Opinion

Alison Frankel

What remains of Libor litigation with antitrust, RICO knocked out?

Alison Frankel
Apr 1, 2013 21:10 UTC

Make no mistake: A 161-page ruling late Friday by the New York federal court judge overseeing private litigation stemming from manipulation of the benchmark London Interbank Offered Rate (Libor) has devastated investor claims that they were the victims of artificially suppressed Libor rates. U.S. District Judge Naomi Reice Buchwald of Manhattan ruled that owners of fixed and floating-rate securities do not have standing to bring antitrust claims against the banks that participated in the Libor rate-setting process, even though some of those banks have admitted to collusion in megabucks settlements with regulators. If that result, which Buchwald herself called “incongruous,” weren’t bad enough, the judge also cut off an alternative route to treble damages for supposed Libor victims when she held that federal racketeering claims of fraud by the panel banks are precluded under two different defense theories.

Buchwald’s opinion didn’t address every Libor case that’s been filed, since she only ruled on bank motions to dismiss two class actions (one by owners of Libor-pegged securities and the other by derivatives traders) and individual claims by Charles Schwab entities. She held, moreover, that some claims based on the banks’ supposed violations of the Commodity Exchange Act may go forward, although she also said she had doubts that Eurodollar contract traders would ultimately be able to tie losses to misconduct by the Libor banks. But unless and until the 2nd Circuit Court of Appeals reverses Buchwald, Libor antitrust and RICO claims in federal court seem to me to be dead.

That’s because Buchwald’s ruling is based on her interpretation of the law, not on facts. The judge said investors simply couldn’t show that any injury they received from manipulation of the Libor process was the result of anticompetitive behavior by panel banks because the rate-setting process was collaborative, not competitive. (In that process, 12 or so banks would report their own interbank borrowing rate to Thomson Reuters, which would calculate the daily mean rate to be disseminated by the British Bankers’ Association.) And though plaintiffs argued that the banks colluded to suppress Libor in order to lower the interest rates they would have to pay on securities pegged to the interbank rate, Buchwald said that the manipulation was not designed to hamper competition between the banks, which she said was a necessary element of antitrust standing.

“Even if we were to credit plaintiffs’ allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury,” she wrote. “Plaintiffs’ injury would have resulted from defendants’ misrepresentation, not from harm to competition.”

As for RICO claims (which were only asserted by Schwab and not by the classes), the judge said in a broad holding that they are barred both under the federal law precluding investors from transforming securities fraud allegations into racketeering suits and under the U.S. Supreme Court’s ruling in Morrison v. National Australia Bank that U.S. laws don’t apply outside of our borders unless Congress so specified. Buchwald rejected arguments by Schwab’s lawyers at Lieff Cabraser Heimann & Bernstein that the banks’ misrepresentations were directed at investors and that not all of them related to securities. And even if that were true, Buchwald held, the RICO case would be impermissible under Morrison, which has been read by courts in the 2nd Circuit to preclude racketeering cases in which the illegal enterprise was based overseas. In Libor, the judge said, rate-reporting decisions were made by banks all over the world, but the center of the enterprise was London, where the British Bankers’ Association is located.

Gay marriage, voters’ rights and the thorny Prop 8 standing problem

Alison Frankel
Mar 27, 2013 19:14 UTC

On Tuesday morning at the U.S. Supreme Court, Charles Cooper of Cooper and Kirk was no more than a sentence into his spiel on the sanctity of traditional marriage when Chief Justice John Roberts interrupted with the request that he first address a more prosaic issue: Do Cooper’s clients, as leading proponents of the 2008 California ballot initiative that banned same-sex marriage, even have standing to defend the initiative, known as Proposition 8, in federal court? By the time oral arguments concluded more than an hour later, it seemedlikelier than not that the court would avoid a sweeping ruling on equal protection under federal law for gays and lesbians – and that they’d do it via a finding that Cooper’s clients did not have standing to bring an appeal.

