Alison Frankel

The Senate Banking Committee is scheduled next week to debate a bill to reform Fannie Mae and Freddie Mac, the government-sponsored enterprises that have single-handedly propped up the market for residential mortgages since the housing crash of 2008. The bill, known as Johnson-Crapo for the lead senators on the banking committee, faces an uncertain future. But even if it manages to emerge from the committee and ultimately become law, Johnson-Crapo won’t, on its own, guarantee the continuation of the U.S. housing recovery because the bill doesn’t address private investment in mortgage-backed securities.

The housing market needs private capital to share risk and keep interest rates affordable, as Pimco CEO Douglas Hodge wrote in an April 11 op-ed in Barrons. Yet as we all know from years of MBS litigation, investors in pre-crash MBS trusts believe they were badly deceived by issuers, originators and trustees, who then compounded their sins by refusing to make good on buy-back provisions in MBS contracts.

Even worse, in the eyes of MBS investors, banks that issued the securities and serviced the underlying mortgage loans shifted some of the burden of their own $25 billion settlement with the U.S. government onto investors. A report earlier this month from the Housing Finance Policy Center concluded that 24 percent of the mortgages that banks modified as part of the $25 billion settlement were owned by investors in MBS trusts, not by the banks themselves. Those modifications could be to investors’ benefit, if they result in revenue to MBS trusts from homeowners who might otherwise default, but as the Housing Finance report notes, there’s no transparency for investors, so they don’t know whether the banks acted reasonably or not.

Mistrust of the sell side, in other words, runs deep among MBS investors. So how can the securitization industry – the mortgage originators, issuers, rating agencies, lawyers and accountants who are counting on the revival of the mortgage finance market – woo back private capital?

I’ve got some ideas, based on interviews with several folks in the MBS business who are thinking about that question, especially as Congress considers legislation to reform government-backed securitizations. Pimco’s Hodge laid out one big proposal in his Barrons piece, urging Congress to enact legislation to tag MBS trustees and mortgage servicers with fiduciary duties to investors in private-label MBS trusts. (The Trust Indenture Act of 1939 did just that for bond investors after the bond market collapsed in the Great Depression.) Hodge argued that such a “simple – but powerful – reform …. would go a long way in bringing back investors, such as Pimco clients, to a marketplace that is (or may soon be) desperately in need of private capital.” (You may recall that Georgetown law professor Adam Levitin has made similar arguments about the role of MBS trustees, including in the litigation over Bank of America’s $8.5 billion breach-of-contract settlement with Pimco and other Countrywide MBS investors.)

Technology is hard. Valet parking and coat check rooms are not, at least for U.S. Supreme Court justices. So at Tuesday’s oral arguments over the online TV startup Aereo, lawyers for Aereo, the U.S. government and the broadcasters who believe Aereo is pirating their copyrighted content used all sorts of tangible analogies to bring issues out of the cloud and into the real world.

Aereo, as you probably know from breathless coverage of how it will break cable’s stranglehold and change television-watching forever, permits subscribers to watch shows in almost live time without paying for cable service. The service uses thousands of dime-sized antennas to capture TV signals, then retransmits them to customers’ Internet devices at their direction. Aereo and its major backer, Barry Diller’s IAC/InterActive, contend that because its customers control transmissions from the tiny antennas, its set-up complies with copyright law as the 2nd Circuit U.S. Court of Appeals defined it in a 2008 case called Cartoon Network v. Cablevision. (In the Cablevision ruling, the 2nd Circuit said that the cable company wasn’t liable for infringement because its remote digital video recorder system was directed by its customers, who made copies of shows to replay for their own private use, not for prohibited public performances.) Broadcasters, of course, say Aereo’s multiple antennas are a guise to cover the company’s outright violations of the Copyright Act’s Transmit Clause, which Congress enacted in 1976 to prohibit cable companies from engaging in the same signal piracy that Aereo is now accused of.

Aereo realized before its case reached the Supreme Court that it was better off comparing itself to an old-school equipment provider – a sort of Radio Shack of the digital age – than bickering with broadcasters over how exactly its banks of antennas operate. No one, after all, believes Radio Shack is responsible for copyright infringement when it sells television antennas and electrical cables that people can set up on their own roofs. At oral arguments Tuesday, Aereo’s Supreme Court lawyer, David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, mostly stuck with that easy-to-grasp analogy. But when Chief Justice John Roberts challenged him on whether Aereo uses thousands of teeny antennas rather than one big one simply to take advantage of the 2nd Circuit’s quirky Cablevision ruling, Frederick called on another tactile comparison to justify Aereo’s devices: Lego blocks.

