This issue of the Credit Crunch Digest focuses on the dismissal of antitrust claims against major banks in Libor-related litigation; settlement in the Merrill Lynch/Bank of America merger case; settlement in the SAC Capital insider trading matter; settlement of a Countrywide mortgage-backed securities class action lawsuit; the status of the Madoff bankruptcy trustee’s attempt to halt the New York Attorney General’s settlement with a major hedge fund; and tensions regarding proposed capital requirements on foreign banks operating in the United States.

Libor Scandal

Litigation and Regulatory Investigations

Fraud and Ponzi Schemes

Government and Regulatory Intervention

Libor Scandal

Big Win for Bank Defendants in Libor Case

In a 161-page ruling on March 29, 2013, U.S. District Judge Naomi Reice Buchwald granted, in part, the defendants’ motion to dismiss the class action Libor scandal lawsuit.  Although some claims survived, such as allegations that the banks breached commodities laws, plaintiffs may not proceed on their federal antitrust claims.  These antitrust claims would have exposed the defendants to treble damages.

Judge Buchwald concluded that the plaintiffs lacked standing to bring the antitrust claims and, even if they had standing, the plaintiffs failed to allege any “antitrust injury” because they did not claim their injuries were a result of any harm to competition.  According to Judge Buchwald, the banks could not have breached federal antitrust laws because the process of setting Libor was not intended to spark a competitive setting for the banks, but rather was a cooperative endeavor.  Accordingly, even if the banks manipulated the rate-setting process, any losses that the plaintiffs suffered would have resulted from the defendants’ misrepresentations instead of any harm to competition.

Besides dismissing the federal antitrust allegations, Judge Buchwald also partially dismissed claims related to commodities manipulation, stating that any commodities manipulation claims based on contracts entered into between August 2007 and May 2008 are time-barred because numerous news articles published at that time placed plaintiffs on notice of their injuries.  Contracts entered into between May 30, 2008 through April 14, 2009 might also be time-barred because the Barclays settlement could have informed the plaintiffs of facts sufficient to bring a claim.  However, Judge Buchwald did not want to dismiss these allegations at this time, and instead allowed the plaintiffs leave to amend their complaint.

As to the remaining claims, Judge Buchwald dismissed any racketeering claims and partially dismissed state law claims.  Any claims brought under the Cartwright Act or for unjust enrichment under New York common law were dismissed.  However, Judge Buchwald declined to exercise supplemental jurisdiction, and therefore would not dismiss any other state law claims.

Although an appeal is likely, Buchwald’s ruling is a major win for the bank defendants, because  it significantly reduces any potential damages.  Moreover, the ruling may deter new plaintiffs from bringing antitrust allegations against the banks.  (“Judge Dismisses Antitrust Claims in Libor Suits,” Wall Street Journal, March 29, 2013)

Litigation and Regulatory Investigations

Court Approves $2.4 Billion Merrill Lynch/Bank of America Settlement

Bank of America Corp.’s (BofA) $2.4 billion settlement with investors over losses stemming from its 2008 acquisition of Merrill Lynch & Co. has been approved by a federal court in New York.

The settlement, which resolves investor claims that BofA misled the market about Merrill’s financial well-being at the depths of the 2008 financial crisis, represents the fourth-largest securities suit settlement.  BofA investors were allegedly harmed when BofA assumed significant liabilities following the merger. The firms representing investors will receive approximately $160 million in attorneys’ fees.

Previously, BofA announced a settlement with the U.S. Securities and Exchange Commission to resolve allegations that the bank failed to inform shareholders that it would pay millions in Merrill bonuses as that firm began to suffer losses.  (“$2.4B Settlement Over BofA-Merrill Deal Wins OK,” Law360, April 5, 2013)

Judge OKs $600 Million Insider Trading Fine by SAC Capital

Although having serious concerns about the “neither admit nor deny” language contained in the settlement agreement, a federal court has blessed the $602 million fine to be paid by SAC Capital Advisors to resolve a civil insider trading case.   U.S. District Judge Victor Marrero held that his ruling would be subject to the much-anticipated ruling by the U.S. Appeals Court for the Second Circuit in the Citigroup case.  The Second Circuit is currently considering the lower court’s rejection of a $285 million fraud settlement with the SEC, which allowed the bank to steer clear of any admission of wrongdoing.

