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.
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.
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?
There is little doubt that the judges on Delaware’s Chancery Court believe they are unrivalled in the business of overseeing corporate litigation. Their challenge in recent years has been to persuade plaintiffs’ lawyers – who, after all, decide where to file their cases – of Delaware’s primacy. Chancery’s waxing and waning share of the booming market in shareholder M&A and derivative suits is an issue that gets considerable attention at securities conferences, and Chancellor Leo Strine in particular has been so unabashed an advocate for his court that New York State Supreme Court Justice Shirley Kornreich recently complained to my Reuters colleague Tom Hals about Delaware’s proprietary attitude.
Amid the fusillade of securities suits against the banks that sponsored and underwrote mortgage-backed notes, there have been a couple of reasons to pay particular attention to the Franco-Belgian bank Dexia’s case against JPMorgan Chase and its predecessors Bear Stearns and WaMu Mortgage. For starters, it was a big case: $1.6 billion in MBS and supposed damages of about $800 million. Moreover, Dexia’s lawyers at Bernstein Litowitz Berger & Grossmann had piled allegations into an amended complaint so apparently damning that it was the basis of a splashy story in The New York Times. And finally, the case was shaping up as a bellwether for MBS claims by individual investors. The litigation was on the rocket docket of U.S. Senior District Judge Jed Rakoff of Manhattan, who denied the bank’s motion to dismiss last September and talked in a recent hearing about a July trial date on Dexia’s claims. Given the resounding victory Rakoff delivered in February to the bond insurer Assured Guaranty in Assured’s MBS case against Flagstar Bank, the Dexia case seemed like it could be a perfect storm for defendants: a strong plaintiffs’ firm trying a high-profile case before a judge with demonstrated skepticism for bank defenses.
There may be no more glaring example of the shifting terrain for securities litigation than the case against the Royal Bank of Scotland. Back in January 2011, RBS was one of the early beneficiaries of the U.S. Supreme Court’s bar on shareholder suits against foreign defendants. U.S. District Judge Deborah Batts of Manhattan dismissed most of a class action claiming that the bank misled investors about its subprime exposure and the success of its ABN Amro deal. The judge tossed the few remaining claims last September, erasing any chance that RBS would be held liable to shareholders in U.S. courts. The American plaintiffs’ firms that sued RBS and the U.S. pension fund clients that vied to lead the litigation were plumb out of options.
Last week, after the U.S. Supreme Court issued its deeply divided 5-to-4 ruling in Comcast v. Behrend, the antitrust class action bar breathed a sigh of relief. Lawyers had been worried the court would rule broadly that in order to be certified, classes must show that they are “susceptible to awarding damages on a classwide basis,” which was the question the Supreme Court had asked Comcast counsel to address. The majority, in an opinion written by Justice Antonin Scalia, seemed to answer the somewhat different question of whether trial and appellate courts may delve into the merits of the plaintiffs’ damages theory before certifying the class. Antitrust plaintiffs’ lawyers told my Reuters colleague Andrew Longstreth that the Comcast decision would have little impact on class certification because they could tailor damages allegations to match their theories of liability.
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.
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.
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.