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September 9, 2008 10:56 AM

THE AM LAW LITIGATION DAILY: SEPTEMBER 9, 2008

Posted by Ed Shanahan

SECURITIES
Pension Funds Analyze Legal Options in Fannie and Freddie Fallout
When we read about the government's takeover of mortgage giants Fannie Mae and Freddie Mac, we naturally thought about the potential for litigation. Big institutional investors have put a lot of money into those companies and we guessed they weren't too happy with a plan that leaves them in the cold.

Turns out our guess was right. Yesterday Legal Times spoke with Richard Ferlauto, director of corporate governance and investment for the American Federation of Sate, County and Municipal Employees (AFSCME), who predicts lawsuits against outgoing management of both companies. Ferlauto listed some potential causes of action: transparency, incorrect guidance, fraud, and market manipulation. But the litigation could be complicated by as-yet-unknown details of the government's bailout, such as protections the government may provide to the institutions or their former management.

"This is really an odd situation because we don't know who's in control completely," Ferlauto told Legal Times.

Late yesterday, Coughlin Stoia won the race to the courthouse, filing what seems to be the first shareholder class action to arise from the government bailout against four Fannie Mae executives.

We also checked in with plaintiffs lawyer Sean Coffey at Bernstein Litowitz Berger & Grossmann, whose firm won a $410 million settlement just two years ago in an accounting fraud shareholder class action against Freddie Mac. Coffey echoed much of what Ferlauto told Legal Times, telling us that his firm has "a lot of clients" affected by the government's action. "The way they were accounting--it looks like these guys are recidivists no matter who is in office," said Coffey. Bernstein Litowitz, he added, is analyzing what to do for its clients for the present situation.

"I presume the government is not going to immunize the bad actors," said Coffey.


ANTITRUST
Cohen, Milstein Adds New Wrinkle to Auction Rate Securities Litigation
To date, suits filed against banks and brokers who pushed auction-rate securities onto investors have focused on the sellers' alleged misrepresentations about the safety and liquidity of the investments they were peddling. And most of the fun in the litigation has been reserved for prosecutors and regulators like New York Attorney General Andrew Cuomo, who seem to have aced plaintiffs lawyers out of the big action.

But Cohen Milstein is muscling into the party with a new theory. On Friday the D.C. plaintiffs antitrust shop filed a pair of cases--one on behalf of investors and the other on behalf of bond issuers--in federal court in Manhattan, alleging collusion among 11 banks that underwrote the securities. (Cohen Milstein was joined by lawyers at Steyer Lowenthal Boodrookas Alvarez & Smith and Heins Mills & Olson in the investor suit; and at Susman Godfrey in the investor suit.)

The essential claim, according to Portfolio.com, is that the banks worked together to prop up the market as buyers for the securities disappeared. Plaintiffs lawyers in antitrust cases such as these typically like to wait for the Department of Justice to strike first, but Cohen Milstein partner Michael Hausfeld told Portfolio.com that he's confident he'll be able to make his case with the evidence already collected by regulators, as well as documents he plans to obtain during discovery. "There has to be an independent reason why they all pulled out at the same time," Hausfeld said. "There has be be a connection, and we're going to make it."

Portfolio.com reported that while the issuer suit does not have smoking gun evidence, it's the first to piece together a timeline of events leading up to the February collapse of the auction-rate securities market. It also offers e-mails that suggest banks were working in tandem. In one e-mail cited in the complaint, a UBS chief risk officer warns his CEO to keep tabs on the other banks: "Watch our competitors closely; if they stop supporting auctions, we have much better freedom to stop [supporting auctions]."


M&A
Hexion Trial Begins in Delaware
Who needs Monday Night Football when yesterday in Delaware we had Monday morning (and afternoon) litigation? The hotly anticipated Huntsman/Hexion trial kicked off yesterday in Chancery Court in Wilmington before Vice-Chancellor Stephen Lamb. Hexion, you'll recall, is seeking a judgment that it's within its rights to walk away from a $10.6 billion merger with Huntsman. The specialty chemical maker claims that the combined company would be insolvent, and that Huntsman has suffered material adverse effects that permit Hexion to back out of the contract.

Over at Dealbook, the Deal Professor live-blogged the morning session in court, which featured Hexion lead trial counsel Marc Wolinsky of Wachtell, Lipton examining Hexion CEO Craig Morrison, followed by David Harvin of Vinson & Elkins doing the cross for Huntsman. (The Deal Professor also analyzed both sides' voluminous pretrial briefs, which he called "a must-read for private equity and bank finance attorneys.")

We're always impressed with the Deal Professor's insights, and found his running analysis of Morrison's testimony quite useful. But we'll admit, we're lawyer-centric. So we were particularly drawn to Dealbook's (all-too) brief account of testimony about Wachtell's role in determining that a post-merger Hexion/Huntsman would be insolvent.

The questions came from V&E's Harvin, who was trying to establish that the solvency opinion offered by Hexion's financial advisors was a sham because Hexion was already spoiling for litigation--in breach of the merger agreement. Harvin homed in on a May 30 meeting between CEO Morrison, Wachtell lawyers, and financial types from Duff & Phelps. As Dealbook tells it, Harvin asserted "that at that meeting, the Wachtell litigation team had already come to the conclusion that the combined entity was insolvent." Morrison denied it, insisting that "D&P was the party to decide this, not Wachtell."