A spate of U.S. pension funds, including Bank of America’s private pension plan and funds for public workers in Maryland, Louisiana and Texas, filed suits Friday accusing BP of defrauding investors in its statements about the Deepwater Horizon oil spill in April 2010. Piling on just ahead of the statute of limitations, several foreign institutions, such as Norges Bank and Deka Investment, also brought cases Friday against BP. In all, the oil company is now facing individual securities suits by at least 20 institutional investors, all of which claim that their investment managers relied on the company’s supposed misrepresentations when they decided to buy BP shares.

That’s a big headache for BP, of course, but it’s also worrisome for other foreign-based companies with significant operations in the United States. Since 2010, those businesses have been virtually immune from securities fraud claims in U.S. courts, thanks to the U.S. Supreme Court’s ruling in Morrison v. National Australia Bank.

In Morrison, the Supreme Court held that American securities laws don’t apply outside of our borders. Trial courts have interpreted the decision to mean that companies listed on foreign exchanges can’t be sued for fraud under the Exchange Act of 1934. (There’s one loophole: Federal-law claims by investors who traded American Depository Shares are viable despite Morrison, but those suits can only recover losses in a defendant’s U.S. float.)

I plow through a lot of appellate opinions. Few of them make me want to stand up and read aloud in the Reuters newsroom. But a couple of sentences, from a ruling Wednesday by the 4th U.S. Circuit Court of Appeals, just about pushed me out of my chair. “A corporation very well may desire that the allegations lodged against it in the course of litigation be kept from public view to protect its corporate image, but the First Amendment right of access does not yield to such an interest,” the three-judge 4th Circuit panel wrote. “Whether in the context of products liability claims, securities litigation, employment matters or consumer fraud cases, the public and press enjoy a presumptive right of access to civil proceedings and documents filed therein, notwithstanding the negative publicity those documents may shower upon a company.” What an unwavering endorsement of open courts!

It’s all the more appropriate that the 4th Circuit underscored the public’s right to know because the case that prompted its ruling implicates the government’s discretion to protect public safety. In 2011, an unidentified local government agency submitted an incident report to the Consumer Product Safety Commission. The CPSC notified the company that manufactures the supposedly dangerous product, which insisted that the report was materially inaccurate and should not be published on the recently-established CPSC database for reports of unsafe products. The Commission agreed to some concessions, but ultimately said it intended to publish the report. The company sued in federal court in Greenbelt, Maryland, to enjoin the publication. It also moved to seal the litigation and to proceed under the pseudonym “Company Doe.”

Public Citizen, the Consumer Federation of America and the Consumers Union intervened to join the CPSC in opposing the company’s request to litigate in secret, but U.S. District Judge Alexander Williams sided with Company Doe. If the company were forced to reveal its identity in the litigation, the judge reasoned, it would suffer exactly the same reputational harm it was trying to avert through its injunction suit. The only way to protect the company from unwarranted damage, Williams said, was to permit the pseudonym and sealing until he reached a determination.

Is there anyone who doesn’t sympathize with the actor Cindy Lee Garcia, who was baldly deceived into appearing in the abhorrent anti-Islam film “Innocence of Muslims”?

The filmmaker, a shadowy character who goes by three different names, told Garcia she’d be appearing in “Desert Warrior,” an adventure movie set in the Middle East. Instead, he overdubbed her lines to make it appear as though the actress was accusing the prophet Mohammed of pedophilia, and included her brief scene in a screed so incendiary that it inspired riots in Egypt and elsewhere in the Muslim world.

Targeted by death threats, Garcia eventually sued Google to force its YouTube unit to block the video. In February, she won a ruling from a divided three-judge panel at the 9th U.S. Court of Appeals, ordering Google to take down the film because Garcia was likely to prevail on her claim that ‘Innocence’ infringes her copyright on her individual performance.

