Opinion

Alison Frankel

Levin Committee report makes fraud case for JPMorgan shareholders

Alison Frankel
Mar 15, 2013 21:36 UTC

On Tuesday, shareholder lawyers leading the 10-month-old securities fraud class action accusing JPMorgan Chase of deceiving investors about billions of dollars in losses by the bank’s chief investment office received permission to delay filing their latest complaint until April 12, in order to allow them time to digest the findings of a Senate investigation of the bank’s so-called “whale trades.” That was good thinking. The 307-page reportof the Permanent Subcommittee on Investigations, released Thursday evening, is a trove for plaintiffs’ lawyers, filled with well-documented allegations of overly risky, undersupervised trading by JPMorgan’s chief investment office; deliberate attempts by the CIO to minimize the appearance of burgeoning losses; and subsequent efforts by the bank to mislead regulators and investors about the CIO’s activities and losses. The report references “previously undisclosed” emails, memos and other documents purportedly showing that “senior managers were told the (CIO portfolio) was massive, losing money, and had stopped providing credit loss protection to the bank, yet downplayed those problems and kept describing the portfolio as a risk-reducing hedge, until forced by billions of dollars in losses to admit disaster.”

That kind of documentary evidence is a rare gift for securities class action lawyers, who usually have to scrape through the preliminaries of fraud litigation without access to any evidence at all from defendants. Here, by contrast, the Senate subcommittee has mapped out precisely what it considers to be misleading statements by top bank officials alongside its evidence that JPMorgan knew the statements were false at the time they were made.

In particular, the Senate report targets comments CEO Jamie Dimon and CFO Douglas Braunstein made during the infamous April 13, 2012, earnings call in which JPMorgan first publicly discussed the CIO and its increasingly troubled portfolio, after news stories earlier in the month reported that JPMorgan’s position was warping the derivatives market. That earnings call has been scrutinized by shareholder lawyers since they first began battling for control of the securities fraud case against JPMorgan last June, and the Senate subcommittee doesn’t supply indisputable evidence that Dimon or Braunstein deliberately lied to analysts about the CIO. There’s a fair amount of inference in the knowledge imputed to Dimon and Braunstein in the report.

But the Senate provides a ton of detail about what JPMorgan knew or should have known at the time of the analyst call. So even though the CEO told analysts that the controversy over the CIO’s losses was a “tempest in a teapot” (a comment he has since said he regrets), the Senate report documents that Dimon already knew the CIO portfolio had experienced three months of losses – including exponentially rising losses the previous month – and that the bank would have difficulty extricating itself from the CIO’s positions. On the same earnings call, Braunstein said the CIO’s trading positions were subject to the bank’s risk management processes; were “fully transparent” to regulators whom the bank regularly briefed; were managed on a long-term basis; and were hedges to reduce JPMorgan’s risk. The Senate report offers evidence that, to the contrary, Braunstein had been informed that CIO positions and trades were inconsistent with long-term protection against credit risk. The report doesn’t specifically accuse him of misrepresenting his own knowledge of CIO risk management or reports to regulators, but said his statements were “mischaracterizations” that omitted facts known to JPMorgan.

Some of the most potentially powerful evidence that the bank was massaging its message about CIO positions and losses, according to the Senate report, came from emails involving JPMorgan’s corporate communications staff. The head of that department supposedly devised the strategy of telling analysts that CIO trading was a long-term hedge against structural risk that was reported to regulators. And according to the report, his “tempering” of the exact words in which the bank would describe the CIO’s role “shows that bank was aware that its initial characterizations were not entirely true.” The day after the public relations strategy launched, the report said, a trader in the CIO sent an email to his boss. “The market is quiet today,” he said. “The bank’s communications yesterday are starting to work.”

