Opinion

Alison Frankel

In new amicus brief, SEC wants to protect whistleblowers – and itself

Alison Frankel
Feb 21, 2014 19:30 UTC

In 2012 and 2013, when the 5th Circuit Court of Appeals was considering the question of whether Dodd-Frank’s anti-retaliation provisions protect whistleblowers who report their concerns internally, rather than to the Securities and Exchange Commission, the SEC stayed out of the fray. The case, Khaled Asadi v. G.E. Energy, centered on the tension between two sections of Dodd-Frank, one of which seemed to define whistleblowers only as those who tip the SEC about potential misconduct by their employers. In its Dodd-Frank implementation process, the SEC attempted to resolve the tension, issuing rules to clarify that whistleblowers are protected from retaliation regardless of whether they report concerns to the agency or up the chain of command through internal compliance programs, as the older Sarbanes-Oxley Act had encouraged. The SEC’s rules have convinced most of the federal trial judges who have considered the scope of Dodd-Frank whistleblower protections; courts have typically cited the deference due to the agency’s interpretation of a law it is responsible for enforcing.

Not the 5th Circuit, however. Last July, the appeals court dismissed Asadi’s retaliation suit against G.E., holding that he is not a Dodd-Frank whistleblower because he first informed his boss, and not the SEC, about possible Foreign Corrupt Practices Act violations in G.E. Energy’s dealings with Iraqi officials. The 5th Circuit said it didn’t need to reach the SEC’s interpretation because the statutory language of Dodd-Frank is unambiguous: Whistleblowers are defined as those who report suspicions to the SEC.

The same issue of the scope of protection for whistleblowers who have reported internally is now before the 2nd Circuit, in a Dodd-Frank retaliation case brought by Meng-Lin Liu, a former Taiwanese compliance officer for a Chinese subsidiary of Siemens. And this time, the SEC isn’t taking any chances that the appeals court will ignore the agency’s prerogatives. On Thursday, the SEC filed an amicus brief explaining its position – and explaining why the courts owe deference to the agency’s statutory interpretation.

It’s certainly no surprise that the SEC argues whistleblowers are permitted to bring Dodd-Frank retaliation claims regardless of whether they reported internally or to the commission. That has been the SEC’s position since Dodd-Frank rulemaking began. In the amicus brief, as it has before, the agency contends that it was anxious to preserve the viability of internal compliance programs companies that adopted after Sarbanes-Oxley was enacted in 2002. Those internal controls are an essential component of securities enforcement, the SEC brief said, so its final Dodd-Frank rules “were carefully calibrated to (provide) ‘strong incentives’ for individuals in appropriate circumstances to report internally in the first instance.”

I’ll skip the nitty-gritty details of the regulatory language by which the SEC attempted to clarify the scope of Dodd-Frank whistleblower protection, since the commission’s intentions are perfectly clear. But the big question for the 2nd Circuit, after the 5th Circuit ruling in the Asadi case, is whether courts must defer to the SEC’s interpretation. That requires a two-step analysis: Was the statute ambiguous and did the SEC adopt a reasonable interpretation of the law? The 5th Circuit stopped at the first question because it found the statute unambiguous. So the SEC’s amicus brief devotes several pages to demonstrating the confusion in the statutory language. Part of its argument, in fact, is the “bizarre consequences” of the 5th Circuit’s holding to the contrary. It simply cannot be, the brief said, that Congress meant to add anti-retaliation protection for whistleblowers who report both internally and to the SEC while leaving those who report only internally without any cause of action if they’re fired.

Aereo’s future rests on Copyright Act’s definition of ‘public’

Alison Frankel
Feb 20, 2014 23:38 UTC

A ruling Wednesday by a federal judge in Salt Lake City, prohibiting the television streaming service Aereo from transmitting intercepted broadcasts from its antennas in Utah to subscribers’ Internet devices, lays out precisely the question that the U.S. Supreme Court will confront in April in a separate challenge to Aereo’s business model. Are Aereo and similar services content hijackers taking advantage of the hard work of those who produce and transmit television shows? Or are they mere facilitators, providing the technical means for individual viewers to watch private transmissions of TV shows? The answer to that question will lie in how the Supreme Court interprets a single clause of the Copyright Act, in a case that will test Congress’s ability to write laws that anticipate technological change.