That holding, which was advocated by lawyers for the same-sex couples who sued to invalidate Prop 8, would assure gays and lesbians the right to get married in California. But it would also implicate some difficult issues that the Supreme Court has not previously addressed. What qualifies someone to act as an agent of the state for the purposes of defending a ballot initiative? If state officials choose not to defend a law passed by the voters, may private citizens who backed the initiative act on the state’s behalf? And if the law’s private proponents don’t have federal standing, does that mean state officials have the de facto ability to undo voter-passed laws they don’t support? If the Supreme Court answers these questions in its Prop 8 decision, the ruling may end up being better remembered for setting precedent on standing, stage agency and ballot initiatives than for civil rights.

To understand why, you have to know a little about the procedural history of the case. In 2009, six months after California voters passed Prop 8 and amended the state constitution to ban same-sex marriage, two same-sex couples filed a suit in federal court in San Francisco against the state officials tasked with enforcing the ban. The complaint, filed with great fanfare by Theodore Olson of Gibson, Dunn & Crutcher and David Boies of Boies, Schiller & Flexner, asserted that Prop 8 violated the Equal Protection and Due Process clauses of the 14th Amendment. The state officials named in the suit chose not to defend the law’s constitutionality, but U.S. District Judge Vaughn Walker (now retired) permitted private citizens who had championed the law to intervene as defendants. After a 12-day bench trial in 2010, Walker found Prop 8 to be unconstitutional.

Robbins Geller faces sanctions in Boeing witness controversy: Posner

Alison Frankel
Mar 26, 2013 20:47 UTC

Robbins Geller Rudman & Dowd has had more than its share of problems with recanting confidential witnesses in securities class actions, but an 18-page ruling Tuesday from the 7th Circuit Court of Appeals is the worst news yet for the plaintiffs’ firm. Judge Richard Posner, writing for a panel that also included Judges William Bauer and Diane Sykes, said the firm had ignored red flag warnings that its lone informant in a securities class action against Boeing was unreliable. No lawyer from the prolific plaintiffs’ firm took the trouble of checking out the informant’s allegations, Posner said, yet the firm didn’t hesitate to repeat his claims in an amended complaint against the aerospace company. The appeals court, not surprisingly, refused to revive the class action claiming Boeing misled investors about its Dreamliner planes, but remanded the case to U.S. District Judge Ruben Castillo to determine whether Robbins Geller should be sanctioned under Rule 11, and, if so, for how much money.

“The plaintiffs’ lawyers had made confident assurances in their complaints about a confidential source – their only barrier to dismissal of their suit – even though none of the lawyers had spoken to the source and their investigator had acknowledged that she couldn’t verify what (according to her) he had told her,” Posner wrote. “Their failure to inquire further puts one in mind of ostrich tactics – of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing.”

Ouch. But that wasn’t all. Posner also noted that Robbins Geller has been accused of “similar misconduct” in three other reported cases: Campo v. Sears Holdings, a 2010 ruling in which the 2nd Circuit said that deposition testimony from confidential informants didn’t match up with the plaintiffs’ complaint; Applestein v. Medivation, a 2012 ruling by U.S. District Judge Edward Chen of San Francisco, who held that Robbins Geller confidential informants were not reliable; and Belmont v. Suntrust, a 2012 decision in which U.S. District JudgeWilliam Duffey of Atlanta found the firm’s amended complaint to be “misleading or, at least, unsupported,” after confidential witnesses recanted allegations attributed to them. (Duffey denied a motion for Rule 11 sanctions against Robbins Geller, though he said it was “a close and reluctant call.”)

Retired NFL stars reject settlement of their own licensing class action

Alison Frankel
Mar 25, 2013 20:28 UTC

In 2009, six retired pro football stars filed a class action against the National Football League in federal court in Minneapolis, claiming that the NFL misappropriated their names and images without their consent. The class action, led by (among others) former Houston Oiler Hall of Famer Elvin Bethea and former Los Angeles Ram All Pro and television star Fred Dryer, asserted that the NFL didn’t compensate its retired players when it used clips from old games to promote the league. In September 2011, the Dryer case was consolidated with two other similar class actions. Three firms, Zimmerman Reed, Hausfeld and Bob Stein, were named interim lead counsel.

