Securities Litigation

Week in Review: The Administration on Wall Street

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Obama Administration has continued its aggressive prosecution of suspect players in the financial meltdown that shaped most of the President’s first term.

Four mortgage insurers, including an AIG subsidiary, have agreed to a $15 million settlement over allegations of improper ‘kickbacks’ paid to lenders for more than a decade.  The Consumer Financial Protection Bureau made the announcement today.  Its director, Richard Cordray, charged, “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”  For more, see the NYTimesand WSJ.

Also today, the U.S. Department of Justice filed a fraud suit against Golden First Mortgage Corp, alleging the company and its CEO “repeatedly lied” to the government.  The complaint claims that Golden First rushed paperwork through internally, although the company certified (to HUD and the FHA) that proper due diligence had been conducted.  According to the government, Golden First used three employees to process 100-200 loans per month—predictably leading to “extraordinarily high” default rates as high as 60% in 2007.  For more, see Thomson Reuters.

On a related note, district court Judge Victor Marrero (S.D.N.Y.) indicated that he may not accept a “neither admit nor deny” provision in SAC Capital Advisor’s insider trading settlement.  At a hearing last week, he made a point unlikely to encounter much resistance:  “There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million that might cost $1 million to defend and litigate if it truly did nothing wrong.”  Judge Marrero is not the first to question these clauses – commonly demanded by corporate litigants – but his remarks demonstrate a growing judicial skepticism with the practice.  For more, see Businessweek, Reuters, and The New Yorker.

Supreme Court Refuses to Extend Statute of Limitations for SEC Fraud Actions

By Luke Burton, J.D. Candidate 2015 | Posted on

On February 27, 2013 the Supreme Court handed down a unanimous decision holding that the Securities and Exchange Commission (“SEC”) may not invoke the “discovery rule” when bringing fraud charges under the Investment Advisors Act.  15 U.S.C. §§ 80b-6(1), (2).  The “discovery rule,” so often extended to plaintiffs in private actions, triggers the statute of limitations at the time fraud is discovered by the plaintiff.  The “standard rule,” on the other hand, triggers the statute of limitations when the alleged illegal acts occurred.

In the Supreme Court’s decision in Gabelli v. SEC, the Court chose not to extend the plaintiff-friendly discovery rule to the SEC.  The reasoning was based on the asymmetries between the discovery powers of private plaintiffs and the nation’s securities regulation agency.  The Court specified that the federal government had powerful discovery tools, such as the power to “subpoena data, use whistleblowers and force settlements” and that this should ensure “timely action.”  Moreover, the Court noted, “[T]he SEC’s very purpose is to root [fraud] out.”  The Court rested the distinction on the equitable nature of the discovery rule:  the SEC’s mission of discovering and prosecuting fraud, coupled with its powerful enforcement tools, “[are] a far cry from the defrauded victim the discovery rule evolved to protect.”  In the Court’s view, the SEC did not need the discovery rule.

The Supreme Court’s decision led to mixed reactions.  The result in Gabelli came with the approval of the Cato institute, which filed an amicus brief for the defendants.  In contrast, many investors were disappointed, concluding that those who contributed to the financial crisis will continue to go without sanction.  Members of the “Occupy the SEC” movement (whose amicus brief can be found here) called the decision a “boon for fraudsters.”

The Network first covered this story the day after the Court handed down its decision.  See the archived “Week in Review” post here.

The Week in Review: SEC Nomination, Symposium, DOJ and FDIC

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee.  Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney.  She appears likely to win confirmation (as early as next week).  If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency.  During her testimony, Ms. White said:  “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.”  For more, see the NYTimes.  On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.

The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15.  Registration is required.  See a previous post for a complete description of this year’s symposium lineup.

Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger.  In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’  “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case.  The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank.  For more, see Bloomberg. 

A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.”  The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.”  Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.”  Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?”  For more, see the LATimes and Forbes.

 

Supreme Court Holds Proof of Materiality Is Not Necessary to Win Class Certification

By Arnold & Porter LLP Partners Michael Trager, Veronica Rendon, and Scott B. Schreiber | Posted on

[Editor’s note: The following post from Arnold & Porter’s recent Client Advisory on the implications of the recent Supreme Court decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds.  The authors include: Michael D. Trager, Veronica E. Rendon, and Scott B. Schreiber.]

