22 Jul
2014

Judge Ellis Sanctions Party for Failing to Preserve Evidence Held by Nonparty Vendor

In an opinion yesterday, Magistrate Judge Ellis sanctioned The Money Store and other related defendants for failing to preserve evidence held by a third party vendor, Fidelity National Foreclosure Solutions. The underlying class action accuses the defendants of improper debt collection practices relating to mortgage loans, and the plaintiff argued that evidence from a database created by Fidelity (referred to as the “New Invoice System”) was improperly lost.

Calling to mind a similar opinion from Magistrate Judge Mass two years ago (see this post), Judge Ellis found that, since the defendants has the legal right and practical ability to direct Fidelity to preserve evidence, they were required to do so:

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21 Jul
2014

Judge Ramos: Securities Fraud Suit Against Deloitte Dismissed, but Plaintiffs May Replead

In an opinion issued today, Judge Ramos dismissed securities fraud and related claims brought against Deloitte & Touche for its part in allegedly fraudulent financial statements and other SEC filings by ChinaCast Education, a Chinese company that traded on the NASDAQ from 2006 to 2012.  Deloitte was ChinaCast’s auditor, and the plaintiffs were investors in the company, including current management, who claimed to have uncovered misdeeds by ChinaCast’s prior management.

Judge Ramos described the plaintiffs’ claims:

At bottom, Plaintiffs contend that, had the Deloitte Defendants performed any audit at all, they would have discovered the rampant fraud at ChinaCast much earlier. The FAC describes a number of failures to comply with PCAOB and GAAP standards, as well as “red flags” that should have placed the Deloitte Defendants on notice of the fraud. Consequently, Plaintiffs assert that DTTC’s statements for the years 2007 through 2010, that it conducted its audits in accordance with PCAOB standards and that ChinaCast’s audited financial statements were GAAP compliant, and for the years 2008 and 2009, that the Company’s internal controls over financial reporting were effective, were materially false.

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21 Jul
2014

Judge Scheindlin Rules That Sovereign Immunity Protects Former Israeli Security Official From Deposition

In an opinion today, Judge Scheindlin granted the State of Israel’s motion to quash, on sovereign immunity grounds, a subpoena to a former Israeli national security official, Uzi Shaya.  The underlying case accuses the Bank of China of aiding and abetting a 2006 suicide bombing in Israel, and Mr. Shaya allegedly had knowledge of the Bank of China funding terrorism.  Judge Scheindlin ruled that Israel had standing to object, and that its objections were valid:

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17 Jul
2014

Judge Crotty Dismisses Derivative Action against JP Morgan Executives Based on Recent Multi-Billion Dollar Settlements

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In a ruling yesterday, Judge Crotty dismissed a derivative action against fifteen JP Morgan Chase current and former executives and board members, including bank chief Jamie Dimon. The complaint alleged that that JP Morgan was damaged by six recent, high profile settlements with government agencies and private litigants that cost the firm billions.

The plaintiff, shareholder Chaile Steinberg, brought suit derivatively under a theory of demand futility, alleging that the board members — each of whom were named defendants — were not disinterested. Judge Crotty disagreed. He ruled that there was not a “substantial likelihood” that seven of the eight board members (all but Dimon, whom JP Morgan conceded was not disinterested) faced potential liability on any of the claims.

Steinberg argues that the Board purposefully disregarded risks related to the company’s allegedly unlawful practices by failing to monitor or oversee operations. But JPMorgan’s certificate of incorporation specifically immunizes its directors from personal liability for actions taken in good faith, so plaintiff must also plead particularized facts demonstrating that the Board acted with “scienter, i.e., that there was an ‘intentional dereliction of duty’ or ‘a conscious disregard’ for their responsibilities, amounting to bad faith.”  In re Goldman Sachs Grp. Inc. S’holder Litig., No. 5215-VCG, 2011 WL 4826104, at *12 (Del. Ch. Oct. 12, 2011).  To establish bad faith, Steinberg identifies a number of purported “red flags” that should have alerted the Board to the misconduct underlying each of the six investigations. But Steinberg fails to provide particularized facts demonstrating that any of the Outside Directors knew or should have known about any of the alleged “red flags.”

Judge Crotty also ruled that the complaint failed to allege conflicts of interest that would create a reasonable doubt as to the board members’ independence.  As a result, Judge Crotty ruled that the complaint failed to give “particularized facts that create a reasonable doubt that a majority of the Board could have exercised disinterested and independent business judgment in considering demand,” and dismissed the case.

15 Jul
2014

Judge Forrest Interprets Janus to Allow Underwriter, Not Just Issuer, to Face Claims for Allegedly False Prospectus

In an opinion yesterday, Judge Forrest denied a motion to dismiss by the investment bank Macquarie, which argued (see here and here) that, based on Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (June 13, 2011), the allegedly false prospectus at issue was “made” by the issuer (a company called Puda Coal), not the underwriter (Macquarie).  There a few lower court decisions on this issue, but Judge Forrest found that Janus did not bar the plaintiffs’ claims here:

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14 Jul
2014

Restaurant Giant Darden Can Charge Automatic Tips, Judge Failla Rules

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In a ruling last week, Judge Failla dismissed a purported class action suit against Darden Restaurants, the owner of the Red Lobster and Olive Garden restaurant chains. The plaintiff, Ted Dimond, sought to represent a class of Darden’s customers, accusing the restaurant giant of violating New York state consumer protection laws by illegally adding an 18 percent tip to diners’ checks and by failing to list beverage prices on menus. He claimed that a gratuity is a “voluntary act,” and that therefore it was “materially misleading to label this… surcharge as a ‘gratuity.’”

