Opinion

Alison Frankel

BofA, JPMorgan travel opposite roads to end MBS liability

Alison Frankel
Oct 31, 2013 19:46 UTC

For a change, JPMorgan’s rollercoaster negotiations with state and federal regulators to resolve the bank’s liability for rotten mortgage-backed securities did not make news Wednesday. Has there ever been more public dealmaking between the Justice Department and a target? It feels as though the public has been made privy to every settlement proposal and rejection, as if we’re all watching a soap operatic reality show. Will there be a reunion episode if the bank and the Justice Department end up finalizing the reported $13 billion global settlement, with Eric Holder and Jamie Dimon shouting imprecations at each other?

Bank of America filled the MBS news vacuum Wednesday. Its quarterly filing with the Securities and Exchange Commission disclosed that the bank – under Justice Department investigation for its securitization practices – has bumped up its estimate of litigation losses in excess of its reserves to $5.1 billion. The filing also said that staff lawyers from the New York attorney general’s office have recommended a civil suit based on Merrill Lynch’s mortgage-backed securities.

BofA also had some good news, though. Late Tuesday, U.S. District Judge Mariana Pfaelzer of Los Angeles granted tentative approval to the bank’s $500 million Countrywide MBS class action settlement, despite objections to the deal from the Federal Deposit Insurance Corporation (on behalf of 19 failed banks that owned Countrywide MBS) and several other institutions. Perhaps even more importantly, on Wednesday, two significant objectors to BofA’s proposed $8.5 billion put-back settlement with private Countrywide MBS investors dropped their challenges to the deal. In separate letters to New York State Supreme Court Justice Barbara Kapnick, who has presided over a sporadic but nearly concluded trial on the settlement, three Federal Home Loan Banks and two Cranberry Park investment vehicles asked to withdraw from the proceeding. The remaining objectors, led by AIG, Triaxx and the FHLB of Pittsburgh, filed a strong post-trial brief summarizing their evidence that the proposed settlement was obtained through a “conflicted, back-room, closed-door process” and “cannot be endorsed without running roughshod over the absent certificateholders’ interests.” But the objectors’ ranks are dwindling, and late withdrawals by MBS certificate holders that actually helped try the opposition case has to increase the pressure on Justice Kapnick to bless the deal.

If you step back from all of these incremental developments, you see two banks traveling opposite roads to the same hoped-for final destination: a resolution of all their liability for deficient mortgage-backed securities. JPMorgan is concentrating first on a deal with regulators, not with private investors. BofA, meanwhile, is inching toward an end to claims by private investors but has balked at paying out more money to regulators. Last week, as you surely remember, Bank of America lost its gamble on a trial of Justice Department allegations that Countrywide’s short-lived, high-speed “Hustle” underwriting system defrauded Fannie Mae and Freddie Mac. A federal jury in Manhattan found the bank liable on one civil fraud charge; U.S. District Judge Jed Rakoff has yet to determine damages. BofA also hasn’t settled the Federal Housing Finance Agency’s securities suits before U.S. District Judge Denise Cote of Manhattan, unlike JPMorgan, which agreed last week to pay $5.1 billion to end the FHFA litigation against it.

To a large extent, these different approaches were forced upon the banks. Because of Countrywide’s egregious mortgage practices, Bank of America was an early magnet for MBS claims. Countrywide was first targeted in an MBS class action all the way back in 2007, before it was even acquired by BofA. MBIA launched its enormous litigation against BofA in 2008, and the Gibbs & Bruns institutional investor group that instigated BofA’s put-back settlement sent a demand notice to Countrywide MBS trustee Bank of New York Mellon in 2010 – two years before Gibbs & Bruns sent similar breach-of-contract notices to trustees for other banks that issued mortgage-backed securities, including JPMorgan. It’s hard even to remember now that Bank of America reached billion-dollar put-back deals with Fannie Mae and Freddie Mac on the last day of 2010. By the time state and federal officials finally got serious about MBS fraud in early 2012, BofA was already battered and bruised by private mortgage-backed securities litigation.