The SEC has a long practice of allowing defendants to pay fines, but avoid admissions of guilt. The SEC contends that the practice promotes efficiency and curtails the risks associated with trials.

The recent conditional approval in the SAC case focused on the boilerplate language in the settlement papers, noting that many other courts were considering the issue as well. “In this age,” the judge stated, “when the notion labeled ‘too big to fail’ (or jail, as the case may be) has gained currency throughout commercial markets, some cynics read the concept as code words meant as encouragement by an accommodating public — a free pass to evade or ignore the rules, a wink and a nod as cover for grand fraud, a license to deceive unsuspecting customers.

“Perhaps, too, in these modern times,” he continued, “new financial, industrial and legal patterns have merged that call for enhanced regulatory and, as appropriate, judicial oversight to counter these sinister attitudes.”  Despite his reservations, Judge Marrero granted preliminary approval of the settlement.  (“Judge Approves SAC Settlement in Insider Trading Case, With Reservation,” New York Times Dealbook, April 16, 2013)

Countrywide Settles MBS Lawsuits for $500 Million

Countrywide Financial Corporation has agreed with plaintiffs to resolve the consolidated mortgage-backed securities actions pending in the Central District of California for $500 million. The settlement, which has not yet been approved by the court, is the largest settlement of MBS class action securities lawsuits arising out of the credit crisis.

The plaintiffs alleged that offering documents associated with mortgage-backed securities issued by Countrywide contained misrepresentations and omissions about the quality of the mortgages underlying the securities and the underwriting process of those mortgages.

Other MBS cases to settle include the December 2011 $315 million Merrill Lynch MBS settlement, and the July 2011 $125 million Wells Fargo MBS securities suit settlement.  (“Countywide MBS Securities Suit Settles for $500 Million” D&O Diary, April 17, 2013)

Fraud and Ponzi Schemes

Madoff Bankruptcy Trustee Loses Showdown With NY Attorney General Over $410 Million Settlement

Judge Jed Rakoff of the U.S. District Court located in Manhattan approved a settlement on April 15 between hedge fund manager J. Ezra Merkin and investors in the Madoff Ponzi scheme.  The terms of the settlement provide that Merkin will pay $410 million to the investors who are represented by New York Attorney General Eric Schneiderman.  Additionally, the settlement will reimburse the $5 million spent in pursing litigation against Merkin over the past three years.    

Irving Picard, the Bernard Madoff bankruptcy trustee, recently challenged the settlement based upon his contention that the settlement unfairly compensates only a portion of Madoff’s investors, while leaving other investors out.  However, Judge Rakoff found that Picard had “lost his right to complain” by waiting more than three years to take action to halt the Attorney General’s suit against Merkin.  A spokesperson for Picard’s office has indicated that they intend to appeal the court’s ruling.  (“Trustee in Madoff Fraud Loses Court Ruling,” The New York Times, April 15, 2013)

Government and Regulatory Intervention

European Union Protests Federal Reserve’s Proposed Regulations

Michael Barnier, the top financial regulator of the European Union, has objected to banking proposals regarding capital requirements proposed by Ben Bernanke, chair of the Federal Reserve.  The E.U.’s protest mainly arises from a requirement that foreign banks have a liquidity buffer for any branches operated in the United States.  Barnier believes that imposing this condition would put European lenders at a competitive disadvantage to U.S. banks, and it could trigger a protectionist reaction in response, negatively affecting global economic recovery.

Previously, U.S. regulators have allowed foreign banks to be overseen by their home countries.  However, providing emergency loans to foreign banks may have been the catalyst to create this new rule.  Barnier’s protest is also supported by European banking industry groups such as the European Banking Federation, which remarked that foreign banks may withdraw any U.S. operations.  (“E.U. Objects to U.S. Regulations on Capital Requirements,” The New York Times, April 22, 2013)

Topics:  Bank of America, Bernie Madoff, EU, Federal Reserve, Insider Trading, Libor, Merrill Lynch, Mortgage-Backed Securities, Proposed Regulation, Settlement, Trustees

Published In: Business Torts Updates, Civil Procedure Updates, Civil Remedies Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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