Alison Frankel

Jed Rakoff has bounced back quite nicely, thank you, from his appellate smackdown in the Securities and Exchange Commission’s collateralized debt obligation case against Citigroup. In the unlikely event you’ve forgotten, earlier this month the 2nd Circuit Court of Appeals stayed the SEC’s case before Rakoff, finding a strong likelihood that the government and Citi would prevail in their argument that the judge overstepped his bounds when he rejected their proposed $285 million settlement. Despite the notably critical language in the three-judge panel’s per curiam ruling in the Citi case, Rakoff, a U.S. Senior District Judge in federal court in Manhattan, seems undaunted in his determination to hold the SEC accountable. On Tuesday, he ruled that the agency must disclose documents used to prepare Goldman CEO Lloyd Blankfein for his deposition in the Rajat Gupta insider trading case.

Rakoff’s 10-page ruling, issued on the same day that he said the government can use wiretap evidence in the parallel Gupta criminal case, rejects the SEC’s argument that work-product privilege protects its preparation of Blankfein. The judge pointed to a 1993 case from the 2nd Circuit, In re Steinhardt Partners, and a 2003 ruling from the same appeals court, In re Grand Jury Subpoenas, in holding that the government waived its privilege claim when it voluntarily shared materials with Blankfein, a third-party witness. Rakoff said that Blankfein doesn’t have a “common interest” with the government in the Gupta case, so disclosures to him amount to “‘deliberate, affirmative, and selective’ use of work product [that] waives the SEC’s ability to now assert the privilege against the defendants.”

Here’s the fascinating backstory. At Blankfein’s deposition on Feb. 24, Gupta’s lawyers at Kramer Levin Naftalis & Frankel asked him standard questions about how he prepared to testify. Blankfein, according to Kramer Levin’s March 1 brief, revealed that on two occasions leading up to the deposition, he met with SEC lawyers, an agent from the Federal Bureau of Investigation, and prosecutors from the Manhattan U.S. Attorney’s office. At those two sessions, he said, prosecutors asked him 75 percent of the prep questions; the SEC asked the other 25 percent of the questions. Blankfein’s own lawyers at Sullivan & Cromwell, according to Kramer Levin, didn’t ask him questions at the two prep sessions with government lawyers. Blankfein also disclosed that government lawyers showed him 10 or 12 documents in advance of his deposition testimony.

The SEC cut off Kramer Levin’s questioning when Gupta’s lawyers tried to follow up with more questions about Blankfein’s preparation, claiming privilege. According to Kramer Levin’s brief, Blankfein’s S&C lawyer, who was also at the deposition, “made plain that the objections were the SEC’s alone and were not being asserted by the witness or Goldman.” Kramer Levin then took the matter to Rakoff, who asked for briefs after a joint phone call on the issue.

In Tuesday’s decision, the judge ruled that Kramer Levin may ask Blankfein follow-up questions about the government-led deposition prep sessions — and that the government must turn over to the defense any documents Blankfein was shown. (Interestingly, Rakoff disregarded one of his own old rulings, Morales v. United States, a 1994 case in which he upheld a privilege claim by prosecutors. The judge said he hadn’t considered Steinhardt when he ruled in Morales.)

Here’s what Rakoff wrote:

To allow the invocation of work product protection to succeed in such circumstances would leave the party taking a deposition with no remedy to determine how, if at all, a witness’s testimony was influenced, not by advice from the witness’s own counsel, but by suggestions from the questioner’s adversary, who, especially if possessing governmental power, was in a position to unfairly pressure the witness…

By asking Blankfein what topics he recalls were discussed, what questions he was asked and what documents he was shown, defendants seek to discover how the preparation sessions affected Blankfein’s testimony, and do not demonstrate a mere naked attempt to obtain the SEC’s and the USAO’s legal opinions and strategy.

