CLOThe hey-day for exotic bets on credit risk spanned most of the first decade of the 21st century. The popping of the housing bubble in 2008 did it in. People lost homes that they bought with debt they couldn't repay; and plenty of investors watched in horror as the value of the junk they'd bought — collateralized debt obligations, mortgage-backed securities, and credit-default swaps — went to zero or worse.

Yet some folks made money. A LOT of money. The vendors whose services made the exotic bets possible sure did. That would include the banks, the deal lawyers, and the firms that acted as trustees. Pretty much everybody did fine until the bubble burst. See, e.g., Michael Lewis, The Big Short.

Until.

A ruling by the Second Circuit today highlights the importance of timing.

Franklin Advisers sued for a "contingent" fee from a $600 million collateralized loan obligation. Franklin claimed that it earned the fee under the CLO's trust indenture for beating a 12 percent gain target. The district court and Second Circuit panel agreed, holding that the cashing out of the CLO in 2007 — shortly before the bubble burst — constituted an event that entitled Franklin to the bonus. Bank of New York Trust Co. v. Franklin Advisers, Inc., No. 12-0168 (2d Cir. Aug. 1, 2013) (applying New York law).

The CLO side claimed, oddly, that the court should construe the trust indenture against trustee Franklin. The panel said no, that rule applies only if the party in question drafted the contract language in question. Franklin, as trustee, didn't even sign the indenture, the court noted.

Blawgletter observes that Franklin very likely hired and directed the law firm that wrote the indenture. The panel describes the firm as "deal counsel". We think that matters as much as or more than the identities of the formal parties to the indenture.

We also point out that Franklin would likely have earned no contingent fee had the CLO's shareholders not voted to redeem their shares in early 2007. In the ordinary course, the CLO would not have matured until Aug. 28, 2013 — a few weeks from now. Because its assets "in the main, were leveraged, secured loans made to below-investment-grade borrowers", the CLO probably wouldn't have lasted until maturity as defaults cascaded through the portfolio and the value of the assets plummeted. Timing is everything.

Bonus:    Goldman Sachs's Tourre Fabrice lost his civil trial in a case that the Securities and Exchange Commission brought against him for helping GS hype a CDO that went bust. The jury found that he committed securities fraud.

The Third Circuit "respectfully disagree[s]" with the conclusion of the Tenth Circuit that corporations have a right under the first amendment to the free exercise of religion. Conestoga Wood Specialties Corp. v. Sec'y of Health & Human Svcs., No. 13-1144, slip op. at 20 n.7 (3d Cir. July 26, 2013) (citing Hobby Lobby Stores, Inc. v. Sebelius, No. 12-6294 (10th Cir. June 26, 2013)).

In both cases, corporations challenged a requirement under the Patient Protection and Affordable Care Act — ObamaCare — that employers provide coverage for contraception.

Juror No. 2 claimed that Juror No. 1 had threatened her with a "fork" and later vowed to "cut" her.

Juror No. 2 told the judge that "I feel I'm not safe" as a result of taunts by the eight other members of the jury.

Counsel for Exxon agreed to excuse Juror No. 2 but also moved to strike Juror No. 1. The district court did let Juror No. 2 go but kept No. 1.

The jury awarded $104.69 million to the City of New York for Exxon's role in causing methyl tertiary butyl ether (MTBE) to enter water wells in Queens. Exxon argued on appeal that the district court should have excused Juror No. 1 also.

The Second Circuit affirmed. The panel pointed out that only Juror No. 2 showed any sign of fearing Juror No. 1. It held:

With this established, we easily conclude that the relief Exxon sought — removal of Juror No. 1 — would have done nothing to change the outcome of the case; it would simply have left an eight- rather than nine-person verdict.

In re Methyl Tertiary Butyl Ether ("MTBE") Products Liability Litig., No. 10-4135-cv, slip op. at 106 (2d Cir. July 26, 2013). 

