September 25, 2020

Judging the Judges in 2014


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money-scalesBy Susan Beck, From The Litigation Daily

What were the best and worst court decisions of the year in the world of business law?

It depends who you ask, of course. To come up with my own far-from-exhaustive list, I asked myself what decisions boosted my confidence in the legal system in 2014—and which left me shaking my head.

The three rulings that inspired me showed that our courts don’t always tilt toward those with the most money and influence. They showed that judges can help level the playing field by holding the powerful accountable, and that they don’t always ignore the problems of those closer to the bottom of our economic pyramid.

Other rulings, meanwhile, showed that the legal system can still be drastically out of touch. One—dealing with the issue of a racially hostile work environment—is just jaw-droppingly insensitive. The other two I identified are less outrageous, but they suggest how oblivious or unconcerned judges can be when it comes to the real world consequences of their rulings.

The Best

Deepwater Horizon litigation

In this group of cases, the judiciary stood firm against a tsunami of noise, pressure and threats by a very deep-pocketed company with a talented and aggressive legal team. BP plc has tried furiously to escape full liability for the Deepwater Horizon explosion and spill that killed 11 men and devastated the Gulf of Mexico in 2010. It’s spending millions on slick ads to sway public opinion, and paying for platoons of lawyers to sway the courts. But judges have resolutely stayed focused on the facts and the law.

Leading the resistance to this extraordinary corporate pressure is New Orleans U.S. District Judge Carl Barbier, who is overseeing multidistrict litigation over the spill. In September he hit BP hard when he parceled out liability for damages after a long bench trial in a civil case brought by the U.S. Department of Justice. In a 153-page ruling, Barbier displayed a mastery of the scientific and engineering forces behind the disaster. He found BP grossly negligent under the Clean Water Act and Oil Pollution Act and assigned it 67 percent of the liability. As a result, BP could be forced to pay another $18 billion—on top of its $4 billion criminal fine and the roughly $9 billion it will likely owe private plaintiffs—depending on the outcome of a damages trial to begin in 2015.

On another front, Barbier has pushed back against BP’s ferocious attack on the process for awarding damages to businesses in the Gulf region. The oil giant has protested that the process is tainted by fraud. It’s trotted out examples of businesses that have recovered for losses that allegedly weren’t caused by the spill, claiming that the payouts are unconstitutional.

Barbier has forcefully and repeatedly reminded BP that it agreed to a settlement that works exactly this way. The settlement pact specifically relieved plaintiffs who met certain economic tests from having to show that the spill caused their losses. The U.S. Court of Appeals for the Fifth Circuit backed up Barbier in a ruling last January. In a final blow to BP, the U.S. Supreme Court declined in December to take up its objections to the claims process.

FHFA litigation against big banks

Manhattan U.S. District Judge Denise Cote hasn’t shown much sympathy for the 18 banks that were sued by the Federal Housing Finance Agency. The FHFA, which is the conservator for Freddie Mac and Fannie Mae, has pursued the banks that sold $190 billion of mortgage-backed securities to Fannie and Freddie, claiming they grossly misrepresented the quality of the underlying loans. In a barrage of rulings, Cote has decimated the banks’ defenses, leading all but two banks to settle for a whopping total of more than $20 billion.

Last July, for example, Cote rejected the defense argument that even if the banks did sell investments backed by shoddy loans, Fannie and Freddie fully understood the risks. In an 89-page, clearly reasoned ruling that displayed an intimate knowledge of these complex cases, Cote cut through the banks’ thicket of arguments. “The defendants have identified no evidence—either direct or circumstantial—of the extremely improbable scenario they posit: [Fannie and Freddie], when investing billions of dollars in securities, knew of the falsity of defendants’ specific representations,” she wrote.

Cote’s handling of this mass of cases has not only been decisive, but also refreshingly swift. Litigation as sprawling and complex as this could have dragged on for a long, long time. Here, all but two of the lawsuits were resolved within a relatively quick three years.

Erica P. John Fund v. Halliburton

In one of the biggest securities cases to hit the U.S. Supreme Court in years, Halliburton and the corporate community were hoping to get rid of the fraud-on-the-market presumption, which relieves securities plaintiffs from proving that individual investors relied on misleading company statements. A win for Halliburton would have transformed the securities class action landscape and made it far more difficult for investors to sue.

In June the high court unanimously kept the presumption alive, although it gave it a slight tweak. Defendants may now rebut the fraud-on-the-market presumption by showing that an alleged misrepresentation didn’t affect the stock’s price. But the ruling is largely viewed as a victory for shareholder plaintiffs.

Securities litigation isn’t perfect. There are abuses on the plaintiffs side that taint the field. But the fraud on the market presumption isn’t one of the problems that needs to be fixed. This is a necessary and sensible presumption that enables investors to sue as a class.

In recent years the Supreme Court has erected significant barriers to class actions and kept many claimants out of court altogether by forcing them into arbitration. It was a relief to see the court in Haliburton refuse to slam this door shut, too.