It’s (finally) time for objectors to BofA’s MBS deal to make their case

Alison Frankel
Jun 4, 2013 13:15 UTC

To say that the hearing to evaluate Bank of America’s proposed $8.5 billion breach of contract settlement with investors in Countrywide mortgage-backed securities got off to a slow start would be something of an understatement. In a courtroom so crowded that New York State Supreme Court Justice Barbara Kapnick repeatedly admonished observers to clear a path to the door, the judge heard hours of pretrial motions, many on issues she regarded as already settled. In particular, objectors to the settlement – led by AIG, several Federal Home Loan Banks and other assorted pension and investment funds – told Kapnick that they should not be forced to proceed with opening statements until they’ve had a chance to take depositions based on privileged communications between Bank of New York Mellon, the Countrywide MBS trustee, and its lawyers at Mayer Brown. Kapnick ordered the documents produced late last month, and AIG counsel Daniel Reilly of Reilly Pozner said it wouldn’t be fair to begin a hearing to determine whether BNY Mellon made a reasonable decision to agree to the $8.5 billion settlement – which resolves potential claims by 530 trusts that Countrywide breached representations and warranties about underlying mortgage loans – until objectors have quizzed witnesses on the confidential material.

Kathy Patrick of Gibbs & Bruns, who represents BlackRock, Pimco, MetLife and other major institutional investors that negotiated the deal with BofA and BNY Mellon, said the objectors just wanted to delay Kapnick’s final reckoning of the settlement, which is being evaluated in a special proceeding under New York trust law. Reilly, who argued unsuccessfully last week for a stay of the case while the state appeals court considers whether it should be heard by a jury, insisted that he just wants the proceeding to be fair. Judge Kapnick, meanwhile, seemed preoccupied with getting the actual hearing under way. “I am trying to make this go ahead,” she told the objectors at one stage. “I am not going to reopen a point we spent an inordinate amount of time arguing about,” she said at another. “At some point, you have to get going with this.”

The delay issue came to a head in the afternoon session, when yet more motions to limit testimony and evidence had to be resolved. Reilly asked the judge to restrict Patrick from asserting that 93 percent of Countrywide MBS investors support the settlement when, in fact, the majority of certificate holders haven’t opined one way or the other. Patrick stood up and promised that she’d henceforth say that 93 percent do not object to the deal.

Preet Bharara’s breathtaking case against Countrywide and BofA

Alison Frankel
Oct 24, 2012 23:08 UTC

What a complaint U.S. Attorney Preet Bharara filed against Countrywide and Bank of America on Wednesday!

Earlier this month, when the New York Attorney General filed accusations of securitization fraud against JPMorgan Chase, I said we should put aside cynicism about the AG’s copycat allegations and be grateful that, at last, a government official was demanding accountability for systemic corruption in the mortgage-bundling business. The new complaint against BofA demands no such nose-holding: It asserts powerfully detailed — and original — accusations of billion-dollar fraud in the way Countrywide approved mortgages destined for purchase by Fannie Mae and Freddie Mac, and in Countrywide’s and BofA’s subsequent (alleged) refusal to repurchase defective loans.

To be sure, the U.S. Attorney had help from a whistle-blower, a former Countrywide Home Loans executive vice president named Edward O’Donnell. O’Donnell filed a relatively bare-bones False Claims Act complaint last February. As always in FCA cases, the complaint was sealed as the Justice Department checked out the allegations and deliberated whether to intervene in the case. Those deliberations can take years, but not in this case, when the government is under intense pressure to make good on promises of fighting mortgage fraudsters. Eight months after O’Donnell initiated his action in federal court in Manhattan, the U.S. Attorney’s office intervened, making the suit public.

How BofA was forced to settle $2.43 bln Merrill class action

Alison Frankel
Oct 1, 2012 23:06 UTC

Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison and Max Berger of Bernstein Litowitz Berger & Grossmann share an elevator bank at 1285 6th Avenue in New York City. Bernstein Litowitz, a 50-lawyer plaintiffs’ firm, has space on the 36th and 38th floors. Paul Weiss’s 750 lawyers occupy much of the rest of the office building. Karp and Berger are also old frenemies: In 2004, they negotiated Citigroup’s $2.65 billion settlement of shareholder claims in the WorldCom accounting fraud case. Over the last several months, with Karp representing Bank of America and Berger one of the lead counsel for shareholders suing over the bank’s acquisition of Merrill Lynch in 2008, the two have spent a lot of time riding the elevator between Berger’s office on the 36th floor and Karp’s on the 30th, discussing a resolution of the class action.