 

Russell BakerBlawgletter really likes Russell Baker, a writer who for decades wrote a very funny "Observer" column for The New York Times. One column that we like to mention dealt with how bitter and ugly people get about abortion rights. Baker said he didn't like the subject and didn't relish questions asking his views on it. "My current position is a profound wish it would go away", he wrote.

Baker's weekly work stood out for us partly because he often ended with a twist. He'd talk about something for 980 of his 1,000 or so words, but all of a sudden he'd dart into something else. You'd feel smart because you got what he meant. You knew he enjoyed tickling you, and you liked him for that.

Today, Linda Greenhouse — who covered the U.S. Supreme Court for almost as many years (1978-2007) as Baker wrote his column (1962-98) – penned "Justices on the Job". The piece does a sort of Bakerian zig-zag, starting with comments (by Chief Justice John Roberts) about the effect on the Court, in general, of having almost nothing but ex-court of appeals judges as justices but ending with a point that singles out one of the Chief's colleagues as proof that a narrow life experience can breed clueless rulings.

Chief Justice Roberts, Greenhouse relates, told a group of judges and lawyers, within days after the 2012-13 Term ended in June, that the background of the justices as judges tended to make them less "political". She does not buy that idea, finding "something disingenuous in it." She regards the Roberts Court as very political, thank you very much.

Having zigged with the topic in general, Greenhouse zags to a specific for-instance — that of Sam Alito, the colleague who replaced Sandra Day O'Connor in 2006. The zag targets Justice Alito's pro-employer rulings in sex discrimination cases. Greenhouse concludes, with no hint of Bakerian mirth:

As far as I can tell from his résumé, Samuel Alito, since his graduation from law school, has never cashed a paycheck that wasn’t issued by the federal government. He has been a law clerk, a lawyer in the Justice Department, a federal prosecutor, and an appeals court judge. In federal employment, salaries are set by law and lines of authority are clear to all. But in the private sector, where I’ve spent my career, salaries are often close to state secrets and it can be the least powerful of many bosses who can make an employee’s daily life the most miserable.

Does Justice Alito understand this? Can he? It’s not really that complicated. So maybe this is the real mismatch: the wrong man for the job.

Justice Alito comes in for such heat, we susepect, partly because Greenhouse adores Justice O'Connor and winces when Alito makes rulings that she thinks O'Connor would have never have agreed with.

Our own bias, as a lawyer who sees trial work as a high calling, makes us sorry that only one of the Court members spent any significant amount of time trying cases or serving on a district court bench. How can you umpire a game you haven't played and therefore don't really understand?

Taking a page from Baker, we wish that problem would go away.

PrimeTime-AnytimeRupert Murdoch's TV empire in the U.S. has lost its bid to stop you from avoiding the ads that Fox embeds in its shows — your Glees, your The Simpsonses, and your So You Think You Can Dances.

The Ninth Circuit turned back Fox's appeal of an order that denied its motion to enjoin Dish from providing its PrimeTime Anytime recording feature to subscribers. Fox Broadcasting Co., Inc. v. Dish Network, L.L.C., No. 12-57048 (9th Cir. July 24, 2013).

Fox argued that Dish had promised in its rebroadcast license not to let subscribers fast-forward through ads and not to make Fox content available "on demand". Fox also claimed that PrimeTime Anytime resulted in both direct and secondary infringement of Fox's copyrights in its programming content.

The panel held that Fox hadn't proven infringement of its copyrights by Dish. Subscribers — not Dish — made copies of the Fox shows by flipping a switch, the court noted. That meant Dish did not infringe directly. Nor did Dish's conduct make it guilty of secondary infringement. Because the subscribers made copies mainly for "time-shifting" purposes, the panel ruled, they had a valid "fair use" defense, and their fair use also exonerated Dish.

The contract issues vexed the panel more. The ruling against Fox turned on a squinty view of what "distribute . . . on an interactive, time-delayed, video-on-demand or similar basis" means. Does giving subscribers a chance to copy and replay Fox content amount to distributing it on a "basis" "similar" to "time-delay[]" or "video-on-demand"? The panel didn't decide, but it hinted that it very well might.