Rakoff rulings against government privilege claims are becoming a habit. I reported last month on his order that the Justice Department disclose emails the Solicitor General’s office created when it was drafting a brief in an immigration case at the U.S. Supreme Court. Jess Bravin of the Wall Street Journal wrote on March 13 that Rakoff said the immigration case had grown “curiouser and curiouser” with additional government disclosures. According to Bravin, the Justice Department is consi de ring a correction of possibly misleading statements in the Supreme Court brief.

It’s not entirely clear how much Tuesday’s ruling will benefit Gupta. Blankfein’s testimony, after all, doesn’t address the core relationship between Gupta and Raj Rajaratnam, the now-convicted hedge fund founder Gupta is accused of tipping off. But establishing the government’s heavy-handed coaching of Blankfein, who is expected to testify about Goldman board meetings Gupta attended, could help Kramer Levin raise doubts about the strength of the government’s criminal and civil cases.

Lead Gupta counsel Gary Naftalis of Kramer Levin declined to comment. An SEC spokesman said the agency is “reviewing the opinions.”

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Goldman’s sweep for internal emails containing client insults like “muppet,” a scoop by my Reuters colleague Lauren LaCapra, got lots of well-deserved snark as the bank’s latest too-little-too-late response to Greg Smith’s “Why I Am Leaving Goldman Sachs” op-ed. In case you’re just returning from a vacation in Antarctica, which is pretty much the only way you could have avoided the financial world’s equivalent of Kim Kardashian’s divorce, Smith, a London-based Goldman executive director, said he was sick and tired of the bank’s callous treatment of its clients. “It’s purely about how we can make the most possible money off of them,” Smith wrote in the New York Times. “If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”

Why Smith’s piece was considered a revelation is mystifying, given Goldman’s starring role in last April’s 635-page Senate report on Wall Street and the financial crisis. We all know about the Securities and Exchange Commission scrutiny of the Abacus deal, in which Goldman permitted hedge fund manager John Paulson to pick underlying mortgages that doomed the collateralized debt obligation it was hawking to clients, and the famous “one shitty deal” otherwise known as the Timberwolf mortgage-backed CDO. As the Senate report explains, both were part of Goldman’s institutional effort to secretly reverse its own long position in residential mortgage-backed securities even as it marketed MBS investments to clients.

That’s the campaign U.S. District Judge Victor Marrero of federal court in Manhattan detailed in a 64-page ruling Wednesday that greenlights most securities and common law fraud claims by investors in two other rigged-to-fail CDOs, Hudson 1 and Hudson 2. (Here’s Jon Stempel’s Reuters story on the ruling.) Marrero’s decision doesn’t have the freewheeling rhetorical flair (or 1980s pop references) of Delaware Chancellor Leo Strine‘s much-discussed opinion on Goldman’s conflicts in Kinder Morgan’s proposed acquisition of El Paso Corporation, but in a way it’s a much more devastating ruling. Marrero portrays a sweeping, months-long effort, initiated by Goldman CFO David Viniar, to shed the bank’s exposure to subprime mortgages in mortgage-backed securities — and simultaneously to take advantage of clients who were slower to perceive the looming MBS market collapse.

As I read through Marrero’s decision, I kept thinking of the movie Margin Call, in which Kevin Spacey suffers a crisis of conscience as he oversees a sell-off of his bank’s MBS portfolio, at the expense of the clients buying the securities. Goldman, like the unnamed investment bank in the movie, came to a sudden realization that it had to shed MBS exposure. But its bankers were much smarter than their counterparts in Margin Call. They didn’t just sell off their portfolio, according to the Marrero ruling. They created doomed CDOs, hedged against the (inevitable) failure of their own instruments, and gladly accepted fees from the clients they allegedly duped into buying the securities. It was a breathtakingly brilliant campaign, if you’re of a ruthless bent. Goldman’s secret MBS short, as Marrero depicts it, tricked not just its own clients but the entire MBS marketplace.