With an Oct. 22 trial date looming and no sign from U.S. District Judge Kevin Castel that he would end the case by granting summary judgment to either side, those elevator rides (and sessions with mediator Layn Phillips of Irell & Manella) led to the $2.43 billion settlement that Bank of America announced Friday. It’s the fourth-largest-ever securities class action settlement by a single defendant (behind Tyco’s $2.975 billion deal in 2007, Cendant’s $2.83 billion settlement in 1999, and the Citi agreement in 2004) and the largest in a case that involved no accounting fraud or criminal convictions. The settlement is vindication for Richard Cordray of the Consumer Financial Protection Bureau, who launched the litigation on behalf of two Ohio pension funds back in 2009, before he was voted out of office as Ohio’s attorney general, and for the three shareholders’ firms that litigated the case for almost four years: Bernstein Litowitz; Kessler Topaz Meltzer & Check; and Kaplan Fox & Kilsheimer.

The plaintiffs in this case will be asking Castel to approve $150 million in fees, and they’ve earned them. Remember, the SEC was originally willing to settle allegations against BofA for disclosure failures in the Merrill acquisition for $33 million. This settlement reflects the nuanced understanding of Bank of America’s failure to disclose billions of dollars in escalating Merrill Lynch losses that shareholders’ counsel gained through dozens of depositions and millions of pages of discovery. The plaintiffs survived motions to dismiss by the bank and individual defendants, motions to reconsider the denial of their dismissal motions, and opposition to class certification. They clearly persuaded Castel of the value of their claims; his class certification ruling rejected defense arguments that shareholders weren’t injured by the alleged disclosure failures. Bank of America repeated those arguments in its motion for summary judgment, but there’s little chance the judge would have granted the motion. From all indications, Castel had cleared his calendar and planned to try this case, in what would surely have been one of the most celebrated trials stemming from the financial crisis.

BofA catches big break: Walnut drops challenge to $8.5 bln MBS deal

Alison Frankel
Jul 24, 2012 15:52 UTC

Late last month, without any fanfare, a New York appeals court issued a terse, one-page ruling that upheld the dismissal of Walnut Place’s breach-of-contract suit against Countrywide, Bank of America and Countrywide’s mortgage-backed securitization trustee, Bank of New York Mellon. It was an abrupt end for what was once a promising attempt at vindication for an MBS investor. It was also a huge setback for Walnut, its lawyers at Grais & Ellsworth and all the other Countrywide MBS investors who were counting on litigation against BofA as an alternative to the bank’s proposed $8.5 billion global settlement of breach-of-contract, or put-back, claims.

That one-page appellate ruling reverberated powerfully on Monday, when Walnut – otherwise known as the Boston hedge fund Baupost – filed a request to withdraw from the special New York proceeding to evaluate BofA’s MBS settlement. Framed as a letter to New York State Supreme Court Justice Barbara Kapnick from Grais partner Owen Cyrulnik, the request offered no explanation for Walnut’s withdrawal; Cyrulnik and Baupost spokeswoman Elaine Mann declined to comment.

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York’s highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut’s suit makes it very difficult for the hedge fund – or any other MBS investor – to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn’t economically rational to continue its challenge to the $8.5 billion deal. (From what I’ve heard, Bank of America did not pay Walnut anything in exchange for the hedge fund’s withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

What does Syncora’s $375 million BofA deal mean for MBIA?

Alison Frankel
Jul 19, 2012 14:17 UTC

Reporting on the implications of the bond insurer Syncora’s $375 million settlement with Bank of America has been a Rashomon experience: Everyone I talked to had something different to say about what drove Tuesday’s settlement and what it means for MBIA, which has been litigating its own mortgage-backed securities breach-of-contract claims in parallel with Syncora. So if you were expecting a clear-cut answer on whether the Syncora settlement is good or bad for MBIA, you’re going to be disappointed. Syncora and MBIA were both litigating put-back claims against Countrywide and BofA before New York State Supreme Court Justice Eileen Bransten, who has delivered important simultaneous rulings for the bond insurers. But the similarities between Syncora and MBIA end in Bransten’s courtroom. When it comes to negotiations with BofA, they’re in very different postures.