In 1976, when lawmakers updated the Copyright Act of 1909, they closed a loophole that had opened with the advent of cable television. In a couple of rulings preceding the amendment, the Supreme Court found that community television antenna systems, as cable networks were then known, did not infringe broadcasters’ copyrights when they set up antennas to intercept transmissions of television shows and then relayed broadcasters’ shows to paying customers. The 1976 version of the Copyright Act made that practice illegal through a provision known as the Transmit Clause, which said that it’s a breach of copyright “to transmit or otherwise communicate a performance or display of the work…to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”

When the law was passed, Congress obviously had no idea what the television industry would look like 40 years later, since the Internet in 1976 was just a rudimentary network of mainframe computers. But the Transmit Clause seemed to foresee changes in technology with the phrase “by means of any device or process.” In 1976, those devices were antennas erected by cable networks, which realized after the new law was enacted that they had no choice but to agree to license TV content from copyright owners. Now it’s possible, of course, to stream shows almost instantaneously through teensy antennas to Internet devices, but according to broadcasters and copyright holders, the technological advances of the last 40 years haven’t undercut the power of the Transmit Clause. They argue that Congress specifically left room in the provision to expand copyright protection to cover infringing transmissions via devices and processes unknown at the time.

In new SCOTUS bid, Argentina hedges bet on sovereign immunity

Alison Frankel
Feb 19, 2014 21:34 UTC

On Tuesday, the Republic of Argentina asked the justices of the U.S. Supreme Court to grant review of a pair of rulings by the 2nd Circuit Court of Appeals that, according to Argentina’s brief, have put millions of Argentineans on the brink of economic catastrophe. The 2nd Circuit decisions, as you may recall, held that under the pari passu, or equal footing, clauses of defaulted Argentine bonds, Argentina may not make payments to bondholders who participated in two rounds of restructuring before it pays more than $1 billion to holdout distressed debt investors that refused to exchange their defaulted bonds. In the cert petition, Argentina’s new Supreme Court counsel, Paul Clement of Bancroft, reprises arguments that failed to sway U.S. District Judge Thomas Griesa and the 2nd Circuit when Cleary Gottlieb Steen & Hamilton previously asserted them. But Argentina is counting on the Supreme Court’s proven interest in the boundaries of sovereign immunity, and, if that doesn’t do the trick, in the court’s federalism concerns.

In fact, the cert petition presents federalism as the first issue for the justices, asserting an extremely unusual request for the U.S. Supreme Court to refer a question to a state high court. The 2nd Circuit, you’ll recall, agreed to block Argentina’s payments to exchange bondholders based on the appellate court’s interpretation of the pari passu provisions in the country’s sovereign debt offerings. Argentina contends not only that the federal appeals court reached the wrong conclusions, but that it exceeded its authority when it did. The interpretation of the pari passu provision is of surpassing interest to New York because it will impact the state’s status as a financial center, the brief said. And no New York state court has issued a decision on the meaning of an equal footing clause in a sovereign debt contract.

So according to Argentina, the justices should certify to the New York Court of Appeals the question of whether a foreign sovereign breaches pari passu provisions when it pays interest to holders of performing debt before paying holders of defaulted bonds. As precedent for this unusual maneuver, the brief cites the justices’ 2013 referral in the abortion pill case Cline v. Oklahoma Coalition for Reproductive Justice, but in that case, the U.S. court was asking Oklahoma justices to clarify a recently passed state law, not to interpret a contract provision.

The perils of suing for libel, Greek-magnate-and-Iran edition

Alison Frankel
Feb 18, 2014 21:19 UTC

During settlement talks in Abu Dhabi last month, lawyers for the Greek shipping tycoon Victor Restis once again extended an offer to United Against Nuclear Iran, a non-profit headed by former U.S. diplomat (and Miami lawyer) Mark Wallace. UANI has denounced Restis for violating international sanctions against Iran and facilitating Iran’s development of nuclear weapons by secretly exporting Iranian oil in his company’s tankers. To settle the litigation over UANI’s accusations, the Restis entities offered to pay UANI $400,000 and to appoint Wallace to the board of the Restis tanker management company, Golden Energy Management.