The trial is expected to last six days. We're hoping that more emerges about what Wachtell told Hexion, and, for that matter, what V&E told Huntsman. One more note: The Litigation Daily recently wrote about Lamb's pretrial order that Huntsman give Hexion all documents related to Merrill Lynch's advice to Huntsman's board. Now we know why Huntsman wanted to protect the documents. According to Wachtell's final pretrial brief, available via Dealbook, Merrill advised Huntsman both that the combined company faced insolvency and that Huntsman had experienced material adverse effects. Wachtell claims, based on e-mails produced under Lamb's order, that when Huntsman management saw a Merrill analysis of the true value of Huntsman's shares, "company counsel asked [Merrill] to remove it [from the board book] and speak to [it] orally."

                         

FIRMS
Who Says You Can't Go Home? Fisher Returns to Latham
It's official: Alice Fisher is returning (again) to Latham & Watkins. Fisher, who most recently headed the DOJ's Criminal Division, will become a partner in the firm's Washington, D.C., office as global co-chair of the white-collar and government-investigations practice group. During her most recent stint at Justice, Fisher supervised the Medicare Fraud Strike Force and Enron Task Force. She also chaired the the National Procurement Fraud Task Force and oversaw the government's wide-ranging investigation of disgraced lobbyist Jack Abramoff, who was sentenced to four years in prison last week. In 2007 The American Lawyer named Fisher to its list of Fab 50 Young Litigators.

"For every good reason, Alice was one of the most sought-after lawyers exiting the current administration, and we are proud and delighted that Alice chose to return to Latham," said Eric Bernthal, the firm's Washington, D.C., office managing partner in a statement.

The Fisher sweepstakes began in May when she announced she was leaving DOJ. She took the summer to spend time with her two boys--ages 7 and 11--before ultimately deciding to return to Latham. It's her second homecoming. After becoming a partner at Latham in January 2001, Fisher left later that year to serve in the Justice Department under her longtime mentor Michael Chertoff, then head of the Criminal Division, now Secretary of the Department of Homeland Security. She returned in 2003 and spent two years at the firm before going back to Justice.

We spoke briefly yesterday with Fisher, who is still just 41 despite the impressive resume. The conversation convinced us that she's already quite adept at the locutions of a private firm lawyer; she extolled Latham's "platform" and "global footprint." She also said she's looking forward to advising global companies to be proactive about risk management. Her first day is October 1. "They've already saddled me with a Blackberry," Fisher told us, though she quickly added: "Well, I shouldn't say 'saddled.'"


IP
New York Judge Rules for Rowling in Harry Potter Copyright Suit
Manhattan federal district court judge Robert Patterson has thrown an invisibility cloak over Steven Vander Ark's reference guide, "Harry Potter Lexicon." In a ruling yesterday, available here via the Wall Street Journal's Law Blog, Judge Patterson permanently blocked its publication, handing a win to author J.K. Rowling, publisher Warner Brothers, and their lawyer, O'Melveny & Myers partner Dale Cendali, who sued Vander Ark's publisher, RDR Books, last year. Guess you could call the judge Rowling's Patronus.

Rowling and Warner Brothers claimed the planned book violated their copyrights. RDR Books, represented by Manhattan solo practitioner David Hammer, countered during a three-day trial last April that Vander Ark's use of the material was covered under the fair use doctrine. Judge Patterson concluded that Vander Ark's book crossed the fair use line, but he also said his ruling should not stop the proliferation of helpful reference materials. "While the Lexicon, in its current state, is not a fair use of the Harry Potter works, reference works that share the Lexicon's purpose of aiding readers of literature generally should be encouraged rather than stifled," wrote the judge.

                         

CONTRACTS
No Contract for Old Actor
Tommy Lee Jones is a pretty smart guy. He was Al Gore's college roommate at Harvard, and for our money, the Oscar-winner (for his role as a U.S. Marshal in "The Fugitive") consistently gives some of the most intelligent performances you'll see on screen. (We are excepting, of course, his less-than-noble turn as a Texas Ranger in 2005's co-ed caper, "Man of the House." Hey, everyone's got to earn a living.)

But apparently, even a wily veteran like Jones can get suckered into a punitive arbitration clause. According to a September 4 complaint filed in state court in Texas, (available via Courthouse News), Jones agreed to an arbitration clause in the contract he signed with Paramount Pictures to make No Country For Old Men only because he was told that all of the film's principals had accepted the same deal. Not true, he now alleges: Producer Scott Rudin's contract did not include an arbitration clause. Jones claims he was fraudulently induced to sign the clause and had to endure the expense of arbitration before filing his breach-of-contract suit against Paramount. We asked Jones's publicity rep, Jennifer Allen, about the outcome of that arbitration, but she declined to comment on any aspect of the case.

Jones--who must know what he's talking about, since he played Gotham D.A. Harvey Dent in 1995's Batman Forever--is claiming that Paramount cheated him out of more than $10 million in back-end bonuses by belatedly citing "mistakes" in the contract regarding box office formulas and home video expenses. Jones is represented by local counsel in Bexar County--he has a home in San Antonio--and by Martin Singer of L.A.'s Lavely & Singer, an entertaiment lawyer who's perhaps best known for representing Arnold Schwarzenegger.

            

CORRECTION
In an August 25 item about a federal court ruling in Cooper Technologies v. Dudas we mistakenly reversed the counsel for the two companies involved, Cooper and Thomas & Betts Corp. Kaye Scholer partner Alan Fisch represented Thomas & Betts; former Texas state solicitor Ted Cruz of Morgan Lewis represented Cooper.

We also confused the parties filing the lawsuit. In the underlying case, Cooper filed a patent infringement suit against Thomas & Betts in federal court in East Texas--not the other way around. We regret the errors.

The trial in the underlying case began on Monday.


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