Opinion

Alison Frankel

Can SAC insider trading target Elan force hedge fund to pay legal fees?

Alison Frankel
Apr 8, 2014 20:57 UTC

Elan Pharmaceuticals believes it was victimized twice over by SAC Capital, the notorious hedge fund now called Point72. The first time was when SAC obtained insider information about unsuccessful trials of the Alzheimer’s drug bapineuzumab and dumped $700 million in shares of the Irish drug company and its drug development partner Wyeth. But to add insult to that injury, Elan had to spend a small fortune, about $1.6 million, in legal fees and costs stemming from the government’s investigation of SAC’s insider trading. That is money SAC should have to pay, according to Elan. With the hedge fund due to be sentenced Thursday by U.S. District Judge Laura Taylor Swain of Manhattan, the pharma company’s lawyers at Reed Smith have submitted a letter asking Swain to recognize Elan as a victim of SAC’s crimes and order the hedge fund to pay it $1.6 million in restitution.

It’s a fascinating request. You probably recall that in a couple of high-profile cases in the recent spate of insider-trading prosecutions, Morgan Stanley and Goldman Sachs won rulings that former employees (in a broad sense of that word) were on the hook for legal fees the banks incurred as a result of the employees’ crimes. In February 2013, U.S. District Judge Jed Rakoff held that under the federal victims’ restitution law, former Goldman director Rajat Gupta owes the bank $6.2 million — the money Goldman laid out to Sullivan & Cromwell to investigate Gupta’s conduct internally and to cooperate with government investigators. Last July, the 2nd U.S. Circuit Court of Appeals affirmed a similar ruling by U.S. District Judge Denise Cote. She had concluded in 2012 that Morgan Stanley was the victim of insider trading by FrontPoint hedge fund manager Chip Skowron, so Skowron was responsible not just for repaying the bank the cost of his own defense but also for restitution of the legal fees Morgan Stanley advanced to other FrontPoint employees.

The 2nd Circuit’s ruling in the Skowron case didn’t leave much doubt that employers can receive restitution as victims for the money they spend to cooperate with government investigations of employees who go on to plead guilty or be convicted. Elan, however, didn’t employ SAC or Mathew Martoma, the former SAC trader who was convicted of trading on inside information about the company. On Monday, in a response to Elan’s letter requesting restitution, SAC’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison said Elan’s theory of restitution is “without precedent.”

“Elan is not seeking restitution against its own agents (Drs. Oilman and Ross) who admitted breaching their duties to it by disclosing confidential information, but from entities that had no fiduciary or other relationship to Elan,” wrote SAC counsel Daniel Kramer of Paul Weiss. “We are aware of no court that has ever held a defendant responsible for legal fees incurred by a public company whose information was misused, where the defendant was not an employee or agent of the company, but rather a tippee of the company’s employees — much less an employer of the tippee.” The victims’ restitution law requires a showing that the supposed victim was directly harmed by the underlying crime in the case. Here, SAC said, Elan couldn’t show that its legal fees were attributable to SAC’s criminal actions.

The hedge fund made its broad argument about Elan’s theory in a footnote, choosing to emphasize in its main arguments that the pharmaceutical company had waited too long to request restitution and hadn’t adequately shown in its 188-page compendium of bills from Shearman & Sterling that the law firm’s fees were specifically tied to the government’s investigation of SAC, rather than other supposed insider trading cases or the Elan shareholder class action against SAC.

Mud-flavored yogurt? Chobani founder, ex-wife wage ugly ownership war

Alison Frankel
Apr 7, 2014 21:16 UTC

For a scant two years, from 1997 to 1999, Hamdi Ulukaya, then a young Turkish immigrant with dreams of a business in Turkish-inspired dairy products, and Ayse Giray, a physician in New York with Turkish roots, were married. Giray believed in and supported Ulukaya’s vision, so much so that even after they were divorced, her family loaned him almost $200,000 in 2002 to keep his inchoate cheese-making business afloat. Ulukaya soon thereafter expanded from feta cheese into Greek yogurt, establishing a company called Chobani with a factory in upstate New York. Last month, Reuters revealed that Chobani is in negotiations to sell a minority stake for $2.5 billion. But Giray and Ulukaya are not jointly celebrating the company’s runaway success. Quite the contrary.

In filings last week in Manhattan state court, these once-friendly exes (or, more accurately their lawyers) exchanged allegations as vicious as those you’d see in the most bitter of custody disputes. Of course, in a way that’s what their litigation is: Giray is suing because she claims Chobani is at least partly her baby.

