Alison Frankel

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.

On reconsideration motions, two high court judges recused themselves, but not the judge elected with the help of Blankenship’s money. In its second ruling on Caperton’s jury verdict, the West Virginia Supreme Court once again struck the jury verdict. Reed Smith continued to argue that Caperton’s due process rights had been violated, both at the state high court and in a petition for certiorari at the U.S. Supreme Court. The Supreme Court eventually accepted the case and ruled in 2009 that Caperton was right. It reversed the state Supreme Court and sent the case back down for reconsideration.

Astonishingly, on the case’s third round at the West Virginia high court, Caperton’s verdict was once again bounced. The judges concluded for the third time that the forum selection clause in Caperton’s original supply contract with the company Massey had acquired required that all of his claims be litigated in Virginia, even though his tort suit against Massey didn’t involve that contract or conduct by anyone connected with it on Massey’s side.

Placing blame for Aurora mass shooting: Is movie theater responsible?

Alison Frankel
Apr 19, 2013 03:42 UTC

I have a feeling that we’re going to be hearing a lot more about a ruling Wednesday by U.S. District Judge R. Brooke Jackson of Denver, who said that victims of the Batman movie massacre in Aurora, Colorado, may proceed with claims that the Cinemark movie theater is responsible for the tragedy under the state’s premises liability law. Moviegoers were owed “a duty to exercise reasonable care to protect them against dangers of which Cinemark knew or should have known,” Jackson ruled. The judge, who is overseeing 10 federal-court cases consolidated for discovery, found that the victims’ suits raised enough questions about whether Cinemark failed to anticipate that a killer could enter the theater unarmed, sneak out to obtain weapons and re-enter undetected – and whether the theater had in place adequate security to deal with a reasonably anticipated threat – to survive Cinemark’s dismissal motion.

He did not reach that conclusion lightly. Jackson said that he was initially skeptical of the plaintiffs’ claims, despite “overwhelming sympathy and grief for the victims of the Aurora theater shootings.” Like many people, he said, his first reaction to suits against Cinemark was, “How could a theater be expected to prevent something like this?”

That’s the question Cinemark’s lawyers at Taylor Anderson highlighted in their motion to dismiss federal-court suits against the theater, and it’s why this case should be closely watched by businesses open to the public. Is it reasonable to expect that untrained movie theater employees could anticipate a mass murder? After all, the family and doctors of the accused gunman, James Holmes, didn’t know that he would open fire in a movie theater, killing 12 people and wounding 70. Law enforcement agencies and officials at the university Holmes attended didn’t foresee it. Nor did the companies that supplied Holmes’s guns, ammunition and other weaponry. Yet suits against Cinemark would impose responsibility for the horrific tragedy only on the movie theater, under the theory that it should have known a mass murder could take place on its property and failed to take steps to prevent it.

Human rights lawyers look for silver lining in Kiobel black cloud

Alison Frankel
Apr 17, 2013 22:09 UTC

When the U.S. Chamber of Commerce rushes out a statement hailing a decision by the U.S. Supreme Court, you can be sure that opinion is a defeat for plaintiffs’ lawyers. So it is with the court’s long-awaited ruling Wednesday in Kiobel v. Royal Dutch Petroleum. All nine justices agreed with Shell’s counsel at Quinn Emanuel Urquhart & Sullivan that claims by a group of Nigerian nationals suing under the Alien Tort Statute for Shell’s alleged abetting of state-sponsored torture and murder in their country should be dismissed, though they split on precisely why. The majority, in an opinion written by Chief Justice John Roberts, held that the presumption against extraterritoriality, most recently articulated by the court in Morrison v. National Australia Bank, applies to the Alien Tort Statute even though the ATS, unlike laws regulating conduct, is strictly a jurisdictional statute. Roberts’ opinion rejected (among other things) arguments that because the ATS was enacted to address piracy on the high seas, it extends to atrocities committed on foreign soil.