Wells Fargo, U.S. Chamber fail to rewrite wage-and-hour case rules

Alison Frankel
Mar 15, 2013 00:48 UTC

In all the tsuris for class action lawyers from the U.S. Supreme Court’s 2011 ruling in Wal-Mart v. Dukes, one category of collective litigation continues to boom: overtime claims brought under the Fair Labor Standards Act. That’s because wage-and-hour cases aren’t really class actions but rather representative actions. Under the process established in a 1987 New Jersey ruling called Lusardi v. Xerox and followed by most federal trial judges overseeing FLSA cases, courts certify a conditional class based on allegations of a representative employee. Other employees who are similarly situated are then notified of the action and offered the opportunity to opt into the case. After discovery, the defendant gets a crack at decertifying the class by showing that employees aren’t actually situated similarly. By convention, the language of federal class actions applies to certification and decertification in wage-and-hour cases. But most judges don’t subject the suits to the strict Federal Rules of Civil Procedure for class actions, so the Supreme Court’s tightening of those rules in the Dukes case hasn’t been of much help to wage-and-hour defendants.

This week, the 5th Circuit Court of Appeals made sure that will remain the state of play in its district courts. In a one-line per curiam order, a three-judge appellate panel denied Wells Fargo’s petition for a writ of mandamus that would have overturned U.S District Judge Gray Miller’s conditional certification of an opt-in class of up to 15,000 home mortgage consultants. The appellate panel – Senior Judge Patrick Higginbotham and Judges Priscilla Owen and Leslie Southwick - unfortunately offered no explanation of its reasoning, which is disappointing in a case that attracted a lot of amicus attention from both sides, including briefs from the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association (for Wells Fargo) and the Department of Labor and Equal Employment Opportunity (for the plaintiffs).

Wells and its amici pleaded with the 5th Circuit to acknowledge that the lenient conditional certification process in FLSA cases is at odds with the bedrock Dukes directive that class actions involve common questions and common solutions. “Plainly, the two-step procedure has it backwards,” the bank’s lawyers at Littler Mendelson wrote in their mandamus brief. “It first conditionally certifies the class, permitting the joinder of additional parties, and only much later does it consider facts already in the record that demonstrate the futility of representative litigation.” The 11th-hour decertification process offers no relief for defendants, the bank argued, pointing to only 24 reported decertification decisions in 2011, when 2,500 FLSA collective actions were filed. Unless the 5th Circuit imposes the Rule 23 standard for class certification, Wells argued, FLSA defendants will continue to face undue pressure to settle de facto class actions without the benefit of protections the Supreme Court established in Dukes.

ResCap’s $750 mln pre-filing deal with Ally is dead. Now what?

Alison Frankel
Mar 13, 2013 20:56 UTC

The last time I checked in on the messy Chapter 11 bankruptcy of Residential Capital, the onetime mortgage lending arm of Ally Financial, squabbling ResCap creditors had put aside their differences to unite in opposition to a deal that granted holders of ResCap mortgage-backed securities an $8.7 billion allowed claim for breaches of ResCap MBS representations and warranties. Earlier this year, junior and senior bondholders and other unsecured ResCap creditors filed objections to that agreement, claiming that it was a backdoor bailout for Ally. Under the creditors’ theory, Ally secretly directed ResCap’s negotiations with lawyers for MBS noteholders, who agreed to back Ally’s own $750 million pre-filing settlement with ResCap in exchange for Ally’s support of the noteholders’ unduly large allowed put-back claim. Ally, according to the ResCap creditors, was the Machiavellian villain pulling ResCap’s strings.

A month later, the MBS allowed-claim fight has been temporarily tabled, but some ResCap creditors are tantalizingly close to airing their grievances against Ally in a suit on behalf of the estate. In a dramatic twist late last month, ResCap reached a deal with its unsecured creditors’ committee in which the bankrupt mortgage lender agreed to walk away from its $750 million settlement with Ally, which would have wiped out all of Ally’s potential liability to ResCap for what creditors considered a bargain price. ResCap furthermore placed the future of its claims against Ally in the hands of the creditors’ committee, agreeing that if the committee moves for standing to sue ResCap’s onetime parent, ResCap won’t contest the motion.

