Opinion

Alison Frankel

Why Parmalat litigation v. Grant Thornton is like 0-0 soccer game

Alison Frankel
Jun 26, 2014 19:43 UTC

If it is possible for an appellate ruling on the jurisdiction of bankruptcy trustees’ claims against an auditor to be snicker-inducing, Judge Richard Posner‘s opinion Wednesday for the 7th U.S. Circuit Court of Appeals in Parmalat v. Grant Thornton is that decision.

Posner precedes his recounting of the history of this litigation — which involves claims by two bankruptcy trustees for the once fraud-wracked Italian dairy conglomerate against former auditor Grant Thornton — by noting that he would “simplify ruthlessly.” (I will try to follow his example.) Near the end of the ruling, after he describes the cases’ journey from Illinois state court through federal courts in New York and Illinois, he observes that the 7th Circuit’s decision to send the cases back to Illinois state court where they began will effectively end any hope of bringing the litigation to a close “before it a chance to exceed the length of the Trojan War.” Funny, right?

I’m writing this post as the United States soccer team is facing off against Germany, so soccer is on my mind. The Parmalat suits against Grant Thornton remind me of a scoreless soccer match. We’ve seen some great footwork from the lawyers on both sides — Quinn Emanuel Urquhart & Sullivan for the main Parmalat bankruptcy trustee, Diamond McCarthy for the Parmalat Capital trustee, and Winston & Strawn for Grant Thornton — but neither side has put the ball in the net for a goal. Posner’s instruction that the cases return to state court puts the litigation into sudden-death overtime.

The outcome of the match will have implications not just for Grant Thornton but for all auditors facing claims from former clients driven into bankruptcy by accounting shenanigans. Auditors are broadly protected from liability under the common law doctrine of in pari delicto (“equally in fault”), which holds that participants in wrongdoing can’t recover from fellow miscreants. Judge Posner himself wrote a landmark opinion about in pari delicto, Cenco v. Seidman & Seidman, in 1982; and Judge Frank Easterbrook recently reiterated, in the 7th Circuit’s 2012 decision in Peterson v. McGladrey and Pullen, that in pari delicto defenses are available to auditors sued under Illinois state law.

Grant Thornton has argued at almost every stage of these long-running cases that Parmalat’s claims are barred by in pari delicto. U.S. District Court Judge Lewis Kaplan in Manhattan –who took charge of the trustee suits after they were removed to federal court and transferred to the Parmalat multidistrict litigation — agreed with Grant Thornton, granting the auditor summary judgment in 2009. The 2nd Circuit, however, found that Grant Thornton was offsides and invalidated the goal. Okay, what the appeals court actually did was vacate Kaplan’s judgment and order the cases to be sent back to state court because federal courts should have abstained from asserting jurisdiction.

On one-year Windsor anniversary, 9th Circuit delivers best gay rights gift

Alison Frankel
Jun 25, 2014 19:12 UTC

Sometimes, the best way to understand the broad implications of a court’s decision isn’t to read the ruling itself but rather the dissent. That was certainly true a year ago, when Justice Antonin Scalia attacked the U.S. Supreme Court’s decision in Windsor v. U.S., which struck down federal prohibitions on same-sex marriage as an unconstitutional intrusion on the equal rights of gays and lesbians. The majority’s ruling was carefully constrained, but a furious Scalia predicted that the stirring language of Justice Anthony Kennedy’s opinion would reverberate more loudly in the lower courts than the actual holding. As we now know from decisions all over the country striking down restrictions on same-sex marriage, Scalia was right.

So if you want to know just how monumental a gay-rights ruling the 9th U.S. Circuit Court of Appeals issued Tuesday, just two days short of Windsor’s one-year anniversary, take a look at the dissent written by Judge Diarmuid O’Scannlain and joined by Judges Jay Bybee and Carlos Bea. O’Scannlain posits that his colleagues’ decision in the case, GlaxoSmithKline v. Abbott Laboratories, “precludes the survival under the federal Constitution of long-standing laws treating marriage as the conjugal union between a man and a woman.” But it’s even more drastic than that, according to the dissent: The appellate decision has changed the standard for evaluating all laws targeting gays and lesbians, the dissent said, “with far-reaching — and mischievous — consequences.”