The good news for MBIA: Bank of America’s settlement with Syncora shows that the bank remains willing and able to resolve claims that the mortgages underlying Countrywide-sponsored securities breached representations and warranties. In 2010 and 2011 Bank of America reached reps-and-warranties deals with the bond insurer Assured Guaranty; with the government-sponsored entities Fannie Mae and Freddie Mac; and with 22 institutional investors who backed a global $8.5 billion settlement of MBS investors’ put-back claims. Since then, the bank has been stuck in litigation with objectors to the proposed $8.5 billion global deal and in sniper fire with Fannie Mae. The Syncora settlement puts BofA back on the settlement track.

The settlement also shows that momentum from the litigation helps the monolines. My understanding is that Syncora and Bank of America have been in settlement talks for a long time, negotiating behind the curtain while the litigation plays out on a public stage. Specific events in the monoline cases against the banks – even developments as significant as Bransten’s loss-causation ruling or the battle over Bank of America’s successor liability for Countrywide’s wrongdoing – don’t have a direct impact on negotiations. That said, when U.S. District Judge Paul Crotty of Manhattan delivered a very insurer-friendly ruling on loss causation last month in Syncora’s case against JPMorgan, BofA took note. That’s also a positive for MBIA.

Fee request in BofA case is ammo for plaintiffs’ critics

Alison Frankel
Jul 5, 2012 22:53 UTC

Remember the vicious fight between plaintiffs’ lawyers in competing New York and Delaware derivative suits against Bank of America’s board? In April, plaintiffs in the federal case in New York reached a proposed $20 million settlement with the defendants, which prompted their Delaware Chancery Court rivals to scream that the New York lawyers were settling on the cheap after an inadequate investigation. They attempted in both Delaware and New York to block the deal, arguing that the derivative suit should be worth as much as $500 million, but failed to enjoin the settlement. On Thursday, plaintiffs’ lawyers in the New York case filed a motion for preliminary approval of the $20 million deal.

A whopping $13.6 million of the money, they said in the motion, should go to them for fees and expenses. That’s 68 percent of the entire settlement, which will be paid by one of BofA’s carriers of directors and officers insurance. This, folks, is what breeds skepticism about shareholder litigation.

Let me say upfront that it’s not completely outside the realm of possibility that the fee request is justified. Lead plaintiffs’ lawyers at Saxena White and Kahn Swick & Foti made what appears to be a tactical decision to divide the fee issue from the settlement approval process, so they’ll file a formal motion for approval of their request for $13 million in fees and $600,000 in expenses after the settlement itself gets a thumbs-up from U.S. District Judge Kevin Castel. Thursday’s filing said only that the plaintiffs’ lawyers have sunk 24,000 hours into the litigation, representing $10.4 million in time, and that they deserve a 25 percent enhancement of their hourly billings. (Just as an FYI, there are 8,760 hours in a 365-day year, and this case was filed in 2009.) I left phone messages with four partners at Saxena and Kahn Swick, as well as with liaison counsel Curtis Trinko of the Law Offices of Curtis V. Trinko, requesting more information on what they did in those 24,000 hours. None of them called me back.

MBIA appeals loss-causation ruling; joins BofA, Syncora

Alison Frankel
Feb 8, 2012 16:09 UTC

The megabillion-dollar game of chicken between Bank of America and the bond insurer MBIA just got even more perilous. On Monday MBIA filed a notice that it is cross-appealing the ruling by Manhattan State Supreme Court Justice Eileen Bransten. MBIA wants reconsideration of Bransten’s finding that the bond insurer is not entitled to summary judgment on its claims that Countrywide breached representations and warranties on the mortgage-backed securities MBIA agreed to insure. You might think MBIA’s decision to appeal is a surprise, given the many routes to recovery Bransten gave MBIA on its insurance fraud claims against Countrywide. But as always in the incredibly complex litigation between Bank of America and MBIA, there are many layers to every move by either side.

