Opinion

Alison Frankel

FHLB demands DOJ draft complaint: ‘What is JPMorgan trying to hide?’

Alison Frankel
Dec 10, 2013 19:23 UTC

If JPMorgan Chase and the Justice Department thought that all the zeroes at the end of the bank’s multibillion-dollar settlement for mortgage securitization failures would foreclose questions about the bank’s actual wrongdoing, clearly they thought wrong. Days after the much-leaked-about $13 billion deal was finally announced, New York Times columnist Gretchen Morgenson looked at the admissions accompanying the settlement and wondered why it had taken the federal government so long to hold the bank accountable for conduct that’s been in the public domain for years. Morgenson’s column echoed posts at Bloomberg and Slate that also scoffed at JPMorgan “admissions.” On Monday, even a commissioner of the Securities and Exchange Commission piled on. Dan Gallagher, a Republican, criticized the settlement as a penalty on the bank’s current shareholders that’s not justified by JPMorgan’s admitted conduct. “It is not rational,” Gallagher told an audience in Frankfurt at an event organized by the American Chamber of Commerce in Germany.

At the heart of all of this criticism is a nagging suspicion that we don’t really know what the Justice Department had – or didn’t have – on JPMorgan, that the $13 billion settlement was not pegged to the bank’s actual misconduct but to the public relations benefits to both sides from a supposedly record-setting deal. Attorney General Eric Holder has called the size of the settlement a proportionate response to JPMorgan’s wrongdoing, but it’s tough to take that assertion on faith when the statement of facts that accompanied the settlement revealed so little about the government’s evidence.

The Federal Home Loan Bank of Pittsburgh believes that the government knows a lot more about JPMorgan’s securitization practices than it disclosed in the settlement agreement – and the FHLB’s lawyers at Robins, Kaplan, Miller & Ciresi are pretty sure those additional details are contained in a civil complaint against the bank that was drafted by the U.S. Attorney in Sacramento, California. At a closed-door hearing last Friday, Judge Stanton Wettick of the Allegheny County Court of Common Pleas heard Robins Kaplan argue that release of this “rich source of detailed facts about JPMorgan’s conduct” would serve the public’s interest in understanding the basis of the $13 billion settlement. JPMorgan’s lawyers at Sidley Austin, meanwhile, contend that the Justice Department never intended the complaint to be public but used it only as leverage in negotiations with the bank. Turning the document over to FHLB and the public, the bank asserts, would be contrary to Pennsylvania’s interest in promoting settlements, would violate attorney-client privilege and would accomplish nothing because Justice’s allegations are not related to claims by the FHLB. Judge Wettick did not issue a public ruling from the bench Friday and lawyers for JPMorgan and FHLB didn’t respond to my emails requesting comment. But if we’re ever going to find out more about the government’s dirt on JPMorgan, there’s a good chance it will be in the FHLB litigation.

Wettick, after all, has already ordered the draft complaint to be turned over to the FHLB once. In early October, when JPMorgan’s settlement with Justice was still just a rumor, Robins Kaplan moved to compel JPMorgan to turn over whatever documents it had disclosed to the Justice Department, in case any of that material shed light on FHLB’s allegations that it was duped into buying JPMorgan mortgage-backed securities. (You may remember the litigation because FHLB successfully deployed the same tactic of moving for Justice documents against Standard & Poor’s, which is also a defendant in the case.) At the time, JPMorgan’s counsel in the FHLB case in Pittsburgh said he didn’t know for sure whether Justice had prepared a complaint against the bank, despite press reports that the complaint existed. At a hearing on Oct. 17, Judge Wettick ordered JPMorgan lawyer Robert Pietrzak of Sidley to find out if the government had shown a draft complaint to JPMorgan, and “to the extent that you have it, (to) turn it over.”

According to an affidavit from FHLB’s general counsel, Dana Yealey, the existence of a draft complaint was confirmed soon thereafter when Justice Department lawyers contacted him to ask if FHLB would agree to extend the deadline on Judge Wettick’s order so that Justice could wind up its negotiations with JPMorgan. Yealey said that he asked if Justice would intervene in his case to oppose production of the draft complaint and received a promise that it would not. “(The Justice lawyer) said he was very close to a final deal with JPMorgan and that after one more week, he would not care about the draft complaint,” Yealey’s affidavit said. FHLB agreed to hold off until the Justice settlement was finalized.

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.

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.

How long did JPMorgan (allegedly) deceive investors?