There’s nothing unusual about attempting to settle a case involving explosive allegations, of course. But here’s the twist: Restis and his company Enterprise Shipping and Trading are actually plaintiffs in the case, a defamation suit Restis’s lawyers filed in federal court in Manhattan. UANI and Wallace are defendants (along with others). Restis, in other words, was willing to put up nearly a half-million bucks and to admit a sworn enemy into his business in order to settle a claim he initiated. That’s not a typical course for high-stakes litigation.

The two sides, as you might imagine, offer quite different accounts of why Restis has been offering to settle this suit since soon after he filed it last July. According to the transcript of a hearing Friday before U.S. District Judge Edgardo Ramos, Restis’s goal is a public announcement from UANI that he isn’t violating anti-Iran sanctions or doing business with the country. His lawyer Michael Bhargava, who took the Restis litigation with him when he moved Monday from Manatt, Phelps & Phillips to Chadbourne & Parke, told Ramos that Restis was forced to sue UANI because the non-profit’s devastating allegations were hurting the shipping company’s business. All that the Restis entities really want from the suit, he said, is a withdrawal of UANI’s accusations, which they believe to be based on “fraudulent and facially unreliable” documents.

New ruling puts Bank Hapoalim in hot seat in terror finance case

Alison Frankel
Feb 14, 2014 20:24 UTC

Israel’s Bank Hapoalim is going to have to do some explaining about 16 wire transfers that originated at Hapoalim branches in Israel and ended with $266,000 in the Bank of China accounts of the alleged leader of a group called the Palestinian Islamic Jihad. On Thursday, U.S. District Judge Shira Scheindlin of Manhattan ruled that Bank of China, as the defendant in a politically charged suit brought by the family of the victim of a 2006 bombing in Tel Aviv, is entitled to depose a witness from Bank Hapoalim, despite the Israeli bank’s arguments that the testimony would violate Israel’s bank secrecy laws.

Scheindlin’s ruling effectively reverses a previous decision by U.S. Magistrate Judge Gabriel Gorenstein, who held last October that, as a matter of procedure, he could not require Hapoalim, as a third party in the case, to produce a witness from beyond the 100-mile reach of his jurisdiction. In Thursday’s opinion, Scheindlin noted that after Gorenstein’s decision, the procedural rules changed and Bank of China’s lawyers at Patton Boggs narrowed their demand for information from the Israeli bank. So rather than focus on the 100-mile subpoena limit, she weighed the merits of Bank of China’s subpoena request against Bank Hapoalim’s opposition. She concluded that the Chinese bank deserves to hear crucial information Hapoalim can supply about the Israeli government’s efforts to block financing to the alleged Palestinian Islamic Jihad leader, Said al-Shurafa.

That testimony, Scheindlin said, would help solve a central mystery of this case. The family of Daniel Wultz, who died in the bombing in Tel Aviv, contends that Israeli counterterrorism officials warned the Chinese government at a meeting in Beijing in 2005 that Shurafa was using his accounts at Bank of China to facilitate the militant group’s activities. According to the Wultzes’ lawyers at Boies, Schiller & Flexner, that warning should have put the Chinese Bank on notice about Shurafa. But the Wultzes have struggled to produce evidence of what Israeli officials said at the 2005 session in Beijing. The family has asserted that the government of Prime Minister Benjamin Netanyahu originally encouraged the suit against Bank of China, but as Israel’s ties to China have deepened, Israel has actively blocked testimony from former official Uzi Shaya, who supposedly attended the 2005 meeting with the Chinese government.

Can inside trader be guilty without knowledge of tipster’s motives?

Alison Frankel
Feb 13, 2014 21:44 UTC

There was a very interesting exchange of letters this week at the 2nd Circuit Court of Appeals, where former Diamondback Capital portfolio manager Todd Newman and his co-defendant, Level Global Investors co-founder Anthony Chiasson, are appealing their December 2012 convictions for insider trading in Dell and Nvidia stock. And after the 2nd Circuit Court addresses the issue highlighted in the letters, not only the Newman and Chiasson convictions but also the guilty verdict against SAC Capital portfolio manager Michael Steinberg and the government’s prosecution of Raj Rajaratnam’s brother Rengan could be imperiled.