The details of the agreement are spelled out in a little-noticed exhibit to a Feb. 26 brief by the creditors’ committee, which is represented by Kramer Levin Naftalis & Frankel. In the filing, the committee dropped its call for the appointment of a Chapter 11 trustee and pledged its support for a 60-day extension of ResCap’s exclusive right to propose a plan of reorganization. ResCap, in return, ceded standing to the committee on its claims against Ally. (The mortgage lender also said it wouldn’t propose a plan without the support of the creditors’ committee, but, under pressure from bondholders, later backed away from giving the committee veto power.)

Amid ‘activist’ debate, Strine sides with hedge fund dogging SandRidge

Alison Frankel
Mar 12, 2013 21:01 UTC

Leo Strine, the Chancellor of Delaware Chancery Court, is no particular friend of the activist shareholder, as hedge funds and institutional investors who press corporate boards for change have become known. Strine is after all on record, in a November 2010 essay for the American Bar Association’s The Business Lawyer, arguing that short-term shareholder pressure impedes corporate boards from building long-term value. That’s a theme echoed loudly last week by a pair of gray eminences of corporate law, Martin Lipton of Wachtell, Lipton, Rosen & Katz and Ira Millstein of Weil, Gotshal & Manges, in warnings about the potentially deleterious effect of what Millstein called “newfound activism (with a) focus on short-term results.” Both Milstein’s relatively moderate opinion piece in Dealbook and Lipton’s bellicose client alert argued that hedge funds focused on quarterly results and shareholder returns are fundamental threats to U.S. corporations. Or, as Strine put it in his prescient 2010 essay, “It is increasingly the case that the agenda-setters in corporate policy discussions are highly leveraged hedge funds, with no long-term commitment to the corporations in which they invest.”

Nevertheless, when Strine had to take sides last week between an activist hedge fund and a self-interested corporate board in a showdown involving seats on the board of the oil and natural gas company SandRidge Energy, his choice was emphatic: SandRidge’s board, he ruled in a 38-page opinion, “failed to exercise its discretion in a reasonable manner” when it used the threat of a $4.3 billion “proxy put” bond buyback to try to sway shareholders against supporting an alternative slate of directors proposed by the hedge fund TPG-Axon. Strine granted a shareholder motion to enjoin SandRidge from continuing to use the maneuver (which I’ll explain in more detail below) in its campaign against the TPG slate.

As usual, Strine’s opinion is dense and fact-intensive, so I’m not suggesting that the chancellor has changed his message on short-term investors. In fact, shareholder counsel Stuart Grant of Grant & Eisenhofer told me that the SandRidge record and the opinion itself do not indicate that hedge fund backing for the alternative slate was a factor in Strine’s decision. Instead, Grant said, the chancellor’s focus was on the board’s interest in its own entrenchment. “Chancery Court bends over backward to give boards discretion as long as there’s no conflict,” he said. “If there’s a conflict, the court is going to look really, really hard at the board’s conduct.” And in this case, said Mark Lebovitch of Bernstein Litowitz Berger & Grossmann, who argued for shareholders at the March 7 injunction hearing, “the chancellor saw a board that was clearly behaving badly.” If there’s a broad message in the ruling, in other words, it’s that boards are not always in the right in Delaware, even when they’re fending off meddlesome hedge funds.

How SCOTUS wiretap ruling helps Internet privacy defendants

Alison Frankel
Mar 12, 2013 13:26 UTC

I’ve spent the last two weeks vacationing out of the country, with only intermittent access to headlines from the United States. Every time I checked in, I felt as though I’d missed another huge legal story: the U.S. Supreme Court’s ruling on materiality and securities class certification in Amgen v. Connecticut Retirement Plans; oral arguments in Argentina’s appeal in the renegade bondholder litigation; a New York state court’s long-awaited holding that insurance regulators were within their rights to approve MBIA’s $5 billion restructuring in 2009; Credit Suisse throwing in the towel on Ambac’s mortgage-backed securities claims; and the slashing of Apple’s billion-dollar patent infringement damages against Samsung. But one of the great things about legal journalism is that first-day coverage isn’t usually the end of the story, especially when it comes to judicial opinions.

