Blawgletter®

Quote of the Day: James Joyce

Whatever else is unsure in this stinking dunghill of a world a mother's love is not.

James Joyce, Portrait of the Artist as a Young Man (1917).

Auction Rate Securities Case Founders on Chump Defense in Second Circuit

You may recall that, back in the go-go days, brokers sold a lot of auction rate securities to people who wanted a bit more interest than money market funds and bank accounts yielded but desired about the same degree of safety and liquidity.

When the auctions froze up in early 2008, the chumps who bought ARS couldn't get their money back. Some of them sued or arbitrated, often under section 10(b) of the Securities and Exchange Act of 1934. Few got some of their money back, and fewer did better. Others wait still.

The Second Circuit yesterday may have sounded a death knell for fraud claims against one big broker, Morgan Stanley. The court held that the ARS buyers couldn't have reasonably relied on false statements about the safety and liquidity of ARS because Morgan Stanley had posted an online notice saying that ARS auctions could fail and that the failure of auctions would hurt liquidity. Ashland Inc. v. Morgan Stanley & Co., Inc., No. 10-1549-cv (2d Cir. July 28, 2011).

Interestingly, a settlement in May 2006 with the Securities Exchange Commission required the notice. The SEC thus furnished the chump defense that allowed Morgan Stanley to dodge liability for the ARS mess.

Working for a Ponzi Scheme Doesn't Pay, Fifth Circuit Affirms

The wages of sin is death. What wages do you get from a Ponzi scheme?

The kind you can't access any more.

People who worked at Stanford Group Company found that out the hard way. Their employer, we now learn, paid them with proceeds of a Ponzi scheme. The Fifth Circuit held that funds they claim belong to them will remain subject to a freeze order pending trial on the merits.

The case involved Texas wheeler-dealer Allen Stanford's eponymous Stanford International Bank. For years, SIB paid outsize returns on "certificates of deposit" from its sunny roost on the island of Antigua (having fled there from Montserrat, well before the volcano covered much of the Caribbean get-away with hot lava and ash). As the Fifth Circuit noted, "Stanford should have held assets of greater than $7 billion, but actually held assets of less than $1 billion." Janvey v. Alguire, No. 10-10617, slip op. at 4 (5th Cir. July 22, 2011).

Do the math.

The Securities and Exchange Commission sued to put the Stanford empire into receivership. The district court granted the relief and appointed Richard Janvey the receiver. Mr. Janvey in turn sought to grab funds from accounts in the names of Stanford employees at Pershing and JP Morgan. The district court granted Mr. Janvey's motion for a preliminary injunction freezing the accounts. The court did so despite a pending motion by the employees to compel arbitration, ruling that it could enjoin now and compel (or not) later.

The Fifth Circuit affirmed in December, see Janvey v. Alguire, 628 F.3d 124 (5th Cir. 2010), and last week, the panel affirmed again, but this time it held that it lacked jurisdiction to decide whether the district court should have compelled arbitration

The interesting thing? The court ruled that the very fact the employees worked for and got wages from a Ponzi scheme implied that they would run off with the money and never pay it back if the court lifted the freeze order:

Here, the Receiver provided evidence of a massive Ponzi scheme and proof that each individual received proceeds from the fraudulent scheme. This is sufficient to prove the likelihood of each individual removing or dissipating the frozen assets but for the preliminary injunction.

Janvey, slip op. at 22.

Quote of the Day: Douglas E. Abrams

Today Blawgletter can't resist giving credit for more than one quote to Douglas E. Abrams, who teaches law at the University of Missouri, the show-me state.

Professor Abrams's piece in the July issue of the Texas Bar Journal -- What Great Writers Can Teach Lawyers and Judges -- highlights such a Great Many pithy comments, on the hard but wondrous art of writing, that we feel sure you'd enjoy more than one or two. Here goes:

• "Brevity is the soul of wit." William Shakespeare, speaking through Polonius, the prolix dunderhead who also says "very like a whale" in Hamlet and dies of a stabbing by Hamlet himself due to Polonius's unwise hiding in curtains during the golden age of Danish sword open-carry laws.
• "The covers of this book are too far apart." Ambrose Bierce, in a book review that starts and ends with this sentence (and thus honors, briefly, Polonius).
• "This report, by its very length, defends itself against the risk of being read." Winston Churchill, who here shows the power of using short words.
• "The writer who breeds/ more words than he needs/ is making a chore/ for the reader who reads./ That's why my belief is/ the briefer the brief is,/ the greater the sigh/ of the reader's relief is." Theodor Geisel.