I should note here that Marrero’s ruling is preliminary. To decide whether to dismiss the case at this stage, the judge must assume all of the allegations in the Hudson investors’ complaint are true. (The investors, represented by Berger & Montague, relied heavily on evidence from the Senate subcommittee report.) There hasn’t been additional discovery in the Hudson case, and Goldman’s lawyers at Sullivan & Cromwell have argued that the bank fully disclosed its hedge against the CDO to the sophisticated investors who purchased Hudson instruments; other federal judges who’ve considered securities fraud class actions based on similar allegations regarding other controversial Goldman CDOs have agreed with the bank’s argument. (Goldman declined a Reuters request to comment on the ruling.)

With those caveats, Marrero portrays a scheme he describes as “not only reckless, but bordering on cynical.” As early as 2005, he said, Goldman began to understand through its own underwriting and its relationship with the outside mortgage appraiser Clayton Holdings that mortgage lending standards were deteriorating. Goldman Sachs had bet heavily on the continued success of mortgage-backed securities, and by the summer of 2006, knew that was a bad bet. The problem, according to the co-manager of the bank’s structured products unit (quotes in Marrero’s ruling), was that there were “few opportunities” to shed Goldman’s MBS risk. The market believed the bank was “very long for the foreseeable future,” according to another Goldman official Marrero cited.

Nevertheless, in December 2006, CFO Viniar directed the structured finance group to begin aggressively ridding the bank of subprime risk and positioning Goldman to take advantage of “very good opportunities as the market goes into what is likely to be even greater distress.” Thus was born the program of shorting Goldman-devised (and Goldman-sold) CDOs based on mortgage-backed securities. The program was so successful that according to filings Marrero cited, Goldman had a net short position of $2.1 billion in credit default swaps on mortgage-backed instruments by March 2007. By August 2007, Goldman told the SEC, it had reduced its overall exposure to subprime mortgage backed securities from $7.2 billion to $2.4 billion. Through what Marrero called “the fine art of financial transubstantiation,” Goldman (in the words of one of its bankers) managed “to make some lemonade from some big old lemons.”

The Hudson CDO offerings came smack in the middle of Goldman’s risk reduction campaign, context that was crucial to Marrero’s decision not to dismiss most of the investors’ case. Goldman’s own actions — “selecting the referenced (residential) MBS and then betting heavily against them” — indicated to Marrero that the bank well understood the risks of its subprime exposure and “maneuvered” to offload it. “All Goldman needed for the success of its venture was large ‘sophisticated’ investors (to) drink up the bittersweet potion despite Goldman’s boilerplate warnings,” the judge wrote. “Goldman thus managed to shift its significant subprime risk over to its own clients.”

That’s muppeteering on a whole different level.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Chancellor Leo Strine of Delaware Chancery Court is thoroughly sick of what he perceives as Goldman Sachs’ disregard for the M&A rules everyone else plays by. His 34-page decision Wednesday in a shareholder challenge to Kinder Morgan’s $21.1 billion acquisition of El Paso Corp is filled with scorn for Goldman’s eagerness to remain an adviser to longtime client El Paso even though Goldman held a $4 billion stake and two board seats at Kinder Morgan. Writing four months after he took Goldman to task for manipulating valuations in the Southern Peru Copper case, Strine used words like “tainted,” “furtive,” and “troubling” to describe the investment bank’s continuing influence on El Paso CEO Douglas Foshee, even after it was supposed to be walled off from the Kinder deal.

“This behavior,” Strine wrote, “makes it difficult to conclude that the [El Paso] board’s less-than-aggressive negotiating strategy and its failure to test Kinder Morgan’s bid actively in the market through even a quiet, soft market check were not compromised by the conflicting financial incentives of these key players.”

