Orrick's Financial Industry Week in Review - September 16, 2013

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RMBS and Other Securities Litigation

UBS Settles RMBS Claims Brought by the FHFA

On September 4, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California entered an order dismissing with prejudice the Federal Housing Finance Agency's claims against UBS Securities Inc. pursuant to a settlement agreement between the parties.  The dismissal bars the remaining non-settling defendants (which include Bank of America, Citigroup and Deutsche Bank Securities, among others) from bringing claims for indemnity or contribution against UBS, and likewise bars UBS from bringing claims for indemnity or contribution against the remaining non-settling defendants.  FHFA originally filed the action in the Supreme Court for the State of New York in 2011, alleging misstatements and omissions about loan quality in connection with RMBS purchased by Fannie Mae and Freddie Mac.  The case was subsequently removed to federal court and consolidated into the FHFA multidistrict litigation before Judge Pfaelzer.  Order.

$180 CDO Claim Against Credit Agricole Dismissed as Time-Barred

On August 31, Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York dismissed with prejudice a $180 million suit brought by Intesa San Paolo (Intesa) against Credit Agricole Corporate and Investment Bank in connection with a collateralized debt obligation (CDO) backed by allegedly faulty mortgages.  Intesa's suit, alleging violations of §10(b) of the Securities and Exchange Act and state law claims of common law fraud and aiding and abetting fraud, was initially dismissed as time-barred earlier this year.  Intesa filed a second amended complaint relying on allegedly false statements contained in more recent documents that it maintained were incorporated by reference into the CDO documents.  The court found that the newly cited documents were not intended to be incorporated into the CDO, and as a result, Intesa's §10(b) claim remained time-barred.  The court also dismissed the state law claims, refusing to exercise supplemental jurisdiction over those claims.  Opinion.

Tell One, Tell All, The Risks of Selective Disclosure

On September 6, the SEC charged the former head of investor relations at First Solar Inc., an Arizona-based solar company, with violating Regulation FD, which is designed to prevent issuers from selectively disclosing material nonpublic information to certain market participants before disclosing the information to the general public.  In this matter, the SEC determined that Lawrence D. Polizzotto violated Regulation FD when he indicated in "one-on-one" phone conversations with about 20 sell-side analysts and institutional investors that the company was unlikely to receive a much anticipated loan guarantee from the U.S. Department of Energy.  When First Solar disclosed the same information the following morning in a press release, the company's stock dropped 6 percent.  In addition to a cease-and-desist order, Polizzotto agreed to pay $50,000 to settle the SEC's charges.   The SEC determined not to bring an enforcement action against First Solar, due in part to the company's "extraordinary cooperation" with the investigation.  Release.  For more information and to access our Securities Litigation blog, please click here

Orrick Alert: Second Circuit Decision on Extraterritoriality

On August 30, the United States Court of Appeals for the Second Circuit handed down its decision in United States v. Vilar, which unequivocally limits the U.S. government's ability to use Section 10(b) of the Securities Exchange Act of 1934 in criminal prosecutions involving extraterritorial conduct. No. 10-521-CR (2d Cir. Aug. 30, 2013).  In so doing, the court made clear that the Supreme Court's territorial limitation on private securities fraud actions, originally set forth in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), also applies to criminal prosecutions.  While the Dodd-Frank Act may in the future affect the scope and longevity of the Vilar decision, at least for the time being, Vilar makes it all the more difficult for U.S. prosecutors to pursue securities fraud where the purchase or sale of securities occurred outside the U.S.  For the complete Orrick alert, please click here.

European Financial Industry Developments

Legislative Resolution on the Market Abuse Regulation Adopted at First Reading by European Parliament

In a press release published on September 10, the European Parliament announced that it had adopted a legislative resolution on the Market Abuse Regulation (MAR) in a plenary session.  The legislative resolution will establish tougher rules to strengthen prevention and punishment of market abuse.

The leading MEP on the legislation, Arlene McCarthy, said "we are sending a clear signal that the EU is not a soft option or safe haven for perpetrators of market abuse."

The legislation introduced:

    • Tougher sanctions: Individuals convicted of market abuse will face fines of up to €5 million and a temporary or even permanent ban on undertaking certain roles within investment firms, while offending companies could be fined up to 15% of their annual turnover or €15 million.
    • Wider scope: A range of financial instruments, including commodity derivatives affecting food and energy prices, traded inside and outside the exchanges, will now be covered.

The European Parliament is due to start negotiations with EU member states on the criminal sanctions for market abuse (directive) in October.  Press Release

SSM Legislation Adopted by European Parliament at First Reading

In a plenary session held on September 12, the European Parliament adopted legislation establishing the single supervisory mechanism (SSM), as announced in a press release.

The new EU bank supervision system will bring approximately 150 of the EU's largest banks under the European Central Bank's direct oversight in a year's time.  The system will be compulsory for Eurozone members and will be open to other EU countries.  Press Release

ESMA Publishes Responses to Consultation on Draft RTS on Information Requirements

On September 7, the European Securities and Markets Authority (ESMA) published a consultation paper on draft regulatory technical standards (RTS) on information requirements for the assessment of acquisitions and increases in holdings in investment firms under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).     

The bodies that responded to ESMA's consultation were:

    • European Fund and Asset Management Association (EFAMA)
    • Investment Management Association (IMA)
    • European Federation of Financial Advisers and Financial Intermediaries (FECIF); and
    • European Private Equity and Venture Capital Association (ECVA).  Responses to Consultation.  

EU Institutions in Public Disagreement over the Legality of the Financial Transaction Tax

Lawyers for the European Commission and EU member states are in public disagreement over the legality of the FTT.  A leaked legal opinion produced by the EU Council's legal service alleged that the FTT was both incompatible with EU law and likely to distort competition.  The Commission "strongly disagrees with the Council lawyers' opinion."  The report also notes that a "very thorough" legal analysis had been conducted on the FTT proposal.

Discussions on the FTT will continue with an expected implementation date of December 1, 2014.  Legal Opinion (available on the FT website).

Events

Orrick's Women's Initiative: Advancing the Conversation

Orrick's Women's Initiative invites you to participate in a thought-provoking conversation about the critical role that leaders can play in promoting the professional advancement of women, and how women can maximize their success by leaning in to their careers.  Panelists include Lisa Beeson, Head of Real Estate Mergers & Acquisitions, Barclays Capital; Elisabeth DeMarse, Chair, President and CEO, TheStreet, Inc.; Sheila Smith, Principal, Deloitte Financial Advisory Services LLP; and Leah Sanzari (Moderator), Partner, Orrick Herrington & Sutcliffe LLP and Co-Chair of Orrick's Women's Initiative.  The event will take place on September 18 in Orrick's New York office.  To register for this event, please click here.