Corporations like Shell, which are based outside of the United States, can now rest assured that they cannot be sued under the ATS by non-U.S. nationals who claim to have suffered harm from the corporation’s activities abroad – an outcome greeted warmly by pro-business interests. But in a call with reporters on Wednesday afternoon, human rights lawyers tried to look on the bright side, pointing to indications throughout the court’s majority opinion and three concurrences that all is not lost for victims who want their day in a U.S. courtroom.

Those indications begin with Roberts’ concluding words in the majority holding. Yes, he said, the presumption must be against extraterritorial application of the ATS, but that presumption is not inviolable when there’s a strong connection between the United States and the allegations asserted. “Where the claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application,” Roberts wrote.

Chevron’s road to redemption

Alison Frankel
Apr 16, 2013 22:53 UTC

The last time I wrote about the Chevron environmental contamination litigation, after Chevron revealed a declaration from an Ecuadorean judge who swore that he acted as the middleman in setting up a $500,000 bribe from plaintiffs’ lawyers to the Ecuadorean judge who entered a $19 billion judgment against Chevron, I said it was profoundly disheartening that alleged misconduct by lawyers for the Ecuadoreans who claim to have been injured by drilling in the Amazon might prevent a final answer to the question of whether they’ve actually been harmed. But Chevron’s latest stunning revelations - a pair of declarations in which scientific consultants for the Ecuadorean plaintiffs disavow their work in the case in Ecuador – cast a deep, dark shadow over the plaintiffs’ claims.

Douglas Beltman and Ann Maest of Stratus Consulting now say that the damages report by a purportedly neutral court-appointed expert in the Ecuadorean proceeding was actually written by Stratus, working under the direction of then lead plaintiffs’ lawyer Steven Donziger. Stratus even drafted the expert’s supposed response to the plaintiffs’ comments on the initial report, effectively answering their own questions about their own report, and in the process boosting the expert’s damages assessment from $19 to $27 billion. That seems bad, but what’s worse (at least in my view) is that Beltman, who was the public face of the Ecuadoreans’ scientific claims, admitted to systemic flaws in the testing process. Stratus was supposedly directed, for instance, not to attribute any contamination to Ecuador’s state-owned oil company, which has ongoing operations in the region, even though samples from those sites showed some of the highest levels of petroleum. Stratus’s assessment of soil remediation, according to Beltman’s new declaration, depended on unverified information from Donziger as well as a contamination standard dictated by the plaintiffs’ lawyer. Beltman also said that the surveys Stratus relied upon to assess cancer rates in the region were “flawed,” and that any finding of excessive cancer in the oil-production region is “invalid and unsupported.”

“I now believe the (damages) process was tainted … and not supported by reliable scientific bases and therefore I disavow the (expert) report and (expert) response,” Beltman said.

$720 mln fee request in credit card case is audacious, risky

Alison Frankel
Apr 15, 2013 22:51 UTC

In 2003, lawyers representing a class of five million merchants in antitrust class action litigation against Visa and MasterCard asked U.S. District Judge John Gleeson for $609 million in fees. They told the judge that they’d litigated all the way to jury selection in a case so vigorously defended that they’d had to oppose certiorari at the U.S. Supreme Court, and they’d achieved historic results: a $3 billion settlement fund for class members – at the time, the largest-ever recovery for Sherman Act violations – and injunctive relief that added billions more to the overall value of the deal. Their fee request represented 18 percent of the present-day cash value of the settlement fund and 9.7 times the lodestar value of their billings, but only about 2 percent of what they estimated to be the total value of the deal.

Judge Gleeson was having none of it. In a December 2003 opinion, he called the initial fee request “excessive,” “absurd” and “fundamentally unreasonable.” Gleeson instead awarded $220.3 million – about 6.5 percent of the settlement fund and a lodestar multiplier of 3.5. The judge said he considered that fee to be “generous,” and was only willing to award such an extraordinary amount of money because class counsel, led by the firm now known as Constantine Cannon, had obtained extraordinary results in a high-risk case.