That’s tough talk, and Strine supplied some juicy details about Goldman’s conduct to back it. For one thing, the chancellor wrote, Goldman’s lead El Paso banker, Steve Daniel, didn’t inform El Paso that he personally had a $340,000 investment in Kinder Morgan. According to Strine, Goldman and El Paso also structured the fee arrangement for Morgan Stanley — the financial adviser the board engaged for the Kinder Morgan negotiations in order to wall off Goldman — so that Morgan Stanley was only paid if El Paso agreed to the acquisition. And Goldman chairman Lloyd Blankfein, Strine wrote, made a really peculiar call to El Paso CEO Foshee to assure Goldman’s continued role as an El Paso adviser. Strine quoted from the “obsequious” draft script Steve Daniel prepared for Blankfein: “Hello Doug — it’s been a long time since we have had the chance to visit/[I] wanted to reach out and say thank you for everything from [Goldman] …./You have been very good to [Goldman] in having us help on all kinds of transactions over the years …./And of course I was very pleased you reached out to us on this most recent matter [the Kinder Morgan proposal].”

Goldman was only making $20 million in advisory fees (and a spot in M&A league tables) from El Paso, Strine wrote. So the bank’s strenuous efforts to make sure El Paso accepted Kinder Morgan’s offer certainly appeared to be motivated by the benefits the deal would bring to Kinder Morgan — thus enhancing Goldman’s $4 billion stake in Kinder. “Goldman’s claim that it was capable of putting aside its $4 billion investment in Kinder Morgan when advising El Paso on its strategic options is hard to square with the record evidence demonstrating the lengths to which Goldman would go to secure an advisory fee of $20 million from El Paso — a fraction of the dollar size of its Kinder Morgan investment — in connection with the merger,” Strine wrote. “At this stage, I am unwilling to view Goldman as exemplifying an Emersonian non-foolishly inconsistent approach to greed, one that involves seeking lucre in a conflicted situation while simultaneously putting the chance for greater lucre out of its ‘collective’ mind.” (I think he was refering to the philospher Ralph Waldo Emerson.)

Bad news for Goldman must be good news for shareholder lawyers from Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer, right? Not necessarily. Strine declined to enjoin a shareholder vote on the acquisition because he didn’t want to preclude shareholders from approving the Kinder Morgan offer, which may be their best option. He went even farther than that, though. Strine noted Bernstein Litowitz and G&E can pursue after-the-fact money damages against the defendants, but cautioned that they’d have a hard time making out an aiding and abetting case against Goldman. Despite finding “a reasonable likelihood of success in proving that the merger was tainted by disloyalty,” the chancellor said it was “at best doubtful” that shareholders could tag Goldman for any shortfall in the price they got from Kinder Morgan because Goldman disclosed its biggest conflict (though not its only one) to the El Paso board.

Delaware law, said Delaware’s leading jurist, simply leaves him powerless to right Goldman’s wrongs. “I share the plaintiffs’ frustration that the traditional tools of equity may not provide the kind of fine instrument that enables optimal protection of stockholders in this context,” the chancellor wrote. “The kind of troubling behavior exemplified here can result in substantial wealth shifts from stockholders to insiders that are hard for the litigation system to police.” (UPDATE: Goldman counsel John Hardiman of Sullivan & Cromwell referred me to a Goldman spokesman, who sent an email response to the ruling: “We respect the judge’s opinion but want to be clear that we stood by our client through this process, encouraging them to get independent views from another adviser. We were also transparent with El Paso about our relationship with Kinder Morgan and the related issues.”)

Strine meanwhile left El Paso CEO Foshee dangling on a meat hook. As I’ve explained, shareholder lawyers asserted that Foshee — who served as El Paso’s lone negotiator with Kinder Morgan — was eager to sell because he wanted Kinder Morgan’s help with a post-deal management buyout of El Paso’s exploration and pipeline business. At oral argument before Strine on Feb. 9, defense counsel from Wachtell Lipton Rosen & Katz (for El Paso) and Weil, Gotshal & Manges (for Kinder Morgan) downplayed the plaintiffs’ evidence on the supposed management buyout, which consisted of a couple emails and brief conversations between Foshee and Kinder Morgan CEO Richard Kinder. Strine said in Wednesday’s ruling that at this preliminary stage in the case, he has to credit the allegations against Foshee.