And she seems perfectly willing to undermine the company to prove it. I can’t imagine that it’s to Giray’s benefit to damage Chobani’s value if, as she claims, she owns a big percentage of the yogurt maker. Nevertheless, she’s claiming not only that Ulukaya deceived two different banks and the U.S. Department of Agriculture in order to obtain his start-up loans, but also that he paid a former employee of rival Greek yogurt maker Fage 30,000 Euros to obtain the recipe Chobani now uses.

Kosher hot dog case presents a real constitutional pickle

Alison Frankel
Apr 4, 2014 22:32 UTC

Who would have guessed that a consumer class action accusing ConAgra of deceiving consumers in the labeling of its Hebrew National hot dogs and salami would implicate two meaty constitutional issues? (Sorry, couldn’t resist.)

As the 8th U.S. Circuit Court of Appeals explained in an opinion Friday, the class action, which contends that ConAgra falsely labels Hebrew National products as 100 percent kosher, presents a question that the 8th Circuit has never before answered: whether the Establishment Clause of the First Amendment precludes federal courts from hearing claims against a secular company just because its labels invoke religious rules. That’s a toughie, according to the 8th Circuit panel — Chief Judge William Riley and Judges Roger Wollman and James Loken, who clearly had no appetite to bite off more than they could chew. (Yes, that was intentional. Sorry again.) The judges opened their discussion of the case by quoting from a 1905 case, Burton v. United States, in which the U.S. Supreme Court said, “It is not the habit of the court to decide questions of a constitutional nature unless absolutely necessary.”

That cardinal rule from 1905 has a corollary, though, according to the 8th Circuit: “If a case may be resolved on easy and settled constitutional grounds, the court should do so instead of deciding the case on difficult and novel constitutional grounds.” In the Hebrew National case, the 8th Circuit hit upon what it considered to be a relatively easy constitutional question, at least compared to the First Amendment issue. The panel found that the consumers suing Hebrew National didn’t have standing in federal court under Article III of the U.S. Constitution because they could not show they’d actually been injured.

Can banks force clients to litigate, not arbitrate?

Alison Frankel
Apr 3, 2014 20:38 UTC

If you are a customer of a big bank — let’s say a merchant unhappy about the fees you’re being charged to process credit card transactions — good luck trying to bring claims in federal court when you’re subject to an arbitration provision. As you probably recall, in last term’s opinion in American Express v. Italian Colors, the U.S. Supreme Court continued its genuflection at the altar of the Federal Arbitration Act, holding definitively that if you’ve signed an agreement requiring you to arbitrate your claims, you’re stuck with it even if you can’t afford to vindicate your statutory rights via individual arbitration.

But what if you’re a bank customer who wants to go to arbitration — and, in a weird role-reversal, the bank is insisting that you must instead bring a federal district court suit? Will courts show the same deference to arbitration when a plaintiff, rather than a defendant, is invoking the right to arbitrate and not litigate?

On Friday, the 2nd Circuit Court of Appeals will hear a rare tandem argument in two cases that present the question of whether bank clients have the right to arbitrate their claims even though they’ve signed contracts with forum selection clauses directing disputes to federal court. Believe it or not, the 2nd Circuit will be the third federal appellate court to answer this question, which has divided its predecessors. In January 2013, the 4th Circuit ruled that a UBS client may proceed to arbitration, but on Friday, the 9th Circuit held that a Goldman Sachs customer who agreed to a nearly identical forum selection clause must sue in federal court. To add to the confusion, the 9th Circuit panel was split, which led the majority to call the case “a close question.”

Sotheby’s shareholders defend activist investors in suit vs board

Alison Frankel
Apr 2, 2014 20:13 UTC

The heat surrounding so-called activist investors — hedge funds that buy up big chunks of a company’s stock, then leverage their position to mount proxy campaigns or otherwise force boards to change the way the company is managed — could hardly be more intense than it is now. Well, okay, maybe there would be even more controversy if Michael Lewis wrote a book about a genius upstart who defied accepted deal conventions and revolutionized corporate takeover battles. But putting aside the Wall Street tizzy inspired by this week’s publication of Lewis’s new book about high-frequency trading, the deal world’s favorite topic remains activist investors like Carl Icahn, Paul Singer, William Ackman and Dan Loeb.

Just in the last two weeks, Chief Justice Leo Strine of the Delaware Supreme Court published his extraordinary essay on shareholder activism at the Columbia Law Review, the Wall Street Journal did a fabulous story on hedge funds tipping each other off about their targets, and Martin Lipton of Wachtell, Lipton, Rosen & Katz — whose avowed disdain for short-term investors has recently manifested in litigation with Icahn — revealed at the Tulane M&A fest that there are actually a couple of activist funds he respects. (He said he wouldn’t go so far as to say he “likes” them, though.)

