30 Jul
2014

Judge Rakoff Orders Bank of America to Pay $1.3 Billion in “Hustle” Case

In an opinion today, Judge Rakoff ordered Bank of America to pay $1.3 billion in the so-called “Hustle” case, in which a jury found that Countrywide (later acquired by Bank of America) and an officer named Rebecca Mairone engaged in a scheme to defraud Fannie Mae and Freddie Mac into buying faulty mortgages.

Judge Rakoff rejected Bank of America’s argument that the statute at issue, FIRREA, required the penalties to be calculated by reference to the “net” gains or loss resulting from the alleged conduct:

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30 Jul
2014

Judge Torres Denies Police Unions’ Request to Intervene in Stop-and-Frisk Litigation

In a 108-page opinion today, Judge Torres ruled that various police unions could not intervene to block or appeal the settlement of litigation concerning the police practice known as “stop-and-frisk.”  New York City and the plaintiffs have agreed to settlement terms, but Judge Torres found that the unions raised their objections too late and that, in any event, the unions lacked sufficient interest in the merits that were distinct from the interests of the City:

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29 Jul
2014

Judge Pauley Grants Motion for Voluntary Dismissal Contingent on Outcome of Appeal

In a short opinion issued today, Judge Pauley granted the motion of a plaintiff to voluntarily dismiss his surviving claims after Judge Pauley had dismissed the plaintiff’s main claims, setting up an immediate appeal to the Second Circuit.  The plaintiff made his motion contingent on the outcome of its forthcoming appeal to the Second Circuit — if the plaintiff wins the appeal and Judge Pauley is reversed, he may reassert his dismissed claims; if not, then the claims are dismissed with prejudice.

As Judge Pauley explained, “This unusual procedure by which Plaintiffs can obtain what bears a passing resemblance to an interlocutory appeal was approved by the Second Circuit in Purdy v. Zeldes:

[W]hen a plaintiff is completely free to relitigate voluntarily dismissed claims, the final judgment rule ordinarily precludes this court from reviewing any adverse determination by the district court in that case. However, where, as here, a plaintiff’s ability to reassert a claim is made conditional on obtaining a reversal from this court, the finality rule is not implicated in the same way …. We therefore hold that a conditional waiver … creates a final judgment reviewable by this court.

Here, the plaintiff decided the his surviving claims were of de minimus value, and both his own and the Court’s resources would be better served litigating the dismissed claim (for a $200 million real estate commission).  Judge Pauley agreed, and granted the motion to dismiss contingent on the outcome of the appeal.

27 Jul
2014

Judge Cote Rejects, As a Matter of Law, Banks’ Defense That FHFA Knew Mortgage Securities Were Defective

In an opinion dated Friday, Judge Cote granted partial summary judgment to the FHFA (the conservator for the two Government-Sponsored Enterprises, or “GSEs,” Fannie Mae and Freddie Mac), dismissing various banks’ affirmative defense that the GSEs had knowledge that the mortgage securities at issue were defective. The essence of her ruling was that, while the GSEs may have had generalized knowledge of problems with mortgage origination, there was no evidence that they had specific knowledge that the representations at issue were false:

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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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