Before receiving cease and desist letters in November 2012, companies providing smartphone apps connecting users in need of rides to willing drivers had operated in their own unregulated market. That has changed now that the California Public Utilities Commission (“CPUC”) voted on September 19th to accept a proposal to regulate the nascent industry.The CPUC asserted its jurisdiction over Transportation Network Companies (“TNCs”) as a subset of chartered passenger services already under their regulatory control.
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After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power. The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument.
Here is the background: The city of Richmond, California, has long-faced deteriorating property values. Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard. City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations. And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.
In response, the City has considered a novel move: mortgage condemnations through the power of eminent domain. That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself. If implemented, banks would be forced to write down large portions of a borrower’s principal. The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan. And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme. The Network covered counterarguments as well.
Apple, Inc. failed to defend itself from the Department of Justice’s antitrust lawsuit for allegedly conspiring with five publishers to set the prices of e-books. Judge Denise Cote announced her decision on July 10, and ordered a separate trial to determine damages. Full text of the opinion can be found here.
Judge Cote’s decision came as no surprise to those who had been following the case closely, as she had previously stated her belief that the government would be able to prove its case. The ruling could expose the tech giant to treble damage claims from the 33 state attorney generals who joined the case, but some commentators say that any financial penalty from the suit will be “pocket change” to Apple. Nonetheless, Apple has already released a statement confirming that the company will appeal Judge Cote’s decision. Read the rest of this entry »
[Editor's Note: The following update is authored by Arnold & Porter LLP]
On July 2, 2013, Judge John D. Bates of the U.S. District Court for the District of Columbia (the District Court) vacated a new rule promulgated by the Securities and Exchange Commission (the Commission) under the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) that required oil, gas, and mining issuing companies to include in an annual report information about certain payments made to foreign governments or the U.S. government for the purpose of commercial development of oil, natural gas or minerals (the Rule). In its 30-page decision, the District Court found the Commission had, inter alia, “misread the statute to mandate public disclosure of the reports.” Judge Bates also found the Commission’s refusal to waive the Dodd-Frank Act’s disclosure requirements for countries that prohibit disclosure of payment information was “arbitrary and capricious.” The District Court vacated the Rule in its entirety and remanded the matter to the Commission for further proceedings. Read the rest of this entry »
The trial for United States v. Apple Inc. begins on June 3rd, with some saying that the case will “effectively set the rules for internet commerce.” The Government alleges that Apple conspired with five publishing companies to increase prices while simultaneously plotting to increase market share vis-à-vis Amazon. The five publishing companies originally named in the suit have since reached a settlement with the Justice Department in which they will pay a collective $164 million to recompense consumers harmed by the price-fixing scheme. Read the rest of this entry »
A group of institutional investors recently filed a class action complaint against some of the world’s largest banks alleging a conspiracy fix prices and monopolize the market for Credit Default Swaps (“CDS”) in violation of the Sherman Act § 1. Defendants include Bank of America, Barclays, Citibank, and Goldman Sachs. The complaint also names the International Swaps and Derivatives Association (“ISDA”), a financial trade association, which the complaint alleges is controlled by the defendant banks. The plaintiffs are claiming potentially billions of dollars in damages.
A credit default swap is a method of transferring the risk of default for a financial instrument. The purchaser pays a fixed payment to the seller in exchange for the promise to pay off the underlying debt in the event of a default. The complaint alleges that because of the CDS market structure is unregulated and over the counter, every transaction must be with one of the defendant banks.
The complaint characterizes the CDS market as “starkly divided” between the defendant banks “who control and distort the market” and the plaintiffs “who, in order to participate in the market, must abide their distortions.” The complaint alleges that this is the result of an opaque trading environment in which the defendant banks manipulate the bid-ask spreads through their negotiations with individual traders. These manipulations cost the plaintiffs billions of dollars, says the complaint. Plaintiffs allege that several of their attempts to create and regulated exchange were rebuffed by defendants.
Both the DOJ and the European Commission have been conducting their own investigations into these activities. In March, the EU indicated that “ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business.”
In Levitt v. J.P. Morgan Sec., Inc., 10-4596-CV, 2013 WL 1007678 (2d Cir. Mar. 15, 2013), the Second Circuit reversed a district court’s grant of class certification to a group of plaintiffs who alleged that Bear Sterns (subsequently bought by J.P. Morgan) had violated its duty to disclose when it did not notify investors of a fraudulent scheme by Sterling Foster, a now-defunct brokerage firm.
The case concerned allegations of fraud arising from a September 1996 IPO of ML Direct, a television marketing firm. Sterling Foster orchestrated the IPO as the introducing broker, with Bear Sterns (subsequently acquired by J.P. Morgan) acting as the clearing broker. In general, the clearing broker in a transaction owes no duty of disclosure to the customers of the introducing broker. However, the plaintiffs sought to overcome this hurdle by establishing that Bear Sterns actively participated in the fraudulent scheme.
The district court agreed with the plaintiffs that Bear Sterns’s participation was extensive enough to trigger a duty to disclose. However, the Second Circuit held that the plaintiffs had failed to allege “sufficiently direct involvement” by Bear Sterns.
