Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

American Banker reports that  JPMorgan Chase & Co. has agreed to eliminate mandatory arbitration clauses in its credit card contracts .   Bank of America made a similar decision in August 2009.   The scraping of mandatory arbitration clauses followed last summer's settlement between National Arbitration Forum and the Minnesota attorney general, which included NAF's agreement that it would stop handling consumer disputes.  The American Arbitration Association made a similar decision shortly thereafter.

The JPMorgan decision preceded an announcement by Berger & Montague P.C.that it had agreed to drop a class-action suit alleging that JPMorgan Chase and other issuers of "unlawfully conspired to require their cardholders to arbitrate disputes." Under the terms of the settlement, JPMorgan Chase will eliminate its arbitration clause for three-and-a-half years, will not discuss arbitration with other issuers and will cover attorney's fees for the plaintiffs.

Mandatory arbitration provisions have long been a source of tension between credit providers and consumer advocates.  Creditors have for many years used arbitration to resolve consumer claims, arguing that arbitration provides a cost-effective and expeditious method to resolve disputes.  Consumer groups, on the other hand, have criticized the arbitration process, including charging that the arbitration groups managing the arbitration process have a pro-industry bias.   

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Two former managers who ran a Bear Stearns hedge fund that invested in subprime bonds and derivatives were found not guilty of securities fraud charges by a Brooklyn jury.  According to a report in the Wall Street Journal, the government alleged that the two men, Ralph Cioffi and Matthew Tannin, lied to investors about the condition and value hedge funds filled with subprime bonds. The funds collapsed in 2007, shortly before the pinnacle of the mortgage crisis that eventually doomed Bear Stearns.  WSJ noted that the acquittals are a setback for New York's U.S. Attorney's Office, which is also involved in investigating other Wall Street players for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and AIG.

In a press release, U.S. Attorney Benton J. Campbell said "Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict.  Honesty and integrity are the principles upon which our financial markets function. Enforcing and protecting those principles will continue to be one of the principal efforts of this Office."

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The Credit Card Act of 2009 was set to go into effect in February, 2010, but Congressman Frank and Congresswoman Maloney want it to go into effect December 1, 2009.

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Rep. Barney Frank, the sponsor of H.R. 3126, has sent a memo to House Democrats outlining his proposals for amendments to the proposed Consumer Financial Protection Agency Act.

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Bank of America Corp. has responded to  New York Attorney General Cuomo's allegations that the bank failed to inform shareholders of material information related to its takeover of Merrill Lynch, according to a report in the American Banker.  In a September 8 letter to the bank, Cuomo's office  also accused the bank of "indiscriminate invocation of the attorney-client privilege" and "hindering efforts to determine which company officers potentially should be charged with securities violations."  In a response from its outside counsel, Bank of America stated that "the basic premise of the letter [raising the allegations] is simply wrong" and that the allegations  about what the bank told investors were “spurious,” according to a report by the Charlotte Observer.  Bank of America had not  "sought to take unfair advantage of the assertion of the privilege by hiding information from [the AG's] office or anyone else," the letter continued. 

The September 8 letter from Cuomo's office identified several areas under investigating, including alleged wrong-doing by senior bank officials related to the release of a merger proxy document that did not identify $3.6 billion in Merrill Lynch bonuses, nor disclose Merrill's forecasted losses or a $2 billion goodwill charge.  In response, the bank stated that the merger proxy "did not contain any false or misleading statements," and the other matters alleged by the AG's office had been properly reconciled and reported as required by relevant laws.

On Wednesday, September 16, Bloomberg reported that the New York Attorney General had subpoenaed five members of Bank of America's board of directors amid his probe into the bank’s purchase of Merrill Lynch.

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A recent article in the Mortgage Banking Magazine by Donna Dezube summarizes numerous efforts by states, local governments, and borrower attorneys to delay or prevent foreclosure.  "Lawyers defending mortgage brokers have their hands full today.  The courts are jammed with motions to delay foreclosures actions, and frivolous litigation is going viral," the article states.   The article also summarizes numerous legislative efforts to delay or prevent foreclosure, along with strategies used by private attorneys and counselors to prevent foreclosure or pursue loan modification.   The article notes that, according to Perkins Coie attorney Fred Rivera, lenders desire to modify loans and avoid foreclosure, if borrowers are qualified and can qualify.