In a February 27, 2013 ruling in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, the Supreme Court addressed the question of whether a plaintiff invoking the fraud-on-the market presumption to satisfy the reliance element of a securities fraud claim must prove, as a prerequisite to class certification, the materiality of the alleged misrepresentations.  In a six-to-three decision, the Court held that proof of materiality is not necessary at the class certification stage because the applicable provision of Federal Rule of Civil Procedure 23(b)(3) “requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.”  The Court explained that materiality is an objective issue, the resolution of which necessarily applies in common to all members of a class.  Because materiality is an issue for which the class “is entirely cohesive” and will “prevail or fail in unison,” the Court concluded that proof of materiality is not a prerequisite to class certification.

Fraud on the Market

In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court first endorsed the “fraud-on-the-market” theory, which allows certain securities-fraud plaintiffs to invoke a rebuttable presumption of reliance on public, material misrepresentations.  The premise of the fraud-on-the-market theory is that, in an efficient market, the price of a security reflects all publicly available information about a company; therefore, a court may presume that a purchaser of the security has indirectly relied on that information at the class certification stage, although reliance could be challenged later in the proceedings.  The rebuttable presumption reflects the Court’s recognition of the evidentiary difficulties posed by requiring direct proof of reliance, which is an essential element of a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.

The fraud-on-the-market presumption is of vital importance to plaintiffs seeking to certify a class action under Rule 23(b)(3).  As the Court explained in Amgen, without the presumption, questions of individual reliance would ordinarily predominate over questions common to the class, precluding class certification. 

To read the rest of this post, please click here.

The Week in Review: SEC Litigation, Sequester Countdown and AT&T

By Christopher Hammond, J.D. Candidate 2015 | Posted on

In a unanimous opinion yesterday, the Supreme Court limited the SEC’s ability to pursue civil penalties.  The Court held that the five-year statute of limitations begins to run at the moment a fraud is committed, not when regulators become aware if it.  In the case at issue, Gabelli v. SEC, the agency sued in 2008 for alleged violations occurring between 1999 and 2002.  Chief Justice Roberts noted practical difficulties in determining when a large governmental agency first discovers a fraud, concluding that Congress had not intended to permit the SEC to bring such actions so late.  Read the opinion here.  For more, see Reuters.

Two days until the sequester.  Congressional leaders are meeting at the White House this morning, but both sides appear to be bracing for $85 billion in across-the-board cuts on Friday, March 1.  While yet another short-term bill might resolve immediate funding concerns, the parties thus far remain gridlocked on tax reform proposals, which both recognize as an important bargaining chip.  House Speaker John Boehner has recently appeared more willing to tackle a comprehensive tax deal this Congress, but a solid democratic majority in the Senate is unlikely to concede to his current “no tax increases” position.  For more, see NYTimes, BBC and Politico.

AT&T has announced plans to expand into Europe with new lines of business, including wireless home-monitoring and automation.  The company will license its new Digital Life product to more than 30 companies worldwide, exceeding anticipated demand.  The move shows that AT&T, the U.S.’s largest phone provider, is transitioning to become a more general technology company, as consumers are increasingly seeking around-the-clock wireless connectivity and product integration.  For more, see Bloomberg.

From the Bench: Dichter-Mad Family Partners v. United States

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.

The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities.  The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.”  Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function.  An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.

The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception.  The FTCA only allows a claim where statutory language mandates a particular course of action.  By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings.  Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.

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Professor Gadinis Comments on the Recent DOJ Suit Against S&P

By Luke Burton, J.D. Candidate 2015 | Posted on

The Department of Justice recently brought charges of mail fraud, wire fraud, and financial institution fraud against Standard and Poor’s Rating Service, owned by parent company McGraw-Hill. It was filed in federal court in Los Angeles. (Read full complaint here).

The DOJ’s civil action against S&P calls for at least $1 billion in civil penalties, and the complaint alleges the rating agency defrauded investors out of as much as $5 billion. The fraud is claimed to have occurred as S&P purposely misled investors in an effort to increase the use and revenue of its ratings service. S&P’s press release denied any allegations that the company behaved in any manner other than “good-faith” when grading RMBSs and CDOs, and further questioned the legal merit of DOJ’s case.

The complaint states that DOJ is going to use the Financial Institutions Reform, Recovery, and Enforcement Act to extract civil penalties from S&P for misrepresenting material facts to investors in an effort to increase profits and market share for its rating business. FIRREA was enacted in 1989 in response to the Savings and Loan Crisis. The statute was little used before it was resurrected by prosecutors who realized the statute might be of particular value for pursuing fraud that occurred during the sub-prime mortgage crisis.  FIRREA is a particularly strong tool for prosecutors because it imposes large civil penalties (up to $1 million per offense), has a long statute of limitations period (10 years), and allows prosecutors to have much greater investigative tools than they would normally enjoy in a civil case (e.g. prosecutors can take testimony from individuals).

