Alison Frankel

Wal-Mart case in Delaware: How much discovery can shareholders get?

Alison Frankel
Jul 11, 2014 20:56 UTC

Shareholder lawyer Stuart Grant of Grant & Eisenhofer told me Friday that he was feeling pretty good about his oral argument at the Delaware Supreme Court the previous day, in a case that will determine how much discovery plaintiffs are permitted when they sue to see corporate books and records.

Grant said his opponent, Wal-Mart counsel Mark Perry of Gibson, Dunn & Crutcher, gave so smooth and polished a presentation that the state justices might easily have glided along with what, according to Grant, was Perry’s “radical rewriting” of Delaware law. Instead, Grant said, “the court was not buying into Wal-Mart’s extreme theory.”

Wal-Mart, you will not be surprised to hear, had a different view of the argument: “We think it went very well,” Perry told me Friday. “We presented strong arguments and look forward to the court’s decision.”
Both sides agree on one thing: If the Delaware Supreme Court affirms then-Chancellor Leo Strine’s 2013 discovery order in IBEW v. Wal-Mart, it’s great news for shareholders and a big reason for Delaware corporations to worry. (Strine, who is now Chief Justice of the Delaware Supreme Court, was recused from hearing Thursday’s argument.)

One of the crucial advantages for corporations defending their conduct in shareholder suits is that investors can’t find out very much about internal decision-making until they’ve gotten past defense dismissal motions. Wal-Mart claims that if it loses at the Delaware Supreme Court, plaintiffs will be licensed to go on deep-sea-fishing expeditions for corporate documents before they even file a breach-of-duty complaint.

That’s because the Wal-Mart case involves a discovery demand from shareholders who haven’t yet filed a derivative suit accusing the company’s directors of breaching their duties. Lawsuits seeking corporate books and records are based on a 1967 Delaware statute that gives shareholders a right of access to certain corporate documents for certain purposes. The dispute at the Delaware Supreme Court Thursday centered on the scope of the materials shareholders should be permitted to see and what purposes investors may pursue through books-and-records suits.

Motorola to 7th Circuit: Make Judge Posner follow the rules

Alison Frankel
Jul 10, 2014 22:23 UTC

I didn’t think Motorola’s antitrust appeal at the 7th U.S. Court of Appeals could get any stranger. This, after all, is the billion-dollar case that prompted a bizarre showdown over international antitrust policy between the U.S. solicitor general and a three-judge appellate panel led by Richard Posner.

Earlier this month, the panel backed down and vacated a highly controversial ruling that had effectively erased U.S. antitrust liability for foreign price-fixing cartels that sell component parts to foreign subsidiaries of U.S. companies. Posner and the other judges ordered Motorola and the liquid crystal display screen manufacturers it has accused of price-fixing to submit new briefs on the merits of their arguments, and I thought the case would return to something resembling normalcy.

Boy, was I wrong.

Motorola submitted a brief yesterday, meeting the incredibly tight deadline the Posner panel set. But instead of laying out for the panel the reasons why precedent and policy favor Motorola’s right to sue the alleged LCD cartel, Motorola’s lawyers at Goldstein & Russell asked the entire 7th Circuit to take the case en banc – not to hear the merits, but to reverse the “terrible judicial policy” that has divided the 7th Circuit from every other federal appeals court.

The last, best chance for besieged bank defendants

Alison Frankel
Jul 10, 2014 20:51 UTC

Goldman Sachs has a little more than two months for a miracle to happen.

Otherwise, on Sept. 29, the bank will go to trial in federal court in Manhattan against the Federal Housing Finance Agency to defend claims that Goldman deceived Fannie Mae and Freddie Mac about the quality of the mortgage-backed securities it was peddling before the financial crash.

For defendants in the FHFA litigation, trying to explain to jurors — and to a deeply skeptical judge — that you’re not responsible for woefully deficient securities is so unappealing a prospect that 15 other big banks have coughed up a collective $15 billion to Fannie and Freddie’s conservator. Only Goldman and three other banks have stuck out three years of lopsided litigation in which U.S. District Judge Denise Cote has consistently ruled against them on matters large and small.

These four holdouts have only one possible advantage over the defendants that have already capitulated: the U.S. Supreme Court’s ruling last month in an environmental case called CTS Corporation v. Waldburger.

Is this the inside info that triggered Goldman’s MBS ‘big short’?

