Opinion

Alison Frankel

How a lone New York judge squeezed billions from banks in MBS cases

Alison Frankel
Jul 28, 2014 21:56 UTC

Asking a federal appeals court to step into the fray of an ongoing case to reverse a decision by a trial judge is extraordinary. Petitions for a writ of mandamus, as such requests are known, assert that trial judges have committed such egregious errors that their appellate overseers must undo the damage immediately, before the case gets to a final judgment. Mandamus petitions are a desperation move, a last resort when you’ve got nothing to lose from alienating a trial judge who’s already ruled against you.

Last Thursday, RBS filed not one but three mandamus petitions at the 2nd, 9th and 10th circuits — an apparently unprecedented response to what the bank claims is an unprecedented abdication of responsibility by trial judges presiding over cases brought by the National Credit Union Administration (NCUA).

The suits, which involve billions of dollars in mortgage-backed securities purchased by failed credit unions, were filed in different federal districts, and the Judicial Panel on Multidistrict Litigation denied requests by bank defendants to consolidate them. But according to RBS, the trial judges took it upon themselves to streamline discovery, agreeing to abide by the rulings of a single “coordination judge.”

Why does RBS, which had previously asked for the cases to be consolidated, now bitterly oppose coordinated discovery?

Because the judge whose rulings will apply in all of the NCUA cases is U.S. District Judge Denise Cote of Manhattan, the avenging angel of financial crisis litigation.

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.

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.”

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.

Don’t get too excited about JPMorgan’s admissions to the SEC

Alison Frankel
Sep 19, 2013 19:18 UTC

The Securities and Exchange Commission was pretty darn pumped about its $200 million settlement Thursday with JPMorgan Chase, part of the bank’s $920 million resolution of regulatory claims stemming from losses in the notorious “London Whale” proprietary trading. And why not? As George Cannellos, the co-director of enforcement, said in a statement, JPMorgan’s $200 million civil penalty is one of the largest in SEC history. The agency also showed that it’s serious about its new policy of demanding admissions of liability from some defendants. For those of us accustomed to the SEC’s “neither admit nor deny” boilerplate, it’s startling to see the words “publicly acknowledging that it violated the federal securities laws” in an SEC settlement announcement. So let’s permit Cannellos some chest-thumping: “The SEC required JPMorgan to admit the facts in the SEC’s order – and acknowledge that it broke the law – because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.”

Until the SEC changed its policy in June, enforcement officials had insisted that defendants wouldn’t settle with the agency if they had to admit liability because they feared the collateral consequences of their admissions in private shareholder class actions. JPMorgan is in the midst of fierce litigation with its shareholders, who claim the bank lied about its Chief Investment Office in public filings dating back to 2010. So you might assume that the bank’s SEC admissions seal their win, and now it’s just a matter of how big a check JPMorgan will have to write to settle the case.

But if you look closely at what JPMorgan actually admitted, you’ll see that the SEC settlement won’t be of much use to shareholders in the class action. Don’t misunderstand me: JPMorgan is extremely unlikely to escape from the private shareholder case without paying a lot of money. That’s not because of the SEC settlement, however. As I’ll explain, the bank’s lawyers did a very good job of tailoring JPMorgan’s admissions to the SEC to minimize their impact in the class action. In fact, I suspect that future SEC defendants are going to look at the JPMorgan settlement as a model for how to quench regulators’ thirst for blood without spilling a drop in parallel shareholder litigation.

U.S. criminal laws don’t apply to conduct abroad: 2nd Circuit

Alison Frankel
Aug 30, 2013 19:11 UTC

Attention, American fraudsters! If you restrict your criminal activities to conduct outside of the United States, you’re safe from prosecution under U.S. laws.

That’s not exactly how a three-judge panel of the 2nd Circuit Court of Appeals worded its decision Friday in U.S. v. Alberto Vilar and Gary Tanaka, but it’s the effective result of the appellate court’s finding that criminal statutes – in particular, criminal securities fraud laws – don’t extend overseas. The opinion noted that the 2nd Circuit has long recognized a presumption against the extraterritorial application of U.S. criminal laws. But make no mistake, the Vilar ruling is a major interpretation of what the court acknowledged to be an open question after the U.S. Supreme Court’s 2010 admonition against overextending the scope of U.S. laws in Morrison v. National Australia Bank. Namely, does Morrison apply to criminal as well as civil laws? The 2nd Circuit panel – Judges Jon Newman, Jose Cabranes and Chester Straub – could not have answered the question more decisively. “The general rule,” wrote Cabranes, “is that the presumption against extraterritoriality applies to criminal statutes.”

That reasoning could result in the dismissal of some counts of the government’s indictment of onetime SAC Capital trader Mathew Martoma, whose lawyers at Goodwin Procter argued in a brief filed in June that Morrison precludes charges based on trading in the American Depository Receipts of Elan, a company whose stock trades on Irish and British exchanges. The intersection of Morrison and fraud prosecution is also at issue in a 2nd Circuit appeal by former Sky Capital executives Ross Mandell and Andrew Harrington, who were convicted of defrauding mostly British investors in London-traded securities.

Appeals court restricts Dodd-Frank protection for whistle-blowers

Alison Frankel
Jul 18, 2013 18:59 UTC

If Khaled Asadi, a former GE Energy executive who lost his job after alerting his boss to concerns that GE might have run afoul of the Foreign Corrupt Practices Act, had sued his old employer in New York or Connecticut, things might have worked out differently for him. Several federal trial judges in those jurisdictions have ruled that whistle-blowers who report corporate wrongdoing internally are protected by the Dodd-Frank Act of 2010, even though the statute defines whistle-blowers as employees who report securities violations to the Securities and Exchange Commission. But Asadi, who worked in GE Energy’s office in Amman, Jordan, filed a claim that the company had illegally retaliated against him in federal district court in Houston. And on Wednesday, the 5th Circuit Court of Appeals – with hardly a nod to contrary lower-court decisions in other circuits – ruled that Asadi is not a whistle-blower under Dodd-Frank because he talked to his boss and not the SEC.

The 5th Circuit opinion, written by Judge Jennifer Elrod for a panel that also included Judge Stephen Higginson and U.S. District Judge Brian Jackson (sitting by designation), highlights the tension between whistle-blower provisions in Dodd-Frank and the Sarbanes-Oxley Act of 2002. SOX, as you recall, directs employees to report possible wrongdoing up the corporate chain of command. SOX whistle-blowers must exhaust administrative remedies before they can sue and may only recover back pay. Dodd-Frank, on the other hand, directs whistle-blowers to bring their concerns to the SEC and permits them to sue for double the pay they lost through corporate retaliation. You can see why employees would rather bring claims under Dodd-Frank than SOX: They can get to court without clearing as many procedural obstacles and can recover twice as much money. You can also see why defendants argue that employees who went to their bosses instead of reporting to the SEC don’t qualify as Dodd-Frank whistle-blowers.

The SEC tried to solve this problem in 2011, when it implemented its final rule on Dodd-Frank whistle-blowers. In the provisions that dealt with anti-retaliation protection, the commission incorporated a reference to Sarbanes-Oxley, holding that Dodd-Frank gives employees a private cause of action against their employers if they have suffered retaliation for reporting violations to the SEC, cooperating with an SEC investigation or “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”

  •