There are probably fewer than 100 lawyers in America who argue regularly before the U.S. Supreme Court and the highest state courts of appeal. And of those, a scant handful argue against corporate interests. That is particularly true when banks are involved: Lawyers who practice at big firms that regularly represent (or hope to represent) financial institutions avoid cases that endanger those relationships, even when one bank is suing another. But the renowned former U.S. Solicitor General Paul Clement left behind those concerns in 2011 when he left King & Spalding and joined Bancroft, a tiny appellate startup. Last year, Clement took up the Supreme Court case of small merchants suing American Express for antitrust violations. (He lost.) Now he’s turned up to oppose banks in one of the biggest-dollar appeals in the courts. On Tuesday, as first reported by the New York Commercial Litigation Insider, Clement appeared as counsel of record in HSBC’s motion, as a mortgage-backed securities trustee, for the New York Appellate Division, First Department to reconsider its Dec. 19 ruling on the timeliness of MBS breach-of-contract claims or else let the case proceed to the state’s highest court.
If you’re reasonably literate about the financial crisis, you probably know that the credit rating agencies have slipped through the carnage like a cat walking away from a knocked-over vase. With their opinions on publicly offered mortgage-backed securities protected by the First Amendment, Standard & Poor’s and Moody’s have won dismissals of the vast majority of MBS investor claims against them in state and federal court, despite powerful evidence from congressional investigations that they worked with underwriters to confer investment-grade ratings on securities backed by dreck. With one possible exception, the only surviving cases against rating agencies involve claims by investors in private placements, who have successfully argued that private ratings aren’t protected free speech.
On Friday, the Wall Street Journal called Bank of America’s 2008 acquisition of the tottering mortgage giant Countrywide a $40 billion mistake. Sure, the bank only paid a total of $4.5 billion to pick up Countrywide, paying $2 billion for a minority stake in 2007 and an additional $2.5 billion for the rest of the company in 2008. BofA had its eye on Countrywide’s then-profitable mortgage servicing business, but since the acquisition Countrywide and its deficient mortgages have been pretty much nothing but trouble for Bank of America, which has seen its share price drop 68 percent and is still digesting what the Journal estimated to be at least $40 billion in “total real estate losses, settlements with government agencies and amounts pledged to investors who purchased poor-performing Countrywide mortgage-backed securities.” The Journal‘s Dan Fitzpatrick quoted a North Carolina banking professor who called BofA’s Countrywide acquisition “the worst deal in the history of American finance.”
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).
In 1998, 400 investors in a trust that distributed revenue from a communications satellite got word that their securitization trustee had settled a $41 million suit against the satellite’s fuel supplier. The trustee, IBJ Schroeder, filed a New York State Article 77 proceeding to obtain a judge’s endorsement of the $8.5 million settlement. Some of the investors protested the deal, arguing that the trustee didn’t have the power to settle the case without consulting them. In 2000, a New York appeals court ruled that, in fact, IBJ Schroeder did have that power, under both New York law and the contract governing the satellite revenue trust. The lower court ultimately ruled in the Article 77 case that even if investors considered the settlement amount too low, Schroeder hadn’t acted unreasonably or imprudently in striking the deal.