Perhaps most importantly, FIRREA only requires that prosecutors prove their case by a preponderance of the evidence. The statute could essentially give DOJ many powerful evidentiary tools and punitive remedies, most commonly seen in criminal cases, but would not require them to demonstrate their case to the onerous reasonable doubt standard.

Because DOJ lawsuit against a ratings agency is uncharted legal waters, much remains to be seen about the merits of the case. Berkeley Law Professor Stavros Gadinis notes that courts have required a high evidentiary burden in the context of fraud litigation in order to curb frivolous or unmeritorious claims. “In Tellabs v. Makor, which concerned 10b-5 litigation, the Supreme Court held that, in order to establish scienter (broadly speaking, intent to defraud or knowledge), courts must look at the evidence as a whole, and not at just excerpts hand-picked by the plaintiffs.” Professor Gadinis explained, “In the S&P’s case, this could mean that, if one looks at email correspondence as a whole, their employees have expressed enough support for their ratings to disprove the claim that these ratings were clearly part of a scheme to defraud.” However, because FIRREA has been rarely been utilized, there is little case law to aid in forecasting how a court might rule. Gadinis emphasized that the reasoning in Tellabs pertained to 10b-5 litigation, thus the extension of the Court’s reasoning to FIRREA “remains an open question.”

 

The Week in Review: FB, BNY Mellon, and Cybersecurity

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Facebook (FB) has cleared an important legal hurdle, as a S.D.N.Y. district court dismissed a lawsuit regarding its fumbled IPO last May.  The plaintiffs had argued that CEO Mark Zuckerberg and other directors should be liable for selectively disclosing negative measures of the company’s performance.  Judge Sweet disagreed.  Unsurprisingly, a Facebook representative said they were “pleased with the court’s ruling.”  For more, see CNBC.

The IRS won a major case in U.S. Tax Court earlier this week, and the ruling could cost the Bank of New York Mellon more than $800 million.  The dispute arose from Structured Trust Advantaged Repackaged Securities (STARS) – essentially manufactured tax shelters marketed by the bank.  In ruling against BNY Mellon, the Court held the STARS program was a “subterfuge for generating, monetizing and transferring the value of foreign tax credits.”  For more, see the Wall Street Journal.

In a follow-up to a previous Network post, President Obama has signed an executive order on cybersecurity.  However, the President’s order does not reach tough new regulations on private companies, falling short of last year’s proposed legislation, and does not allow for broad information sharing with government intelligence agencies as proposed by CISPA.  Congressional reaction to the executive order is yet to be determined—some commentators view the move as taking pressure off Congress to act on cybersecurity this term, but even President Obama, in his State of the Union address last night, addressed the need for a comprehensive law.  For more, see CNET and BBC.

AIG Seeking Declaratory Judgment on Right to Sue Financial Institutions

By Mark Rutter, J.D. Candidate 2015 | Posted on

American International Group (AIG) recently filed suit in the New York State Supreme Court in Manhattan in an attempt to gain a declaratory judgment affirming its right to sue the originators of the faulty residential-backed mortgages that led to its collapse (and subsequent bailout) during the 2008 financial crisis. The sole defendant in the suit is Maiden Lane II, an entity created by the Federal Reserve during the crisis to assist AIG with its bailout. Maiden Lane II purchased AIG’s bad mortgages, bolstering its liquidity.

AIG claims that it retained its right to sue the banks that sold it the allegedly faulty securities during the mortgage crisis, but according to the complaint, the Federal Reserve informed the insurer in December that all litigation claims arising from the mortgages had transferred to Maiden Lane II as a condition of the purchases. AIG is not seeking monetary damages in the current suit, but it is hoping for clarification that it can move ahead with possible lawsuits against several financial institutions. The company has been embroiled in a legal battle with Bank of America since 2011 over faulty residential-backed mortgages that the latter inherited with its acquisition of Countrywide Financial in 2008 (discussed here), and it may be looking to sue Deutsche Bank, JPMorgan, and Goldman Sachs as well.

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While SCOTUS is Considering the “Fraud-on-the-Market” Presumption, the Oregon Supreme Court Weighs In.

By Will Schildnecht, J.D. Candidate 2015 | Posted on

The Oregon Supreme Court recently ruled that securities fraud claims made under Oregon securities law require a showing of reliance, but that reliance can be established through an assertion of “fraud-on-the-market.” The Court then remanded to consider the constitutional questionsof whether misstatements must be made knowingly. The case follows on the heels of the U.S. Supreme Court’s consideration of the fraud-on-the-market presumption under federal securities laws in Amgen Inc. v. Conn. Retirement Plans & Trust Funds. That case had oral argument on November 5, 2012; an opinion is pending.

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