Activist investor David Einhorn’s hedge fund, Greenlight Capital, withdrew the highly publicized case it brought against Apple alleging that the tech giant tried to ram through a proposal in its annual proxy by “bundling” it with other less controversial proposals. But not before Judge Sullivan gave Greenlight a nice win, and left some important precedents on proxy voting for the rest of us. Continue Reading
Investors who lost money in the housing crisis may prefer to have their case heard by a hometown jury in state court, instead of as a federal securities fraud claim. But if their investment included properties outside of the United States, the Edge Act – created after WWI “in order to protect federally chartered banks engaged in international banking from variations in state law and the local prejudices of state and insular courts” – will force their claims into federal court. Continue Reading
Judge Rakoff issued an opinion with significant implications for parties litigating cases involving mortgage backed securities. In Assured Guaranty v. Flagstar Bank, Assured sought to recover some $89 million in insurance claims it paid to bondholders who invested in Flagstar bonds secured by what turned out to be lousy mortgages. When the mortgage market collapsed, the bonds secured by the mortgages also failed, leaving Assured on the hook. Assured claimed that Flagstar breached its contract with Assured by overstating the quality of the mortgages when it asked Assurance to insure the bonds — about 15,000 separate mortgage loans. After a bench trial, Judge Rakoff agreed with Assured and found that Flagstar was liable for the $89 million in insurance claims paid by Assured to bondholders. Judge Rakoff’s opinion is the first ever after trial holding a bank liable for breach of its representations and warranties to its monoline insurer about the quality of the morgages it originated. Continue Reading
In Republic of Iraq v ABB AG, Judge Stein dismisses claims by the current Iraqi government, the Republic of Iraq, against BNP Paribas under RICO for facilitating the corruption of the United Nation’s Oil for Food Program by the Saddam Hussein Regime. The Oil for Food Program was intended to allay the suffering of the Iraqi people caused by worldwide trade sanctions against Iraq after its 1990 invasion of Kuwait. The Program allowed Iraq to sell oil to third parties so long as the proceeds were used to purchase food and medical supplies for the Iraqi population. Under the Program, the proceeds of approved sales were deposited in a UN escrow account at the New York Branch of BNP Paribas. According to the complaint, the Hussein Regime, with the active assistance of the Bank and other defendants, exploited the Program to siphon off millions of dollars in kickbacks for itself and its political allies.
In a fascinating decision, Judge Stein finds the Republic has standing to sue for wrongful depletion of the UN escrow account because the account was held for Iraq’s “proprietary benefit,” and further finds that the Republic’s claims are not barred by either the act of state or political question doctrines. But, after dangling those hopeful signs before the Republic, he then dismisses its case against BNP with prejudice. Continue Reading
Judge Scheindlin continues to define the law for rating agencies, finding that they don’t have immunity from fraud claims on the ground that their ratings are merely their own opinions, not statements of fact. That’s pretty significant for lawsuits arising out of the subprime mortgage meltdown. Here’s how she nicely sums up the essence of a viable fraud claim against a rating agency in King’s County v. IKB Deutsche Industriebank, which involved a rating for a structured investment vehicle made up of bad mortgages: “To sustain a fraud claim against each rating agency, then, plaintiffs must provide evidence that the rating agency issued a rating that it knew was unsupported by facts or analysis – that the rating agency did the equivalent of issuing a restaurant review despite never having dined at the restaurant.”
In denying motions by the rating agencies for summary judgment, Judge Scheindlin addresses each of the elements of a fraud claim against a rating agency. First, she finds that when “a rating agency issues a rating, it is not merely a statement of that agency’s unsupported belief, but rather a statement that the rating agency has … reached a fact based conclusion as to creditworthiness.” Next she finds that a jury can infer scienter, or intent to defraud investors, based on evidence that an agency issued a rating it knew was inaccurate, and that a plaintiff’s testimony is enough on its own to establish “reliance” on the rating. She also finds that reliance on the rating agencies can be reasonable where the agencies had access to information not available to investors, and the investments rated were “the most opaque structured credit vehicles and transactions on the market.” Continue Reading
Yulia Tymoshenko is the former prime minister of the Ukraine, and was one its most successful businesswomen, reportedly making a fortune in the natural gas industry. Today, however, she is serving a seven year prison sentence in the Ukraine for abuse of power and for working against the Ukraine’s interests while in office by agreeing to buy natural gas from Russia at inflated prices. Her supporters claim the sentence resulted from an unfair trial, and Tymoshenko has challenged her conviction in the European Court of Human Rights. (Here is a brief news summary of Tymoshenko’s political fights and present situation from Times Topics.)
But business moves on. In a case involving the scope of personal jurisdiction over foreign parties, Universal Trading v. Tymoshenko, Judge Crotty found that the New York courts did not have personal jurisdiction over Tymoshenko, and dismissed an action to enforce a $18.3 million judgment against her that stemmed from a mid-1990s commercial dispute in the Ukraine. Continue Reading
Even an avid sports fan might reasonably believe that there’s no shortage of sports programming on television. But according to Judge Scheindlin in Laumann v. National Hockey League, predatory practices by the National Hockey League and Major League Baseball, and television providers, may be restricting choice and pushing up the cost of watching our favorite teams.