For all of the outrage kicked up by Michael Lewis’s depiction of fundamentally rigged securities exchanges in his book “Flash Boys,” there’s a giant obstacle standing in the way of punishing high-frequency traders or the exchanges that facilitate them: the blessing of federal regulators. As Dealbook’s Peter Henning wrote in his White Collar Crime Watch column on why high-frequency trading is unlikely to result in criminal charges, securities exchanges openly sell access to high-speed data feeds and to physical proximity that increases trading speed by milliseconds. Exchanges are, in the words of Andrew Ross Sorkin, “the real black hats” of high-frequency trading, since they unabashedly profit from differentiating access to trading information.

That may be true, but exchanges do so with the full knowledge of the Securities and Exchange Commission and the Commodity Futures Trading Commission. Georgetown professor James Angel, who specializes in the structure and regulation of financial markets, told me Monday that as long as securities exchanges don’t discriminate in the sale of high-speed access, they’re acting within their regulatory bounds. He compared the system to airlines selling different tiers of service: It’s perfectly fine to sell first-class seats to high-frequency traders as long as people in coach had the same opportunity to sit up front and opted instead for the cheap seats.

I had called Angel to ask his opinion of a new class action against the Chicago Mercantile Exchange. Filed Friday in federal district court in Chicago, the suit claims that the Merc’s parent, CME Group, has defrauded the derivatives market by representing that it’s providing real-time market information when, in fact, it has entered into “clandestine” contracts to provide order information to high-frequency traders before anyone else. Angel’s take? “This is a bogus case,” he said after reading the suit. “This is clearly about somebody who bought a coach ticket and is now complaining that they didn’t get first class service.”

Way back in 2000, the Electric Power Research Institute, a non-profit funded by utility companies, asked the Justice Department’s Antitrust Division for guidance on a proposal to help its members pool information to ward off cyber attacks. EPRI told Justice that companies across the energy sector wanted to exchange information about how best to conduct vulnerability assessments, install anti-hacking protections and formulate restoration plans in case of breaches. EPRI asked for the department’s assurance that this kind of industry-wide collaboration would not violate antitrust laws.

In a letter to EPRI, then antitrust chief Joel Klein said it would not, as long as the companies kept EPRI’s promise not to use the information exchange to impede competition. The companies could not, for instance, swap details of negotiations with specific anti-hacking service providers. But as long as they avoided talking specifically about prices or other competition-sensitive topics, they’d be fine. “The proposed interdictions on price, purchasing and future product innovation discussions should be sufficient to avoid any threats to competition,” Klein wrote. “Indeed, to the extent that the proposed information exchanges result in more efficient means of reducing cyber-security costs, and such savings redound to the benefit of consumers, the information exchanges could be procompetitive in effect.”

That perfectly reasonable advice was the Justice Department’s last word on the antitrust consequences (or lack thereof) for companies that collaborate to thwart cyber attacks. There’s a very simple reason for the resounding 14-year silence: No one else asked for guidance. Since EPRI’s request all those years ago, no other company or industry group thought it necessary to get clearance before collaborating across a sector on cybersecurity strategies. In fact, according to comments by Assistant Attorney General William Baer at a press conference Thursday, there shouldn’t really have been any uncertainty about the legality of that sort of information sharing.

In 1999, a couple of partners at the firm now known as Wilmer Cutler Pickering Hale and Dorr had a fabulous idea. Businesses were just beginning to recognize the potential advantages of imposing mandatory arbitration provisions and class action waivers on their customers. In early 1998, First USA was the first credit card bank issuer to adopt a mandatory arbitration clause, followed by American Express at the end of the year. Wilmer, which had a roster of credit card clients, came up with a marketing strategy to position itself as an expert on the clauses. In May 1999, Wilmer lawyers invited big credit card issuers to attend a conference on arbitration provisions at its Washington offices “to show these folks that this was something on which we were at the leading edge,” one of the partners later testified.

Wilmer was absolutely right about the marketing potential of mandatory arbitration. After that initial meeting at the firm’s offices on May 25, 1999, Wilmer teamed up with another firm, Ballard Spahr, and several in-house credit card lawyers. They dubbed themselves the “Arbitration Coalition” and invited lawyers from other outside firms and from companies in other industries to join the group. The coalition met throughout 1999 and 2000, as credit card issuers rushed to adopt class action waivers and arbitration clauses. Spin-off groups — including a very short-lived cluster called the Class Action Working Group and a loose band of lawyers for credit card issuers, known as the In-house Working Group — also held sessions in 2000 and 2001.