Alison Frankel
Jul 9, 2014 22:12 UTC

It is an axiom of the financial crisis that Goldman Sachs realized before any of the other big banks that the mortgage-backed securities market was going to implode in 2007. Goldman dumped MBS and shorted the market, turning a profit in its mortgage department when every other major financial institution suffered record losses.

So what tipped Goldman to start off-loading its MBS exposure at the end of 2006? In a new brief in its securities fraud case against the bank, the Federal Housing Finance Agency has an intriguing theory.

According to the conservator for Fannie Mae and Freddie Mac, Goldman received a report on December 10, 2006 from the CEO of Senderra, a subprime mortgage lender partially owned by Goldman. Goldman had taken a stake in Senderra — a relatively small mortgage originator — to stay informed about the state of the mortgage market, according to FHFA.

Early test of Delaware ‘loser pays’ bylaws looms in Biolase dispute

Alison Frankel
Jul 8, 2014 21:19 UTC

(Reuters) – On Monday, a Delaware shareholder firm issued a press release urging shareholders of the dental laser company Biolase to get in touch if they’re concerned about allegations that board members leaked corporate financials, among other supposed shenanigans. You know what that means: Class action firms are circling the beleaguered company, looking for a reason to file a shareholder derivative suit accusing Biolase’s board of breaching its duties.

Meanwhile, Biolase’s former chairman and CEO — ousted in June after months of fighting in Delaware courts to keep his job — has sent a demand for books and records to the company’s board. Deposed CEO Federico Pignatelli claims that his fellow Biolase directors are working for their own interests, not for shareholders. Represented by Baker Marquart, he’s spoiling to keep litigating against the directors who tossed him out.

That’s a risky proposition for Pignatelli and for Delaware shareholders. At the same June 26 meeting at which the board got rid of Pignatelli, Biolase became one of the first public companies in Delaware to adopt a “loser pays’ fee-shifting bylaw.

Health benefits for retired public workers: the next muni bond crisis?

Alison Frankel
Jul 7, 2014 21:25 UTC

The Illinois Supreme Court set off some pre-holiday fireworks ruling Thursday that the state constitution protects health benefits for retired public workers — even though the constitution’s so-called pension protection provision does not specifically mention healthcare coverage.

The state high court said that subsidized healthcare is one of the benefits of membership in the state’s public pension systems so it falls within the broad ambit of the clause, which bars impairment of state employees’ pension and retirement benefits.

The ruling in Kanerva v. Weems aligns Illinois with Hawaii and Alaska, the two other states that have construed constitutional protection for public pensions to encompass healthcare benefits. Other states, most notably New York, have held that similarly phrased clauses shielding state workers’ pensions do not prohibit states from shifting healthcare costs onto retirees.

When MDL judges go rogue

Alison Frankel
Jul 3, 2014 19:18 UTC

Five years ago, the Judicial Panel on Multidistrict Litigation assigned Michael McCuskey, then chief judge of the federal district court in Urbana, Illinois, to oversee consolidated class action claims that the roofing company IKO Manufacturing misled customers about the quality of certain organic asphalt shingles. McCuskey accepted the assignment in December 2009, but just four months later, he informed lawyers for IKO and the purchasers that he was swamped with other cases. Before he’d done much of anything in the shingle litigation, McCuskey turned the case over to the only other judge in the courthouse, Harold Baker.

Neither judge, nor any of the lawyers in the shingle litigation, went to the trouble of informing the MDL panel about the reassignment, even though the MDL panel has exclusive authority to appoint the judges who preside over big consolidated cases. The MDL judges continued to send tag-along suits against IKO to McCuskey, presumably unaware that all he did was pass them in turn to Baker. Only in February 2014, four years after the unauthorized transfer and a couple of months before McCuskey retired from the federal bench, did the MDL panel formally order that the shingle litigation be transferred to Baker.

By then, as the 7th U.S. Circuit Court of Appeals explained in an unusual opinion Wednesday, Judge Baker had already denied class certification to shingle purchasers. According to the 7th Circuit, that ruling — and every other decision Baker made in the IKO shingle case before the MDL panel’s transfer order in February 2014 — exceeded the scope of Baker’s authority under the rules of procedure for multidistrict litigation. Because the MDL panel had assigned the case specifically to McCuskey, wrote Judge Frank Easterbrook for an appellate panel that also included Chief Judge Diane Wood and Judge Michael Kanne, McCuskey’s unauthorized decision to shift the MDL from his docket to Baker’s was “a foul-up in the process.”