TV subscribers sued their cable and satellite television providers, the NHL, the MLB, and regional sport networks (like YES, or MSG). They claim that those defendants agreed to divide the market for hockey and baseball broadcasts so that subscribers in one region usually can only watch their local team. The only way a subscriber can watch all the games of a favorite team that plays in another region is by buying an expensive “all league games” package. So, if you live in New York but root for the San Francisco Giants, you are blacked out from Giants games unless you buy a television or internet package that includes the games of every other team outside of New York. Without these agreements the regional network that produces the Giants, for example, might decide to compete against the local Yankee broadcasts, or vice-versa – which could be good for sports fans. Continue Reading
Starr International, a shareholder of AIG, is run by AIG’s former leader, Hank Greenberg. In Starr Intern’l v. Federal Reserve Bank of New York, Judge Engelmayer takes on Starr’s charge that the FRBNY ran roughshod over AIG’s shareholders when it bailed out AIG during the 2008 financial crisis. Judge Engelmayer describes Starr’s complaint as painting “a portrait of government treachery worthy of an Oliver Stone movie.” But like much of Oliver Stone’s work, the Judge found the complaint contains more imagination than fact.
According to Starr, the FRBNY exploited its financial rescue of AIG to create “a backdoor bailout” of other banks. In particular, the FRBNY required AIG to satisfy its outstanding credit default swap contracts (insurance that AIG provided to banks for the banks’ disastrous subprime mortgage loans) on “terms needlessly detrimental to AIG.” The complaint also alleges that the FRBNY circumvented Delaware law anti-dilution provisions by grabbing 80 per cent of AIG’s common stock. Because the FRBNY was alleged to have “de facto” control of AIG by reason of its rescue package, Starr alleged it “stood in a fiduciary relationship to AIG’s other shareholders…,” and had to act in the shareholders’ interests. Continue Reading
The Private Litigation Securities Reform Act of 1995 was passed (over Bill Clinton’s veto) in order to limit frivolous federal securities fraud lawsuits. The Act established strict pleading requirements, and, in order to reduce the costs of litigation, barred discovery during the pendency of a motion to dismiss, which is the routine first line of defense to securities lawsuits. A plaintiff can obtain discovery if a motion to dismiss is pending only if the discovery is necessary to preserve evidence or prevent “undue prejudice.”
In In Re GMR Securities Litigation, Magistrate-Judge Netburn was faced with plaintiff’s claim that he was the only “stakeholder” in the litigation without access to documents, and therefore was suffering undue prejudice. Judge Netburn noted that the Second Circuit has not yet addressed the meaning of “undue prejudice” under the PLSRA, but found that the fact that other individuals have access to the documents plaintiff wants is not “controlling.” Rather, plaintiff would have to show that those other “stakeholders” were bringing ongoing litigation that competed with plaintiff’s own PLSRA claims, thereby putting plaintiff at a disadvantage. Absent that specific showing, the Judge found no undue prejudice to plaintiff arising from the automatic stay, and denied discovery pending a decision on defendants’ previously filed motion to dismiss.
In SEC v. Tourre, Judge Forrest rejected the SEC’s motion to reconsider part of its complaint against Fabrice Tourre, the thirty-something Goldman executive involved in selling subprime mortgage securities to Goldman clients. In an e-mail, Tourre unfortunately referred to himself as ‘Fabulous Fab’ for standing tall while the subprime mortgage market collapsed – a moniker that stuck.
The question before Judge Forrest was whether the Supreme Court’s decision in Morrison v. Nat’l Australia Bank barred securities fraud claims against Tourre for the sale of subprime securities made by Goldman to a customer in Germany, even if Goldman obtained title to the securities in New York. Under Morrison, the Supreme Court made clear that section 10(b) and Rule 10b–5 apply only to “transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities.”
The SEC argued that Goldman’s taking title in New York was in connection with its fraudulent sale to its customer in Europe, and therefore fell within Morrison’s ambit. The SEC relied on a recent Second Circuit decision, holding that for purposes of section 10(b), “a sale of securities can be understood to take place at the location in which title is transferred.” Absolute Activist, 677 F.3d at 68.
Here, although the securities were transferred to Goldman in the United States, that was not enough to establish a claim against Tourre. The defrauded German customer did not assume irrevocable liability for the purchase until the transfer to it in Europe, and Tourre’s fraud was in connection with that purchase. There was no fraud in connection with Goldman’s assumption of title in New York since no fraud was perpetrated on Goldman.
“According to the SEC, the broad interpretation of section 10(b)’s “in connection with” language provides the necessary link between the Goldman transfer of title and the [German] note purchase to establish 10(b) liability. The Court finds, however, that the “in connection with” language modifies how close the fraud and the offending domestic transaction must be – not whether the domestic transaction can sit between the fraud and a purely foreign transaction, thereby itself providing the ‘connection.’ “
The SEC motion was brought under Rule 54(b) of the federal rules of civil procedure, which provides that “[A]ny order or other decision … may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.” The SEC argued that the new Second Circuit decision required revision of an earlier order dismissing the claims against Tourre, but Judge Forrest did not agree: “There is substantial case law supporting that prior “law of the case” should only be revisited in the face of “an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”
On the other hand, the balance of the SEC’s complaint on sales of the same subprime securities to other Goldman customers is set for trial against Tourre next year.