World Trade Center AftermathThe law treats some acts as grave enough that it won't give them legal effect unless a person with knowledge of the facts attests to them. The oath of a witness tends to give the act heft. It suggests you can trust what the witness says.

But what happens when the witness botches the oath? Does the act still count?

In the last week, two courts of appeals made rulings about the effect of statements that fell short of what an oath-governing statute called for. The cases make a striking contrast.

In the first case, a panel held that a false statement under oath in an assignment (of a mortgage) did not void the transfer. The affiant had sworn that he signed the assignment — when in fact someone had scanned an image of his name onto it. He also vowed that he inked it in the presence of the notary — but in truth the notary likely didn't see him. The two-judge majority ruled that those sorts of defects did not matter, in part because they didn't render the affiant guilty of "forgery" under the Texas Penal Code. Reinagel v. Deutsch Bank Nat'l Trust Co., No. 12-50569, slip op. 10 n.22 (5th Cir. July 11, 2013). The third judge disagreed, concluding that forgery did occur but that the debtors waived the point.

The other case dealt with answers to questions about the claims of people who cleaned buildings near the World Trade Center after the Towers fell. Rule 33 of the Federal Rules of Civil Procedure required the claimants to answer the questions under oath, either in the form of an affidavit or "an unsworn declaration [or] statement" per 28 U.S.C. 1746. If they chose the latter way, the statute said, they had to recite that they declared the facts "under penalty of perjury". But the claimants didn't include "under penalty of perjury". They instead said "I am aware that if any of the foregoing responses are willfully false, I am subject to punishment." The court ruled that the statement didn't go far enough. "Inclusion of the language 'under penalty of perjury' is an integral requirement of the statute for the very reason that it impresses upon the declarant the specific punishment to which he or she is subjected for certifying to false statements." Cortez v. City of New York (In re World Trade Center Disaster Site Litig.), No. 2-87-cv, slip op. 8 (2d Cir. July 16, 2013).

The settings differ, of course. The first case involved a bank's efforts to foreclose on an overdue mortgage, and the second concerned an attempt by defendants to get plaintiffs to reveal the factual basis for their claims. Yet both rulings went against the little guy. Hmmm.

Blawgletter didn't follow the Trayvon Martin case — State of Florida v. George Zimmerman — but when we heard about the verdict Saturday night we had one big question.

What did the jury charge say about reasonable doubt and self-defense?

Now we know, thanks to The Law of Self Defense blog, which posted the Zimmerman jury charge, which you can read here.

The key passages appear under the headings Justifiable Homicide and Excusable Homicide and Justifiable Use of Deadly Force. They say:

Th

They key to us comes in the next-to-last paragraph, which seems to put on the State the burden of showing beyond a reasonable doubt that Zimmerman did not "reasonably believe[] that it was necessary to [shoot Martin] to prevent death or great bodily harm to himself".

In a civil case, the plaintiff would have to meet a much lower burden of proof — the preponderance of the evidence standard. The defendant would in turn have to show, by the same more-likely-than-not test, that he did reasonably believe he had to wound or kill Martin in order to avoid death or severe injury.

But none of that may matter. A civil jury could conclude that Zimmerman caused the wrongful death of Martin by setting in motion the train of events that resulted in the fatal meeting. The fact that Zimmerman chose to confront Martin may persuade the jury to hold him liable for damages.

E-bookDid Apple collude with publishers to jack up the price of e-books?

You betcha, U.S. District Judge Denise L. Cote ruled in Manhattan today after a three-week trial.

NYT story here, WSJ there.

A damages trial will follow.

Apple pursued a nutty defense, which held that it and the publishers did no wrong by colluding because they joined forces to combat Amazon's drive to monopolize e-book sales. The Amazon threat gave Apple good reasons to switch to an "agency" pricing model and do other things that helped publishers sustain higher prices, it alleged. The per se ban on price-fixing, Apple alleged, thus didn't apply to its dealings with the e-book suppliers.