Take, for example, the Supreme Court’s ruling late last month in Clapper v. Amnesty International. On its face, the decision addresses a challenge by human rights advocates and media groups to a 2008 amendment of the Foreign Intelligence Surveillance Act that makes it easier for the government to obtain approval from a special court for wiretaps on intelligence targets outside of the United States. Opponents of the amendment, who asserted that their work requires them to engage in sensitive phone and email communications with likely targets of such surveillance, claimed the law violates the First and Fourth Amendments and the separation of powers doctrine. The court, as you probably read soon after the decision was announced on Feb. 26, said that the 2nd Circuit Court of Appeals erred when it concluded the plaintiffs had standing to bring their case. In a 5-to-4 ruling, the Supreme Court held that the human rights and media groups could not show, without resorting to speculation, that they faced “certainly impending” harm from the 2008 amendment. The majority also said that the plaintiffs could not establish standing through the costs they incurred to prevent harm from the new law.

That’s good news for government spooks, of course. But as Ropes & Gray noted in a very smart client alert last week, it’s also good news for companies facing class actions based on alleged breaches of their customers’ online privacy. Defendants have shelled out tens of millions of dollars (mostly in charitable contributions and legal fees for the other side) in consumer class actions filed in the wake of data breaches or revelations of undisclosed customer tracking. The Clapper ruling should make it easier for Internet businesses to win the quick dismissal of these cases on standing grounds.

In MBS litigation, NCUA is FHFA’s Mini Me

Alison Frankel
Feb 22, 2013 23:14 UTC

The next time Congress creates a conservator for failed government-backed entities such as credit unions and mortgage finance outfits, it would sure be nice if lawmakers were specific about just how long the bailout groups have to bring litigation to recover for their members’ losses. You already know about the statute of repose question looming over the Federal Housing Finance Authority’s cases against 18 banks that sold supposedly deficient mortgage-backed securities to Fannie Mae and Freddie Mac. With the 2nd Circuit Court of Appeals now weighing UBS’s Hail Mary argument that FHFA’s suits are time-barred under the statute of repose, which was not explicitly extended in the law creating the FHFA, most of the other banks in the litigation are waiting for an appellate ruling before they buckle down and settle the conservator’s billions of dollars of claims. (The exception, as my Reuters colleague Nate Raymond was the first to report, is GE, which had relatively small exposure to FHFA and settled last month.)

You may not have been aware that the same congressional language that created a wedge for defendants in the FHFA cases has also led to tussling in a series of suits against MBS sponsors and arrangers by the National Credit Union Administration, which oversees failed credit unions. Those institutions weren’t MBS investors on the order of Fannie Mae and Freddie Mac – no one was – but NCUA’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel and Korein Tillery have quietly filed suits against more than a dozen banks that sold mortgage-backed securities to failed credit unions. NCUA touts itself as the “the first federal regulatory agency for depository institutions to recover losses from investments in faulty securities on behalf of failed financial institutions,” citing the $170 million in MBS settlements it has reached with Deutsche Bank, Citigroup and HSBC.

But there’s a little something standing in the way of additional NCUA settlements: that pesky statute of repose, which Congress didn’t explicitly address in language that extended the NCUA’s time to sue on behalf of its members. The so-called “extender statute” of the Federal Credit Union Act includes a specific extension of the statute of limitations, and the credit union authority has fared well in federal court in Kansas with arguments that Congress clearly intended the law to apply also to the statute of repose. Defendants argue otherwise – JPMorgan’s lawyers at Cravath, Swaine & Moore asserted this week in a motion to dismiss the NCUA’s case against the bank in Kansas that, among other things, the credit union overseer’s case is time-barred – but Kansas federal judges have resisted that argument.