Bransten’s rulings were undoubtedly a boon for the monolines Syncora and MBIA. The judge said the bond insurers don’t have to establish a direct causal link between the alleged deficiencies in the mortgage loans underlying the securities they agreed to insure and the subsequent payouts the insurers had to make on those MBS policies. Under Bransten’s opinion, MBIA and Syncora can prove insurance fraud merely by establishing that they relied on Countrywide’s alleged misrepresentations when they agreed to write the policies at issue in the litigation. And to prove a breach of the insurance agreements, they need only prove that Countrywide materially misrepresented the risk profile of the underlying mortgage pools.

Nevertheless, two days after Bransten issued her opinion, Syncora’s lawyers at Debevoise & Plimpton filed a notice of appeal. That’s because the decision wasn’t all good news for the monolines: Bransten denied Syncora and MBIA summary judgment on their interpretation of the MBS contracts they signed with Countrywide. The monolines argued that Countrywide was required to buy back every underlying mortgage that didn’t live up to the representations and warranties the issuer made about the mortgage pool. Bransten, however, said the contract language was too ambiguous for the issue to be decided on summary judgment. Syncora said it was seeking a reversal of that part of the ruling.

Bad news for Countrywide MBS investors: LA judge tosses BofA

Alison Frankel
Feb 6, 2012 15:56 UTC

None of the firms battling Countrywide and Bank of America on behalf of mortgage-backed securities investors has dedicated more resources to the fight than Quinn Emanuel Urquhart & Sullivan. Quinn represents some of the biggest MBS claimants in suits against Countrywide, including AIG and the Federal Housing Finance Agency. The firm also represents MBIA in the bond insurer’s long-running New York State case against Countrywide. If anyone on the plaintiffs’ side has the goods on Countrywide and Bank of America, in other words, it’s Quinn Emanuel.

That’s why a ruling Thursday by U.S. District Judge Mariana Pfaelzer of Los Angeles federal court is such a blow to Countrywide MBS investors. Pfaelzer, who’s overseeing the consolidated federal-court MBS litigation against Countrywide, dismissed Allstate’s successor-liability and fraudulent-conveyance claims against Bank of America, with prejudice. Quinn represents Allstate, and offered detailed allegations that Bank of America’s 2008 acquisition of Countrywide was structured to deliver Countrywide’s revenue-producing businesses to BofA while simultaneously walling off the mortgage company’s looming liability for subprime mortgages and mortgage-backed securities.

Pfaelzer said, however, that Quinn Emanuel hadn’t come up with sufficient facts to back its assertions. She rejected two different theories: first, that Bank of America and Countrywide engaged in a fraudulent conveyance or transfer; and second, that BofA’s acquisition of Countrywide was a de facto merger. The judge has previously found for Bank of America in two other rulings on the de facto merger question (here’s Pfaelzer’s April 2011 opinion in an MBS class action against Countrywide), but this is the first time she’s delivered a definitive ruling on fraudulent-conveyance allegations.

No joy for MBS investors in NY judge’s bond insurer rulings

Alison Frankel
Jan 4, 2012 22:35 UTC

Tuesday’s parallel rulings by Manhattan State Supreme Justice Eileen Bransten in MBIA and Syncora suits against Countrywide were a big win for the bond insurers. The judge concluded that MBIA and Syncora need only show that Countrywide materially misled them at the time they agreed to write insurance on Countrywide mortgage-backed notes, not that the alleged misrepresentations led directly to MBS defaults and subsequent insurance payouts. Bransten is considered a leading judge on MBS issues, so her grant of summary judgment on the insurance fraud and contract issues should be a boon to all of the monolines engaged in do-or-die litigation with MBS issuers.

But for MBS investors hoping Bransten would set a low bar for claims that Countrywide breached mortgage-backed securitization agreements, the rulings have to be considered a disappointment. Both Syncora’s lawyers at Debevoise & Plimpton and MBIA’s counsel at Quinn Emanuel Urquhart & Sullivan had moved for summary judgment on a baseline question: could they demand that Countrywide repurchase any underlying mortgage loan that materially breached the MBS issuer’s representations and warranties in securitization agreements?

If Bransten had agreed with the Syncora and MBIA interpretations of the agreements’ put-back clauses, the bond insurers would have had to show only that an underlying loan was deficient, not that the alleged deficiency contributed to the mortgage’s default — or, for that matter, that the underlying loan even was in default. The insurers wanted the judge to rule that as a matter of contract, Countrywide was required to repurchase every flawed mortgage in underlying pools.

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