A new shareholder derivative complaint against the board of the auction house Sotheby’s is the latest contribution to the furor over activist investors. Two of the most successful shareholder firms in the game, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer, filed the class action Tuesday night in Delaware Chancery Court on behalf of St. Louis’s employee pension fund. The suit squarely aligns shareholders with activist investor Loeb and his Third Point hedge fund, which owns nearly 10 percent of Sotheby’s stock and has launched a proxy contest for three board seats at the auction house.

D.C. judge wants DOJ to justify ‘gag orders’ on Twitter, Yahoo

Alison Frankel
Apr 1, 2014 20:58 UTC

For the last two weeks, U.S. Magistrate Judge John Facciola of Washington, D.C., has been on a one-man campaign to hold the government accountable for secret subpoenas to Internet companies.

On March 24, Facciola issued unusual orders in two cases, one involving Twitter and the other Yahoo. The Justice Department had applied for court orders under the Electronic Communication Privacy Act to bar Twitter and Yahoo from disclosing that they had received grand jury subpoenas for customer information. Those non-disclosure applications are routine, but Facciola decided he wasn’t going to grant the government’s requests unless Twitter and Yahoo had an opportunity to be heard. He ordered the government to file a redacted version of its applications on the public docket and asked Twitter and Yahoo to inform him whether they intended to file briefs in response.

The government immediately went over Facciola’s head, appealing his orders to Chief Judge Richard Roberts of Washington federal district court. Facciola’s response? He refused to grant a Justice Department non-disclosure application in a third case, also involving a grand jury subpoena for Twitter records. And this time, the magistrate wrote a detailed, citation-filled opinion explaining why he believes Twitter has a constitutional right under the First and Fifth Amendments to be heard before he can issue what he called a “gag order.” Facciola once again instructed the Justice Department to file a public version of its non-disclosure application and invited Twitter to brief him on its view of its free speech rights.

New yen Libor ruling is bad omen for rate-rigging antitrust claims

Alison Frankel
Mar 31, 2014 21:12 UTC

One of the most controversial and consequential antitrust rulings of the last few years came last March, when U.S. District Judge Naomi Reice Buchwald of Manhattan tossed class action claims under the Sherman Act against the banks on the London Interbank Offered Rate panel. Buchwald acknowledged that her holding was “incongruous,” considering that some of the bank defendants had already admitted to colluding to manipulate the benchmark Libor rate, which was used to set interest rates for trillions of dollars of securities. But the judge was convinced the class couldn’t show any antitrust injury. The Libor rate-setting process (in which individual banks report the interest rates they’re being charged to borrow, which are then averaged and reported daily) was cooperative, not competitive, she said. So even if the banks conspired to rig Libor, Buchwald held, any harm they caused was not from reduced competition — and since federal and state antitrust laws are intended to target conduct that impedes competition, they don’t apply to Libor manipulation.

The ruling shocked antitrust plaintiffs firms, which had sunk enormous expense into expert analysis of the alleged Libor conspiracy. They asked Buchwald for leave to file an interlocutory appeal of her ruling to the 2nd Circuit Court of Appeals. She refused (and pretty angrily, to boot), which means that it will probably be years before the 2nd Circuit gets to consider the question of whether collusive rate-rigging is anti-competitive. After Buchwald’s ruling, some Libor claimants, including the Federal Deposit Insurance Corporation in its recent suit against Libor panel banks, made the decision to assert breach-of-contract claims as their main cause of action. But that’s only possible when plaintiffs engaged in Libor-pegged transactions directly with the banks. Other Libor plaintiffs, like the National Credit Union Administration, are counting on the 2nd Circuit to overturn Buchwald’s interpretation of antitrust injury.

That hope looks a bit more remote after a ruling Friday by a Buchwald colleague, U.S. District Judge George Daniels, who is overseeing a class action alleging manipulation of two other benchmark interest rates, the Euroyen Tokyo Interbank Offered Rate (or Tibor) and the yen Libor. Daniels agreed completely with Buchwald’s analysis of antitrust injury, endorsing her controversial holding that collusive rate manipulation doesn’t amount to a horizontal antitrust conspiracy. That’s bad enough for plaintiffs who are hoping to revive Libor antitrust claims (which, of course, carry treble damages). But Daniels also rested his antitrust holding in part on the very 2nd Circuit case plaintiffs are relying upon to refute Buchwald. When a judge turns your own citation against you, that’s got to be discouraging. (I should note that Daniels kept alive class claims based on the Commodity Exchange Act, as did Buchwald in the U.S. dollar Libor litigation.)