If the 9th Circuit dissenters turn out to be as good at fortune-telling as Scalia, states in the Western swath of this country — California, Oregon, Washington, Montana, Idaho, Nevada, Arizona, Hawaii and Alaska — won’t be able to curtail equal rights based on sexual orientation, even if the states think they have a rational basis for doing so. That’s a much farther-reaching holding even than the 10th Circuit’s decision Wednesday that Utah’s ban on same-sex marriage is unconstitutional — and for gay rights proponents, it’s quite an anniversary present.

Forum selection clauses are killing multiforum M&A litigation

Alison Frankel
Jun 24, 2014 21:00 UTC

It was entirely predictable that last spring, after Safeway announced that it had agreed to accept a $9.2 billion offer from the private equity firm Cerberus Capital, shareholders would rush to file suits challenging the deal. As you know, shareholder M&A suits have become an inevitable consequence of merger announcements, and, to the frustration of defendants, are often brought in more than one jurisdiction — which has meant, in years past, that if defendants couldn’t persuade judges to defer to other courts, they sometimes had to defend against the same claims by multiple plaintiffs firms in multiple courts.

Defendants thought they’d at least solved the multiforum problem a year ago, when then Chancellor Leo Strine ruled in Boilermakers v. Chevron that corporations may adopt and enforce bylaws requiring shareholders to bring suits in Delaware. The plaintiffs firms that had challenged bylaws adopted by Chevron and Fedex decided not to appeal Strine’s decision to the Delaware Supreme Court, though the state justices may yet have a say on Chevron’s forum selection clause via a parallel shareholder suit that was filed in federal court in San Francisco. (U.S. District Judge William Alsup has said he may certify the bylaw validity to the Delaware Supreme Court in that case.) Under prevailing Delaware precedent, the only way forum selection bylaws wouldn’t work for Delaware corporations was if judges in other jurisdictions refused to honor the provisions.

So far, all of the out-of-state judges to consider Delaware forum selection bylaws have deferred to the provisions — with the California state judge presiding over a wing of the Safeway litigation the latest to rule that a forum bylaw is enforceable. (Sullivan & Cromwell has a client alert describing all four decisions; I first heard about the S&C memo from The Chancery Daily.)

SCOTUS Halliburton ruling could backfire for securities defendants

Alison Frankel
Jun 23, 2014 21:29 UTC

Let’s state the obvious: Big Business did not get what it wanted Monday from the U.S. Supreme Court, which refused in Halliburton v. Erica P. John Fund to overturn Basic v. Levinson, the 25-year-old precedent that permits shareholders to bring classwide claims of securities fraud.

The justices didn’t even adopt the alternate approach — suggested by some Halliburton supporters in friend-of-the-court briefs — of requiring plaintiffs who want to sue as a class to show that supposed corporate misstatements had an impact on share prices. Instead, the court ruled only that defendants may argue against class certification with evidence that share prices didn’t drop as a result of the alleged fraud.

Halliburton’s lawyer, Aaron Streett of Baker Botts, told me that’s still a “significant win,” especially considering that the justices might have upheld the 5th U.S. Circuit Court of Appeals and barred defendants from using such price-impact evidence to keep shareholders from banding together.

Argentina’s public comments put U.S. lawyers in awkward spot

Alison Frankel
Jun 19, 2014 20:42 UTC

At a hearing Wednesday afternoon in Manhattan, Argentina’s lawyer, Carmine Boccuzzi of Cleary Gottlieb Steen & Hamilton, informed U.S. District Judge Thomas Griesa that Argentine officials “will be in New York next week” in order to begin negotiations with the hedge funds whose bond litigation has forced the country to the brink of a sovereign debt crisis.

The very next morning, at a press briefing, Argentine Cabinet Chief Jorge Capitanich appeared to contradict Cleary’s representations to Griesa: “There is no delegation prepared for a possible trip to the United States,” he said, according to a Reuters report from Buenos Aires.

