The Work

December 8, 2008 9:00 AM

The Am Law Litigation Daily: December 8, 2008

Posted by Ed Shanahan

Edited by Alison Frankel

Discover's Suit Against Morgan Stanley Heats Up

Remember when it seemed like Discover's $2.75 billion antitrust settlement with MasterCard and Visa (third item) was big news? Well, it's beginning to look like the real story of the case hasn't yet been told. The settlement has sparked a potentially nasty (and expensive) oedipal battle, with Discover accusing its now struggling former parent, Morgan Stanley, of forcing it into a premature deal in order to score some much needed cash for the bank. Morgan Stanley and Discover have already exchanged a juicy set of briefs, but the battle is expected to escalate this week, when the bank answers Discover's charges of breach of contract and tortious interference.

Here's the backstory. This fall, with banks collapsing right and left, Morgan Stanley was desperate for cash. The bank saw an opportunity in settlement negotiations then underway in Discover's antitrust case against rival credit card companies Visa and MasterCard. Under the terms of Morgan Stanley's 2007 spinoff of Discover, the bank was entitled to almost half of Discover's antitrust recovery--up to a total payment of $1.5 billion. So even though Discover had claimed that the antitrust case was worth up to $18 billion, Morgan Stanley stepped into settlement talks and pushed the credit card companies to accept a $2.75 billion deal. The bank even offered to take $100 million less from Visa than it was due.

But Discover balked at paying Morgan Stanley its share of the settlement. In late October, Morgan Stanley's lawyers at Cravath, Swaine & Moore filed for a declaratory judgment against Discover in New York State Supreme Court, seeking to force Discover to turn over the $1.2 billion Morgan Stanley says it's owed.

Discover fired back with an answer and counterclaim that suggest Morgan Stanley has a long and uphill battle ahead. Discover claims that Morgan Stanley violated an agreement giving Discover sole control over the antitrust litigation, and accuses the bank of engaging in secret negotiations of its own with Visa and MasterCard. The spinoff's lawyers at Bartlit Beck Herman Palenchar & Scott assert that Morgan Stanley forced Discover to agree, on the eve of trial, to accept a settlement for far less than Discover might have won in the courtroom. They're arguing that Discover not only doesn't have to pay Morgan Stanley its share of the settlement but that Morgan Stanley owes Discover damages for its interference in the antitrust case.

Bartlit Beck's Christopher Lind says that with Morgan Stanley's share of any settlement in the antitrust case already capped at $1.5 billion, the bank had little incentive to wait for Discover to go to trial instead of pushing the backdoor $2.75 billion settlement--especially given its cash-strapped situation. "Morgan Stanley basically couldn't have gotten a better deal," Lind told us.

We called Cravath partner Daniel Slifkin, who's handling the case for Morgan Stanley along with presiding partner Evan Chesler, but he referred us to Morgan Stanley. A bank spokesman told us "there is absolutely no basis for Discover's claims."

Discover was represented during the antitrust case by Kirkland & Ellis and Constantine Cannon, but when it came time to litigate with Morgan Stanley--a Kirkland client--the credit card company turned to Bartlit Beck. Partners Philip Beck and Hamilton Hill are working with Lind on the case. New York's Kleinberg, Kaplan, Wolff & Cohen is also representing Discover.

--David Bario

New York Jury Finds Against Bank of America in Asset-Backed Securities Case

In the shakeout on Wall Street, Bank of America has emerged as one of the few winners. But in a New York federal courtroom last Friday, B of A was a big loser.

Following a six-week trial before Judge John Koeltl, a jury decided that Bank of America should pay $141 million in a civil fraud case that centered on its sale of asset-backed securities. Institutional investors, including Allstate, Travelers, Société Générale, and American International Group had sued BofA in 2003, alleging that the bank had lied about the financial health of the furniture company Heilig-Meyers, for which BofA sold securities in the late nineties. The institutional investors suing Bank of America bought around $300 million worth of securities, which lost nearly all their value when Heilig-Meyers went bankrupt in 2002.

David Spears of Spears & Imes, who represented all of the plaintiffs except AIG, told us the jury found Bank of America liable on all the claims his clients asserted. The award consisted of compensatory damages of about $100 million, plus prejudgement interest.

Jeff Ross of Anthony Ostlund Baer Louwagie & Ross represented AIG. King & Spalding senior partner Dwight Davis took the lead at trial for Bank of America, with Lawrence Robbins of Robbins, Russell, Englert, Orseck, Untereiner & Sauber providing assistance to the bank behind the scenes. In a statement, BofA said it was disappointed with the outcome and was considering an appeal.