The Worst

Adams v. Austal USA

This galling decision went largely unnoticed, but it sure caught my attention. In June the U.S. Court of Appeals for the Eleventh Circuit found insufficient evidence of a racially hostile workplace for the majority of the 24 African-American plaintiffs who worked at a Mobile, Ala., shipyard owned by Austal USA, despite their shocking complaints. Black employees claimed that they found eight nooses on their job site, and white supervisors and coworkers repeatedly called them “boy” and “monkey.” And here’s just a sampling of the graffiti that appeared in the men’s room: “How do you keep 10 niggers from raping your wife, give them a basketball”; “How do you starve a nigger to death? Hide his food stamp card in his work boots.”

This harassment went on for 10 years, according to the plaintiffs.

While the Eleventh Circuit did allow six individuals who were most directly and severely targeted to pursue their claims, it refused to reinstate the claims of the rest, shrugging off the notion that such a work environment might upset them. It concluded that plaintiff Rahman Pratt, for example, didn’t have a case even though he overhead a white coworker talking about another black employee, saying he would “hang that nigger and shoot that nigger,” and heard him call black people “monkeys.” He also saw the restroom graffiti and his coworkers’ Confederate flag shirts. But, the court pointed out, none of the graffiti was directed at him personally, and the lynching conversation he overheard wasn’t directed at him. So this really wasn’t so bad, the court concluded.

To its credit, the court did overturn the decision by U.S. District Court Judge Kristi DuBose in Mobile to dismiss claims by plaintiff Tesha Hollis. In the three years that Hollis worked at Austal, she discovered two nooses on the job, and her supervisor pretended to masturbate in front of her while telling her about a racist drawing of her in the men’s room. DuBose decided that these racial threats and insults against Hollis weren’t sufficiently “frequent, severe, physically threatening (apart from the nooses) or humiliating or demeaning (apart from the one drawing of her in the men’s bathroom).” Stop for a minute and let it sink in that a federal judge actually wrote this: “Apart from the nooses,” plaintiff Hollis wasn’t threatened, and “apart from the drawing of her in the men’s bathroom,” she wasn’t demeaned.

The judges responsible for the Eleventh Circuit ruling are William Pryor Jr., who wrote the opinion, Emmett Ripley Cox and Lee Rosenthal (a Houston district court judge sitting by designation).

U.S. v. Newman

The U.S. Court of Appeals for the Second Circuit has made it a whole lot easier for hedge funds and others with access to corporate secrets to trade on that information. In December the court reversed the convictions of Todd Newman and Anthony Chiasson, two investment fund managers who were convicted of insider trading in the stocks of Dell Inc. and NVIDIA Corp. The court held that even if Chiasson and Newman knew they were getting confidential inside information, the convictions can’t stand because prosecutors failed to prove that the defendants knew that the sources of the leaks would “personally benefit” from providing this information.

What this ruling means is that if a hedge fund titan can put enough distance betweeen himself and the person leaking corporate secrets, and not ask too many questions, he can trade away to his heart’s delight on inside tips. It also means that it’s OK to wrangle secrets out of a corporate insider as long as you don’t pay him off.

I shouldn’t be too harsh on the Second Circuit panel, which consisted of Judge Barrington Parker (who wrote the ruling), Senior Judge Ralph Winter Jr. and Judge Peter Hall. There’s no statute or regulatory rule that specifically bans insider trading, so they were forced to wrangle with evolving precedent.

Still, given the squishiness of the law in this area, I believe the judges could have found the support to uphold these convictions if they had wanted to. Instead, their ruling that sends the message that the markets are rigged in favor of those with the most wealth and access.

Securities and Exchange Commission v. Citigroup

When Manhattan U.S. District Judge Jed Rakoff refused in 2011 to approve the Securities and Exchange Commission’s $285 million settlement with Citigroup over the marketing of collateralized debt obligations, he raised a host of essential issues. How much information should a judge get about a case before he approves its settlement? Why does the SEC routinely allow settling defendants to deny liability? When is a settlement in the public interest?

The U.S. Court of Appeals for the Second Circuit barely touched on these issues when it swept Rakoff’s concerns aside in June. The court’s 30-page ruling emphasized the need for expediency above all. “Consent decrees are primarily about pragmatism,” stated Judge Rosemary Pooler, who was joined by Judges Raymond Lohier and Susan Carney. “Consent decrees provide parties with a means to manage risk,” the court held, adding that assessments of such deals “are uniquely for the litigants to make.”

So the SEC is just managing risk, just like any other business attuned to the bottom line, according to the Second Circuit. Efficiency, not justice, is the guiding principle.

I don’t agree that federal judges have practically no role to play in reviewing SEC settlements—especially when the agency is claiming serious misconduct that gets swept under the rug when a defendant cuts a deal. I’m even more disturbed by the court’s depressing rationale for its ruling, and by its refusal to grapple with the important issues Rakoff raised.

Finally, I wonder why it took the Second Circuit more than 30 months to issue this ruling. A decision like this—which is so curtly dismissive of all the important questions that Rakoff raised—could have been written in a day.

Summary Judgment is a regular opinion column by American Lawyer senior writer Susan Beck.

Illustration via iStock

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