Judge Failla disagreed, finding that Darden placed the tip “conspicuously” on its menus for diners to see before ordering and that diners “had the option of leaving” if they had a problem with the charge. The Judge also held that gratuities between 18 and 20 percent are “not uncommon” in New York City, “undercutting… the argument that patrons were deceptively tricked” into paying a tip they would not have otherwise.

Judge Failla also ruled that the failure to list beer and soft drink prices was not misleading because customers could learn those prices by asking. (Hat tip Reuters.)

11 Jul
2014

Judge Crotty: Massive 91st Street Trash Center Plan May Proceed

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In a ruling this morning, Judge Crotty dismissed a pair of lawsuits that aimed to block the construction of a “massive, 70,000 square foot, 10-story tall” trash-transfer center at the East River on 91st Street in Manhattan. As Judge Crotty explained, the 91st location has had a long and important role in trash disposal in New York City.

Most New Yorkers are agnostic about where their garbage goes, or how it gets there, so long as it goes away. But garbage disposal is both messy and expensive. At present, New York City garbage must be collected, transported, consolidated, transshipped, and ultimately disposed of by means of landfill dumping, composting, energy conversion, or some other mechanism.

For six decades beginning in the 1930s, there was a marine transfer station – a garbage shipping plant used to dispose of the City’s waste – at the intersection of 91st Street, the FDR Drive, and the East River. During that timeframe, the surrounding neighborhood became more residential and affluent. Asphalt Green was developed as a recreational facility. The East River Esplanade, a pedestrian walkway between the FDR Drive and the East River, was created and subsequently renamed the Bobby Wagner Walk. And all during this six decade period of residential and neighborhood development, garbage trucks were driving to York Avenue and 91st Street, transiting over an escalated ramp, crossing the FDR Drive, and arriving at the marine transfer station where the garbage was dumped out of the truck into barges.

The old trash transfer station was closed in 1999, but the Department of Sanitation began planning the new station five years later. The plaintiffs, including “Residents for Sane Trash Solutions” and New York State Assembly member Micah Kellner, challenged the Clean Water Act construction permit issued for the site by the United States Army Corps of Engineers, claiming that the Corps ignored the potential environmental consequences of the center and failed to consider enough alternative centers for trash disposal.

Much to Upper East Side residents’ chagrin, Judge Crotty found that the Corps’ issuance of the permit was “rational and well-supported.” He held that the Corps’ analysis of the center’s effect on surrounding waters and of alternative disposal methods were adequate and dismissed the lawsuit, allowing the project to move forward.

09 Jul
2014

Judge Marrero Rejects PwC’s In Pari Delicto Defense in MF Global Case

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In his latest MF Global ruling, issued today, Judge Marrero denied PriceWaterhouseCooper’s motion to dismiss a $1 billion malpractice and negligence suit brought by the bankrupt brokerage firm’s plan administrator.

PwC had acted as an outside auditor and accountant for MF Global before it went bankrupt.  The plan administrator alleged that PwC “engaged in ‘extraordinary and egregious professional malpractice and negligence.’”  According to the complaint, MF Global relied on PwC’s advice in accounting for proprietary investments it had made in European sovereign debt that ultimately backfired and led to the firm’s bankruptcy in 2011.

PwC moved to dismiss the claims on the grounds of in pari delicto, arguing that MF Global was equally guilty of malpractice because of its “business strategy and decision-making” in implementing PwC’s strategies. Judge Marrero held that PwC’s “broad reading of the doctrine,” was “not in line” with New York law and would “insulate an auditor from liability whenever a company pursues a failed investment strategy after receiving wrongful advice from an accountant.”  Nonetheless, Judge Marrero cautioned, “this is not to say that MF Global and its officers will play no role in the outcome” of the case, as it must prove that it “innocently accepted PwC’s negligent advice.”

Our prior posts on the MF Global litigation can be found here.

 

09 Jul
2014

Judge Rakoff: Madoff Trustee Cannot Recover Foreign Funds

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In an opinion dated Sunday, July 6, Judge Rakoff ruled that the trustee administering Bernie Madoff’s defunct investment firm could not invoke the Bankruptcy Code to recover funds transferred between two foreign entities. Citing Morrison v. Nat’l Austria Bank Ltd., Judge Rakoff held that Section 550 of the Bankruptcy Code, like other federal statutes, did not have extraterritorial reach absent specific congressional intent.

As part of his wide-ranging efforts to clawback profits paid out to Madoff investors, the Madoff trustee Irving Picard had argued that the language of Section 541, which defines “property of the estate” as having no borders, allows for the clawback of funds transferred from offshore “feeder funds” to foreign banks. Judge Rakoff disagreed. Calling his argument “clever,” Judge Rakoff explained that the funds only become “property of the estate” once the Trustee has recovered them.

Judge Rakoff recognized Picard’s concern that such a ruling would allow U.S. debtors to fraudulently transfer all of his assets offshore and then retransfer those assets to avoid the reach of U.S. bankruptcy law. Nonetheless, Judge Rakoff ruled that the desire to close such “loopholes” must be “balanced against the presumption against extraterritoriality, which serves to protect against unintended clashes between our laws and those of other nations which could result in international discord.”