I’m bringing you this little history lesson to inform your consideration of the request for $720 million in fees filed Friday with Gleeson by Robins, Kaplan, Miller & CiresiBerger Montague; and Robbins Geller Rudman & Dowd. The three firms are class counsel in another merchants’ antitrust class action against Visa and MasterCard, this one involving transaction processing “swipe fees” charged by the credit card companies. Like their predecessors in the 2003 case, which involved supposedly improper linkage of debit and credit cards, the swipe fee class lawyers have obtained a record cash settlement, $7.25 billion, and valuable, industrywide injunctive relief. (I should note that the controversial deal has not yet received final approval. Class lawyers filed a separate motion for approval on the same day as the fee request.) Plaintiffs’ lawyers in the swipe fee case argue that their unprecedented results, coupled with the nearly 500,000 hours expended by the 40 plaintiffs’ firms that worked on the case and would share in the fees, justify the outsize award.

ResCap creditors to bankruptcy court: Ally owes us $20 bln

Alison Frankel
Apr 12, 2013 22:18 UTC

told you this was coming: Late Thursday, the creditors committee of the bankrupt mortgage lender Residential Capital asked U.S. Bankruptcy Judge Martin Glenn of Manhattan to grant creditors permission to sue ResCap’s former parent, Ally Financial. The committee, represented by Kramer Levin Naftalis & Frankel, argues that in its short, unhappy existence ResCap functioned first as a cash magnet to boost Ally’s failing auto-lending business and then as a shield against Ally’s liability for toxic mortgages. Ally’s opportunistic manipulation of its captive onetime subsidiary, the committee said, exposes the troubled bank to ResCap’s entire $20 billion liability to creditors.

As the committee explains in its filing, ResCap has agreed to cede control of litigation against Ally to the creditors. Normally, this kind of fraud claim in a Chapter 11 bankruptcy would belong to the debtor. And in fact, before it entered bankruptcy, ResCap made a deal with Ally to resolve any of its potential claims against its former parent for $750 million. But in a dramatic turnaround earlier this year, ResCap renounced the $750 million deal and threw in with the creditors, who have been agitating for more money from Ally from the moment the bankruptcy was filed in May 2012. In Thursday’s brief, the creditors assert that ResCap can’t now sue Ally because it is “subject to the disabling conflicts of the flawed deal” and focused on developing a wind-down plan. Moreover, the creditors argue, they’ve already seen millions of documents through an evidence-sharing agreement with the court-appointed Chapter 11 trustee, so they’re positioned to jump right in to a suit against Ally.

The tale laid out in the committee’s brief is of a devious parent company that has abused its subsidiary since birth. ResCap was spun off from Ally in 2004, when mortgage lending was a much more profitable business than Ally’s traditional auto-loan financing. (Ally began its existence as the financier of GM loans.) According to the brief, however, the spinoff was never really separate from its parent. ResCap’s leadership substantially overlapped with Ally’s, and executive compensation depended on Ally’s performance. And though Ally had created the strategy of loosening mortgage-underwriting standards in the housing boom, the creditors contend that Ally used ResCap to cabin off liability for deficient loans.

New billion-dollar MBS question: Are there limits on monoline damages?

Alison Frankel
Apr 11, 2013 21:58 UTC

Countrywide’s new lawyers in New York State Supreme Court litigation with MBIA have come out firing. In a pair of letters interpreting last week’s ruling by the Appellate Division, FirstDepartment, the bank’s counsel from Simpson Thacher & Bartlett are asserting an aggressive argument that the appellate opinion limits MBIA’s potential recovery to the repurchase of materially deficient underlying mortgage loans – a restriction that would prevent MBIA from collecting from the bank the full amount of insurance claims it has paid on underperforming Countrywide mortgage-backed securities. If Countrywide is correct – and that’s far from certain – bond insurers could have a much tougher route to recovery against MBS issuers than we’ve assumed in the wake of Assured Guaranty’s decisive win against Flagstar in February.

