailed in the memorandum of understanding between News Corp and shareholders, you’ll find what appears to be a historic concession by the company: News Corp has agreed to disclose its campaign and political action committee contributions to shareholders and its lobbying and Super PAC spending to the board. According to two advocates for corporate political transparency, this settlement apparently marks the first time that shareholders have used the vehicle of a derivative suit to obtain enhanced disclosure of corporate political spending. “I think it’s terrific,” said Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington (CREW). “Any way to force companies to disclose spending is good for democracy.”

Earlier this year, you may recall, New York State’s public employee pension fund brought a books-and-records suit against Qualcomm, seeking to force the chipmaker to tell shareholders about its political spending. (Notably, the New York fund, like shareholders in the News Corp case, was represented by Mark Lebovitch of Bernstein Litowitz.) I said at the time that the novel tactic of suing corporations under the Delaware law that grants shareholders the right to request corporate books and records could be a breakthrough in the post-Citizens United effort to force companies to admit their political spending. Qualcomm certainly knuckled under. In February, less than six weeks after the New York fund sued, the previously opaque corporation agreed to disclose online all of its contributions to candidates and parties, as well as donations to Super PACs and trade associations.

Virginia Supreme Court revives epic suit against Massey Coal

Alison Frankel
Apr 19, 2013 20:22 UTC

If Hugh Caperton’s litigation against Massey Coal were a cat, it would now be entering its sixth or seventh life, thanks to a ruling Thursday by the Supreme Court of Virginia.

Long ago, in 1998 to be exact, the West Virginia coal mining executive launched his case against Massey, which Caperton accused of driving his mining business into ruin. According to Caperton and his lawyers at Reed Smith, when Massey acquired a company Caperton supplied with coal, it aborted Caperton’s supply agreement with the acquired company, put Caperton’s business on the brink of collapse, then reneged on tentative offers to buy Caperton’s operations. Caperton sued Massey’s subsidiary in Virginia state court for breaching the original supply contract and won a $6 million jury verdict. But he also brought tort claims against Massey in West Virginia, since that’s where he lived and where his fateful meetings with Massey’s then chief, Don Blankenship, took place. Caperton believed that Blankenship meant to destroy him, and a state-court jury in West Virginia apparently agreed. In 2002, it awarded Caperton more than $50 million in punitive and compensatory damages.

The West Virginia Supreme Court of Appeals, however, was more kindly disposed toward Blankenship and Massey. A lot more kindly disposed. As it would later emerge, one judge on the state high court had vacationed with Blankenship on the French Riviera. Another had received $3 million in contributions from Blankenship in his campaign for a seat on the Supreme Court – more than the combined contributions of all the rest of the judge’s supporters. Despite recusal efforts by Caperton and Reed Smith, the West Virginia high court struck down the verdict in 2007 on the grounds that a forum selection clause in Caperton’s original supply contract required him to bring any claims in Virginia – and because Caperton had already obtained a judgment in Virginia, his tort claims were barred under the doctrine of res judicata.

  •