The chancellor was relentlessly snarky about the El Paso CEO (who, remember, hasn’t yet appeared live in Strine’s courtroom.) “It may turn out after trial that Foshee is the type of person who entertains and then dismisses multibillion dollar transactions at whim,” the chancellor wrote. “Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinder over canapés and forgotten about the next day. It could be. Or it could be that Foshee is a very smart man, and very financially savvy. He did not tell anyone but his management confreres that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted. Thus, he decided to keep quiet about it and approach his negotiating counterpart Rich Kinder late in the process — after the basic deal terms were set — to maximize the chance that Kinder would be receptive.”

Let’s recap: Strine unleashed his stingingly robust vocabulary to describe the alleged wrongs of Goldman and Foshee, concluding that the El Paso/Kinder Morgan deal was likely tainted as a result of their conflicts. Yet he said there was nothing he could do to fix things right now, and added that there’s a good chance shareholders won’t be able to recover anything later against Goldman. If you’re keeping score, that leaves only the El Paso board and Kinder Morgan unscathed by a ruling that essentially maintains the status quo.

The chancellor seems to be hoping that Goldman and El Paso will cough up some money for shareholders just to avoid the embarrassment of a full-blown trial and another nasty ruling from him. He said as much at the end of the opinion: “Although an after-the-fact monetary damages claim against the defendants is not a perfect tool, it has some value as a remedial instrument, and the likely prospect of a damages trial is no doubt unpleasant to Foshee, other El Paso managers who might be added as defendants, and to Goldman,” Strine wrote. (I should note that if the deal goes through as expected, Kinder Morgan will likely indemnify El Paso for any payments to shareholders; Foshee is surely covered by D&O insurance, although he could meet resistance from his insurer if he’s found to have breached his duty.)

Plaintiffs’ lawyer Mark Lebovitch of Bernstein Litowitz, who argued for shareholders at the Feb. 9 hearing, told me he’ll take what the chancellor is giving. “We think the court recognized that Goldman Sachs had no business being in this deal,” he said. “Our clients are going to press full steam ahead to hold the defendants accountable.”

But is this really how we want the court system to work? Strine said he was afraid to enjoin the shareholder vote because Kinder Morgan could then walk away from the proposed acquisition, costing El Paso stockholders billions in lost equity. Does that mean the Delaware courts are unwilling to act against any single-bidder deal, no matter how tainted the process that produced it? At the Feb. 9 hearing, Strine himself mused about the consequences of excusing conflicts in the name of shareholder interests. “So you don’t do the injunction,” he said. “And time after time, you don’t do the injunction. And so … the marginal potential for corruption and diversion just grows into being part of the M&A process, because the remedial tools of later on trying to deal with monetary damages is just not a very precise one.”

Wednesday’s ruling is Strine’s surrender. He goes out shooting, but he goes out.

I sent email requests for comment to El Paso counsel Paul Rowe of Wachtell and Goldman counsel John Hardiman of Sullivan & Cromwell. Neither got back to me.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Back when former Goldman Sachs director Rajat Gupta’s most pressing problem was the Securities and Exchange Commission’s civil case against him, his defense scored a small victory when the SEC agreed to drop an administrative proceeding against him and brought civil charges in federal court instead. Gupta’s lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, had fought to have Gupta’s case heard by a federal judge, rather than an SEC administrative law judge, because the rules of evidence in administrative proceedings favor the agency. Among other things, the SEC can admit hearsay evidence, and defendants don’t have the same rights to depose opposing witnesses. Although the SEC can’t seek the same penalties in administrative proceedings as it can in federal court, they can be an effective way for the agency to make a statement about improper conduct.

Except when the defendants win.