Here’s Countrywide’s argument, which the bank first staked out in an April 3 letter to New York State Supreme Court Justice Eileen Bransten of Manhattan, who is overseeing the MBIA case. The state appeals court, as you probably recall, ruled last week that MBIA may not recover rescissory damages, which the opinion called “a very rarely used equitable tool.” MBIA’s rescissory theory would have required Countrywide to, in essence, make MBIA whole, as if it had never agreed to insure Countrywide MBS in the first place. By knocking out that route to recovery, Countrywide argued, the appeals court left MBIA without any claim for compensatory damages. Instead, the bank said, under the terms of its agreements with the bond insurer, MBIA’s sole remedy is the repurchase of materially deficient underlying mortgage loans. “Any other interpretation is flatly contradicted by the First Department’s decision,” the bank said. “The First Department made clear that MBIA is not entitled to unwind the contract and receive all of its claims payments merely upon proving that it would not have entered the contract but for Countrywide’s alleged misrepresentations – this is the very rescissory relief that the First Department held unavailable to MBIA.”

MBIA’s lawyers at Quinn Emanuel Urquhart & Sullivan, you will not be surprised to hear, disputed Countrywide’s interpretation of the appellate ruling in their April 8 letterto Bransten, which offers what we English majors might call a close text analysis of the First Department’s cryptic missive. The bond insurer pointed to a sentence in which the appeals court said that MBIA can seek “recovery of payments made pursuant to an insurance policy without resort to rescission.” Why, MBIA asked, would the appeals court refer to recovery of those payments if MBIA’s sole remedy were repurchase? That’s especially true, MBIA argued, because the opinion cited insurance law provisions that provide for broad recovery. If the First Department had wanted to restrict MBIA’s damages to the “sole remedy” of repurchase – which is specified in only one paragraph of MBIA’s agreements with Countrywide – it would have said so.

Chaos of rulings on toxic CDOs means uncertainty for investors

Alison Frankel
Apr 10, 2013 21:35 UTC

One of the notable losers in the U.S. housing crash was a set of special purpose entities organized in the UK island of Jersey and collectively known as Loreley. Loreley erroneously believed in the long-term health of the subprime mortgage market in the United States. So as banks stuffed toxic mortgage-backed securities into collateralized debt obligations and sold the CDOs to offload their subprime exposure, Loreley was a buyer. The funds invested hundreds of millions of dollars in mortgage-referenced CDOs in late 2006 and 2007.

That turned out, of course, to be a very bad bet. But Loreley has since claimed that it was something else as well. According to suits Loreley has filed against Citigroup, Wells Fargo, UBS and Merrill Lynch, the investment vehicle was the unwitting dupe of a scheme between the banks and a Chicago hedge fund called Magnetar, which Loreley accuses of secretly selecting the underlying mortgage-backed securities referenced in the CDOs the banks marketed and it bought. If you remember the Goldman Sachs Abacus deal involving Paulson & Co, you can predict Magnetar’s supposed motive: The hedge fund, according to Loreley, picked securities that doomed the CDOs to fail because it had shorted them via credit default swaps.

Loreley certainly wasn’t the only one to suspect that Magnetar and the banks had rigged the CDOs they peddled in 2006 and 2007; in 2011, JPMorgan agreed to pay $153.6 million to resolve allegations by the Securities and Exchange Commission that it marketed the Squared CDO without telling investors that Magnetar had a hand in selecting the CDO’s reference portfolio while simultaneously shorting the deal. Since then, State Street, Mizuho and Deutsche Bank have all reached regulatory settlements over undisclosed Magnetar involvement in CDO deals. According to ProPublica, Magnetar had a role in about 30 deals in which it bought equity tranches of mortgage-referenced CDOs while at the same time shorting the same or similar CDOs through swaps. (I should note here that Magnetar, like Paulson in the Goldman deal, has not been accused of wrongdoing by the SEC. Magnetar has always maintained that its short positions were a hedge against equity tranche investments.)

