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.

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.

It’s (finally) time for objectors to BofA’s MBS deal to make their case

Alison Frankel
Jun 4, 2013 13:15 UTC

To say that the hearing to evaluate Bank of America’s proposed $8.5 billion breach of contract settlement with investors in Countrywide mortgage-backed securities got off to a slow start would be something of an understatement. In a courtroom so crowded that New York State Supreme Court Justice Barbara Kapnick repeatedly admonished observers to clear a path to the door, the judge heard hours of pretrial motions, many on issues she regarded as already settled. In particular, objectors to the settlement – led by AIG, several Federal Home Loan Banks and other assorted pension and investment funds – told Kapnick that they should not be forced to proceed with opening statements until they’ve had a chance to take depositions based on privileged communications between Bank of New York Mellon, the Countrywide MBS trustee, and its lawyers at Mayer Brown. Kapnick ordered the documents produced late last month, and AIG counsel Daniel Reilly of Reilly Pozner said it wouldn’t be fair to begin a hearing to determine whether BNY Mellon made a reasonable decision to agree to the $8.5 billion settlement – which resolves potential claims by 530 trusts that Countrywide breached representations and warranties about underlying mortgage loans – until objectors have quizzed witnesses on the confidential material.

Kathy Patrick of Gibbs & Bruns, who represents BlackRock, Pimco, MetLife and other major institutional investors that negotiated the deal with BofA and BNY Mellon, said the objectors just wanted to delay Kapnick’s final reckoning of the settlement, which is being evaluated in a special proceeding under New York trust law. Reilly, who argued unsuccessfully last week for a stay of the case while the state appeals court considers whether it should be heard by a jury, insisted that he just wants the proceeding to be fair. Judge Kapnick, meanwhile, seemed preoccupied with getting the actual hearing under way. “I am trying to make this go ahead,” she told the objectors at one stage. “I am not going to reopen a point we spent an inordinate amount of time arguing about,” she said at another. “At some point, you have to get going with this.”

The delay issue came to a head in the afternoon session, when yet more motions to limit testimony and evidence had to be resolved. Reilly asked the judge to restrict Patrick from asserting that 93 percent of Countrywide MBS investors support the settlement when, in fact, the majority of certificate holders haven’t opined one way or the other. Patrick stood up and promised that she’d henceforth say that 93 percent do not object to the deal.

New brief heats up fight over $7 billion credit card settlement

Alison Frankel
Jul 25, 2012 22:08 UTC

Last Friday, when lawyers from three firms – Robins, Kaplan, Miller & Ciresi, Robbins Geller Rudman & Dowd and Berger & Montague – asked to withdraw as counsel to the National Association of Convenience Stores in the proposed $7 billion antitrust class action settlement with Visa and MasterCard, they said that they only learned of NACS’s opposition to the deal right before the settlement was filed with U.S. District Judge John Gleeson in Brooklyn. That’s not what NACS’s new lawyers at Constantine Cannon said in a brief filed Tuesday night. If there was any doubt that there’s going to be a battle royal over this settlement, the new brief should remove it.

Constantine Cannon asserted that the convenience store trade group – one of 19 name plaintiffs in the litigation over the swipe fees Visa and MasterCard charge merchants – has consistently agitated against the settlement. “Contrary to class counsel’s representation,” the new brief said, “NACS began expressing to class counsel its serious concerns about the proposed settlement long before the settlement was filed. Indeed, NACS expressed its concerns to class counsel repeatedly.” Constantine Cannon said that NACS formally asked to have its name removed from the settlement three days before it was filed, which is two days before the law firm showed up in the docket as NACS’s new counsel.

What’s particularly interesting about the brief is its reference to the rules imposed by the mediation process that helped produce the settlement. NACS said it intends to abide by those confidentiality rules, so Gleeson should permit it to continue as a class representative and order class counsel to continue to provide the trade group with work product. Mediation usually carries strict confidentiality rules, though. You can bet that Robins Kaplan, Robbins Geller and Berger & Montague are scrutinizing the Constantine Cannon filing to see if they can assert that NACS’s disclosure of its long-standing objection to the settlement is a breach of confidentiality. (Craig Wildfang of Robins Kaplan declined to comment; Constantine Cannon was very careful not to mention any specific details of the mediation in discussing NACS’s problems with the proposed settlement.)

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