--Andrew Longstreth

Plaintiffs Load the Bases with Key Decisions in Two Huge Subprime Cases

Looks like Gibson Dunn & Crutcher is going to have to revise its report on early trends in subprime fraud litigation. Two crucial rulings that came at the end of last week--denying motions to dismiss class actions against onetime mortgage giants Countrywide and New Century--show that the plaintiffs bar isn't giving up and going away. In fact, if we're going to keep our subprime-litigation-as-a-baseball-game metaphor going, you could say that the plaintiffs in Countrywide and New Century right now have the bases loaded with no outs.

The Countrywide ruling by Los Angeles federal district court judge Mariana Pfaelzer was not considered a big surprise, according to D&O Diary, because Judge Pfaelzer previously denied a motion to dismiss a separate Countrywide subprime derivative suit. In the class action, Judge Pfaelzer dismissed claims only against accounting firm Grant Thornton, which was represented by Winston & Strawn. Lead plaintiffs counsel in Countrywide is Joel Bernstein of Labaton Sucharow, who will now have a chance to get to know a long list of defense counsel a lot better. They include: Goodwin Procter for Countrywide and its former execs; O'Melveny & Myers for Bank of America; Gibson Dunn for the underwriters; and Morrison & Foerster for the outside directors.

We were more intrigued by Los Angeles federal district court judge Dean Pregerson's 65-page New Century decision. Back in January 2008, Judge Pregerson was the first federal judge to dismiss a subprime class action. And what case enjoyed the distinction of being the first to be dismissed? New Century! Judge Pregerson essentially told the lead plaintiffs firm--Bernstein Litowitz Berger & Grossmann--that he didn't like the way the firm had drafted its complaint against New Century and its officers, directors, accountants, and underwriters.

But the judge dismissed the case without prejudice, giving Bernstein Litowitz partner Salvatore Graziano and his team a second chance. And before the plaintiffs lawyers filed their amended complaint, the examiner in New Century's bankruptcy issued a report full of allegations of financial chicanery.

So in the second complaint, underwriters' counsel William Sullivan of Paul Hastings Janofsky & Walker told us, Bernstein Litowitz offered better-pled support for scienter and loss causation. "Plaintiffs had the benefit of the [bankruptcy] trustee's report," Sullivan said. "It allowed them to go into more detail." (Other defense counsel in the New Century class action include Munger, Tolles & Olson for the former officers; Gibson Dunn for the outside directors; and Sidley Austin for KPMG.)

We asked Sullivan about previous reports (including ours) of plaintiffs struggling to show scienter and loss causation in subprime class actions. "You may want to rethink that," he said. "There were some early cases where the plaintiffs didn't know a lot, and some of those were dismissed. But the plaintiffs have gotten much more sophisticated about this."

--Alison Frankel

Family of Wal-Mart Temp Crushed by Black Friday Crowd Files Suit

We can't say we were shocked to hear that the family of Jdimytai Damour, the temporary Wal-Mart worker who was trampled to death by a horde of bargain seekers, has sued the giant retailer in New York State Supreme Court in the Bronx. In an almost unthinkable tragedy, Damour was asphyxiated when 2,000 shoppers stormed the store before dawn on Black Friday. His family, represented by personal injury lawyer Jordan Hecht, is accusing Wal-Mart and the mall where the store was located of gross negligence. But here's the twist: Damour wasn't technically a Wal-Mart employee. He was employed by a temp agency that supplied security workers to the megastore.

There's some difference of opinion in the blogosphere about whether that fact will turn out to help or hurt Damour's case. At the New York Disability Law Blog, disability lawyer Troy Rosasco says that under the "exclusive remedy" provisions of New York's worker's compensation law, Damour's claim against Wal-Mart will be dismissed. "Without any fanfare, Wal-mart will quickly move to dismiss the lawsuit based upon the defense that workers' comp is the exclusive remedy," Rosasco writes. "The Damour family will get a measly onetime $50,000 payment to his estate (plus a $6,000 expense) for the life of their loved one." The New York Personal Injury Blog, on the other hand, says that Damour's recovery won't be limited by workers comp because he wasn't employed by Wal-Mart.

We reached out to labor and employment lawyer Steve Hirschfeld of San Francisco's Curiale Dellaverson Hirschfeld & Kraemer for some clarity. He came down squarely in Damour's corner. "If he was either an independent contractor or someone working through an agency, he wouldn't be limited by workers' compensation [remedies]," Hirschfeld told us. "Ironically, [Damour] can make a better claim." Hirschfield cautioned that it's hard to predict the outcome without knowing the underlying facts of the case, but added that "for sophisticated companies like Wal-Mart, with prior knowledge of customer reactions to sales--especially in this economy--it might have done something more to minimize the stampede."

