Opinion

Alison Frankel

Rakoff ripples: NY court says SEC boilerplate no defense

Alison Frankel
Dec 15, 2011 15:17 UTC

In 2006, Bear Stearns entered a $250 million settlement of Securities and Exchange Commission allegations that its traders engaged in illicit market timing for certain preferred customers. Like scores of SEC defendants concerned with liability in related civil litigation, Bear insisted on the language that’s become boilerplate in SEC settlements. So “without admitting or denying” the SEC’s findings, the bank agreed to disgorge $160 million and pay a $90 million penalty.

Bear and its successor, JPMorgan Chase, turned to Bear’s insurers to cover the disgorgement. (Penalties aren’t indemnified in Bear’s policy.) The insurance agreements said the bank was covered for damages awards and charges incurred by regulatory investigations, with one catch: The policies excluded claims “based upon or arising out of any deliberate, dishonest, fraudulent, or criminal act or omission,” if there were a final adjudication reflecting that wrongdoing.

No problem, right? The SEC settlement explicitly said that Bear didn’t admit deliberate or dishonest behavior when it agreed to the disgorgement. The insurers, represented by DLA Piper, Drinker Biddle & Reath and several other firms, balked at paying, but JPMorgan, with counsel from Proskauer Rose, sued to enforce the policies. In September 2010, New York State Supreme Court Justice Charles Ramos agreed that Bear hadn’t admitted anything. “An insured’s settlement or consent to entry of an order with the SEC, wherein it did not admit guilt, will not preclude if from disputing those findings in subsequent litigation with its insurers,” Ramos wrote in an order refusing to dismiss JPMorgan’s suit. “The [SEC settlement] does not contain an explicit finding that Bear Stearns directly obtained ill-gotten gains or profited by facilitating these trading practices.”

Ramos’s decision was issued before the SEC’s “neither admit nor deny” boilerplate became a source of controversy, thanks to U.S. District Senior Judge Jed Rakoff of Manhattan federal court. I’ve speculated on the consequences if other judges opt to abide by the rules Rakoff seems to want to impose on corporate defendants setting with federal agencies. But a ruling Tuesday by the New York state Appellate Division, First Department, suggests the boilerplate language that Ramos cited — and Rakoff has derided — may no longer offer defendants much benefit even without judges specifically rejecting it.

As my Reuters colleague Joseph Ax reported, the appeals court dismissed the JPMorgan suit against the insurers. But the decision’s implications may be broader than that. In an opinion written by Justice Richard Andrias, the state judges simply didn’t pay much heed to the SEC “neither admit nor deny” boilerplate. “Read as a whole,” the decision said, “the offer of settlement, the SEC Order … and related documents are not reasonably susceptible to any interpretation other than that Bear Stearns knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.” Moreover, in a footnote, the opinion referred explicitly to Rakoff’s criticism of SEC boilerplate in SEC v. Vitesse Semiconductor.

$315 ml Merrill deal shines light on damages in MBS litigation

Alison Frankel
Dec 6, 2011 23:13 UTC

A filing late Monday confirmed what I reported last month: Merrill Lynch has agreed to a $315 million settlement of a securities class action stemming from 18 Merrill mortgage-backed note offerings. This agreement is the fourth MBS securities settlement, following this summer’s landmark $125 million Wells Fargo class action deal and a pair of settlements with Citigroup and Deutsche Bank, totaling $165.5 million, that National Credit Union Agency reached in November. The Merrill agreement, negotiated by lead class counsel at Bernstein Litowitz Berger & Grossmann, is by far the biggest score so far for MBS investors in a securities suit (as opposed to contract, or put-back, litigation).

There are dozens more MBS securities suits out there, as the Merrill settlement agreement acknowledges: the deal carves out claims by AIG, the Federal Home Loan Bank of Boston, the Federal Housing Finance Agency, and other MBS investors that have already filed their own securities suits against Merrill Lynch. But one of the big mysteries of the MBS securities litigation has been how to value the cases, since there’s so little precedent in the way of settlements. The NCUA deals helped; the credit-union regulator repackaged and resold mortgage-backed securities belonging to five failed credit unions, so the agency actually knew how much the credit unions lost through their MBS investments. In its talks with Citi and Deutsche Bank (which the agency didn’t formally sue), NCUA was able to claim specific, fact-based damages.

The Merrill settlement documents provide significantly more insight for plaintiffs who don’t have the luxury of U.S. government backing to sell repackaged mortgage-backed securities. The documents don’t disclose the class’s specific damages claim; the case settled before investors filed their damages expert’s report. But the exhibits included along with the settlement brief indicate a methodology for calculating damages that other plaintiffs can use. MBS defendants, including Merrill Lynch, will undoubtedly continue to assert that MBS noteholders shouldn’t recover anything for their securities claims because they’re sophisticated investors who knew the riskiness of mortgage-backed notes. But as hundred-million-dollar settlements pile up, that’s a tougher argument to sell.

Rakoff’s rules: What if other judges did it?

