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February 23, 2009 9:00 AM

The Am Law Litigation Daily: Feb. 23, 2009

Posted by David Bario

APPELLATE
Jenner Partner Extends Winning Streak for Video Game Clients

Maybe it's all the exposure to courtroom aggression, but the Litigation Daily has never been a big fan of ultraviolent video games. But as we are regularly reminded, our opinion isn't everything.

With an appellate victory Friday, Jenner & Block partner Paul Smith kept intact his winning streak for the video game industry. The U.S Court of Appeals for the Ninth Circuit struck down a California law that banned the sale of some violent video games to minors, and proposed fining stores $1,000 for violating the ban. The circuit court's 30-page ruling upholds a summary judgment victory in district court for the video game makers that declared the state law unconstitutional under the First Amendment.

For our earlier coverage of this case in October, look here.

We caught up with Smith by phone Friday after the ruling had been handed down. He said he wasn't surprised by the court's decision: Federal courts have ruled on similar state laws across the country in eight or nine federal cases with the video game industry winning every time. "This is the last case of its type at the moment where a state has said we're going to ban sales of a certain type of game to people of a certain age," Smith says. "I would certainly hope this case would put this practice to an end."

SECURITIES
Plaintiffs' Attorneys Sanctioned in Biovail Class Action

Biovail's long-running battle against several hedge funds and analysts for allegedly driving down its stock price has provided plenty of drama. The high point came two years ago in New York federal court, where the Canadian drugmaker was a defendant in a securities class action. Manhattan federal district court judge Richard Owen sanctioned Biovail for using documents that were under a protective order to file a separate RICO suit against the hedge funds and analysts, accusing them of spreading false rumors about the company. That ruling led to a summer of embarrassing hearings in which Biovail's lawyers at Kasowitz, Benson, Torres & Friedman and Howrey blamed each other for the screwup.

Another chapter in the saga was written last week. On Thursday a New Jersey federal judge dismissed a securities class action brought by sellers of Biovail stock against the same analysts and hedge funds, including Banc of America Securities. Most notably, he sanctioned two lawyers for the plaintiffs--and the lead plaintiff, himself--for copying the claims in the RICO suit, including claims relying on documents under the protective order, and not conducting a sufficient investigation into their allegations. Judge Stanley Chesler found that lead counsel William Federman of Federman Sherwood and liaison counsel Evan Smith of Brodsky & Smith knew that the complaint was based on documents that had been placed under protective order.

In a harshly worded opinion, Chesler said the New Jersey shareholder action was a "choreographed strategy by Biovail and its attorneys," and described the plaintiffs' lawyers as "ready and willing tools of Biovail [who] ignored their professional and ethical obligations and aided Biovail for their own benefit."

Plaintiffs' lawyer Federman told us he disagrees with the order and is considering an appeal. "[Judge Chesler] ignores the majority of precedents, which allow you to rely on information that is publicly disseminated," said Federman. "We had nothing to do with those documents becoming public. We just used them."

Smith declined to comment.

Brad Butwin of O'Melveny & Myers, who filed the motion for sanctions for defendant Banc of America Securities and one of its former analysts, called Judge Chesler's opinion "well reasoned." Separately, defendant SAC Capital said in a statement that it was "gratified," adding, "The court's opinion underscores these claims were a cynical attempt to manipulate the legal process in order to divert attention from the company's own improper conduct."

--Andrew Longstreth

WHITE-COLLAR
Baker & Hostetler's Picard Updates Madoff Creditors

Maybe it's time to stop calling Bernie Madoff a "billionaire investor." Turns out, he wasn't doing much investing at all--at least not for his clients.

"For some substantial period, perhaps as much as 13 years, no securities were purchased in client accounts," the trustee responsible for liquidating assets of Bernard L. Madoff Investment Securities told creditors Friday. The trustee, Baker & Hostleter's Irving Picard, dropped this little hand grenade just minutes into his first meeting with Madoff creditors at a packed auditorium in U.S. Bankruptcy Court in Manhattan. He also told creditors that Madoff's broker-dealer and investment advisory arms were functionally indistinct from one another. "We have found nothing to suggest there was any difference, any separateness," Picard said.