Alison Frankel
Aug 19, 2013 20:28 UTC

Last week’s criminal complaints against former JPMorgan Chase derivatives traders Javier Martin-Artajo and Julien Grout – who allegedly mismarked positions in the bank’s infamous synthetic credit derivatives portfolio to hide hundreds of millions of dollars of trading losses in early 2012 by the JPMorgan Chief Investment Office – does not directly impact the shareholder class action under way in federal court in Manhattan. But you can be sure that the plaintiffs firms leading the class action were gratified that the Manhattan U.S. Attorney has decided the so-called “London Whale” losses merit criminal charges. When U.S. District Judge George Daniels hears arguments next month on the bank’s motion to dismiss the class action, shareholder lawyers will absolutely remind him that prosecutors believe a criminal cover-up took place. JPMorgan’s lawyers at Sullivan & Cromwell moved in June to dismiss the entire shareholder class action, but as I’ve said before, I don’t think there’s much chance Judge Daniels will toss claims based on bank officials’ statements about the London Whale losses. The government’s new criminal charges make that prospect even more remote.

But what about shareholder allegations that JPMorgan lied to them and the Securities and Exchange Commission back in 2010 and 2011, when the bank touted its superior internal controls and risk management procedures? Those allegations would dramatically extend the time frame for class membership, opening the case up to claims by shareholders who traded JPMorgan shares beginning in February 2010, not just those who traded the stock in the first half of 2012, before the bank issued a restatement of its earnings to reflect London Whale losses in July 2012. The government hasn’t alleged misconduct in those 2010 and 2011 statements, though according to Dealbook, the bank and the SEC may be negotiating a deal based on internal control failures. If the SEC does, in fact, secure an admission from the bank that its internal controls were deficient, shareholders’ burden would be narrowed to establishing that JPMorgan officials knowingly misrepresented the bank’s ability to manage risk.

JPMorgan’s arguments for why shareholders can’t meet that burden should be required reading for every investor operating under the apparently mistaken belief that you can rely on what you read in SEC filings and what you hear from corporate officials. JPMorgan was supposed to be different than financial institutions that teetered or fell in the financial crisis, and as shareholders wrote last week in their opposition to the bank’s dismissal motion, investors paid a premium for its supposed commitment to discipline and risk management. Yet now JPMorgan says that even if its representations about internal controls were false – which, of course, it insists they were not – those statements are not actionable because no investor actually relied upon such immaterial puffery. As JPMorgan depicts things, you should no more believe an SEC filing than the patter of a carney trying to convince you to knock over the pyramid of milk bottles.

What, us worry? Banks’ 3Q earnings downplay litigation exposure

Alison Frankel
Oct 14, 2012 00:49 UTC

As I read the just-released third-quarter earnings statements of JPMorgan Chase and Wells Fargo, I felt as though I were living in a parallel universe to the banks. Looking for any mention of the New York attorney general’s encompassing $22 billion Martin Act suit against JPMorgan in the bank’s statement? You won’t find it. The only question on the AG’s case that JPMorgan CEO Jamie Dimon fielded in the Friday morning call with analysts was a softball asking whether, as a policy matter, it’s fair to hold the bank responsible for the alleged sins of Bear Stearns when the Fed pushed JPMorgan into the acquisition; Dimon, you will be shocked to hear, agreed that that’s not good policy. No one on the analyst call asked — and the bank didn’t say anything — about Libor liability or about the ongoing securities fraud class action stemming from JPMorgan’s nearly $6 billion chief investment office derivative hedge losses.

Wells Fargo made a fleeting reference in its call with analysts to a new suit by the Manhattan U.S. Attorney’s office, accusing the bank of defrauding the Federal Housing Administration about its mortgage underwriting practices, but didn’t happen to note that Bank of America settled a similar suit with Brooklyn federal prosecutors for $1 billion earlier this year. The U.S. Attorney’s suit was not mentioned in Wells Fargo’s earnings report. And neither Wells Fargo nor JPMorgan addressed the multibillion-dollar breach of contract (or put-back) claims they’ve received from a group of major institutional investors on allegedly deficient loans underlying mortgage-backed securities offerings. Wells Fargo has received formal notices of deficiency from noteholders with the requisite voting rights in trusts with a face value of $15 billion. JPMorgan is facing demands from noteholders in trusts with a face value of $95 billion.

But to hear the banks tell it, their litigation and put-back exposure is well under control. In Friday’s report, JPMorgan reported a $684 million expense for litigation reserves, which have historically included its reserves for put-back demands by private investors (as opposed to Fannie Mae and Freddie Mac). That seems to be up from the $323 million expense the bank reported in the second quarter, but it’s way down from $2.5 billion in the first quarter and $4.9 billion in 2011. (Those numbers come from a handy bank-by-bank report on litigation and put-back reserves that Natoma Partners put out last August.) On Friday, in response to a question about the litigation reserves, Dimon said they “would stay high for a while,” but also said that “on the private label stuff, we’re fairly well done.” Indeed, JPMorgan said that the additional $684 million in litigation reserves was “largely offset” by tax adjustments.

