The Work

October 10, 2008 10:21 AM

The Am Law Litigation Daily: October 10, 2008

Posted by Joe Phalon

Edited by Ben Hallman

John Beisner of O'Melveny & Myers

Nearly two years into the housing slump, no one really knows how many home loans are in trouble, how many homeowners face default, and whether banks can weather the fallout. And meanwhile, financial prognosticators continue to warn that the economy can't recover until the toxic mortgage mess is resolved and the housing market returns to normal.

One litigator nudged that process forward last week, which is why we've selected John Beisner, who heads the class actions, mass torts, and aggregated litigation practice at O'Melveny & Myers in Washington, D.C., as our litigator of the week. On Monday Beisner's client, Bank of America, announced an $8.6 billion settlement with 11 state attorneys general that will restructure about 400,000 troubled mortgages issued by the mortgage lender Countrywide, which B of A acquired in July. "To my mind this is more than a settlement," Beisner told us. "It's a public policy statement of what needs to be done to stabilize the housing market."

The Bank of America settlement came about, he said, after months of "Kissinger-style shuttle diplomacy" with AGs and staff lawyers from 11 states. (Illinois and California took the lead.) "We logged a lot of miles in the past month," said Beisner, who is a veteran of such giant-scale settlements as the 2007 $4.85 billion Vioxx deal, in which he was one of Merck's advisors.

The program announced on Monday will identify homeowners who are struggling to pay their mortgages. Countrywide will then work with these mortgage holders to restructure the loans so that their total payment of principal and interest amounts to 34 percent of their income. (The bank won't be able to meet this target in every case, Beisner told us, but that is the goal.) Though restructuring costs are high, he said, the fallout from an incessant wave of foreclosures could be worse.

Beisner said this deal was different than others he's worked on because he and his client were driven by the need "to constructively address a national emergency." At least one national leader has noticed. Rep. Barney Frank, the Chairman of the House Financial Services Committee, cited the deal in a letter to mortgage lenders this week. "It is essential that every mortgage servicer firmly commit to implement plans for immediate mass modifications based on, or stronger than, the measures Bank of America/Countrywide has undertaken," Frank said.

At a time when most litigation stemming from the financial crisis is focused on apportioning blame, we're glad to salute a lawyer who's helping to solve problems beyond those of his client.

Citi to Wachovia: Deal's Off. Lawsuit's Still On

Late yesterday afternoon Citibank announced that it was walking away from negotiations with Wells Fargo to divide the assets of Wachovia. According to the Wall Street Journal, Citi came to believe that Wells Fargo negotiators wouldn't budge from their $7 a share offer for Wachovia, despite Citi's conviction that Wachovia's books were so polluted with bad real estate loans that Wells couldn't afford that price. Citi was not especially graceful in departure: The bank didn't tell negotiators from Wachovia and Wells, but at 5 p.m. issued a press release announcing its decision, which it also faxed to the various judges overseeing pieces of the litigation between the banks.

And that litigation, Citi said, will continue. Though Citi said it would no longer seek an injunction to block the Wells/Wachovia deal, it will continue to pursue the $60 billion in damages claims it laid out in the New York state supreme court complaint Citi's lawyers filed on Monday. The litigation standstill agreement amongst the banks expired at 8 a.m. today.

Why is Citi intent on pursuing damages almost quadruple the amount it was wiling to pay for Wachovia? Citi says, according to the Financial Times's account of a Tuesday town hall meeting led by CEO Vikram Pandit, that it's a matter of principle: At the behest of regulators, Citi stepped in to rescue Wachovia when no other bank would. Certainly Citi deserves a breakup fee, the NYT's Dealbook concedes. But Dealbook also argues, citing the Breakingviews blog, that the $60 billion lawsuit is not so great for Citi's image.

Did JPMorgan Chase Loot Lehman Subsidiaries Before Their Bankruptcy Filing?

We've spent a lot of time in the last time in the last three weeks immersed in the Lehman Brothers bankruptcy docket sheets. And frankly, we've been disappointed. Considering the unprecedented size of the Lehman estate and the speed at which its most valuable assets were sold off, this Chapter 11 has produced a lot of litigation heat but no real fires.

We learned yesterday that we had been looking in the wrong place. Or, we should say, at the wrong Lehman. According to the Am Law Daily's David Bario, in the weeks after Lehman Brothers Holding, Inc., filed for Chapter 11 protection, New York state court claims piled up against Lehman Brothers Commodity Services, Inc., Lehman Brothers Special Financing, Inc., and Lehman Brothers Finance, S.A. Beginning with Bank of America, which demanded $470 million, dozens of plaintiffs that had been involved in derivative deals or swap agreements with Lehman--including Goldman Sachs funds and billionaire energy trader T. Boone Pickens--sued Lehman units that weren't in Chapter 11.

And here's the latest wrinkle. Last Friday, the subsidiaries also filed for bankruptcy. But hours before they did, JPMorgan Chase paid itself as much as $640 million (the amount has not been disclosed) out of accounts it maintained for those Lehman units.