Judge Posner backs down (for now) in antitrust policy duel with U.S.

Alison Frankel
Jul 2, 2014 19:50 UTC

It’s not often that Judge Richard Posner of the 7th U.S. Circuit Court of Appeals concedes that he might have been wrong. (Just ask U.S. Supreme Court Justice Antonin Scalia and his “Reading Law” co-author Bryan Garner, who have been engaged in a back-and-forth war of words with Posner since he first harshly criticized their research back in August 2012.)

But it’s also not often that a federal appellate panel suggests that it has a deeper understanding of U.S. foreign economic policy concerns than the Justice Department.

On Tuesday, Posner and two other 7th Circuit judges agreed to reconsider their March 27 decision in Motorola’s antitrust suit against international liquid crystal display screen makers. That’s a relief to both Motorola and the U.S. government; the panel’s opinion, written by Posner, had effectively erased U.S. liability for foreign price-fixing cartels that sell component parts to foreign subsidiaries of U.S. companies — even if the subsidiaries’ purchasing decisions were dictated by the U.S. headquarters and even if the cartel’s products ended up being sold to U.S. consumers.

SCOTUS Libor case, by itself, won’t revive antitrust claims

Alison Frankel
Jul 1, 2014 19:14 UTC

Don’t get too excited about the news Monday that the U.S. Supreme Court has agreed to hear the appeal of bond investors whose antitrust claims against the global banks involved in the Libor-setting process were tossed last year.

Untold billions of dollars are at stake in the Libor litigation, in which investors in all sorts of securities pegged to the London Interbank Offered Rate claim that the banks conspired to manipulate the interest rate benchmark. There are now about 60 cases consolidated in the Libor multidistrict litigation before U.S. District Judge Naomi Reice Buchwald in Manhattan, asserting a potpourri of state and federal securities, racketeering and fraud claims as well as violations of federal antitrust laws. Last year, Judge Buchwald gave the bank defendants an almost priceless gift when she concluded that U.S. antitrust laws don’t cover the sort of rate-rigging alleged in the Libor scandal because the banks’ conduct wasn’t anticompetitive. Buchwald has permitted other pieces of the litigation to move forward, most recently refusing to dismiss classwide unjust enrichment claims in an 80-page decision last week, but has refused to re-instate the big-money antitrust allegations, which offer the prospect of treble damages.

The 2nd U.S. Circuit Court of Appeals has been no help to Libor antitrust claimants either. Although Judge Buchwald entered judgment so class action lawyers could appeal her antitrust holding, the 2nd Circuit refused to take the case, holding in an unpublished order in October 2013 that it did not have jurisdiction over the appeal because Buchwald had not yet disposed of all claims in the consolidated Libor litigation.

New York’s (stalled) grab for jurisdiction over foreign businesses

Alison Frankel
Jun 30, 2014 21:45 UTC

Should New York courts have the right to hear cases against international businesses with any operations in the state? That’s what the state’s top administrative judge asked for — and very nearly got — from the state legislature. The proposed changes to state laws died on June 20, the last day the state senate was in session. But according to the chair of the New York courts’ advisory committee on civil procedure, the law to reclaim jurisdiction over foreign corporations will probably be revived when the legislature returns to session, possibly as soon as this fall.

New York’s contemplated law is a direct response to last January’s decision by the U.S. Supreme Court in Daimler v. Bauman. The Daimler opinion, written by Justice Ruth Bader Ginsburg for a unanimous court, restricted jurisdiction over foreign businesses to the states in which those business are “at home.” Jurisdiction isn’t justified just because a corporation has substantial operations in a particular state, the court held. Instead, it said, a state must be the site of incorporation or the base of the business’s U.S. operations in order to claim jurisdiction.

The 2nd U.S. Circuit Court of Appeals has since cited Daimler in at least two decisions tossing claims for lack of jurisdiction, according to a June 18 client alert by the law firm Akerman, so it’s no wonder that New York’s courts regarded the ruling as a threat to their turf. Jurisdiction always seems like a wonky topic, but it matters a lot to both courts and corporations. Courts, of course, have a strong institutional interest in protecting their power, since they only exist to hear cases. Businesses, meanwhile, want to control where they can be sued; that’s why, for instance, Delaware-incorporated businesses are rushing to enact provisions that require their shareholders to litigate in Chancery Court.