On Friday, the SEC’s chief administrative law judge, Brenda Murray, entered a painstaking 58-page decision that cleared former State Street executives John Flannery and James Hopkins on all of the SEC’s sprawling allegations that they misled investors about the mortgage-backed securities holdings in State Street bond funds. Murray found that the agency failed to show at trial that Flannery and Hopkins violated any securities laws in communicating with investors about the funds’ subprime MBS holdings. She went out of her way to describe the former State Street execs as candid, believable witnesses who were frustrated to be on trial.

Murray’s ruling is yet another courtroom rebuke to the SEC, which in the last few years has seen several high-profile trials end in victory for defendants. Most notably, in 2009 a San Francisco federal judge dismissed stock options backdating charges against Broadcom executives; and in 2010 a Manhattan federal judge exonerated two traders in a landmark SEC case alleging insider trading in credit-default swaps. The State Street loss is perhaps an even bigger black eye for the SEC, given that the loss came in an administrative proceeding, the agency’s home turf.

“This is a case where the SEC should never have proceeded against my client,” said Mark Pearlstein of McDermott Will & Emery, who represented former State Street Americas chief investment officer Flannery. “We felt all along that if we received a fair hearing we would prevail. Chief judge Murray gave us a very fair hearing.”

Hopkins, who was a former head of project engineering for State Street, was represented by John Sylvia of Mintz Levin. “We and our client are thrilled,” Sylvia said. “We’ve maintained from the outset that this is a case that never should have been brought.”

The ruling may be a setback for the SEC in another way as well. Agency lawyers urged the chief ALJ to adopt a narrow interpretation of the U.S. Supreme Court’s June 2011 ruling in Janus Capital v. First Derivative Traders. In Janus, the court ruled that a mutual fund adviser isn’t liable for the fund’s allegedly false statements in a prospectus because the adviser did not make the statements at issue. The SEC argued that the Janus decision should apply only to private securities fraud cases, and not to its causes of action. The administrative law judge, citing a ruling by U.S. district judge Colleen McMahon in Securities and Exchange Commission v. Kelly, said Janus extends to the SEC’s allegations.

In the end that didn’t matter in the case against Flannery and Hopkins, because Murray found that the SEC’s allegations of misstatements fell short. But the agency may want to think twice about asking the full commission to review the chief ALJ’s reasoning on Janus. The SEC, which told Reuters that it is reviewing the ruling, has three weeks to decide whether to appeal Murray’s initial determination to the full commission.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Grupo Mexico’s lead lawyer, Alan Stone of Milbank, Tweed, Hadley & McCloy, told me Monday that the company was “shocked” by Chancellor Leo Strine’s 106-page Oct. 14 ruling that the company owes $1.26 billion to the shareholders of Southern Peru Copper Company — the second-biggest shareholder derivative award in history.

It is a pretty shocking ruling. Strine found that Grupo Mexico, which at the time owned more than 50 percent of the shares of Southern Peru, basically forced the publicly-traded company to overpay, in stock, for Minera, Grupo’s privately-held Mexican mining company. In reaching that conclusion, the Chancellor managed to do three remarkable things: He rejected the judgment of Goldman Sachs, which advised Southern Peru on the deal; he questioned decisions by former Wachtell, Lipton, Rosen & Katz partner Harold Handelsman, who represented a minority owner of Southern Peru that was eager to cash out its stake; and he concluded that a special board committee of investment bankers conducted a tainted analysis. From the lead judge in a court that’s best known for making it almost impossible to prosecute a shareholder derivative suit successfully, this is a ruling every securities and corporate lawyer should read. (Plus, it’s written in Strine’s usual fluent, engaging style.)

Don’t cry too hard for Grupo Mexico (if you happen to be the sort of person who cries for corporate defendants found liable of breaching their duty to shareholders). Not only is it planning to appeal, according to Milbank’s Stone, but it now owns about 80 percent of the shares of Southern Peru, so even if it loses on appeal and has to pay up, it’s basically moving money from one pocket of Grupo Mexico’s fat wallet to another.