First Amendment protects Internet search results: N.Y. judge

Alison Frankel
Mar 28, 2014 17:34 UTC

U.S. District Judge Jesse Furman of Manhattan grabbed the chance Thursday to set precedent on a question that has received surprisingly little attention in the courts: Does the First Amendment’s protection of free speech extend to the results of Internet searches? Furman was clearly captivated by the issue as an intellectual challenge, delving into the vigorous academic discussion of the First Amendment and Internet search even deeper than the two sides in the case, the Chinese search engine Baidu and the activists who sued the site for supposedly violating their civil rights by blocking their pro-democracy works from appearing in search results. In a supersmart opinion that Furman seems to have written to be widely read, the judge concluded that when search engines exercise editorial judgment – even if that judgment is just algorithms that determine how results will be listed – they are entitled to free speech protection.

That protection, he said, is quite broad in scope. “There is a strong argument to be made that the First Amendment fully immunizes search-engine results from most, if not all, kinds of civil liability and government regulation,” Furman wrote. “The central purpose of a search engine is to retrieve relevant information from the vast universe of data on the Internet and to organize it in a way that would be most helpful to the searcher. In doing so, search engines inevitably make editorial judgments about what information (or kinds of information) to include in the results and how and where to display that information (for example, on the first page of the search results or later).”

The judge said U.S. Supreme Court precedent on the First Amendment “all but compels” his conclusion. The plaintiffs in the Baidu case are New York residents accusing the search engine of suppressing their political speech at the behest of the Chinese government. Those allegations, Furman wrote, necessarily imply that Baidu is exercising editorial judgment. So the search engine, he said, is no different from a newspaper editor deciding what stories to run, a guidebook writer picking which events to highlight or Matt Drudge making judgments “about which stories to link and how prominently to feature them.” And though it might seem counterintuitive that the right of free speech would protect editorial judgments to squelch free speech, Furman said that’s the point of the First Amendment.

Shareholders beware: Federal judge OKs corporate arbitration clause

Alison Frankel
Mar 27, 2014 21:10 UTC

Complaining about mandatory arbitration clauses in consumer and employment contracts is like whining about the weather: an exercise in futility. Whatever slim hope remained for opponents of mandatory arbitration after the U.S. Supreme Court’s 2011 ruling in AT&T Mobility v. Concepcion was extinguished last year in the court’s decision in American Express v. Italian Colors, which said that arbitration clauses are valid even if they effectively preclude people from enforcing their statutory rights. After the Italian Colors ruling came down, I speculated that corporations would next take advantage of the Supreme Court’s enthusiasm for arbitration by enacting provisions to require shareholders to arbitrate their claims against the company or its directors.

Law professors James Cox of Duke and John Coates of Harvard told me that some intrepid business was bound to attempt to impose arbitration on its shareholders, either in the charter of a company first offering shares to the public or in a bylaw amendment for an already public company. The profs said that the Securities and Exchange Commission, which has historically opposed mandatory shareholder arbitration, might not be able to stop a corporation that chose to fight all the way to the Supreme Court. The biggest obstacle to requiring shareholders to give up the right to sue in court, Coates told me, would probably be the issue of providing adequate notice. Would courts agree that shareholders had consented not to sue simply by purchasing the stock of a corporation with a mandatory arbitration provision?

We now have an answer to that question from a federal judge in Boston – and it’s one that should embolden corporations considering shareholder arbitration clauses. On Thursday, U.S. District Judge Denise Casper refused to invalidate a mandatory shareholder arbitration clause in the bylaws of the notorious Commonwealth real estate investment trust. Casper said that under the principle of res judicata, she was bound by two previous opinions from a Maryland state court judge who found that the Commonwealth arbitration clause was valid. But even if she were ruling on the merits of the provision, Casper said, she would find that shareholders hadn’t shown mandatory arbitration to be unenforceable.

U.S. stays out of Argentina pari passu case at SCOTUS – for now

Alison Frankel
Mar 26, 2014 19:18 UTC

France, Brazil and Mexico told the U.S. Supreme Court this week that the 2nd Circuit Court of Appeals has endangered sovereign debt markets with its ruling last year against the Republic of Argentina. In amicus briefs supporting Argentina’s petition for Supreme Court review, the foreign sovereigns argue that the 2nd Circuit gravely misinterpreted the so-called “pari passu” (or equal footing) clause of Argentina’s sovereign debt contracts. By ruling that Argentina may not pay bondholders who exchanged defaulted bonds for restructured debt before it pays hedge fund creditors that refused to exchange their defaulted bonds, the amicus briefs argue, the 2nd Circuit has undermined international debt restructurings, permitting vulture investors to hold entire foreign economies hostage.

The United States made quite similar arguments, as you may recall, when Argentina’s pari passu case was before the 2nd Circuit. But there’s no filing from the Justice Department among the 10 new amicus briefs urging the Supreme Court to take Argentina’s appeal. Does that mean Argentina has lost its most influential friend in the U.S. court system?

It does not, but it does mean that the administration is waiting for an invitation from the Supreme Court justices before it takes a position in the Argentina pari passu case. And there’s at least some chance the invitation will never come.

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