Lawyers representing Newman and Chiasson – Stephen Fishbein of Shearman & Sterling for Newman and Mark Pomerantz of Paul, Weiss, Rifkind, Wharton & Garrison for Chiasson – contend that the jury’s guilty verdicts should be overturned because the judge in the case, U.S. District Judge Richard Sullivan of Manhattan, made a fatal mistake in his instructions to the jury. Sullivan decided not to instruct jurors that the government must prove Newman and Chiasson were aware that Dell and Nvidia insiders stood to gain from passing along non-public information. Instead, he told the jury that it could find the defendants guilty as long as prosecutors proved the defendants knew they were trading on information the insiders disclosed in breach of their duty of confidentiality.

Newman and Chiasson argue that Sullivan’s jury instruction is contrary to the law of insider trading. As Fishbein explained in Newman’s appellate reply brief, the defendants believe that two U.S. Supreme Court decisions, Dirks v. Securities and Exchange Commission in 1983 and Bateman Eichler v. Berner in 1985, stand for the proposition that if the recipients of insider information don’t know that the original tipster stands to benefit from disclosing the tips, then no crime has been committed.

Could an obscure 1994 law upend the Volcker Rule?

Alison Frankel
Feb 12, 2014 22:10 UTC

At the end of 2013, five regulatory agencies finally managed to adopt the Volcker Rule, the Dodd-Frank mandated regulation that curbs risky proprietary trading by financial institutions. Regulators from the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Securities and Exchange Commission took more than two years to refine their original proposal, after taking into account the 18,000 comments they received on the trading bars. Now comes the really fun part for the government: defending the 900-page behemoth of a law against the sort of industry-mounted challenges that have already felled shareholder proxy access and resource extraction disclosure rules that the SEC adopted in response to Dodd-Frank.

In a terrific piece Tuesday, my Reuters colleagues Sarah Lynch and Emily Stephenson previewed two possible grounds for a challenge to the Volcker Rule (which is named for former Federal Reserve chairman Paul Volcker, who pushed for a bar on proprietary trading after the financial crisis hit in 2008). Both potential attacks would home in on regulators’ supposed failure to pay enough attention to the impact the new rule would have on financial institutions and the broader economy. According to the story, lawyers for business lobbying groups like the U.S. Chamber of Commerce are looking at the Unfunded Mandates Reform Act, which requires the OCC to assess the economic impact of proposed rules that will cost the government or the private sector more than $100 million. Volcker Rule opponents have been kicking around the idea of a challenge under UMRA for a while, but Dodd-Frank has created some uncertainty about its application. More recently, according to Lynch and Stephenson, the Chamber and other groups have begun to look at a different law that also imposes a cost-benefit analysis requirement on bank regulators: the Riegle Community Development and Regulatory Improvement Act of 1994.

Inspired by the Reuters piece – and by my utter ignorance of the Riegle law – I did some research at Westlaw. The Clinton-era statute turns out to be quite a hodgepodge of a law. Its primary purpose was to encourage small, community-based lending institutions. But it also reformed anti money-laundering and flood insurance laws and included provisions intended to streamline the bank regulatory process. The streamlining section of the law, entitled “Paperwork Reduction and Regulatory Improvement,” includes language that could justify a challenge to the Volcker Rule.

N.Y. judge: Mortgage securitization was not racketeering scheme

Alison Frankel
Feb 11, 2014 20:03 UTC

Did you happen to see the complaint Better Markets filed yesterday in federal court in the District of Columbia, accusing the Department of Justice of obfuscating the facts behind its $13 billion settlement with JPMorgan Chase? I have some doubts about Better Markets’ standing to sue Justice but none at all about the central point of the suit: We the public are still trying to understand the magnitude of wrongdoing by financial institutions that profited from the boom in residential mortgage securitization. The oft-mangled George Santayana quote has it that “Those who cannot remember the past are condemned to repeat it.” I’m sure the same condemnation awaits those whose memories of the past are circumscribed by the efforts of excellent defense lawyers. There has been virtually no market for private residential mortgage-backed offerings since the economic crash, but as the economy recovers and banks finally resolve liability from their boom-era offerings, that will probably change – especially because of court rulings that have blessed the instruments of securitization.

