The Work

September 25, 2008 10:25 AM

The Am Law Litigation Daily: September 25, 2008

Posted by Joe Phalon

Edited by Andrew Longstreth

Weil, Dechert, MoFo Repping Targets of F.B.I. Mortgage Fraud Investigations

We're sure it was a pure coincidence that only days after members of Congress began grumbling about Wall Street fat cats getting off the hook in the Treasury Department's $700 billion bailout plan, "senior law enforcement officials" let slip reports that the Federal Bureau of Investigation has initiated preliminary probes of four corporate pariahs: Fannie Mae, Freddie Mac, American International Group, and Lehman Brothers Holdings. The leak couldn't possibly have been intended to mollify Congress and improve the bailout's odds of being passed. Not a chance.

Whatever the reason for their disclosure, the probes should keep a good number of lawyers busy over the next few months. Joseph Allerhand of Weil, Gotshal & Manges, for example, confirmed to us that he's representing American International Group in all regulatory investigations, although he would not specifically confirm the existence of the reported FBI inquiry. Dechert's Andrew Levander also told us he's involved in FBI probes, but wouldn't name his client. (For the record, an FBI spokesperson would not confirm that Fannie, Freddie, Lehman, and AIG are targets of investigation, but did acknowledge that the bureau has initiated 26 investigations into companies that have played a part in the collapse of the mortgage lending market.)

Not surprisingly, the litigators who are being hired to defend companies in the FBI's mortgage investigations say they're skeptical that the feds will find anything. "Some of these people may have been foolish, or even arrogant, but that is not the stuff of which criminal cases are made," said one.

Still, given the open-ended nature of the investigations and the digital age of discovery, these probes could drag on for some time. "Once they start looking at millions of e-mails, you never know what they'll find," says Carl Loewenson, Jr., of Morrison & Foerster, which is representing at least five clients in the investigators' sights.

--Additional reporting by David Bario

Mayer Brown Wins Seventh-Circuit Truth-in-Lending Case
Mortgage lenders are right up there with Wall Street bankers on the who's-to-blame-for-the-financial-crisis list. Luckily for them, appellate litigation is not a popularity contest. On Tuesday the mortgage lending industry dodged a bullet when the Seventh Circuit reversed a district court's certification of a class of 8,000 borrowers seeking rescission of their loans from Chevy Chase Bank. The 2-1 appellate ruling saves mortgage lenders--who face similar suits across the country--from what Chevy Chase lead appellate counsel Jeffrey Sarles of Mayer Brown calls "intolerable liability." If the Seventh Circuit had permitted the class action to proceed, Sarles told us, borrowers would ultimately face more expensive loans.

The name plaintiffs in the case alleged that Chevy Chase had violated the Truth in Lending Act by not disclosing material terms of their loans or using confusing terminology in disclosure statements. Milwaukee federal district court judge Lynn Adelman issued a sweeping ruling in the case, certifying a class of borrowers and granting a summary judgment motion that gave the entire class the right to rescind their mortgages. The Seventh Circuit ruling lets the bank breathe a big sigh of relief.

In a statement, plaintiffs lawyers at Milwaukee's Demet & Demet said they disagreed with the appeals court's decision. "The language of [the Truth in Lending Act] does not ban class certifications for rescission," they said. "The Seventh Circuit ignored the plain language of the statute." Demet & Demet lawyers also said they would seek an en banc hearing before the entire Seventh Circuit.

Cadwalader's Bruce Hiler Talks Shorting with the Am Law Daily
Lest you worry that we're not covering the other whipping boys of the Wall Street meltdown--the short sellers--we have news on that front as well. With the shorts reportedly considering suits against regulators in the U.S. and the U.K. for imposing trading restrictions that they claim have cost them dearly, The Am Law Daily's Brian Baxter spoke with Bruce Hiler, head of the securities group at Cadwalader, Wickersham & Taft. Hiler, a former associate director of enforcement at the SEC, talked about the short-selling controversy in the Am Law Q & A.

"What we've seen recently is shorts coming in the market as a result of smelling blood in the water because of all the real estate debt issues," Hiler told Baxter. "With all of the fear out there, it's clear that people going long have been very tentative. That creates an environment for short-sellers to have more of an effect than they usually would have."

Should we expect the shorts to face prosecution? "Clearly if there were unfounded rumors or collusion, that's a problem," Hiler said. "But I'm not aware of any cases that the SEC has ever been able to make on that."

Chicago Judge Denies Class Certification to Gas Consumers
As we've learned this political season, Americans are not too happy about the rise in gas prices over the last few years. And we at the Litigation Daily believe that one of the greatest things about this great nation is that when Americans get mad, some of them are bound to sue. In 2006 Rebecca Siegel and Michael Siegel, fed up with high gas prices, filed a purported nationwide class action against major gas producers in the Northern District of Illinois, claiming fraud and unjust enrichment. But on Tuesday the Siegels' case ran out of gas (sorry!) when Chicago federal district court judge Amy St. Eve denied their class certification motion.