The Damour family's lawyer, Hecht, isn't talking to the press anymore, according to the receptionist at his firm. We also contacted Thomas Mars, Wal-Mart's GC, but didn't get a call back.

We wondered, of course, who might be defending Wal-Mart in the Damour litigation. It seems like every major employment practice in the country does work for the company, and almost all of those we called declined to comment. We did hear from Pearl Piatt, the public relations chief at Gibson, Dunn & Crutcher. She told us that the firm doesn't usually handle personal injury work. But then we remembered that Gibson does make exceptions--it represented Robert Bork in his $1 million slip-and-fall suit against the Yale Club in New York.

Surely, if it can handle personal injury work for Bork, it can do the same for one of its most valued corporate clients.

--Vivia Chen

Blackwater Guards' Indictment Expected to Be Made Public Today

In what promises to be a thorny prosecution, the Justice Department will today unseal the indictments of five Blackwater Worldwide guards who were involved in a deadly 2007 shooting in Baghdad that left 17 civilians dead, according to The New York Times. And Indiana's Barnes and Thornburg may find its already significant role in the case deepening.

The Indiana firm represents ten guards who witnessed the event but, according to Barnes and Thornburg partner Larry Mackey, did not fire their weapons and were never targeted in the criminal investigation. The Associated Press, which has tracked Justice's prosecution efforts for several weeks, has reported that Justice officials have raised concerns that the Barnes and Thornburg clients may have coordinated their stories. Justice, according to the Associated Press, questioned whether the firm--which was hired by Blackwater to represent the ten guards--had a conflict of interest.

Mackey told the Litigation Daily that Barnes and Thornburg was careful to protect the interests of each of the guards it represents. "We were very sensitive to any issue that would effect the interests of individual clients," he said. And the arrangement under which Blackwater paid its employees' legal fees, he told us, is typical. "That fact alone never gives rise to conflict of interest," he said.

At the time of the shooting, Blackwater said the guards had been ambushed and were acting in self-defense; eyewitnesses, however, said that none of the civilians had shot at the Blackwater guards, and that on the contrary, they were attempting to flee the violence. U.S. soldiers who arrived on the scene after the shooting confirmed the latter account. Barnes and Thornburg's clients may well be witnesses in any criminal case that results from the shooting, which means the firm's involvement will continue.

Mackey told us the guards targeted by the Justice Department have hired counsel, but he declined to say whom. All he would tell us is that it's not Barnes and Thornburg.

--Daphne Eviatar

Wildman Harrold and Lewin & Lewin Win Seventh Circuit Reinstatement of Judgment for Terror Victims

After seven long years of litigation, Wildman Harrold--and the family of a young man killed in a 1996 drive-by Hamas shooting in Israel--received a measure of vindication last week, when an en banc panel of the U.S. Court of Appeals for the Seventh Circuit reinstated a $156 million judgment against two U.S.-based Islamic groups. In a 7-to-3 decision the court ruled that U.S. charities must be held liable if they give money to groups that commit terrorist acts, even if those funds are designated for humanitarian purposes.

"Anyone who knowingly contributes to the nonviolent wing of an organization that he knows to engage in terrorism is knowingly contributing to the organization's terrorist activities," Judge Richard Posner wrote for the majority. "And that is the only knowledge that can reasonably be required as a premise for liability."

The case stems from the 1996 murder of American-born David Boim. After a 2004 trial, Boim's parents won $156 million from a trio of Islamic charities and an U.S. citizen whom they alleged had contributed to Hamas. In December 2007 the verdict was overturned by a three-judge Seventh Circuit panel that ruled the Boims had not proved a casual link between the funding of terrorism and a specific terrorist act.

The en banc ruling says plaintiffs don't have to establish that direct link. "It's not the case that these terrorism financers write a check to the shooters," says Wildman Harrold partner Stephen Landes, who split the oral argument with cocounsel Nathan Lewin of Washington, D.C.'s Lewin & Lewin. Wildman Harrold lawyers have worked on the case with Lewin & Lewin since 2001 without pay.

The Boims are still unlikely to recover much money as a result of the Seventh Circuit's ruling. The two organizations that are subject to the en banc decision are effectively defunct. Brendan Shiller, a sole practitioner who represents the American Muslim Society, says his clients assets were wiped out after the 2004 jury decision. John Beal, who represents the Quranic Literacy Institute, says he's considering the organization's options going forward, including a possible appeal to the Supreme Court. The appellate court remanded the Boims' case against the third Islamic charity, the recently convicted Holy Land Foundation, to the trial court for retrial. Should the Boims prevail, Landes told us, there's a chance of recovering some money from Holy Land, whose assets were frozen by the U.S. government in 2001.

--Ross Todd

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