Guess who's not amused by Morgan's slick maneuver? That's right: the rest of the banks and funds with claims against the Lehman units. "I just want the record to be crystal clear that that's a issue that we for Bank of America think we have an entitlement to pursue," Shearman & Sterling lawyer William Roll said at a NY state supreme court hearing this week. "They just helped themselves. What the rest of us were trying to do in court, JPMorgan just did on its own," a lawyer for another of the other plaintiffs told Bario.

JPMorgan has already raised eyebrows, in Congress and in courtrooms, for freezing $17 billion of cash and securities belonging to Lehman on the Friday night before its failure. Some Lehman creditors blame Morgan for precipitating liquidity crisis that forced the investment bank to declare bankruptcy.

Lawyers for two plaintiffs in subsidiary cases told Bario that their clients might now seek to recover their funds directly from JPMorgan. A Saterlee Stephens Burke & Burke lawyer representing Morgan declined to comment.

General Re Lawyer Faces Life In Prison for Work On Sham Deal

When Jeffrey Skilling was sentenced to 24 years in prison for his role in the fraud that brought down Enron, he bore the burden of responsibility for orchestrating one of the great financial crimes of the century. Robert Graham, a former senior lawyer at General Re Corp., an insurance company, doesn't at first blush seem to be in Skilling's league. Yet federal prosecutors in Connecticut want to sentence Graham to up to 230 years behind bars for what his defense lawyers call "a few hours' work" on a fraudulent deal. Yikes.

The story, writes Corporate Counsel's Sue Reisinger in a cameo appearance at the Am Law Daily, began a decade ago when Gen Re paid a $10 million insurance premium to AIG, which secretly returned the money to Gen Re. AIG then booked $500 million in false loss reserves to impress analysts and increase its stock price. Prosecutors say Graham's advice helped to "legitimize bogus documents and to conceal the fraud" by structuring it through a holding company.

In February a federal court jury in Hartford convicted Graham--Gen Re's former assistant general counsel--and four other executives of multiple counts of securities fraud. At a September 25 sentencing hearing before Judge Christopher Droney, prosecutors argued that Graham should face a stiff penalty because he abused a position of trust and used his special skills and knowledge as a lawyer to further the fraud. (The government isn't just picking on the lawyer, it is seeking the same sentence for three codefendents.)

The pre-sentencing report calls for terms of 12-17 years for each defendant. Prosecutors argue that they deserve heavier sentences because more than 250 AIG investors lost at least $544 million as a result of the fake deal. The issue will be decided by Judge Droney, who has not yet set a sentencing date.

Graham's attorney, Alan Vinegrad of Covington & Burling, wouldn't comment for Reisinger's story. But in a September court filing, he argued that his client was the "least culpable" of the defendants, and that prosecutors are overstating the seriousness of his misconduct.

Chrysler Shifts into Litigation Gear

The dual clutch is a minor miracle of automotive technology, offering drivers the increased control and fuel efficiency of manual transmission without the hassle and foot fatigue that comes with working a clutch. But don't look for a dual-clutch transmission in Chrysler cars anytime soon.

According to a complaint filed in state court in Pontiac, Michigan, Chrysler was all set to build a factory to produce the transmissions when Getrag, a German company that had promised to partner with the American car maker, bowed out. In the complaint, Chrysler, represented by Mayer Brown partners Michael Gill and Rick McCombs, said Getrag failed to make good faith efforts to secure $300 million in financing to support the joint development of a dual-clutch manufacturing plant in Tipton, Indiana. Getrag is "one of only a few suppliers in the world" able to meet Chrysler's requirements for the dual-clutch transmissions, the complaint says.

The complaint identifies Michael Zeller of Charlotte's Moore & Van Allen as Gertag's lawyer, but we couldn't reach him by phone.

Fee Disclosure Time for Lehman's Lawyers

The bad news for Weil, Gotshal & Manges: In the year before Lehman Brothers filed for bankruptcy, the investment bank, a longtime Weil client, paid the firm $51.8 million in fees. That work is never coming back. The good news: Weil could easily earn another $50 million from Lehman's bankruptcy in the next few months.

On Wednesday, Lehman filed an application in federal bankruptcy court in Manhattan to formally retain Weil Gotshal. Lehman asked for court approval to pay $650 to $950 an hour for partners and counsel, $355 to $595 for associates and $155 to $295 for paraprofessionals. It also disclosed that it had paid Weil a $5 million advance. "Weil, Gotshal & Manges' past experience with Lehman is particularly valuable because of the extraordinary complexity of the debtors' business operations," Lehman said in the filing.

What the fees will ultimately be is anyone's guess, but also this week, in an internal e-mail obtained by Above the Law, Weil chairman Steven Dannhauser thanked the 100 or so Weil lawyers who have worked on the bankruptcy since Lehman filed in September. Let's see: 100 times an average billing rate of about $650 times who knows how many hours. Seems to us that Weil's well on its way to $50 million already.

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