The near-impossible standard for showing auditor fraud

Alison Frankel
Apr 9, 2013 20:47 UTC

A couple weeks back, Dena Aubin of the Reuters tax team had a very insightful story about the risks auditors face as more countries permit some form of mass shareholder litigation. With class actions or their like now permitted in more than 20 countries, Aubin said, auditors’ structural firewall – in which national operating units are legally isolated from each other and from the parent firm – isn’t as liability-proof as it once seemed. Aubin cited Ernst & Young’s recent $118 million settlement of a Canadian class action stemming from its audits of the collapsed Chinese forestry company Sino Forest as a possible preview of what’s in store for the Big 4 accounting shops, thanks to a surge in international litigation. Their potential exposure is so large, according to Aubin, that commercial insurers no longer offer affordable liability coverage to audit firms, which have shifted to a self-insured model.

That’s outside of the United States, though. In this country, Aubin found, shareholders rarely even bother to name audit firms as defendants in class actions: Only two securities class actions filed in 2012 made claims against top audit firms. And if you want to know why, read U.S. District Judge Shira Scheindlin’s 72-page opinion Monday dismissing allegations that the Chinese unit of Deloitte Touche failed investors in its audits of the Chinese financial software firm Longtop Financial Technologies, which admitted in 2011 to cooking its books and was subsequently sued by the Securities and Exchange Commission. Scheindlin concluded that Deloitte may have been lazy, at worst, but under U.S. laws and accounting standards, the audit firm should be considered a victim of Longtop’s fraud, not an abetter of it.

What’s unusual in this case, as Scheindlin explained, is that shareholder lawyers from Grant & Eisenhofer andKessler Topaz Meltzer & Check had more evidence than plaintiffs usually get in securities class actions. The judge had previously refused to dismiss claims against Longtop’s CFO, who then had to produce millions of pages of documents and emails to shareholders. They argued in an amended complaint that evidence obtained from the CFO showed that Deloitte had red-flag warnings of Longtop’s internal control problems, misreporting of revenue and underpayment of social welfare obligations. The audit firm, plaintiffs claimed, confronted Longtop officials about some of the issues but never disclosed problems to investors. In a brief opposing dismissal of their claims, the plaintiffs said Deloitte “chose the path of least resistance” and abdicated “its corporate watchdog responsibilities.”

S&P: State AGs trying to usurp federal regulation of rating agencies

Alison Frankel
Apr 8, 2013 21:20 UTC

Over the next few weeks, federal courts in more than a dozen states are going to begin to consider a very interesting question: Does coordination between and among state attorneys general and the U.S. Department of Justice constitute an improper attempt to override federal regulation?

The credit rating agency Standard & Poor’s is asserting that it does, in an argument that could affect how state AGs enforce consumer laws against defendants in regulated industries. You’ll recall that when the Justice Department announced its $5 billion suit against S&P in February, seven state AGs were in attendance to announce their own parallel state-court claims that the rating agency lied about its independence and objectivity, in violation of state consumer protection and trade practice laws. Three such suits, by Connecticut, Illinois and Mississippi, were already under way at the time of the Justice Department filing, and several more states have since brought claims in their home courts. S&P has now removed all of the state-court AG cases to federal court and has asked the Judicial Panel on Multidistrict Litigation to consolidate the proceedings before one of two judges in federal court in Manhattan.

The rating agency’s lawyers at Cahill Gordon & Reindel argue that the coordinated attack by the Justice Department and the state AGs is a de facto pre-emption of the Credit Rating Agency Reform Act of 2006, which gave oversight of S&P and its competitors to the Securities and Exchange Commission. “Taken as a whole, the actions represent a concerted effort to undermine, if not supplant, a detailed, comprehensive and carefully balanced federal scheme through patchwork and inevitably conflicting rulings across the country,” Cahill wrote in S&P’s brief to the JPMDL. “These nominally separate actions – the vast majority of which were filed on the same day and touted as the result of a ‘coordinated’ effort at a joint press conference held by several of the Attorneys General to announce their filing – are, in effect, a single hindsight-infused attempt by the states to lay blame with S&P for failing to predict the financial crisis and they should be treated collectively.”