The Second Circuit noted that providing “normal clearing services” do not give rise to a duty to disclose, even when the broker providing those services is aware of the introducing broker’s fraudulent intentions. Rather, to trigger a disclosure duty, the clearing broker would have to actively depart from its normal passive clearing functions and affirmatively exert “direct control” over the introducing broker and the fraudulent trades. The court found that Bear Sterns, by merely “allowing” such trades to proceed, had not assumed such a level of control.
The plaintiffs’ counsel characterized the ruling as “a sad day for investor protection,” stating that the court had “has for the first time held that a clearing firm has no duty to disclose that it is knowingly participating in market manipulation by its introducing broker.”
The court, however, carefully declined to address the legal implications of “market manipulation itself” on the duty to disclose, confining itself to its factual conclusion that Bear Sterns did not directly engage in such manipulation. Underscoring the narrowness of the Second Circuit’s ruling, the New York district court refused to apply Levitt to a case where a defendant had made misleading statements, holding that the making of misleading statements constituted direct involvement. The same district court has also recently observed that the question of market manipulation remains open.
The Obama Administration has continued its aggressive prosecution of suspect players in the financial meltdown that shaped most of the President’s first term.
Four mortgage insurers, including an AIG subsidiary, have agreed to a $15 million settlement over allegations of improper ‘kickbacks’ paid to lenders for more than a decade. The Consumer Financial Protection Bureau made the announcement today. Its director, Richard Cordray, charged, “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.” For more, see the NYTimesand WSJ.
Also today, the U.S. Department of Justice filed a fraud suit against Golden First Mortgage Corp, alleging the company and its CEO “repeatedly lied” to the government. The complaint claims that Golden First rushed paperwork through internally, although the company certified (to HUD and the FHA) that proper due diligence had been conducted. According to the government, Golden First used three employees to process 100-200 loans per month—predictably leading to “extraordinarily high” default rates as high as 60% in 2007. For more, see Thomson Reuters.
On a related note, district court Judge Victor Marrero (S.D.N.Y.) indicated that he may not accept a “neither admit nor deny” provision in SAC Capital Advisor’s insider trading settlement. At a hearing last week, he made a point unlikely to encounter much resistance: “There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million that might cost $1 million to defend and litigate if it truly did nothing wrong.” Judge Marrero is not the first to question these clauses – commonly demanded by corporate litigants – but his remarks demonstrate a growing judicial skepticism with the practice. For more, see Businessweek, Reuters, and The New Yorker.
Wells Fargo’s bid to block the government’s most recent charges against it stemming from the mortgage crisis—primarily alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”)—took a blow earlier this month when a court ruled that its $5 billion contribution to the multi-bank, $25 billion settlement in April over foreclosure practices did not preclude the new charges. Previous coverage of Wells Fargo’s attempt to preclude the litigation is here. U.S. District Judge Rosemary Collyer ruled that the settlement did not bar all civil or administrative claims against Wells Fargo, including those under the False Claims Act, paving the way for prosecutors in the United States Attorney’s Office for the Southern District of New York to move forward with the suit.
Collyer’s decision left the bank’s lawyers, led by teams from Fried Frank and K&L Gates, vehemently protesting the court’s interpretation of contested language in the settlement. According to Collyer, that language indicated the government retained the right to sue Wells Fargo for material violations of Housing and Urban Development/ Fair Housing Administration (“HUD-FHA”) requirements, only barring claims based on false annual certifications regarding the bank’s compliance with those requirements. Collyer stated that the current charges do not fall under the precluded claims, finding Wells Fargo ignored the plain language of the settlement in coming to a mistaken interpretation. As a result, the government can bring allegations under the False Claims Act in the current suit.
Collyer, however, did not address the pending case directly. The court for the Southern District of New York will still have to make a final determination as to whether the prosecution has pled barred claims as the case moves forward.
The defense team has strongly attacked the government’s charges in its court filings, framing the current charges as part of a broader effort to avoid honoring FHA and HUD commitments to insure thousands of defaulting mortgages as it attempts to wrongly implicate the financial industry for the defaults.
The prosecution has not yet filed its response to Wells Fargo’s motion to dismiss the current suit.
The Ninth Circuit recently affirmed a judgment – from the Central District of California – that the victims of Bernard Madoff’s Ponzi scheme lack subject matter jurisdiction to sue the Securities and Exchange Commission as an agency of the United States under the Federal Tort Claims Act.
The SEC compiled a 450-page public report highlighting its failure to uncover Madoff’s problematic investment activities. The allegations posed by the victim plaintiffs centered on decisions made by the SEC which the district court acknowledged “should have and could have been made differently” and “reveal[ed] the SEC’s sheer incompetence.” Nevertheless, the court held that the United States was protected from suit because the Securities and Exchange Commission was engaged in a discretionary function. An exception is set aside in the Federal Tort Claims Act (“FTCA”) whereby employees of the Government cannot be held liable for failures relating to purely “discretionary” functions of that employee.
The district court, considering the legislative history of the FTCA, noted that Congress “repeatedly and explicitly suggested” that the SEC should be shielded by the discretionary function exception. The FTCA only allows a claim where statutory language mandates a particular course of action. By contrast, the duties and functions of the SEC allow it discretion in choosing who to investigate and when to bring enforcement proceedings. Because the plaintiffs could not demonstrate that the SEC violated a specific and mandatory policy directive that related to the investigation, the court held they failed to overcome an FTCA claim’s threshold requirement.