Capitanich is the third Argentine official this week whose public comments seem to be at odds with positions the country’s lawyers have espoused in U.S. courts. Earlier this month, Cleary partner Boccuzzi assured Judge Griesa that Argentina was not making contingency plans to restructure its debt in the event that the U.S. Supreme Court upheld Griesa’s orders requiring the country to pay hedge fund holdouts about $1.5 billion at the same time that it makes coupon payments to exchange bondholders that participated in previous restructurings. Argentina also said in a brief to the Supreme Court that it would comply with U.S. court orders.

Now Argentina wants to negotiate with hedge funds. Is it too late?

Alison Frankel
Jun 18, 2014 23:26 UTC

If Argentina truly wants to resolve its debt crisis without defaulting on tens of billions of dollars in restructured bonds, its politicians had better stop giving speeches.

At a hearing Wednesday afternoon in Manhattan federal court, Argentina’s lawyers informed U.S. District Judge Thomas Griesa that Argentine officials “want to engage in dialogue” with holdout hedge funds that are owed $1.5 billion under Griesa orders upheld by the U.S. Supreme Court on Monday. But the judge, who has been presiding for more than a decade over litigation between Argentina and hedge funds that refused to exchange defaulted bonds, seemed more interested in a fiery speech on Monday night by Argentine president Cristina Fernandez de Kirchner, in which she said the country would not submit to “extortion” by the hedge funds; and by a second speech Tuesday by the Argentine economy minister, who disclosed plans to restructure bonds to avoid “attachments.”

Argentina counsel Carmine Boccuzzi of Cleary Gottlieb Steen & Hamilton tried to portray the speeches as political posturing, but Griesa said they suggested that Argentina was on the brink of violating U.S. court orders. He asked lawyers for NML and Aurelius Capital to draft a proposed order stating that if Argentina attempted to restructure its debt as the economy minister proposed Tuesday, it would be in violation of his previous orders. NML and Aurelius had wanted Griesa to authorize discovery on Argentina’s restructuring plan, which the judge didn’t agree to do. Nevertheless, Griesa’s comments at the hearing put Argentina on notice that Griesa plainly doesn’t trust the country’s leaders.

The weird proviso in Apple’s e-books settlement

Alison Frankel
Jun 17, 2014 19:55 UTC

There’s a very unusual sentence near the beginning of the letter that class action lawyer Steve Berman of Hagens Berman Sobol Shapiro sent Monday to U.S. District Judge Denise Cote of Manhattan. Cote is presiding over the consolidated antitrust litigation in which the Justice Department, 33 U.S. states and territories and a class of book purchasers have accused Apple of conspiring with publishers to fix e-book prices. A year ago, after a bench trial of the Justice Department’s case, Cote found Apple liable for violating federal antitrust law. Since then, the company has been pursuing an appeal of the liability decision at the 2nd U.S. Circuit Court of Appeals while continuing to battle with the states and private plaintiffs in Cote’s courtroom.

Berman’s letter on Monday informed the judge that Apple has agreed to a binding settlement with the consumer class and the states. But there’s a catch, he wrote: “Any payment to be made by Apple under the settlement agreement will be contingent on the outcome of that appeal.”

What? The whole point of settlements is to eliminate uncertainty for both sides. Yet according to Berman’s letter, this deal hinges on the uncertain outcome of Apple’s appeal to the 2nd Circuit. That didn’t make any sense to me. Almost all of the leverage in this case right now belongs to the class and the state AGs. Apple’s liability under federal antitrust law has already been established in the Justice trial, and Cote ruled earlier this month that her liability opinion also puts Apple on the hook under the laws of the 24 states that are seeking penalties. The only issue to be decided at the second e-books trial, which was scheduled to begin on Aug. 25, was how much Apple would have to pay — and the consumers and state AGs had experts who said Apple owed them as much as $840 million, even before the trebling available under federal antitrust law.

If Argentina restructures bonds to evade hedge funds, sanctions loom

Alison Frankel
Jun 16, 2014 21:29 UTC

Argentina is just about out of legal options in its blood feud with NML Capital, Aurelius Capital and other holdout bondholders.