Last week the NFL and the class filed a $50 million settlement with U.S. Senior District Judge Paul Magnuson. Two days later, Dryer, Bethea and the other four retired players who filed the original suit – and who are still the first six name plaintiffs in the case - objected to the settlement, arguing that it delivers no cash directly to class members and, as such, should be treated with the judicial skepticism that has lately greeted settlements involving no money for class members and millions for their lawyers. That argument may be familiar, but the circumstances of this objection are anything but. How often do you see six original name plaintiffs repudiate the settlement of their case? Aside from the widespread retailer discontent with the recent Visa and MasterCard interchange fee settlement, I can’t think of an example. Nor can I remember a case in which plaintiffs’ lawyers fought so nastily over settlement terms that the court had to appoint a lawyer outside of the lead counsel triumvirate to negotiate on behalf of the class. What a mess for Judge Magnuson to clean up.

Court-ordered settlement talks began before U.S. Magistrate Arthur Boylan last summer, after the class filed an amended complaint (adding more retired players as plaintiffs) and discovery got under way. But it turns out that a deep schism had developed between some of the players and their counsel Michael Hausfeld. (Hausfeld was actually the second lawyer for Dryer, Bethea and their fellow original name plaintiffs, who began the case with counsel from Charles Zimmerman of Zimmerman Reed.) Last November, former journeyman quarterback Dan Pastorini filed a notice in the Minnesota class action, informing the court that he had sued Hausfeld and his eponymous firm for malpractice in state court in Harris County, Texas. Pastorini said that he and many of Hausfeld’s other clients “do not support the present actions of defendants to attempt to settle their own class action case in a way that lines the pockets of defendants with legal fees, creates nonsensical entities orchestrated by defendants to obtain still more additional side benefits to them, but does nothing to effectively further the interest of plaintiff and the class members that he represents.”

Downside of business development: accusations of facilitating cartel

Alison Frankel
Mar 22, 2013 19:57 UTC

Alan Kaplinsky of Ballard Spahr had a good thing going at the turn of the century. Along with a couple of partners at the firm now known as Wilmer Cutler Pickering HaleandDorr, Kaplinsky was the leading lawyer for credit card issuers considering the addition of mandatory arbitration clauses to their agreements with cardholders. Between 1999 and 2003, Kaplinsky and three Wilmer partners, Ronald GreeneChristopher Lipsett and Eric Mogilnicki, led a series of meetings with in-house lawyers for the credit card companies, virtually all of which subsequently hired Wilmer or Ballard Spahr to help them implement new cardholder agreements that mandated arbitration and foreclosed class actions.

Good business strategy or antitrust facilitation? Those long-ago meetings led by Wilmer and Ballard Spahr are now at the heart of cardholders’ claims of an illegal antitrust cartel among the credit card companies in a case that’s headed for a ruling by U.S. District Judge William Pauley of Manhattan. The long-running class action seeks an injunction forcing credit card issuers to remove mandatory arbitration clauses from cardholder agreements. Several companies have already settled, but American Express, Citigroup and Discover went to trial in January. This week, cardholders represented by Berger & Montague and Scott + Scott filed a post-trial finding of facts that portrays Ballard Spahr and Wilmer as advisors to credit card conspirators dedicated to depriving consumers of their class action rights. “The business interests of the issuing banks and their outside counsel, Lipsett, Mogilnicki and Kaplinsky, dovetailed comfortably,” the cardholder brief said. “The issuing banks desired to insulate themselves from potential class action liability, relying on (arbitration) clauses, and these outside counsel were engaged in the business of drafting (such) clauses for consumer credit businesses.”

“Wilmer and Ballard Spahr were clearly involved,” said lead class counsel Merrill Davidoff of Berger & Montague. “They were outside counsel to virtually all of the participants.”