Lead counsel contests take shape in Facebook, JPMorgan cases

Alison Frankel
Jul 26, 2012 23:02 UTC

Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd are the most successful members of the securities class action bar. Check the ISS rankings for 2011: Bernstein Litowitz is in the top slot, with $1.37 billion in settlements last year; Robbins Geller is second, with $1.14 billion. Those total dollars, though, mask the very different business models of the two firms, which are reflected in two other numbers on the ISS chart. Bernstein Litowitz settled only 13 cases in 2011, for an average settlement of about $106 million. By contrast, Robbins Geller settled 28 – more than twice as many as Bernstein Litowitz and 12 more than any other leading class action firm. Robbins Geller’s average settlement was about $49 million, less than any firm in the top 10 except Milberg. Both models work, or you wouldn’t always see Bernstein Litowitz and Robbins Geller at the top of the ISS rankings, but the firms are the yin and yang of securities class action litigation.

That’s why it’s so interesting that they’re both angling for lead counsel appointments in the two hottest cases of the year. The deadlines for lead plaintiff briefs have come and gone in the JPMorgan “London Whale” and Facebook IPO cases. There’s plenty of competition in both – though, as I predicted, less in the JPMorgan case – but the strongest leadership bids come from clients represented by Robbins Geller or Bernstein Litowitz.

Let’s look first at the JPMorgan briefs, which came in earlier this month. JPMorgan lost more than $17 billion in market capitalization when it disclosed in May that its chief investment office had lost $2 billion as a result of risky credit default swap positions taken by the so-called London Whale, derivatives trader Bruno Iksil. Shareholders have offered different theories about when the bank’s alleged deception began, but they all point to CEO Jamie Dimon calling the CDS position “a tempest in a teapot” in an April call with analysts.

JPMorgan class action may hinge on when alleged fraud began

Alison Frankel
Jun 19, 2012 17:17 UTC

The last time I wrote about the securities fraud class action claims against JPMorgan Chase for the losses it suffered in risky credit default swaps, I told you to pay attention to the unusually short class period alleged in the early complaints. The first couple of filings claimed the bank’s deception of investors began on April 13 – the day JPMorgan CEO Jamie Dimon told analysts that news reports about the dangerous trading position of its chief investment office were a “tempest in a teapot” – and ended on May 10, when the bank disclosed the initial $2 billion loss of the “London Whale.”

Two institutional investors joined the JPMorgan fray last week in federal court in Manhattan, and suddenly the class period has become a point of controversy. A pipefitters’ union trust fund represented by Labaton Sucharow claims that the bank’s fraud began not on April 13 but three months earlier, on Jan. 13. That was the date JPMorgan filed an annual report with the Securities and Exchange Commission that allegedly failed to warn investors about the looming CIO losses, “instead offering a false and misleading picture of stable and consistent operational strategy and risk exposure.”

The Louisiana Municipal Police Employees’ Retirement System, represented by Grant & Eisenhofer, put the beginning of the alleged fraud long before the 2012 annual report. According to the LAMPERS complaint, filed Friday, JPMorgan began deceiving shareholders about its exposure all the way back in February 2010, when it published a misleading description of the CIO in its annual report. From then on, LAMPERS claims, the bank ignored so-called red flag warnings and continued to mislead investors about its risky hedges.

Why plaintiffs’ lawyers would rather sue Facebook than JPMorgan

Alison Frankel
May 25, 2012 19:55 UTC

Securities class action lawyers have short attention spans. It was only last week, after all, that JPMorgan Chase and its $2 billion (and counting) loss on its credit default swap hedge was the topic of the moment. Plaintiffs’ lawyers and their institutional clients were figuring out whether they bought the bank’s shares in the one-month period between CEO Jamie Dimon telling analysts that the hedge was a “tempest in a teapot” and Dimon disclosing the initial $2 billion loss. But after an initial flurry of filings and press releases about the JPMorgan case, this week has brought no additional complaints against the bank – even as the impact of JPMorgan’s hedge ripples through credit markets and regulatory debate.

Instead, the securities class action bar has scurried this week to grab a piece of what will undoubtedly become known as In re: Facebook IPO Securities Litigation. On Tuesday Alistair Barr of Reuters reported that Morgan Stanley, the lead underwriter for Facebook’s initial public offering, told favored clients that the bank’s Internet analyst was cutting his revenue forecast for the company. Almost as soon as plaintiffs’ firms could cut and paste Barr’s story into a complaint, the shareholder class actions began piling up. By Thursday evening, at least eight suits against Facebook and its underwriters had been filed in federal court in Manhattan and San Francisco. Some big-name plaintiff firms were among the early filers, including Hagens Berman Sobol Shapiro, Girard Gibbs, Wolf Haldenstein Adler Freeman & Herz and (inevitably) Robbins Geller Rudman & Dowd.

