Alison Frankel

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.

Litigation costs at JPMorgan are on a downward trend as well. A footnote in the earning statement says the bank had litigation expenses of $800 million in the last quarter, up from the previous quarter’s $300 million but way down from last year’s pace, when the bank shelled out $4.3 billion in litigation expenses in the first nine months.

But meanwhile, when you look at the bank’s reporting on outstanding repurchase demands by Fannie and Freddie, bond insurers and private investors, you’ll see that they continued to rise this quarter, all the way up to $4.1 billion from last quarter’s $3.5 billion, with $1.79 billion in claims coming just in the last three months. (That figure excludes put-back claims that are already being litigated.) JPMorgan is settling fewer put-back demands, though. Its realized losses were $268 million in the third quarter, up slightly from $259 last quarter but down from the three preceding reporting periods.

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.

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.

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.

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.

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.