2nd Circuit squelches Title VII exception to mandatory arbitration

Alison Frankel
Mar 21, 2013 21:03 UTC

The 2nd Circuit Court of Appeals has been known on occasion to buck the judicial trend of deference to arbitration and champion plaintiffs’ rights to class action litigation. But not if the only justification for classwide litigation is a phantom statutory right. In a notably short and emphatic decision issued Thursday in a closely watched sex discrimination case against Goldman Sachs, a three-judge appellate panel reversed a lower-court ruling that former Goldman managing director Lisa Parisi may pursue a class action despite the mandatory arbitration clause in her employment contract. The appeals court agreed with just about every argument by Goldman’s lawyers at Sullivan & Cromwell, ruling that the bank’s arbitration clause does not preclude Parisi’s statutory rights under Title VII of the Civil Rights Act because she has no private cause of action to claim that her employer engaged in a pattern or practice of discrimination.

A contrary ruling by the 2nd Circuit would have punched a huge hole in employment agreements mandating individual arbitration. Instead, the appeals court acknowledged that employers can curtail class actions against them, even when they’re accused of violating employees’ civil rights.

The 2nd Circuit panel (Judges Barrington ParkerReena Raggi and Gerard Lynch) said that U.S. Magistrate Judge James Francis and U.S. District Judge Leonard Sand erred when they found that Parisi could not vindicate her Title VII rights without classwide litigation. Parisi’s trial lawyers at Outten & Golden had persuaded the lower courts that she could only prove Goldman’s supposed pattern or practice of discrimination – and thus assure her statutory civil rights – through a class action, because her employment agreement prohibited classwide arbitration. But the 2nd Circuit sided with Goldman. As an initial matter, the opinion said, the Civil Rights Act of 1991 contains specific language endorsing arbitration as a vehicle for resolving discrimination claims, and courts have “consistently found” that civil rights claims can be subject to arbitration. Moreover, the court said, the pattern-or-practice method of proof is intended to enable the government to enforce Title VII on behalf of employees, not to give private plaintiffs a freestanding cause of action. And since Parisi has no statutory right to pursue a pattern-or-practice class action, the 2nd Circuit held, she cannot rely on that right to invalidate the mandatory arbitration clause in her employment contract.

The billion-dollar cloud lingering over GM’s bankruptcy

Alison Frankel
Mar 20, 2013 20:56 UTC

More than two years after General Motors received court approval for a plan to issue its old creditors stock in its shiny new self, a dispute among those creditors threatens to saddle the new company with almost $1 billion in liability. In a statement filed this week before U.S. Bankruptcy Judge Robert Gerber of Manhattan, the new company and warring creditor factions disclosed that mediation has failed to produce a settlement of creditor allegations that one group of noteholders extracted preferential treatment from the company as it teetered on the verge of Chapter 11 in 2009. The failure of mediation means that Gerber will be left to reach a ruling based on testimony he heard last fall in an adversary proceeding initiated by the trustee for GM’s unsecured creditors.

Depending on what the judge makes of the trustee’s allegations that four distressed debt hedge funds – Elliot, Appaloosa, Aurelius and Fortress – forced old GM to accede to what amounts to a $367 million fraudulent conveyance, there’s even an outside chance that GM’s entire 2009 asset sale could be voided. That’s a very remote prospect, but the mere possibility shows the risk to new GM in this little-noticed case.

The backstory on the hedge funds and their deal with old GM is incredibly complicated, but I’ll boil it down. According to the trustee’s complaint, filed in March 2012, distressed debt investors began snatching up notes issued by a GM subsidiary called Nova Scotia Financing Company in late 2008 and early 2009, when GM seemed to be well on its way to Chapter 11. Nova Scotia’s only real assets were two intercompany loans to GM Canada, which was operating in the same straits as its parent company. GM did not want GM Canada to go into bankruptcy, presumably because it didn’t want to deal with bankruptcy proceedings in two different countries at the same time. So the hedge funds that held Nova Scotia notes knew GM was desperate to resolve their potential claims against GM Canada.