On Monday, the U.S. Supreme Court refused outright to hear Argentina’s appeal of a ruling from the 2nd U.S. Circuit Court of Appeals that prohibits the foreign country from making payments to bondholders who exchanged defaulted debt without also paying holdout hedge funds that have won about $1.5 billion in judgments against Argentina. Argentina had been hoping the justices would at least ask for briefing from the U.S. Solicitor General, which would have bought it some time. But time is up for Argentina: The country’s next payment to exchange debtholders is due on June 30, and if it fails to pay the hedge funds at the same time or tries to restructure its bonds to evade U.S. courts, Argentina risks monetary sanctions and being held in contempt of court.

Such a ruling would further blacken Argentina’s reputation in global debt markets — but it wouldn’t have much actual effect on whether the hedge funds are able to collect what they’re owed. According to Michael Mukasey of Debevoise & Plimpton, a former U.S. attorney general and former chief U.S. district judge in Manhattan, Argentine assets in the United States would probably still be protected by the Foreign Sovereign Immunities Act even if Argentina were found in contempt and hit with sanctions. “What can (U.S. courts) do about it?” Mukasey said. “Not a whole lot.”

Can market competitors police false ads better than class actions?

Alison Frankel
Jun 13, 2014 21:32 UTC

Companies should not mislead consumers about their products. Some do anyway. Those companies should be held accountable for their deception, not only because they lied but also to deter other companies from lying.

No one can seriously dispute any of these points, but what is the most effective way to stop businesses from deceiving consumers? We have state and federal regulatory agencies, of course, but regulators would be the first people to tell you that they can’t police every advertisement, label and package put out by businesses selling products to American buyers. That’s why state consumer protection laws give customers the rights to bring their own cases — except that, as a practical matter, individual consumers don’t really drive litigation against corporations that supposedly deceived them. Class action lawyers do, because they can represent buyers whose individual claims wouldn’t otherwise be worth pursuing.

Consumer class actions over deceptively advertised low-cost items are a remarkably inefficient vehicle for assuring the integrity of the consumer marketplace. Here, again, there’s really no legitimate argument to the contrary. I don’t mean to impugn the intentions of class action lawyers. Most (though not all) of them are prosecuting legitimate cases on behalf of consumers they truly believe to have been deceived by false corporate advertising. They force defendants to change misleading labels, ads or packaging and to agree not to use the deceptive material again. They also sometimes deliver money unclaimed by class members to charities, usually ones involved in righting the alleged wrongs in the case.

Bain, Goldman settlements in collusion case undercut shareholder releases

Alison Frankel
Jun 12, 2014 21:25 UTC

As inevitably as thunder follows lightning, shareholder class actions follow deal announcements. Debate has been raging for years now about whether shareholders derive any real benefits from the resolution of these cases, with judges increasingly skeptical about awarding big fees to plaintiffs lawyers who win only enhanced disclosures in deal documents. For defendants, the upside of settlements is more obvious: They obtain global releases of shareholder claims related to the transactions.

Or do they? On Wednesday, Goldman Sachs and Bain Capital agreed to pay a combined $121 million ($54 million from Bain, $67 million from Goldman) to resolve antitrust class action claims that they and several other private equity defendants cheated shareholders in eight companies acquired in private equity LBOs by colluding to depress acquisition prices. According to Patrick Coughlin of Robbins Geller Rudman & Dowd, who is one of the lead lawyers in the antitrust case, the beneficiaries of the Bain and Goldman settlements will include shareholders who previously released claims against the private equity funds in shareholder M&A class action settlements.

Bain and Goldman, along with their fellow antitrust defendants — Blackstone, TCG, KKR, TPG and Silverlake — had argued in a motion in January that shareholder releases in the original M&A cases should preclude certification of a class of onetime shareholders injured by their supposed conspiracy to depress LBO prices. It was a pretty creative argument, based on a ruling in the collusion case that shareholders who sold stock in the various LBO deals could not introduce evidence from those transactions against defendants they released from liability in M&A settlements. That patchwork of evidence, the defendants contended, meant that the collusion case did not meet commonality and typicality standards for class actions.

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