Victim in SCOTUS generics case has powerful amici: Harkin and Waxman

Alison Frankel
Feb 21, 2013 23:12 UTC

Last week a New Hampshire woman who suffered grievous side effects when she took a generic pain reliever manufactured by Mutual Pharmaceutical filed her merits brief at the U.S. Supreme Court, in a case that will determine whether the Food and Drug Administration’s regulation of generic drugs pre-empts state-law design defect claims against manufacturers. Karen Bartlett’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figelargue that design defect claims, unlike failure-to-warn claims, do not depend on the FDA-approved labels generics are required to carry under the Hatch-Waxman Act. That fact, they contend, distinguishes Bartlett’s case (and the underlying 1st Circuit Court of Appeals ruling Mutual is challenging) from the reasoning the Supreme Court applied in its 2011 decision in Pliva v. Mensing, which held that generics are not liable for failing to warn of dangerous side effects because they are required to carry the same labels approved by the FDA for brand-name versions of their products.

Bartlett’s brief, which also urged the justices to disregard the U.S. government’s changing position on pre-emption for drugmakers, said that the Supreme Court really should consider congressional intent – as the court itself acknowledged when it ruled that FDA regulation doesn’t pre-empt state-law product liability suits against brand-name drugmakers in the 2009 case Wyeth v. Levine. Congress was certainly aware of state-court product liability litigation when it passed the Hatch-Waxman Act in 1984, just as it was previously aware of such litigation when it originally enacted the Food, Drug and Cosmetic Act establishing the FDA’s regulation of pharmaceuticals. Neither law, Bartlett’s brief said, includes a provision expressly stating that those product liability claims are pre-empted by federal regulation. Quoting from the Supreme Court’s Levine decision, the brief argues that the absence of pre-emption clauses in Hatch-Waxman and the FDCA is “powerful evidence” that Congress didn’t intend FDA regulation to pre-empt common law claims.

Here’s even more powerful evidence of Congress’s intent: a newly filed amicus brief filed by Senator Tom Harkin (D-Iowa) and Representative Henry Waxman (D-California, and, yes, the Waxman of Hatch-Waxman) in support of Bartlett. Harkin and Waxman, who are represented by Allison Zieve of the Public Citizen Litigation Group, say lawmakers’ intentions couldn’t be clearer. If Congress wanted federal regulation to preclude personal injury suits, it would have said so. It’s no accident that Congress did not, according to the brief.

Will 2nd Circuit limit on UBS liability in terror case have ripples?

Alison Frankel
Feb 20, 2013 23:04 UTC

Have you heard about the story by a reporter for the New York Daily News who says he inadvertently started a rumor that Senator Chuck Hagel, President Obama’s nominee to head the Defense Department, received speaking fees from a group called Friends of Hamas? The reporter, Dan Friedman, wrote in a piece Monday that earlier this month, he called a congressional staffer to check out reports that Hagel had received fees from controversial groups. He pressed for details on the groups, using what he considered farcical, made-up names like “Junior League of Hezbollah” and “Friends of Hamas.” The next thing Friedman knew, conservative websites published speculation that Hagel had accepted fees from Friends of Hamas, citing Capitol Hill sources. Eventually, after mainstream sites questioned the existence of the group, the story fizzled.

“Friends of Hamas” may be fictional, but according to ongoing litigation against financial institutions including Arab Bank, National Westminster Bank and Credit Lyonnais, Hamas and other terror groups had, at least, friendly customer relationships with their bankers. In cases in federal court in Brooklyn and Manhattan, victims of terrorist acts have asserted that the banks violated the Anti-Terrorism Act (ATA) by enabling groups like Hamas to finance bombings. More than a half-dozen suits involving thousands of terror victims have survived defense motions to dismiss and are headed for summary judgment rulings.