Alison Frankel
Dec 1, 2011 14:59 UTC

On Tuesday, as you probably heard, Facebook reached a settlement with the Federal Trade Commission to resolve allegations that it deceived users about how it used their personal information. Facebook CEO Mark Zuckerberg said publicly that “we made a bunch of mistakes.” But you won’t find any such admission in Facebook’s proposed settlement agreement with the FTC. In that document, Facebook “expressly denies the allegations set forth in the [FTC] complaint.”

There’s a similar denial of wrongdoing from Merck, which last week reached a $950 million resolution of the Justice Department’s civil and criminal allegations that it falsely marketed the painkiller Vioxx. Even though Merck pled guilty to a misdemeanor violation for off-label marketing and agreed to pay a $322 million criminal penalty, the company said it wasn’t admitting liability or wrongdoing in the civil portion of the DOJ settlement, for which it agreed to pony up $628 million.

Over at the Commodity Futures Trading Commission, meanwhile, regulators obtained a $24 million settlement in early November with a North Carolina company called Queen Shoals. But if you check out the Queen Shoals consent order entered by a North Carolina federal judge, you’ll see that the defendants “neither admit nor deny” the CFTC’s allegations. And in the Federal Depositors Insurance Corporation’s most recently disclosed enforcement agreement, an October 20 settlement with the First Community Bank of Santa Rosa, Calif., the bank resolved allegations “without admitting or denying any [FDIC] charges of unsafe or unsound banking practices.”

Chief judge: Rakoff assignment to Citi case was ‘totally random’

Alison Frankel
Nov 30, 2011 16:30 UTC

If there’s one federal jurist the Securities and Exchange Commission absolutely, positively did not want to see at the top of the docket in its $285 million settlement with Citigroup, it was Senior Judge Jed Rakoff of Manhattan federal court. Rakoff has been a festering sore for the agency since 2009, when he rejected a proposed $33 million settlement with Bank of America over failing to disclose bonus payments to Merrill Lynch executives in merger-related documents. In a March 2011 opinion in the Vitesse Semiconductor case, Rakoff took the agency to task for agreeing to settlements in which defendants neither admit nor deny wrongdoing. Then in July he claimed jurisdiction over the SEC’s case against former Goldman Sachs director Rajit Gupta, accusing the agency of forum shopping in filing an administrative action against Gupta. You can only imagine the teeth-gnashing at the SEC when Rakoff was assigned the Citi case. After the SEC tried to argue that Rakoff doesn’t have the power to consider the public interest in his evaluation of the proposed settlement, Monday’s rejection of the settlement was practically a foregone conclusion.

So you may be wondering — as I was — how it is that Rakoff ended up with the Citi case. The answer, according to his chambers and Chief Judge Loretta Preska of the Southern District, is that the assignment was purely random. Yes, there are 41 federal district judges in the district, so the odds of any of them overseeing multiple, unrelated cases filed by the same plaintiff are long. But according to Preska and Rakoff’s chambers, that’s what happened here.

The SEC filed the Citigroup case in federal court in Manhattan, rather than Washington, D.C. (where it filed a $75 million settlement with Citi in 2010) because the new Citi case includes SEC charges against Brian Stoker, a Citi Global Markets employee who allegedly structured and marketed the CDO that’s at the bottom of the case. Unlike the two Citi employees in the 2010 case, Stoker refused to settle with the agency. So in anticipation of litigation with him, the agency filed the entire Citi case in New York.

Mets ruling could upend Madoff bankruptcy

Alison Frankel
Sep 28, 2011 22:27 UTC

Helen Chaitman of Becker & Poliakoff represents more than 300 investors who had accounts with Bernard Madoff. For more than two years she’s hammered away at one particular argument in federal bankruptcy court, in Congress, even on YouTube: Madoff bankruptcy trustee Irving Picard of Baker & Hostetler shouldn’t be allowed to demand the return of profits that Madoff investors pulled out of their accounts as long ago as 2002, six years before the Ponzi scheme imploded in December 2008. On Tuesday night, Chaitman finally found vindication, even though it wasn’t in any of her cases. Manhattan federal judge Jed Rakoff, ruling in Picard’s fraud case against the owners of the New York Mets, concluded that a section of the federal bankruptcy code precludes Picard from attempting to claw back money Madoff investors pulled out of the Ponzi scheme before 2006.

“This is something I’ve been saying from the beginning,” Chaitman told me. “Anyone who didn’t withdraw their money in the last two years [of Madoff's scheme] is out completely.” Jonathan Landers of Milberg, who represents 30 clawback clients, agreed: “This is a very, very significant ruling.”

That’s putting it mildly. Judge Rakoff’s 18-page ruling could completely upend the Madoff bankruptcy. Among the big-name Madoff investors who would be off Picard’s hook completely if Rakoff’s ruling stands is former Securities and Exchange Commission general counsel David Becker, who’s in hot water for allegedly failing to alert SEC commissioners of a potential conflict of interest stemming from his parents’ long-closed Madoff account. Picard had filed a clawback suit against Becker, who inherited money after his parents’ account was liquidated in 2002; Rakoff’s ruling would wipe out Picard’s suit.

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