Amen!

We'll get a second dose of advice from Dr. Abrams next month. We almost can't wait.

Mock Trial -- Dare You NOT Do It?

Blawgletter's firm handles much of our work on a contingent fee basis. That means we share risk with our clients -- and earn no fee if we don't help our clients get a good result.

What counts as a good result will vary from case to case. It often involves a money inflow, sometimes not having to pay. In some instances, a particular outcome -- winning a motion to dismiss, to compel arbitration, for class certification, for preliminary injunction, and so on -- defines success.

Why do we mention the risk-sharing? Mainly because our firm has a rule that, before trying any case in which we have a contingent fee on the line, we must MOCK TRY it. That should tell you how much we believe in the usefulness of the mock trial.

But what good, you may ask, does the mock trial do? Do the results predict the real outcome? How could they? Cramming weeks of opening statements and witnesses and argument and PowerPoints and blow-ups and expert opinions and juror notebooks and sidebars and so forth into TWO OR THREE HOURS -- how could that possibly tell you anything worthwhile?

Okay. Listen up. We don't want to have to repeat this.

Mock trying the case forces you -- the lawyer and the client -- to prepare. It makes you think about the other side's strengths -- especially if you compel your lead trial counsel to play the other side's lead (in her or his own style, of course). And it fast-forwards your client to the main event, which he or she may have an unrealistic Hollywood-y image of.

Does the outcome predict actual results? Heck no -- by which we mean in the particulars. Mock juries often differ widely in their damages awards. That goes double for punitive damages. But the direction of their verdict -- you win, or the other side does, big time -- has a fair degree of reliability.

Third, the process reveals the One Fact. The One Fact that the lawyers know Has Importance. But that nobody realizes -- until the mock trial -- the Whole Case Turns On.

So mock try your cases. Spend your own money doing it, if you work on a contingent fee. Clients should insist on jury research. You'll like the results. 

RICO Can't Reach Aiding and Abetting Securities Fraud, Second Circuit Rules

Way back in January 2009, Blawgletter wrote that we doubted a 1995 federal law -- a sub-section of which the Second Circuit called "the RICO Amendment" -- bars claims, under the Racketeer-Influenced and Corrupt Organizations Act, that allege fraud involving credit default swaps and other swap contracts. MLSMK Inv. Co. v. JP Morgan Chase & Co., No. 10-3040-cv, slip op. at 13 (2d Cir. July 7, 2011) (referring to 18 U.S.C. § 1964(c)).

The RICO Amendment, we should note, formed a part of the Private Securities Litigation Reform Act of 1995, which put all sorts of hurdles, trip-wires, and snares -- not to mention booby-traps -- in the paths of securities fraud victims.

We should also note that our notion about the reach of the RICO Amendment stemmed from the fact that the dread Commodity Futures Modernization Act of 2000 changed section 10(b) of the Securities Exchange Act of 1934 so that it now prohibited not only securities fraud but also fraud in the purchase or sale of credit default swaps and the like. See Ciaolo v. Citibank, N.A., New York, 295 F.3d 312, 327 (2d Cir. 2002) ("Sections 302 and 303 of the CMFA define 'swap agreements' and then expressly exclude them from the definition of 'securities,' but amend section 10(b) to reach swap agreements."). The CFMA, you'll recall, traded almost wholesale deregulation of derivatives -- with disastrous results -- for creating a private cause of action for victims of fraud relating to derivatives.

Why do we mention all this stuff? Because the Second Circuit held last week that a person can't get around the RICO Amendment by alleging a claim that no private person (and only the Securities and Exchange Commission) can bring -- aiding and abetting securities fraud. The case related to securities fraud of the heinous kind -- the scheme that Bernard Madoff created and ran for many years. The Second Circuit ruled that 18 U.S.C. § 1964(c), when it nixed RICO claims relying on "conduct that would have been actionable" as securities fraud, meant conduct actionable by anybody, including the SEC, even though the private plaintiff couldn't bring the claim. MLSMK at 26-28.

