Self-made corporate billionaires are a rare breed, and I think we can all agree that they deserve respect for their acumen and tenacity. What they don’t deserve, if they’ve accepted shareholder money through the capital markets, is unfettered control of their businesses. Public companies cannot treat corporate governance best practices as a nuisance, or worse, a hindrance – especially when the company’s interests may be at odds with those of its billionaire founder.
On Friday, as you’ve surely heard, the U.S. Supreme Court agreed to hear Halliburton v. Erica P. John Fund, which challenges an essential building block of securities fraud class actions. Halliburton’s cert petition presented the question of whether the Supreme Court should overrule its own 1988 decision in Basic v. Levinson, which held that investors in broadly traded stock presumptively relied on public misstatements. Basic’s fraud-on-the-market theory freed securities class action lawyers from having to show that individual shareholders made investment decisions based on fraudulent misrepresentations, permitting the certification of enormous classes of investors. If the justices decide to chuck Basic’s presumption of reliance, it’s hard to imagine how plaintiffs’ lawyers will be able to win certification of securities fraud class actions. As Max Berger of Bernstein Litowitz Berger & Grossmann said at a securities litigation conference on Tuesday, “I seldom lose sleep at night, but one of the things that keeps me up is what the Supreme Court is going to do in Halliburton. It’s a game changer.”
Remember the spate of fraud cases by the National Credit Union Administration in federal court in Manhattan earlier this fall? Perhaps emboldened by its quiet success in settling claims that failed credit unions were duped into buying fraudulently depicted mortgage-backed securities, NCUA filed complaints against nine banks that sold more than $2 billion of MBS to two credit unions that subsequently went under. The suits, which name Morgan Stanley, Barclays, JPMorgan Chase, Credit Suisse, RBS, UBS, Ally, Wachovia and Goldman Sachs, have all been transferred to U.S. District Judge Denise Cote, who has been notoriously tough on the same defendants (and others) in MBS fraud suits brought by the Federal Housing Finance Agency.
I suspect that the American public doesn’t have much sympathy to spare for the big-time lawyers whose firms have reaped untold millions of dollars defending Too Big to Fail institutions against accusations that they caused the Great Recession. But those lawyers sure cast themselves and their clients in a pitiable light at a securities conference at the New York Bar Association on Tuesday. Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison, best known for representing Citigroup, said he was “relentlessly pessimistic” about the near-term litigation prospects for banks, given the de facto impossibility of standing up to threats from government enforcers. Scott Musoff of Skadden, Arps, Slate, Meagher & Flom, who defended UBS (and is still defending Societe Generale) against securities fraud claims by the Federal Housing Finance Agency, noted that FHFA’s wards, Fannie Mae and Freddie Mac, were quasi-private concerns when they took on risk from securitized subprime mortgages, yet claims by FHFA are treated as though they’re asserted by a government regulator. And Julie North of Cravath, Swaine & Moore questioned whether it’s fair to preclude banks from attributing investor losses in mortgage-backed securities to the broad economic downturn and not to bank misrepresentations.
Davis Polk & Wardwell had an interesting post last week at the Harvard Law School Forum on Corporate Governance. As the post noted, shareholder lawyers recently dropped their appeal of a ruling in June by Chancellor Leo Strine of Delaware Chancery Court that upheld the validity of corporate bylaws requiring shareholders to litigate in Delaware. With Strine’s ruling in Boilermakers v. Chevron entrenched, at least for now, as Delaware precedent, Davis Polk asked, is there any reason why businesses shouldn’t rush to adopt forum selection provisions? According to the firm, about 120 corporations, mostly in Delaware, have done just that. But Davis Polk also said there are a couple of reasons to wait. For one thing, shareholders may look askance at forum selection provisions, and could even try to extract revenge against board members who push for them. And for another, it’s not clear that judges in jurisdictions outside of Delaware will obey the law according to Leo Strine.
On Wednesday, CLS Bank filed a brief opposing U.S. Supreme Court review of a spectacularly controversial en banc decision from the Federal Circuit Court of Appeals. You probably remember the Federal Circuit ruling from last May in the CLS case: The en banc court held that Alice Corp’s computer-implemented escrow system is not eligible for patents, but couldn’t muster a majority to explain why. The 10 appellate judges ended up writing six different opinions, none of which attracted enough co-signers to provide long-sought clarity on a standard for the patent-eligibility of abstract ideas that are implemented via computers. As Alice’s lawyers at Sidley Austin explained in their certiorari petition in May, “The legal standards that govern whether computer-implemented inventions are eligible for patent protection … remain entirely unclear and utterly panel dependent.”
In April 2012, a California shampoo purchaser named Nancie Ligon filed a class action in federal court in San Francisco on behalf of all buyers of certain L’Oreal products that are labeled “salon-only.” Ligon’s counsel at The Mehdi Firm and Halunen & Associates claimed that L’Oreal products’ labels were misleading because they were actually sold not just at salons but also at mass-market retailers such as Target and K-Mart.
Last August, the rules committee of the Judicial Conference of the United States published its long-awaited proposed changes to the Federal Rules of Civil Procedure. The advisory committee on civil rules – which included private lawyers John Barkett of Shook, Hardy & Bacon, Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein, Parker Folse of Susman Godfrey and Peter Keisler of Sidley Austin as well as federal judges, law professors and a Justice Department representative – suggested amendments to 10 rules, all with the goal of speeding up the pretrial litigation process. You’re forgiven if you didn’t dive right into the document. It’s more than 350 pages long, and you have to thumb past more than 200 pages of proposed changes to federal bankruptcy rules before you even get to the section on proposed civil rules amendments. But every civil practitioner will be affected by these changes, which are open for public comment until Feb. 15. So it’s probably time to start paying attention.
I’m pretty sure we can all agree that the Internet has wrought fundamental changes in our daily lives. Remember when you had to call friends with encyclopedic memories for pop-culture trivia to remind you of the name of the Brady Bunch’s dog or the lyrics to the second verse of the theme song of Gilligan’s Island? Okay, so maybe the world would keep spinning without instantaneous answers to those sorts of questions, but more seriously, can you recall (if you’re over 40 or so) or imagine (if you’re younger) the practice of law without e-filing? Voir dire without Google and Facebook? Networking without LinkedIn and Twitter?
Last Friday, with rumors of SAC Capital’s imminent guilty plea as inescapable as stale candy corn on Halloween, class action lawyers from Wohl & Fruchter filed a first-of-its-kind letter with U.S. District Judge Laura Swain, the judge presiding over the Justice Department’s criminal case in Manhattan against Steven Cohen’s infamous hedge fund. The firm explained that it is co-lead counsel in a securities class action in federal court in Manhattan, alleging that SAC harmed investors in the Irish drug company Elan when the hedge fund dumped Elan shares based on inside information. Along with Wyeth investors, whose parallel class action has been consolidated with the Elan case, Elan shareholders claimed that they’re a victim of SAC’s crimes. And under the federal Crime Victims Rights Act of 2004, wrote Wohl & Fruchter, Elan and Wyeth shareholders have a right to present her with their view of SAC’s plea.