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During its August 19, 2009 board meeting, the Financial Accounting Standards Board (FASB) re-opened discussions of a controversial proposal requiring companies to disclosure more information about actual and potential lawsuits, according to an article in the American Banker.   In 2008, FASB pushed for changes to FAS 5 (contingent liabilities) that would expand reports of potential outcomes of pending or anticipated lawsuits.  According to a FASB report, the proposed changes were based on investor complaints that the current reporting requirements failed to provide sufficient information to assess the impact of litigation matters.  FASB delayed the plan after receiving opposition from several major companies, including Bank of America, JPMorgan Chase, and Citigroup.

The proposed FASB amendments would require companies to disclosure, among other things: the amount, or an an estimated amount, of a lawsuit or potential claim; likely insurance coverage; maximum potential loss; details of the origin of the dispute and current status; the likely timing of resolution; and the likely outcome. 

Criticism of the original proposal included concerns that the proposed disclosure would require companies to release significant information about their internal deliberations regarding litigation matters, and put at risk information protected by the attorney-client privilege.

During its August 19, 2009 meeting, FASB discussed the effective date of any final guidance on the proposed changes,  and decided not to rule out the possibility that it could be effective for fiscal years ending after December 15, 2009.

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DocMagic, Inc.,  the largest loan document production company in the United States, alleges in a federal antitrust complaint that software and services provider Ellie Mae has illegally denied customers the ability access DocMagic's products through Ellie Mae's ePass web portal.  DocMagic claims that Ellie Mae has cut it off from a market worth $200 million by denying it use of ePass, a Web portal that allows mortgage lenders to prepare closing documents online.   According to a DocMagic press release, DocMagic had been provided access to the ePASS network until Ellie Mae notified DocMagic of its intent to terminate its ePASS Agreement and subsequently took steps to prevent its users from accessing DocMagic products through unfair and anti-competitive behavior, including sabotaging clients from accessing DocMagic via alternative web service calls.   DocMagic is seeking an immediate injunction preventing the alleged unfair activity of Ellie Mae.

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Bloomberg.com reports that a settlement has been reached resolving a U.S. Justice Department lawsuit against UBS AG seeking the names of Americans suspected of evading taxes through 52,000 secret Swiss accounts.  According to the Bloomberg report, tax lawyers believe that the settlement includes UBS agreeing to disclosure information about thousands of accounts.  In February, Zurich based UBS agreed to pay $780 million to defer prosecution for aiding tax evasion,  as well as providing data to the Internal Revenue Service on 250 clients. Since then, three UBS clients have pleaded guilty in the United States to secreting bank assets from the IRS in UBS accounts.  This data released under the latest settlement will undoubtedly result in further investigations and prosecutions.

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At yesterday’s hearing on BofA’s proposed $33 million settlement of an SEC civil suit, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York continued to withhold his consent for the settlement, stating that he needs more time and information before deciding whether to approve the settlement. Judge Rakoff requested further filings by August 24th, and told the parties he would not be able to approve the settlement prior to September 9th.

The SEC’s complaint, initially filed on August 3rd, states that BofA made “materially false and misleading statements in the joint proxy statement that it filed with Merrill Lynch & Co., Inc. (“Merrill”) in connection with Bank of America’s $50 billion acquisition of Merrill on January 1, 2009.” Specifically, the SEC alleges that BofA authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed. Merrill would ultimately pay $3.6 billion in bonuses, according to the SEC.

One issue on which Judge Rakoff focused his questioning was who at BofA was responsible for not disclosing that Merrill could award $5.8 billion in incentives and bonuses to employees. At one point the Judge asked David Rosenfeld, the associate regional director of the SEC’s New York office, “[w]as it some sort of ghost? Who were these people? Mr. Thain and Mr. Lewis would seem to be responsible, yes?” John Thain was the CEO at Merrill during negotiations of the sale to BofA, and Kenneth Lewis is BofA’s CEO. Rosenfeld responded, in part, that the SEC “can’t infer” misconduct from an accelerated bonus schedule.