SCOTUS to class action bar: You can’t stipulate out of federal court

Alison Frankel
Mar 20, 2013 20:54 UTC

The U.S. Supreme Court’s unanimous seven-page ruling Tuesday in Standard Fire v. Knowles proves that sometimes the best way to get through a thorny briar patch is with a machete. The court cut through incredibly complex jurisdictional arguments and what-if scenarios to reach the essential intent of the Class Action Fairness Act, a law passed in 2005 to assure that big-money class actions are litigated in federal court. And according to the Supreme Court’s decision, name plaintiffs and their lawyers cannot evade federal court jurisdiction by simply stipulating that their damages fall beneath CAFA’s $5 million threshold.

The ruling, written by Justice Stephen Breyer, should put an end to a tactic by which class action lawyers have managed to keep their cases in plaintiff-friendly state courts, according to Theodore Boutrous of Gibson, Dunn & Crutcher, who argued for the insurer Standard Fire. (Boutrous actually used the word “abuses” rather than tactics but I’ll give plaintiffs’ lawyers the benefit of the doubt.) You probably remember the backstory: After CAFA was enacted, enterprising class action lawyers in places like Miller County, Arkansas, figured out that if name plaintiffs stipulated to classwide damages of less than $5 million (and also avoided CAFA’s other jurisdictional criteria), they could have cases remanded to state court after defendants removed them to federal court under CAFA. Class action defendants groused that once the cases were back in state court they were often forced to settle for more than $5 million simply to avoid the risk of class litigation before state court judges, but the 8th Circuit Court of Appeals was unsympathetic to their purported plight.

The Supreme Court’s 2011 ruling in Smith v. Bayer gave Standard Fire a wedge, however. Last summer, after the 8th Circuit refused to hear its interlocutory appeal of the remand of Knowles’s class action to state court, the insurer went to the justices with a petition for certiorari, arguing that Smith v. Bayer precluded name plaintiffs from stipulating damages on behalf of absent class members. The justices were apparently so intrigued by the question (or disturbed by Standard Fire’s description of events in Miller County) that the court made an extraordinary grant of certiorari before conferencing on the case.

In Federal Home Loan Bank suit, S&P feels first ripples of DOJ case

Alison Frankel
Mar 19, 2013 00:41 UTC

Last week my Reuters colleagues Luciana Lopez, Peter Rudegeair and Matt Goldstein published a piece contending that the JusticeDepartment’s fraud suit against the credit-rating agency Standard & Poor’s may turn out to be a bust. Despite purportedly damning internal S&P emails quoted in the Justice Department complaint, a dozen securities lawyers told Reuters that the government would be hard-pressed to show that S&P deliberately skewed ratings to retain market share or that the presumably sophisticated credit unions and other financial institutions that relied on S&P’s ratings were actually gulled into investment decisions. Said one structured finance consultant: “It is a crappy case.”

I’m not so sure S&P can hold out for long enough to obtain a ruling on the merits of the government’s complaint; few companies can withstand the withering effect of defending against Justice Department allegations. And in the meantime, S&P faces collateral damage in various private cases raising allegations that the credit-rating agency misled investors about mortgage-backed securities. Last week, in what seems to be the first fallout from the Justice Department suit in a private case, a Pennsylvania state court judge ordered S&P to turn over millions of pages of documents it produced to the government to the Federal Home Loan Bank of Pittsburgh, which is suing the credit-rating agency for fraud stemming from its losses in mortgage-backed securities.

Judge Stanton Wettick of the Allegheny County Court of Common Pleas had previously denied an FHLB motion for documents S&P turned over to the government, but he said that the Justice Department complaint, which raised allegations similar to the FHLB’s claims, made S&P’s production to the FHLB of the documents it gave to the government “very relevant to this litigation.” Wettick rejected arguments by S&P’s lawyers at Cahill Gordon & Reindel that materials from the government’s broad investigation of the rating agency’s CDO practices were not related to the FHLB’s lone remaining MBS fraud claim, as well as arguments that the rating agency has spent a lot of time and money tailoring the production of 500,000 documents to the FHLB in the four years since the home loan bank filed suit. S&P said it would be “inappropriate” at this late stage of the litigation to throw another 20 million pages of discovery into the FHLB case.

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.

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