In all, including that initial session Wilmer convened in 1999, members of the credit card industry met 28 times over the course of four years to discuss how to impose and implement mandatory arbitration clauses. By the end of 2001, when Citi adopted the provisions in its agreements with cardholders, mandatory arbitration clauses had become the industry standard.

When an anonymous speaker’s First Amendment rights conflict with a criminal defendant’s right to due process under the Fifth Amendment, which constitutional protection prevails?

There’s actually not a lot of precedent on how to balance those competing constitutional protections, according to a ruling Tuesday by the 5th U.S. Circuit Court of Appeals. The U.S. Supreme Court has gone out of its way to protect unnamed speakers, hearkening back — most recently in its 1995 ruling in McIntyre v. Ohio Elections Commission — to this country’s long tradition of anonymous political speech. On the other hand, the trial judge in the case before the 5th Circuit believed there was a reasonable possibility that the unmasking of two pseudonymous commenters to an online news article would reveal misconduct by federal prosecutors. Tuesday’s opinion left the 5th Circuit with a chance to change its position some day, but for now, the court said, it’s sticking with the trial judge: The Fifth Amendment trumps the First when anonymous online comments are possible evidence of due process violations.

The circumstances of the case that prompted the 5th Circuit’s holding were, to quote the opinion, “extraordinary.” Last June, after a years-long investigation, the former director of the non-profit New Orleans Affordable Homeownership was indicted by a federal grand jury for allegedly accepting kickbacks from contractors her group employed to repair houses damaged by Hurricane Katrina. Two months after the director, Stacey Jackson, was charged, U.S. District Judge Kurt Engelhardt of New Orleans issued a stunning opinion in a different Katrina corruption case against several former New Orleans police officials. Engelhardt vacated their convictions, finding rampant misconduct by a former first assistant and senior litigation counsel in the New Orleans U.S. Attorney’s office. Among their misdeeds: anonymous online comments and blog posts about ongoing investigations, prosecutions and even trials. To call the posts intemperate would be to understate drastically their offensiveness.

Elan Pharmaceuticals believes it was victimized twice over by SAC Capital, the notorious hedge fund now called Point72. The first time was when SAC obtained insider information about unsuccessful trials of the Alzheimer’s drug bapineuzumab and dumped $700 million in shares of the Irish drug company and its drug development partner Wyeth. But to add insult to that injury, Elan had to spend a small fortune, about $1.6 million, in legal fees and costs stemming from the government’s investigation of SAC’s insider trading. That is money SAC should have to pay, according to Elan. With the hedge fund due to be sentenced Thursday by U.S. District Judge Laura Taylor Swain of Manhattan, the pharma company’s lawyers at Reed Smith have submitted a letter asking Swain to recognize Elan as a victim of SAC’s crimes and order the hedge fund to pay it $1.6 million in restitution.

It’s a fascinating request. You probably recall that in a couple of high-profile cases in the recent spate of insider-trading prosecutions, Morgan Stanley and Goldman Sachs won rulings that former employees (in a broad sense of that word) were on the hook for legal fees the banks incurred as a result of the employees’ crimes. In February 2013, U.S. District Judge Jed Rakoff held that under the federal victims’ restitution law, former Goldman director Rajat Gupta owes the bank $6.2 million — the money Goldman laid out to Sullivan & Cromwell to investigate Gupta’s conduct internally and to cooperate with government investigators. Last July, the 2nd U.S. Circuit Court of Appeals affirmed a similar ruling by U.S. District Judge Denise Cote. She had concluded in 2012 that Morgan Stanley was the victim of insider trading by FrontPoint hedge fund manager Chip Skowron, so Skowron was responsible not just for repaying the bank the cost of his own defense but also for restitution of the legal fees Morgan Stanley advanced to other FrontPoint employees.

The 2nd Circuit’s ruling in the Skowron case didn’t leave much doubt that employers can receive restitution as victims for the money they spend to cooperate with government investigations of employees who go on to plead guilty or be convicted. Elan, however, didn’t employ SAC or Mathew Martoma, the former SAC trader who was convicted of trading on inside information about the company. On Monday, in a response to Elan’s letter requesting restitution, SAC’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison said Elan’s theory of restitution is “without precedent.”