John D. Rockefeller, Sr.'s Standard Oil Company tried pretty much the same thing, about 100 years ago. "Ruinous competition", he protested. It didn't work then either.

You can see Judge Cote's 159-page opinion — complete with a damning Steve Jobs email and color exhibits – here.

The WSJ's editors would have none of it, deeming the collusion "normal business practices". Which collusion would become, if the WSJ had its way.

Bonus:    "[I]t is no defense to participation in an illegal price fixing conspiracy to suggest that others did it too." Id. at 133.

GraduationIf you watch a lot of daytime TV, you may have seen lots of ads by for-profit schools. The pitches promise you an awesome job, a lot of pay, more sex-appeal, and even, in some cases, super-human powers.

But did you ever think about the people whose job it is to get you to pony up the fees that put the profit in for-profit? Do you know what they have to go through? The multi-point reviews of their performance? On things like drop-out rates, attitude, team-playerness, professional development, and appearance? Did we mention attitude?

Guess what — none of that mattered. Only getting the students to do something that paid a fee in fact counted when it came time to put money in your pay packet each month.

A woman who did the job over the course of a decade sued ITT Educational Services under the False Claims Act. She alleged that ITT scammed the feds out of some of the $150 billion that goes to helping people afford higher (post-high school) education. The district court dismissed the case on the ground that an earlier lawsuit (Graves) had alleged pretty much the same thing. Because the FCA bars suits where someone else already made “public disclosure” of the underlying facts, the court ruled, it had no jurisdiction to hear the suit.

The Seventh Circuit reversed. It held that Debra Leveski based her FCA claim not on the old way ITT did things — a way that more or less paid bounties on sales — but on the new way — which hid the bounties behind a fake evaluation system–and on activities in a separate department, financial aid. That made Ms. Leveski’s claim different enough to avoid the public disclosure bar of the FCA in 31 U.S.C. § 3730(e)(4)(A). As the Court explained with a bit more detail:

Leveski’s case appears to be substantial, not frivolous. Even disregarding the fact that Leveski’s allegations cover a later time period than the Graves allegations, Leveski has still provided the district court with at least two ways in which her allegations substantially differ from the Graves allegations: (1) Graves alleged an outright scheme to violate the HEA incentive compensation ban, in which ITT did not even attempt to feign compliance, and (2) Graves was solely concerned with the ITT recruitment office and had nothing to say about the ITT financial aid office. Moreover, through her affidavit and deposition testimony, Leveski has provided the district court with numerous pieces of evidence both supporting her allegations and demonstrating that her knowledge is direct and independent.

Leveski v. ITT Ed. Svcs., Inc., No. 12-1369 (7th Cir. July 8, 2013).

Gettysburg 7-4-13 Looking Towards Little Round TopFrom Intruder in the Dust, by William Faulkner, as a first-ever visit to Gettysburg begins:

For every Southern boy fourteen years old, not once but whenever he wants it, there is the instant when it’s still not yet two o’clock on that July afternoon in 1863, the brigades are in position behind the rail fence, the guns are laid and ready in the woods and the furled flags are already loosened to break out and Pickett himself with his long oiled ringlets and his hat in one hand probably and his sword in the other looking up the hill waiting for Longstreet to give the word and it’s all in the balance, it hasn’t happened yet, it hasn’t even begun yet, it not only hasn’t begun yet but there is still time for it not to begin against that position and those circumstances which made more men than Garnett and Kemper and Armistead and Wilcox look grave yet it’s going to begin, we all know that, we have come too far with too much at stake and that moment doesn’t need even a fourteen-year-old boy to think This time. Maybe this time with all this much to lose than all this much to gain: Pennsylvania, Maryland, the world, the golden dome of Washington itself to crown with desperate and unbelievable victory the desperate gamble, the cast made two years ago.

 

[Photo shows Big Round Top (on right) and Little Round Top (to left of Big Round Top) from Seminary Ridge. Pickett's charge, which Faulkner refers to, crossed the same field farther to the left, aiming at the center of Union lines. ]