Nevertheless, for the sake of fairness, here’s Grupo’s comment: “The decision is not supported by the evidence presented at trial and is inconsistent with Delaware law,” Stone told me. “The court held the admittedly independent special committee … to an unrealistic and unachievable standard. Moreover, the court substituted its judgment not only for highly sophisticated board members but also for that of Goldman Sachs.”

So with all that gravitas weighing in support of the Southern Peru decision essentially to pay Grupo $3.1 billion in stock for Minera, how did plaintiffs’ lawyers at Prickett, Jones & Elliott and Kessler Topaz Meltzer & Check convince Chancellor Strine the deal was improper? (It wasn’t by working quickly. Strine quotes Vice-Chancellor Lamb, who handled the suit for several years after it was filed in 2004, criticizing the plaintiffs’ lawyers for failing to prosecute the case, then adds his own chastisement.)

But the plaintiffs’ lawyers ultimately came up with evidence that when Goldman Sachs evaluated Grupo’s offer to sell Southern Peru Minera, it concluded that under a strict valuation analysis, the Mexican company wasn’t worth anything approaching the value of the shares Grupo Mexico wanted for it.

As the judge wrote: “Goldman summed up the import of these various analyses in an ‘Illustrative Give/Get Analysis,’ which made patent the stark disparity between Grupo Mexico’s asking price and Goldman’s valuation of Minera: Southern Peru would ‘give’ stock with a market price of $3.1 billion to Grupo Mexico and would ‘get’ in return an asset worth no more than $1.7 billion.” (In testimony, Grupo Mexico said the price it wanted for Minera came from its bankers at UBS.)

Instead of telling Grupo Mexico “to go mine [itself],” as Strine put it, the special committee charged with weighing the deal had Goldman revise the analysis. Because Minera wasn’t publicly traded and couldn’t be valued by its share price, Goldman turned to what Strine called a “relative valuation.” Grupo Mexico contended that the revised comparison meant that Southern Peru and Minera were being judged on a similar basis.

Strine saw it differently.

“The special committee justified paying a higher price [for Minera] through a series of economic contortions,” he wrote. “According to special committee member [Harold] Handelsman, these ‘bells and whistles’ made it so that ‘the value of what was being … acquired in the merger went up, and the value of the specie that was being used in the merger went down,’ giving the Special Committee reason to accept a higher merger price.” (In the course of the special committee’s eight-month consideration of the deal, Grupo did agree to take fewer Southern Peru shares for Minera, but Southern Peru’s share price also rose dramatically because copper prices spiked.) It didn’t help Southern Peru and Grupo Mexico that the Goldman Sachs banker who led the deal evaluation, a non U.S.-resident, refused to come to Delaware to testify.

Strine also included a lot of discussion of the role of Handelsman, a former Wachtell M&A partner who is now general counsel for the Pritzker family’s interests. The Pritzker entity that owned an 11 percent stake in Southern Peru at the time Grupo Mexico was pushing for the Minera deal — a vehicle called Cerro — was simultaneously negotiating with Grupo Mexico to unload its Southern Peru shares. That, according to Strine, put Handelsman, who was a member of the Southern Peru board’s special committee, in a weird position.

“Although I am not prepared on this record to find that Handelsman consciously agreed to a suboptimal deal for Southern Peru simply to achieve liquidity for Cerro from Grupo Mexico, there is little doubt in my mind that Cerro’s own predicament as a stockholder dependent on Grupo Mexico’s whim … influenced how Handelsman approached the situation,” Strine wrote.

“Put simply, although I continue to be unpersuaded that one can label Handelsman as having acted with the state of mind required to expose him to liability given the exculpatory charter protection to which he is entitled, I am persuaded that Cerro’s desire to sell influenced how Handelsman approached his duties and compromised his effectiveness.” (I left a message with Handelsman but didn’t hear back.)