Judge Rakoff also requested additional information on how the settlement figure of $33 million was arrived upon by the parties. “Don’t I need to know what the truth is to make a determination?” the Judge questioned. If BofA indeed broke the law by not disclosing the bonus payments in proxy materials, Judge Rakoff asked, “is there not something strangely askew in a fine of $33 million?” when compared to the billions that were paid in bonuses? Rosenfeld, on behalf of the SEC, responded that the settlement figure was “fair and reasonable” based upon prior cases.

Judge Rakoff concluded that he wants more information to determine whether the settlement amount is appropriate and whether an evidentiary hearing might be necessary, commenting that he “would be less than candid” if he didn’t “express [his] continued misgivings about the settlement at this stage.

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This afternoon at 4 p.m. EST, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York will hold a hearing at which the SEC and Bank of America (BofA) will have to justify a proposed $33 million settlement to resolve an SEC civil suit stemming from BofA’s takeover of Merrill Lynch earlier this year.

The SEC’s complaint, initially filed on August 3rd, states that BofA made “materially false and misleading statements in the joint proxy statement that it filed with Merrill Lynch & Co., Inc. (“Merrill”) in connection with Bank of America’s $50 billion acquisition of Merrill on January 1, 2009.” Specifically, the SEC alleges that BofA authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed. Merrill would ultimately pay $3.6 billion in bonuses, according to the SEC.  Two weeks after the merger was complete, losses at Merrill prompted BofA to accept $20 billion of TARP funds, on top of its earlier $25 billion.

In conjunction with the August 3rd complaint, the parties submitted a proposed Consent Judgment by which BofA, without admitting or denying the allegations, agreed to pay a penalty of $33 million. However, Judge Rakoff took issue with the proposed settlement in an August 6, 2009 Order, stating that “[d]espite the public importance of this case, the proposed Consent Judgment would leave uncertain the truth of very serious allegations made in the Complaint. Further, the proposed Consent Judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bail out’.”

Today’s hearing is expected to focus on whether the $33 million settlement is in the public’s interest.  The underlying context is that shareholders and the public might get the short end of the deal twice in a row – first when they were “defrauded” by the BofA proxy statements, and then again if BofA uses TARP money to pay the fine for that fraud.

Ultimately, the settlement is expected to win Judge Rakoff’s approval if the SEC and BofA can convince him that the public’s interest is not being harmed.  In 2003, Judge Rakoff blocked a $500 million SEC settlement with WorldCom Inc. over the accounting fraud that led to the phone company's bankruptcy.  Judge Rakoff later approved a $750 million settlement of the case.

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 Federal securities class action activity declined in the first half of 2009, with a particularly significant decline in the second quarter, according to the Securities Class Action Filings—2009: Mid-Year Assessment, an annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.

According to the report, a total of 87 federal securities class actions were filed in the first half of 2009, a 22.3 percent decline from the 112 filings in both halves of 2008.  Only 35 filings were observed in the second quarter, the lowest quarterly total since the first quarter of 2007.  While filings are on the decline, the report also found that financial services firms have been named as defendants in 66.7% of filings this year, an increase over the 50% share of all filings in 2008.

Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse commented that “[s]ecurities litigation activity continues to be driven by claims against financial services firms, but all the large firms in the industry have already been sued.  Plaintiffs are therefore filing claims against the smaller number of smaller financial services firms yet to be sued.”

Among the report’s key findings:

• About half of the filings so far in 2009 were driven by the credit crisis, with 42 filings in the first half of the year containing allegations related to the credit crisis.

• Financial firms have been named as defendants in an increasing number of suits. 12.8 percent of companies in the S&P 500 classified by Bloomberg as financial were named as defendants, accounting for 41.2 percent of the market capitalization of that sector.  (See below chart)

• There were 15 filings related to Ponzi schemes thus far in 2009. The majority of these lawsuits, 11 filings, were on behalf of investors in Madoff funds, with most suits targeting so-called feeder funds, hedge funds, and other financial intermediaries that invested their clients’ money with Madoff.

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