Of the $23 billion known to have been lost in Madoff's alleged $50 billion Ponzi scheme, Picard said that he had recovered about $650 million. He said 2,350 claims have been processed so far. (The Associated Press reckons that if the number of claimants doubles as expected, Picard's collection so far would net each one $138,300.)

Creditors, who endured a 30-minute wait in freezing winds to pass security and enter the meeting, left plenty hot. "I want you to go after his clothes and his drapes," one investor told Picard, according to The New York Times.

David Sheehan, Picard's partner at Baker & Hostetler, did manage to get some laughs from the disgruntled audience when he noted that Madoff's home, currently securing his bail, couldn't be seized unless Madoff goes to jail. "Not that anyone in this room gives a damn about that," Sheehan added.

WHITE-COLLAR
Brendan Sullivan May Defend Stanford Fund Defendant

For those of us (alas) without millions of dollars to lose in gargantuan frauds and ponzi schemes, the scandals surrounding Bernie Madoff and R. Allen Stanford have been endlessly enthralling. Only today we learned that Stanford owns his own island, once lived in a 57-room castle complete with moat, and that his child support payments to an estranged girlfriend run to $850,000 a year, plus access to limos and jets.

Now that Stanford has reportedly hired Brendan Sullivan, Jr., of Williams & Connolly, things could get even more interesting. ABC, which first reported that Stanford had tapped Sullivan to represent him, says the information came from Stanford lobbyist and former Texas politician Ben Barnes. For a nice portrait of Sullivan, take a look at Andrew Longstreth's American Lawyer story on the prosecution of former Cendant chairman Walter Forbes.

Stanford surrendered his passport Thursday when FBI agents located him in Virginia and served him with an SEC complaint describing an elaborate $8 billion fraud. He and his Stanford Investment Co. were already hit with at least one investor suit last week, and federal criminal charges are considered all but inevitable. If it turns out that Stanford hasn't already hired Sullivan--Sullivan and Williams & Connolly have not responded to calls seeking confirmation--he may wish he had.

BANKRUPTCY
Orrick Argues for Vallejo Bankruptcy

With California's economic and budget woes capturing headlines this week, a three-judge panel of the Ninth Circuit Court of Appeals heard arguments Thursday in Pasadena over one city's eligibility for bankruptcy protection. Orrick, Herrington & Sutcliffe's Marc Levinson, who represents the City of Vallejo, says he feels "pretty good" about his performance, but that the judges hinted that they could certify the case to the Ninth Circuit even if they affirm Vallejo’s eligibility for bankruptcy protection.

"I hate the thought that we'll still be stuck worrying about eligibility instead of dealing with the issues in the bankruptcy, but I can see the handwriting on the wall," says Levinson.

Vallejo filed for bankruptcy under Chapter 9 last year, after the Bay Area city of 117,000 found itself unable to afford its contracts with city employees. Police, fire, and managerial employee unions fought hard to stop the bankruptcy, but Sacramento U.S. Bankruptcy Court judge Michael McManus sided with the city, and in September 2008 Vallejo became the largest U.S. municipality to be granted bankruptcy protection since Orange County, Calif., in 1994. The unions appealed, and following last week’s arguments a decision is expected soon.

Vallejo hopes to cancel its most expensive contracts, and both the city and its unions are anxiously waiting on a decision from Judge McManus. Levinson has already negotiated new contracts with two unions, but the firefighters are resisting concessions.

Levinson says the unions' lawyer, Kelly Woodruff of Farella Braun + Martel, accused him of trying to break the firefighters union in her argument Thursday. At least 20 firefighters from surrounding communities attended to show solidarity with their Vallejo brethren. "Sure, people love the firefighters, and they should," says Levinson. "That doesn't change the fact that we can’t pay them."


Edited by David Bario

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