Last week’s ruling by New York State Supreme Court Justice Barbara Kapnick, mostly approving Bank of America’s $8.5 billion settlement with investors in Countrywide mortgage-backed securities, is one example. Kapnick didn’t provide much analysis, but she did provide some assurances to future MBS trustees about their rights and duties. (If, on the other hand, Kapnick had agreed with some of the experts who testified for objectors to the settlement about the inevitable conflicts hobbling MBS trustees, her ruling would have been a significant obstacle to any resurrection of the market for private residential mortgage securitizations.) I’ve also told you about a series of rulings from state and federal courts that have upheld the right of the bank-originated Mortgage Electronic Registration System to aid securitization by transferring promissory notes from bank to bank. Most recently, on Monday, a federal judge in White Plains, New York, tossed a sprawling, multiplaintiff case alleging that the entire mortgage securitization industry was a giant racketeering enterprise whose victims were homeowners duped into buying property they couldn’t afford. (Hat tip: S.D.N.Y. Blog.)

U.S. District Judge Cathy Seibel, like judges in other federal trial courts, found that under the Rooker-Feldman doctrine, former owners of foreclosed properties cannot recast their challenges to state-court foreclosures judgments as federal-court claims. The onetime homeowners, represented by KamberLaw and The Law Offices of Zoe Dolan, had argued in their brief opposing dismissal that there’s an exception to the doctrine in cases in which state-court judgments were procured by fraud on the court. Seibel conceded that federal circuit courts are divided on the fraud exception, but said the 2nd Circuit has never recognized it and so she would “decline plaintiff’s invitation to create an exception.”

New class action: Real victims of Samsung infringement are consumers

Alison Frankel
Feb 10, 2014 19:55 UTC

Once again, we are reminded that defendants underestimate the creativity of the class action bar at their own peril.

Last week, the firms Reese Richman and Halunen & Associates filed quite an interesting class action complaint in federal court in San Francisco. The case asserts that Samsung’s infringement of various Apple patents in its mobile devices – as established in a jury trial in federal court and in a proceeding at the U.S. International Trade Commission – has injured unwitting Samsung mobile device buyers who believed they were purchasing non-infringing products. According to the complaint, the resale market for Samsung devices has been hard-hit by infringement findings against the company; the suit claims that Samsung owners are actually in danger of violating the Tariff Act of 1930 if they attempt to resell infringing tablets and smartphones.

As you may recall, Samsung is on the hook to Apple for more than $900 million in damages after a partial damages retrial in November of its first round of patent infringement claims against Samsung in San Francisco federal court. The purported nationwide consumer class action actually claims far more than that on behalf of Samsung device purchasers. Under one of the suit’s causes of action, the class wants Samsung to repay the entire cost of the infringing mobile devices to the consumers who bought them – or at least the lost value consumers have realized as a result of Samsung’s infringement. Under another theory, class members assert that Samsung must disgorge to them all of its profits from selling infringing devices. That’s a lot of money: According to Apple, Samsung took in $3.5 billion in revenue from the sale of almost 11 million infringing devices.

The $44 mln Accenture judgment riddle: When is it time to pay up?

Alison Frankel
Feb 7, 2014 21:29 UTC

You might have thought that after nearly 225 years of American jurisprudence, the law was clear on whether a defendant can avoid surrendering a final award while it seeks review from the U.S. Supreme Court. But based on a $44 million fight between the consulting company Accenture and a would-be oil and gas services software company called Wellogix, it isn’t at all.

Wellogix’s business plan was to sell oil and gas companies proprietary software to streamline their planning and procurement processes. It made the apparent mistake, however, of partnering with other companies that supplied core accounting software. In 2005, Wellogix and SAP made a joint bid to provide global software for complex services to BP. Unbeknownst to Wellogix, however, SAP was also working directly with BP’s consultant, Accenture, on a software system. Wellogix came to believe that SAP and Accenture had hijacked pieces of its design and, in so doing, had destroyed the company. In 2008, Wellogix sued SAP, Accenture and BP, accusing them of stealing and misappropriating its trade secrets. U.S. District Judge Keith Ellison of Houston dismissed SAP for lack of jurisdiction. BP and Wellogix agreed to arbitration. Accenture went to trial.

A Houston federal jury returned a verdict against Accenture in May 2011, awarding Wellogix $26.2 million in compensatory damages and $68.2 million in punitive damages. Judge Ellison reduced the punitive damages to $18.2 million but otherwise denied Accenture’s post-trial motions for judgment as a matter of law or for a new trial. Accenture posted a $49 million bond to cover the judgment and interest, and took its case to the 5th Circuit Court of Appeals. Ellison stayed enforcement of the judgment “pending final disposition of Accenture’s appeal.”

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