Neither the JPMorgan nor the Facebook IPO case is a slam-dunk, by any means. Despite increasing concern about the risk of JPMorgan’s $100 billion CDS bet – and its alleged failure to disclose that risk – shareholders won’t have an easy time proving that they bought JPMorgan shares because they relied on Dimon’s “tempest in a teapot” remark. In the Facebook IPO case, meanwhile, underwriters will argue that Facebook’s uncertain revenue prospects were adequately disclosed in the IPO offering materials, and whatever additional information was conveyed to favored clients was permissible oral communication under rules the Securities and Exchange Commission adopted in 2005.

Where are institutional investors in JPMorgan securities cases?

Alison Frankel
May 18, 2012 17:18 UTC

The key detail in the two securities-fraud complaints filed so far against JPMorgan Chase isn’t that CEO Jamie Dimon told analysts that news reports about the bank’s risky credit default swap position were a “tempest in a teapot.” Even though that’s the statement both complaints pinpoint as best evidence so far of the bank’s alleged deception, to understand the shape this litigation is likely to take, you have to check out the class period both complaints (here and here) assert. It’s unusually short for a securities class action, beginning on Apr. 13 – when Dimon made the fateful “tempest” comment – and ending on May 10, the day the bank disclosed losses of $2 billion in CDS trades, with more to come.

Under the rules the U.S. Supreme Court established in its 1975 opinion in Blue Chip Stamps v. Manor Drug Stores, only investors who bought or sold JPMorgan shares within that window can be part of the class suing for fraud. Shareholders who bought the bank’s stock before Dimon’s comment on Apr. 13 are not in the suit as it’s currently framed, even if they subsequently lost millions after the May 10 disclosure. So before JPMorgan shareholders can file a suit and make a bid to be named lead plaintiff in the class action, they have to be sure they bought in that one-month window. (The law permits claims by sellers as well, but as a practical matter, it’s much harder for them to show that they suffered losses tied to the alleged fraud.)

That’s one reason the first complaints against JPMorgan weren’t by the large institutional investors that typically end up as lead plaintiffs. Pension and healthcare funds have to figure out when they purchased the bank’s shares and what their losses in the class period were. They buy and sell all the time, but one veteran shareholder class-action lawyer told me the short window will limit the universe of institutional investors with large losses. He also said that many institutional investors have made significant gains in JPMorgan investments in the last couple of years and may be reluctant to sue the bank.

Suing JPMorgan over MBS? Say thanks to bond insurers

Alison Frankel
Jan 26, 2012 22:36 UTC

Attention everyone who’s suing or planning to sue JPMorgan Chase, Bear Stearns, or Bear’s onetime mortgage unit EMC over mortgage-backed securities gone bad: Those indefatigable bond insurers are busy amassing whistleblower evidence for you. Last Friday, Patterson Belknap Webb & Tyler — which represents the monolines Syncora, Assured Guaranty, and Ambac in fraud and breach-of-contract suits stemming from EMC mortgages — began deposing witnesses from outside companies that evaluated the underlying loans in Bear’s mortgage-backed offerings. (The Nov. 18 amended complaint in Assured’s Manhattan federal court case against EMC and JPMorgan outlines the whistleblower assertions Patterson has come up with.)

The first deposition was of a former employee of Watterson Prime, a contractor that re-underwrote mortgages in EMC securitizations. The employee has claimed that Watterson simply rubber-stamped the loans; even mortgages that the contractor rejected, she has said, were nevertheless placed in MBS loan pools. Assured and the other monolines argue, of course, that they were deceived about the supposedly independent review of the underlying mortgage loan pools in the securities they agreed to insure. Whistleblower deposition testimony could be powerful evidence to support their arguments.

We only know about the whistleblower depositions because of a letter JPMorgan’s lawyers at Greenberg Traurig sent to Manhattan State Supreme Court Justice Charles Ramos, who is overseeing the Ambac case in state court, and to U.S. District Judge Paul Crotty, who’s presiding over Syncora’s Manhattan federal court case against EMC. (JPMorgan isn’t a defendant in that action.) The Jan. 18 letter identified the Watterson confidential witness by name, accused Patterson Belknap of “ambush litigation tactics,” and asked the judges to order Patterson to turn over a signed affidavit from her in advance of the Jan. 20 deposition. Greenberg also asked for affidavits from three other whistleblowers whose depositions have been scheduled. Despite a Jan. 19 Patterson letter claiming privilege for the whistleblower affidavits it has obtained, the monolines were ordered to turn over the witness statements.

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