The banks believe their defenses received a boost last week from the 2nd Circuit Court of Appeals in a decision captioned Rothstein v. UBS. A three-judge appellate panel (Judges Amalya Kearse, Raymond Lohier andChristopher Droney) upheld the dismissal of an ATA case against UBS, finding that the plaintiffs hadn’t shown a proximate link between UBS’s admission of forbidden transfers of U.S. currency to Iran and acts of terror by Iran-sponsored groups like Hamas and Hezbollah. The plaintiffs had argued that because UBS was fined $100 million for breaching U.S. financial sanctions against Iran, the bank bore the burden of showing that its money transfers to Iran were not used to finance terror. The 2nd Circuit disagreed on burden shifting, holding that the language of the ATA indicates that Congress wanted terror victims to show a direct nexus between their injuries and defendants’ actions. In this case, the appeals court said, the plaintiffs couldn’t show that Iran specifically used transfers from UBS to finance terror operations by groups it backed. The ruling said the ATA does not carry a strict liability standard that would open up claims against anyone who provided money to a state sponsor of terrorism. It also held there’s no cause of action for aiding and abetting under the ATA.

Facebook IPO derivative ruling: a cure for multiforum madness?

Alison Frankel
Feb 15, 2013 00:22 UTC

Every company considering an IPO owes a hearty thanks to U.S. District Judge Robert Sweet of Manhattan for his decision Wednesday to dismiss four shareholder derivative suits against Facebook board members. Sweet’s painstaking 70-page opinion includes holdings that are great for Facebook’s defense of a parallel securities class action over its disclosures to IPO investors, but the judge also reached precedent-setting conclusions on standing and ripeness that will help other derivative defendants ward off IPO-based claims in state court. Facebook’s lead lawyers, Andrew Clubok of Kirkland & Ellis and Richard Bernstein of Willkie Farr & Gallagher, certainly deserve credit for coming up with innovative arguments to establish valuable precedent in IPO cases.

I believe Sweet’s ruling may have application beyond IPO derivative suits, though. The decision could represent a way for defendants to address the proliferation of derivative suits that are inevitably filed in multiple state courts after M&A deals are announced.

First, a refresher on the allegations and procedural background of the Facebook derivative suits. The complaints allege that under the direction of Facebook’s board, the company failed to make adequate disclosures to IPO investors about Facebook’s revenue projections and challenges in adapting to smart device usage. (If those sound an awful lot like securities class action claims, that’s because the derivative suits parallel a securities case against Facebook that is also before Judge Sweet.) Three derivative suits were filed in state courts in California. A fourth was filed in federal court in Manhattan. Defendants removed the three California cases to federal court in San Francisco. Then, before shareholders could litigate motions to remand them to state court, the Judicial Panel on Multidistrict Litigation transferred all of the derivative litigation to Sweet in Manhattan federal court.

FDA confirms: It’s considering rule change for generic labels

Alison Frankel
Feb 13, 2013 22:37 UTC

Last month, when I wrote about the Obama administration’s apparent flip-flop on the question of federal pre-emption of product liability claims against generic drugmakers, I mentioned a curious footnote in the Justice Department’s Supreme Court amicus brief in Mutual Pharmaceutical v. Barrett. All the wrangling over liability for generics, which are required by law to use the same labels as the brand-name drugs they replicate, could be unnecessary, Justice hinted. “This office has been informed that Food and Drug Administration is considering a regulatory change that would allow generic manufacturers, like brand-name manufacturers, to change their labeling in appropriate circumstances,” the brief said. “If such a regulatory change is adopted, it could eliminate pre-emption of failure-to-warn claims against generic-drug manufacturers.”

I should have given the footnote more attention. In the last couple of weeks, it has prompted speculation by a number of pharma websites about whether the FDA really intends to upend longstanding policy barring generics from altering their labels, and, if so, what that portends for their product liability exposure. On Wednesday, I emailed the FDA to ask. In an email response, an FDA representative confirmed what the Justice Department footnote suggested: “FDA is considering a regulatory change that would allow generic manufacturers, like brand-name manufacturers, to change their labeling in appropriate circumstances,” the agency said. “FDA intends to provide an opportunity for public comment with respect to any such proposed changes to its regulations.”

The FDA email, according to Kurt Karst of Hyman, Phelps & McNamara (and the FDA Law Blog), is the first confirmation of what FDA watchers have been anticipating since the U.S. Supreme Court’s 2011 ruling in Pliva v. Mensing freed generics from liability for failing to warn consumers about dangerous side effects.

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