We persist in our belief that the RICO Amendment doesn't cover what we'll call derivatives fraud under section 10(b). Because, you know, it isn't securities fraud.

Does Cy Pres Have a Prayer?

A federal judge asked Blawgletter a few years ago what we thought about "cy pres" (sounds like "sigh pray") payments in class actions. The judge had in mind a method of dealing with money that a class settlement or judgment produces but that for one reason or another doesn't find its way into class members' pockets -- usually because you can't find the class members or because they don't claim their share of the funds. We admitted some queasiness about cy pres, which aims to do the next best thing with the cash. We saw good in it, particularly the part about taking the profit out of wrongdoing, but we also worried that it could get out of hand. So did the judge.

The judge's colleagues on the Fifth Circuit seem not to share our ambivalance about the cy pres remedy. In Lease Oil Antitrust Litig., No. 10-40119, slip op. at 14 (5th Cir. June 27, 2011), the panel ruled that potential cy pres "funds, insofar as they were allocated to plaintiffs with a last known address in Texas, are governed by Texas law of unclaimed property." The fact that the funds came from a class action settlement didn't impress the court, which held that Texas law didn't conflict with the class action rule.

We rather doubt that a state can properly snatch money out of the bank account that a federal court set up to hold funds coming from a class settlement. Surely the federal court's claim to the funds, and therefore its power to distribute them, trumps the state's grabbiness -- and, likely, distaste for class actions.

Will the court reconsider? If it doesn't, will cy pres perish in the Fifth Circuit?

Snappy and Bitey Discuss What "Health Care" Means

Snappy:    You know, Bitey, ever since the nice doctor cut out my spare kidney by not-on-purpose, I've thought a lot about tort reform.

Bitey:    But Snappy, you hate reform -- tort or not. Why thinketh thou aboutst itteth after your Bad Surgery Thing?

Snappy:    Oh, you know, one thing leads to another. For instance, as I gazed at the spare kidney, which now I keep in a Ball jar on my nightstand, there came to me a question.

Bitey:    Bout what?

Snappy:    About "health care". Like, what does that even mean? Health care.

Bitey:    What does that have to do with tort reform?

Snappy:    Oh, just this: it explains why I can't get a lawyer to talk with me about helping me get money for the kidney-ectomy I got by not-on-purpose.

Bitey:    Erp.

Snappy:    So, I wanted to know what "health care" covers. The slicing out of my kidney, for sure. (Who knew opthalmologists did renal surgery!) But what else?

Bitey:    Like what?

Snappy:    Like, what if a brown recluse spider bites me as I lay in bed after the malpracticey surgery. Would tort reform treat that as a "health care" claim?

Bitey:    Yes. Yes it would. Omaha Healthcare Center, LLC v. Johnson, No. 08-0231 (Tex. July 1, 2011).

Fade to black.

Quote of the Day: D. Brooks Smith

It is not enough for counsel to claim that s/he is too busy to meet the deadline, has plans to be on vacation, wants more time to study the record, or was only recently added to the client's team of lawyers. Such assertions, inasmuch as they turn on factors within the control of counsel or the client, can be raised in most any case and generally do not justify extending the deadline for certiorari review. Rather, unforeseen or uncontrollable events (e.g., a death in the family, illness, or active engagement at trial) lie at the heart of the "good cause" requirement for additional time to seek certiorari.

Joseph v. Hess Oil Virgin Islands Corp., No. 11-8026, slip op. at 17 (3d Cir. July 6, 2011) (Smith, J.) (holding that Hess Oil's reason for needing more time to file certiorari petition -- the advent of new counsel -- to Supreme Court did not satisfy "good cause" test but granting request due to "absence of prior guidance" on question).

SCOTUSblog Review of Patent Term

Ronald Mann over at SCOTUSblog just posted Commentary: Tide turns for Federal Circuit in patent cases. He looks at the three-for-three record of the lone circuit that reviews patent law issues in the Supreme Court during the 2010 Term:

• Microsoft Corp. v. i4i P'ship, No. 10-290 (U.S. June 9, 2011) (post here)
• Board of Trustees of Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., No. 09-1159 (U.S. June 6, 2011)
• Global-Tech Appliances, Inc. v. SEB S.A., No. 10-6 (U.S. May 31, 2011).

Mann also looks ahead to the next Term, which so far will deal with "patentability" questions.

Blawgletter says check it out.