Handelsman withdrew from the special committee’s vote on the deal, which was ultimately approved by shareholders. Strine also dismissed claims against him and the other special committee members, leaving just Southern Peru officers and Grupo Mexico as defendants. And those defendants, he concluded, breached their fiduciary duty by causing Southern Peru to pay an unfair price for Minera. He calculated the difference between what Southern Peru paid and what it should have paid to be $1.23 billion.

A final note: Strine didn’t suggest attorneys’ fees for the plaintiffs’ lawyers, but it doesn’t sound like he’s going to approve a windfall payout for this extraordinary award. He said fees will be paid out of the award and suggested the two sides get together on a suggestion.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter

A couple of cases from the last few years drove home that lesson. Proskauer Rose represented Allen Stanford’s Stanford Financial as the Ponzi scheme collapsed. Proskauer partner Thomas Sjoblom was in the room with Stanford Financial’s chief investment officer, Laura Pendergest-Holt, when she was interviewed by the SEC in 2009. Sjoblom told the SEC that he was representing the company, not Pendergest-Holt. But she ended up indicted for lying to investigators and obstructing justice based on that SEC interview. Pendergest-Holt turned around and sued Sjoblom and Proskauer, asserting that she was never told the firm wasn’t representing her. Sjoblom subsequently resigned from Proskauer. (Proskauer’s spokesman didn’t return my call.)

In another case, Irell & Manella represented Broadcom in an internal investigation of its stock options backdating practices. As part of that investigation, Irell lawyers interviewed Broadcom CFO William Ruehle. Irell was simultaneously representing Ruehle in two securities suits, and, he later said that he believed Irell was his counsel. But it wasn’t: when Broadcom decided to cooperate with prosecutors, Irell turned over its notes of the Ruehle interview. Ruehle was indicted and (among other things) blamed Irell for misleading him. The trial judge in Ruehle’s case, Cormac Carney, blasted Irell for breaching its duty to Ruehle, though the U.S. Court of Appeals for the Ninth Circuit later cleared the firm of wrongdoing. (Judge Carney eventually tossed charges against Ruehle for other reasons.)

So Sullivan & Cromwell and Blankfein are both better off now that the CEO’s interests are protected by another lawyer, even if Blankfein only brought in counsel for an interview with DOJ investigators. In that regard, we shouldn’t assume that Weingarten’s entrance necessarily bodes ill for Goldman or Blankfein. Goldman told Reuters Monday that this is entirely routine: “As is common in such situations, Mr. Blankfein and other individuals who were expected to be interviewed in connection with the Justice Department’s inquiry into certain matters raised in the PSI report hired counsel at the outset,” the bank said.

Nevertheless, Blankfein’s choice of Weingarten is very intriguing. Weingarten is a great lawyer with close ties to the Justice Department, where he once worked in the Public Integrity section, and to Attorney General Eric Holder, whom he actually represented when Congress grilled Holder about President Bill Clinton’s eleven-hour pardon of financier Marc Rich. Weingarten is not, however, part of the club of white-collar defense counsel who typically get referrals from New York firms like S&C. (That group includes Andrew Levander of Dechert; Mary Jo White of Debevoise & Plimpton; Patricia Hynes of Allen & Overy; and Gary Naftalis of Kramer Levin Naftalis & Frankel, all of whom represent high-profile Wall Streeters in financial crisis cases.)

One white-collar defense lawyer who gets referrals from Wall Street firms told me it could be significant that Blankfein went outside the usual circle, turning to a lawyer best known for his trial work. “For many people, the choice of Reid Weingarten would be unusual to represent someone in a simple interview,” he said. “He’s often retained when an investigation is going to lead to a case that would go to trial.”

That unseen hand that guides the market, in other words, may turn out to be pretty smart.

For more of Alison’s posts, please go to Thomson Reuters News & Insight

Follow Alison on Twitter