The Siegels, represented by solo practitioner Larry Drury and Ben Barnow of Barnow & Associates, alleged that the big gas companies keep prices high by, among other things, limiting supply, restricting purchases, and falsely advertising the scarcity of gasoline. They sought to represent a class of all U.S. retail purchasers who bought the defendants' gasoline after December 2002. Judge St. Eve, however, ruled that claims of fraud and unjust enrichment would vary from state to state, which would violate the standard for class certification. We wondered whether the Siegels or their lawyers would appeal or file statewide class actions, but they were not immediately available for comment.

The defendants included Shell Oil Company (represented by Mark Bernstein, Ray Rezner, and Heather Macklin of Barack, Ferrazzano, Kirschbaum & Nagelberg); Marathon Oil (represented by Joseph Eaton and T. Joseph Wendt of Barnes & Thornburgh); Citgo Petroleum Corporation (represented by Adam Deutsch and Andrew Klevorn of Eimer Stahl Klevorn & Solberg); BP Corporation North America (Richard Godfrey, Barack Echols, and Leslie Smith of Kirkland & Ellis); and Exxon Mobil Corporation (James Quinn and David Yohai of Weil, Gotshal & Manges and Christopher Murphy and Michael Pope of McDermott, Will & Emery).

Opening Arguments in Trial of Senator Stevens Set for Today
Conventional wisdom says that this will not be a great election season for Republicans seeking re-election. We assume it will be even tougher for a Republican convicted on public corruption charges to reclaim a Senate seat. Opening arguments are scheduled to begin today in the government's case against 84-year old Alaska Senator Ted Stevens, who is fighting for his political life. Stevens gambled big when he asked Washington, D.C. federal district court judge Emmett Sullivan to hold his trial before the November elections. Now we're going to see if Stevens's bet pays off.

Legal Times offered an amusing account of voir dire proceedings earlier this week. Brendan Sullivan, Jr., of William & Connolly, who took the lead for Stevens, reminded 45 prospective jurors that Stevens does not have to testify to prove he's not guilty. "It's not like a basketball game," Sullivan, rather inscrutably, told jurors twice. Sullivan fought to keep an admitted conservative "political animal" (who said he considered Stevens's alleged offense to be a regulatory matter) on the jury, but prosecutor Brenda Morris of the Justice Department's Public Integrity Section--surprise!--called for him to be excused.

There were also some light moments. It turns out that one prospective juror, a lawyer at Verizon, once interviewed for a job at Williams & Connolly but was not hired. "No hard feelings," Legal Times says the man told Brendan Sullivan.

Fortune Analyzes Bank of New York RICO Case
For the last couple months, we've been tracking the strange suit filed by the Russian Federal Customs Service against the Bank of New York Mellon. The Russian government, represented by Miami plaintiffs lawyer Steven Marks, sued the bank in a Russian court for its involvement in illicit wire transfers of $7.5 billion. The Russians--in a weird cross-border reliance on U.S. law--are demanding $22.5 billion under the Racketeer Influenced and Corrupt Organization Act.

Earlier this summer, Marks and his team of experts told a Russian court why the government should be permitted to sue under RICO. Next month Bank of New York's team--which is led by Boies, Schiller & Flexner partners Jonathan Schiller and Damien Marshall--will get its chance to argue why the Moscow court does not have jurisdiction over such a case.

In the current issue of Fortune, writer Roger Parloff sidesteps the RICO debate to highlight what may be a fundamental flaw in the Russian government's case. Parloff reports that Marks' case depends significantly on a joint press release that the U.S. Attorney's offices in Brooklyn and Manhattan issued when the Bank of New York signed a non-prosecution agreement for its role in the illicit wire transfers. In that release, the Justice Department wrote that the bank had "admitted its criminal conduct." But it turns out that BONY made the admission in connection with another investigation, this one involving fraudulent loan applications at one of the bank's branches. Last month, both U.S. Attorney's offices amended the joint press release to clarify that the statement of wrongdoing referred only to the loan application case.

Parloff asked whether that amendment was a major setback to Marks's RICO case for the Russian government. But Marks, in an e-mail statement to Parloff, insisted that it wasn't. "It is absolutely amazing that Justice would amend the release some three years later during pending civil litigation to potentially help the wrongdoer," he wrote. "This should be troubling to all of us, that Justice is apparently subject to such influence and that the bank has so much power."

Marks added that since BONY took "responsibility" for the actions described in the non-prosecution agreement, it has essentially admitted criminal wrongdoing. Parloff asked Marks why responsibility automatically equals criminal guilt. "Please tell me that you are kidding," Marks responded. "This was a criminal investigation, not a civil one, so what other responsibility could the U.S. Justice Department and law enforcement attorneys who prosecute criminals possibly mean?"

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I agree with Marks. U.S. attorneys only prosecute criminal cases, not civil cases. If this was an agreement not to prosecute a criminal case and it required BNY to admit its "responsibility" there is no need to further clarify whether it is admitting to "criminal responsibility." This parsing of words looks like an attempt by BNY to redefine its prior wrongdoing. Also, the court is going to look to the text of the non-prosecution agreement itself and not to the wording of a "press release."

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